Districts' house of cards is falling down
Orlando Sentinel - Orlando, Fla.
Sunday's column took a look at a form of government called community development districts and at the wave of defaults, bankruptcies and foreclosures going on in the background and destroying the lifestyles of the people who live in the communities.
The districts are simply a form of municipal government -- but without police powers. However, they can issue bonds, and that's where the trouble has been brewing for the past 10 months as these developer-initiated governments start crumbling, particularly in communities where few lots have been sold.
At the start, developers own all the land, so they control the districts. The districts sell bonds to pay for the infrastructure. As the homes and lots sell, the residents take control of the district government -- and assume the responsibility for repaying the bonds, typically through assessments on each lot.
What's happening now, however, is that lots stopped selling during the bust, and developers have filed bankruptcy. If there's no one to pay the assessment on each lot, the district can end up defaulting on the bonds.
Today, some 294 community development districts in Florida have issued bonds, and 123 of those -- 42 percent -- are defaulting or aren't collecting enough money to make their payments, or the developer has gone under, according to records assembled by financial adviser and business columnist Richard Lehmann, who tracks the districts at floridacddreport.com.
Those 123 districts owe a combined total of nearly $4 billion in these so-called "dirt bonds," and six of them are in Lake County, where $89 million is at stake.
Among the Lake County districts are:
*Arlington Ridge in Leesburg, which issued about $16 million in bonds to pay for traditional infrastructure and to run the community's restaurant. After selling about 235 of the planned 1,036 lots in the 487-acre project, developer Blair Communities went belly up. At most projects, residents sit by and watch their investment drain away. At Arlington Ridge, which is on U.S. Highway 27 just south of County Road 48, residents swung into action.
They have negotiated with the bank that took over Blair's properties and cajoled them into paying assessments on at least some of the lots. But they've also had to use some of the bond's reserve fund to make the May payment. There is enough left in the kitty to make one more payment. Oppenheimer Funds bought the entire bond issue.
*Cascades at Groveland was planned to be a 999-home development by Levitt & Sons on 752 acres inside the city limits of Groveland, but Levitt abandoned the community when the company declared bankruptcy in November 2007. The community development district had issued $5.4 million bonds in March 2006, and they are split between Oppenheimer Funds, which holds $2.1 million and Nuveen Asset Management, which has $3.2 million.
When the builder collapsed, Levitt's lender Bank of America took title to the property and continued to make all the assessment payments due to the district, said William Rizzetta of Rizzetta & Company Inc., the Tampa firm that manages the district. The district hasn't drawn on the bond reserve fund, which continues to be fully funded.
The bank sold the property to a new developer in June, and the new owner is responsible for paying assessments.
Listing the Cascades on default list, as Lehmann did, is "blatantly irresponsible," Rizzetta said.
While Cascades is tagged on the list with a default code, the code does specify that it is there because of the developer's failure.
*Deer Island Community Development District issued $15.6 million in bonds in 1996, and its developer failed some years ago. The district's manager did not return a telephone call seeking information on the current status of the bonds.
*The Estates at Cherry Lake Community Development District issued $13.3 million in bonds in April 2006 and hasn't made its payments since 2009. The development is on the northeast side of Cherry Lake, south of U.S. Highway 27 and east of O'Brien Road. The developer, a Florida-only builder called America's First Home, had planned to build 1,504 houses, along with commercial space. It went into receivership in 2008. The district missed its May payment this year. Nuveen Asset Management is the major bondholder.
*Greater Lakes/Sawgrass Bay Community Development District is in default on the interest payments for its $16 million worth of bonds issued in April 2006. The project, with 775 acres, was supposed to have 612 homes in the Greater Lakes portion to the north and 629 homes for the Sawgrass Bay portion to the house. Roughly 40 homes had been sold by 2009. Oppenheimer Funds is the bondholder. The manager of the district did not return a call asking why the landholders -- two developers who are not in bankruptcy -- aren't paying their assessments.
*Pine Island Community Development District has had to dip into its reserve account to pay bondholders on its $22.8 million debt because the developer, Ginn-LA Pine Island LLP, hasn't paid its assessments. Nuveen Asset Management is the bondholder for $12.1 million; Goldman-Sachs, $7.5 million; VanKampen Asset Management, $3.3, and Blackrock Advisors, less than $1 million.
On Aug. 12, the district's manager reported that Ginn didn't turn over utility-connection fee payments to the district and does not intend to. The developer has asked the manager to begin debt restructuring discussions with the bondholders. Ginn has filed bankruptcy in two Florida communities and is facing lawsuits in several others.
Shall we go on? Presumably, readers are getting the idea. These "governments" called community development districts are nothing but a money-making arm of the developer. And they are no more stable than the financial security of the firm, at least until the community is sold out. If developers did it the old-fashioned way -- by paying for infrastructure up front -- residents wouldn't be paying twice for infrastructure and would fare better in a down market.
When community development districts were created in 1980, the logic behind them was to give developers a boost to bring growth to Florida. Today, there are 594 of these districts. So far, only half of them has sold bonds.
The usefulness of community development districts -- if there really ever was anything to be gained -- is over. Florida has learned that letting developers make obscene profits does, indeed, spur growth. It's the kind of growth that is built like the proverbial house of cards. And that's why it's crumbling now.
The fix is up to the Legislature.
Lehmann, who writes a newsletter about the districts and maintains a database about them, said that Texas solved a similar problem by restricting district boards from issuing bonds until more than 35 percent of the infrastructure is in place.
"Too many developers are able to throw together a district and not have a nickel in the project. That way, the developer is forced to use his own money and has a stake in the project. He's not as inclined to walk away," Lehmann said.
State lawmakers could keep this from happening again -- if they want.
Credit: Lauren Ritchie, Orlando Sentinel Columnist