The Hidden Cost of Living

Published December 12, 2003 

Jehan Humayun's kitchen table is covered with stacks of documents.

Humayun and his wife, Faiza, signed the closing papers this summer for a home in Heritage Isles, one of Florida's 226 communities governed by a Community Development District.

Five months later, Humayun is slowly learning that buying the home left him and his family - along with more than 600 other Heritage Isles homeowners - responsible for paying off $1.3-million in annual losses racked up by their CDD.

That's a detail Humayun would have liked to have known before he bought his home.

Amid the hundreds of pages of documents on his table, Humayun finds only one page explaining the CDD.

Not described on that page is Heritage Isle's shaky economic health - which an auditor described as being "technically in a state of financial emergency."

That assessment, made four months before Humayun bought his house, was never mentioned in his closing papers or by Realtors.

"We just weren't told the full extent of what a CDD was," Humayun said. "We bought in here with infinite ignorance, and only now are we finding out how it's going to cost us."

Nearly a quarter century after the Florida Legislature allowed the creation of these special districts, Humayun's lament is such a familiar refrain that state lawmakers are considering changing some of the ways CDDs operate - including fuller disclosure about how much they cost homeowners.

If the changes are approved next year, it would be the first step taken to prevent sticker shock for people buying into CDD communities.

"If you buy a prescription, it tells you all the things that can happen," said Rep. Ken Littlefield, R-Wesley Chapel, who may be the House sponsor of the bill. "But with CDDs, the buyer doesn't know the risk and isn't told about all the things that can happen. I think we can do a better job informing home buyers what it is exactly that they're buying into."

A popular development tool

As Florida's population boomed, CDDs were created to shift the burden of building roads and utility lines away from cash-starved municipal and county governments. The massive costs of building the infrastructure are financed by the developer with a key CDD incentive: tax-free municipal bonds.

The bonds pay for not only roads and utilities, but also amenities such as clubhouses, pools, tennis courts and golf courses that entice middle-class buyers yearning for a more lofty lifestyle.

Rather than paying everything up front, homeowners pay the ultimate costs for the amenities over a span of 15 to 30 years.

A five-member CDD board, chosen by the developer, issues the bonds and levies taxes and assessments on the homeowners, who pay the added fees along with their county and city taxes. It is only when most of the homes in a development are sold, and all the crucial initial decisions have already been made, that homeowners can begin to sit on the board.

There's little downside for either politicians or developers.

Elected officials get to add mammoth swaths of upscale homes that contribute to a government's tax base while bragging they did so without raising taxes to build or maintain the infrastructure that's needed.

Developers bear little risk in borrowing millions of dollars, knowing that serious miscalculations can be covered by a generation of homeowners.

It's little wonder that CDDs have become the most popular development tool in Florida for new home construction.

In the past four years alone, their numbers have more than doubled, becoming especially prolific in the Tampa Bay area. One out of every five CDDs in Florida is either in Hillsborough County, which leads the state with 28, or Pasco, which has 17.

"Historically, local governments paid for roads with property taxes," said Douglas Buck, director of environmental affairs for the Florida Home Builders Association. "But they don't do that anymore. Developers don't have the deep pockets for those kinds of costs. So if you're talking about new home construction in large developments, the only way to finance it is with upfront cash or CDDs."

The risk of rising costs

As these developments flourish, an increasing number of home buyers complain they weren't told the true costs before signing their closing contract.

Near Brandon, residents in FishHawk Ranch pay $950 a year to maintain award-winning landscaping, miles of trails that wind beneath the shade of giant oak trees and a water park that could occupy a 6-year-old for hours.

But Roger Snipes, who moved into the community in 1999, said the next time he buys a house, it won't be in a CDD.

"I knew about the CDD when I went there, but I didn't expect an increase," he said. "I was told that it wouldn't change for 22 years."

In October, the FishHawk Ranch CDD board increased the fees by $50 to help pay for landscape maintenance.

Snipes doesn't understand why his fees went up when construction is complete on the first phase of FishHawk Ranch, where he lives. The way he sees it, he's paying for projects in Phase II, an area that isn't even connected by roads to his neighborhood.

"They're going to raise our CDD fee and they're not doing anything for us," he said. "But what do you do? Until you sell your house, you're trapped in that situation.

"If I had to do it all over again, I wouldn't do it. The buyer needs to beware."

When Frank Choy moved to the Tampa area four years ago from Clifton, N.J., he wanted to find a home that was close to his CitiCorp office in Mango. He and his wife decided to move to Arbor Greene in New Tampa because of its proximity to Interstate 75.

Choy said he didn't know what a CDD was. But many of his concerns were downplayed by the real estate agent, who said his annual assessments would go down as more people moved into the community.

