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CRUNCH TIME FOR FLORIDA CDDs

May 1, 2010 is a date that should see a large number of new defaults of Florida CDDs. This is the date, along with November 1, when semiannual interest payments are made to bondholders. It is, therefore, the date after which trustees start reporting which projects did not make their tax payments and therefore reserve funds had to be invaded to make the payment. Or the trustee may make no payment at all because interest reserve funds have been exhausted.

What makes this date different from previous pay dates is that a large number of projects will be making their first payment from current assessments, i.e. these are the projects begun in late 2006 or 2007 which have run out their self funding time period and have no prospects of finding buyers within the economic lifetime of the developer. These are projects that have no sales momentum and are hugely overvalued. In short, these are the really ugly ones. Worst of all, since they have missed no interest payments so far, they are often selling at vastly inflated prices that will see steep declines in the coming months. Thus, the next few months will see a pick up in availability and sales of CDD bonds, but at ever declining prices. We can also expect that entire projects will be going on the auction block or into Chapter 9 bankruptcy before year end.

We have identified approximately 70 such projects on our website (www.floridacddreport.com) which face this harsh reality and represent a hazard for anyone who has not visited these projects and assessed their long-term viability. Another hazard facing investors is the upcoming sale of tax certificates. May 1 kicks off Florida’s annual tax cert sales cycle and this year should be a bumper crop. The problem for the various municipalities, however, is that buyers are aware of the hidden danger of buying certs on properties in a failed CDD. Such certs are on par legally with the CDD bondholders. Hence, the cert holder faces paying 100 cents on the dollar for a claim which is on par with a bond selling for 40 cents on the dollar. This is hardly conducive to attracting cert bidders. Worse still is that it may not be clear to a cert buyer whether he is bidding on a claim within a CDD or not, so the hazard is unclear.

We understand that the state is trying to remedy the cert sale problem through a bill currently before the legislature which would prioritize the cert claim. We don’t know whether this will be applicable to certs being sold this May 1, but there is little doubt it could be a real blow to the price of CDD bonds. In any case, the next few months should be very interesting.