Community development districts in Lake and across Florida in financial crisis

Article Courtesy of The Orlando Sentinel
By Lauren Ritchie
Published August 31, 2010

PART I

Life at the Arlington Ridge retirement community south of Leesburg was considerably cushier before the developer went belly up.

"We had a restaurant, full-time instructors for water aerobics, full-time security, social coordinators they're all gone," said Dominic Setaro, 62, a retired government finance officer.

And those are the inconsequential effects of that developer's failure.

Thanks to the greedy way Blair Communities financed the project, retirees who live on about 235 of the lots now are stuck with $15.9 million in bond debt.

Across Florida, retirees are watching their communities crumble and their carefree lifestyles vanish as they become saddled with bonds and other debts bequeathed to them by dying developers.

Nearly always, it's because of a funky form of government called community development districts, a gift in 1980 from the Legislature to developers, guaranteeing them fantastic profits without risk. Never mind the retirees. Let the dopey New Yorkers fend for themselves.

Today, Florida has 294 of these powerful districts that have borrowed billions by issuing bonds, and 123 of those 42 percent are either defaulting or aren't collecting enough money to make their payments, according to an analysis of records assembled by financial adviser and business columnist Richard Lehmann, who tracks the districts at floridacddreport.com.

Forced to uproot retirement

So how much do the 123 districts combined owe bondholders? Nearly $4 billion.

Six of those districts are in Lake County, which is contributing a tidy little $89 million to the mess. ( Polk County's community development districts in trouble owe $489 million; Osceola County, $317.5 million and Volusia County, $24.2 million)

The defaults are leaving folks like Setaro to uproot their retirement and fend for themselves in a morass of complicated government finance involving these so-called "dirty bonds."

And they aren't the only ones hurt.

Let's take Arlington Ridge as an example again. Remember that bonds are simply a way of borrowing money over a long period of time. The community development district offers the bonds for sale. Individuals can buy municipal bonds like these, but they usually are purchased by big investment funds.

In this case, Oppenheimer funds bought the whole bond issue. Anybody out there have Oppenheimer funds in a retirement portfolio?

Though the developer went bankrupt, Arlington hasn't yet defaulted on its interest payments, but that's only because of the efforts and Setaro and a few other savvy fellows who live there. However, the district dipped into its bond reserve account for $202,615.78 to make its May payment. The amount left in the cookie jar, which was set aside when the bonds were sold, is $219,093.05. And there's a payment due in November.

Not the American way

To understand the enormity of these defaults, one must first have an idea of how the transactions work. Here's a primer:

In regular old retirement communities or subdivisions without community development districts, the developer wraps all sorts of costs into the price a buyer pays for a house. They range from roads, sewer lines and water plants to community centers, street lights and pools.

When you buy a house, it's all included. That's the American way.

It's different when you buy into a project with a community development district.

Developers love these districts, and they're the ones clamoring for permission of the city or county where they're located to establish them. Obviously that's because developers are the ones mining huge quantities of easy cash from them.

At first, developers control all the seats on the boards of directors for these districts because they own all the lots. They use that control to sell bonds to pay for the kinds of infrastructure mentioned above.

But it is the community development district not the developer that is obligated to repay the loans. And who is the district? By then, developers have sold lots and the landowners gradually take control of the board.

Lower prices? Nope

So, think about it: the price of a home theoretically should be lower than similar homes in communities without development districts, right? After all, the buyer shouldn't have to pay for the cost of the infrastructure both in the price of the home and then over a 30-year period in repaying the bonds.

But who in a community with a development district can honestly say they got a cut rate on their new house? It doesn't happen, does it? Of course not.

Instead, the developer walks away with pure profit in the amount of the bonds issued and the homeowners get to pay twice for infrastructure.

That's the Florida way. Nice deal for developers, isn't it? Stinks for the retiree who usually doesn't realize the costs involved.

On Wednesday, we'll take a look at the six failing districts in Lake County.

PART II

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.

'Blatantly irresponsible'

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.

'Not a nickel' at stake

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.

  
E-MAIL CCFJ COMMITTEES NEWS BACK HOME