When he paid $2,300 in assessments his first year, in addition to about $6,000 in county and city taxes, he was confident that would go down over time.

This year, however, Choy paid $3,000 in assessments - a 30 percent climb from what he paid the first year.

"There are valid reasons why the fees didn't go down, but they weren't disclosed to me at the time," Choy said.

Choy lives in one of 22 homes in the Retreat, one of five Arbor Greene communities that is behind its own gate. This year, the CDD decided to restructure the payment plans so that only those who live behind the gates pay for them. The Retreat is the smallest of the gated neighborhoods, so fewer homes have to pay the increased fee for the gate maintenance.

That means the assessments for those homes are going up $400 this year, a 12 percent increase from last year.

"If I had known it was going to be this much, I wouldn't have moved here," Choy said. "What's irksome is I was never told that the costs could go up. I wasn't told anything about the CDD that someone who had never lived in a CDD community could understand."

Over at Heritage Isles, Humayun pays about $2,000 a year in CDD fees, but he's afraid those will skyrocket to cover the growing debt that the development's golf course faces.

According to the CDD's 2002 audit, the golf course, restaurant and pro shop took in $1.4-million. However, expenses totaled $2.1- million. Annual interest payments brought the net loss for 2002 to $1.3-million, records show.

Humayun said he resents that the developer's miscalculation that the golf course was going to pay for itself will end up costing people with no say in that decision.

"If I had a say in how this money was spent, I certainly wouldn't spend it on swimming pools and golf courses," he said. "I would make sure it was spent better."

Lennar Corp., the developer, appointed a homeowner to Heritage Isles' board for the first time this fall. Otherwise, everyone else on the board is a Lennar employee.

"I have no control over the CDD," Humayun said. "Do I blame the builder? No. I would have utilized the same loophole. I blame the fact that there's no oversight, so the CDD isn't accountable for its actions."

Under Florida law, oversight of CDDs is slight.

CDDs must send their annual budgets to the local governing authorities. But those governments can only review the budgets and have no power over the districts.

CDDs also must register with Florida's Department of Community Affairs, but that's only to give the agency contact information. They also are required to submit audits and revenue/expenditure reports to the Department of Financial Services. Yet officials there have little time to review the reports.

"We just collect them," said Otis Smith, a state accountant. "We don't have the manpower to go over each one. Sometimes we'll go over an audit, but from where we are, it's hard to see if anything's been misclassified. If we need more detail, we'll ask for it."

If homeowners have a beef with a CDD, they can try appealing to the board, which in the early years of a community is stacked with the developer's employees, friends or family.

Although Florida law says residents should be able to sit on the board in six years, that often doesn't happen. For instance, Cory Lake Isles' CDD was created in 1991, yet its board members still are appointed by the developer because Cory Lake doesn't have enough residents to require the developer to cede control.

Aside from appealing to the CDD, residents have few other places to resolve disputes, save for the courts.

"There's no place for me to go and say: 'Who's responsible?' " Humayun said. "If I look at the CDD rules, it says I'm responsible. So, okay, if I'm responsible, I should have a say. But I don't, and that's not right."

Holding CDDs accountable

This will come as a shock to anyone familiar with the struggles John and Terri Bakas have had with their CDD managers and board members.

But they actually like CDDs.

"We like to pay CDD fees. We wouldn't mind paying more if we felt the money was being properly spent," said John Bakas, who pays $900 a year to the Lake St. Charles CDD in Riverview.

They see CDDs as an investment that ultimately should improve property values.

But late last year, Bakas said, newly elected board members stopped security patrols and fired the landscapers.

Bakas said when he asked to see the bid documents for the landscaping contract, he was told by a representative of Rizzetta and Co., which manages the Lake St. Charles CDD and more than 30 others in Florida, that the contract was a business decision that didn't require input from residents.

The Bakases have been two thorns in the sides of Rizzetta and Co. and the Lake St. Charles CDD board of supervisors ever since.

The pair attend every board meeting, take notes, ask questions, send letters and demand responses. They created a Web site with a community message board, where they encourage their neighbors to go to board meetings.

The Bakases' efforts prompted the board to change its meeting time from 3 p.m. to 5:30 p.m. so working residents can attend and revealed that the salary for a dead person was on the Lake St. Charles CDD budget for several years.

Rizzetta corrected the error and says the money was used to supplement other portions of the Lake St. Charles budget.

Now, John Bakas plans to run for a seat on the board during elections next fall.

His name will appear on the ballot Nov. 2, 2004, when registered voters in Lake St. Charles go to the polling booth to choose, among other things, a president of the United States. Nearly a dozen other Hillsborough CDDs will also hold elections.

"In terms of structure and operation it's just like having a little bitty county government for the subdivision," Bakas said.

And just like a local government, Bakas said, the best way to keep it accountable is to get involved.

"Most people are very uninformed about a CDD. There are some people that still probably don't even know that we have a CDD. That is a big problem," Bakas said. "A large number of people we come in contact with don't understand the difference between an HOA (homeowners association) and a CDD."

But getting involved in the complex nuances of CDD law and government takes its toll, too.

Just ask Rick St. Pierre, who now sits on the Heritage Harbor CDD board, which represents another Lennar development that had some of the same problems with its golf course that Heritage Isles now faces.

St. Pierre was one of the few homeowners to get involved when they learned the golf course was awash in red ink.

He spent more than two years negotiating with Lennar and other homeowners to resolve the situation, which meant about 30 hours a week away from his wife and family. Golf trips were put on hold, dinners canceled.

"I kind of like living here," he said, "but hell no, I wouldn't do it again because it's too much damn work."

Possible CDD fixes

Discontent with CDDs is rising high enough that the Florida Senate conducted a survey this past summer about improving them.

The survey results led to five recommendations that could be included in a bill next year. Among the recommendations is to expand the disclosure to potential home buyers so that it includes annual special assessments.

Right now, Florida law only requires the closing contract to include a paragraph disclaimer that CDDs may impose taxes or assessments on property. And that notice isn't required when a home in a CDD is sold a second time.

"I want an actual dollar amount as part of that disclosure," said Littlefield, the state representative from Wesley Chapel. "Also, it should show what the risks are, that your fees could go up. And I'd like to have the Realtor sign off on it, too."

Another change recommended by the survey would be to give impact fee credits back to CDDs that pay for road improvements, rather than to the developer.

For instance, in Meadow Pointe, residents' CDD fees helped pay for the widening of Bruce B. Downs Boulevard.

But Hillsborough County compensated builders, not the CDD, for the highway by charging them less than the standard $2,200-per-home transportation impact fee.

Dennis Smith, a Meadow Pointe CDD supervisor, said that money should have replenished CDD accounts - although the developer could argue residents already got a break on the price of their houses equal to the impact fee credit.

Other changes recommended include dissolving a district when it has paid off its bonds and reducing election expenses by overlapping CDD elections with general elections.

Littlefield, who agrees with the recommendations, said he has already been approached by the Senate to sponsor the bill in the House.

"I think CDDs are a good idea," Littlefield said. "I think they allow Florida to build these upscale communities that wouldn't be possible without it. I think they can be tweaked. Something I'm sure can be worked out."

A similar bill, however, fizzled last year. And the building industry says there's plenty of information already available to the home buyer about CDDs.

"It's incumbent on the individuals to read the documents and understand them," said Buck, of the Florida Home Builder's Association. "We're disclosing them to death as it is."

Some CDD homeowners say that the proposed changes don't go far enough.

Joe Gorman, who lives in a CDD in Lady Lake south of Ocala, complains that the Senate's survey leaned too far in favor of the building industry and government officials. Of the 45 surveys sent out, 35 were returned. Of those, only four were homeowners.

"I was really disappointed," said Gorman, who was one of those who was surveyed. "The people closest to the problems live in CDDs. People in government may not know the horror stories. Industry people are knowledgeable, but you have to keep their comments in perspective."

Gorman wants the following changes to the disclosure:

Include estimated dollar amounts for the first three years for each assessment, tax, monthly fee and debt payment.

Disclose the costs at least a week before closing.

Require the developer to get a receipt that is signed and dated by home buyers indicating they received the disclosure.

Penalize developers $1,000 for each violation.

Gorman also wants homeowners to have the power to vote in an election to hire top administrative staff.

"Without this provision, these top personnel favor the developer who hired them rather than the community's residents," Gorman said. "Can you imagine if our representatives weren't elected but appointed by special interests? That would be bad, but that's what happens with CDDs."

CDDs don't need tweaking, he said, but major revamping. And the best way to start is to send out a survey to homeowners to get a sense of their problems.

"If we had a report that wasn't influenced by the industry, then I think we would have a better understanding of what the problems are," he said. "And we can go from there."

But unless there's major reform, CDDs will remain risky for the home buyer, said St. Pierre of Heritage Harbor.

"I've given up trying to change them," St. Pierre said. "It ain't gonna happen. Politics is politics. Homebuilders contribute to politicians. Politicians keep taxes low. Everybody wins, but the homeowner, who's basically on his own."

Migration patterns for CDDs

The number of Community Development Districts had doubled in the past four years to 226. But about 75 percent of that total is confined to just 11 of Florida's 67 counties. Here are the top 11.

1. Hillsborough .......28
2. Lee ................20
3. Miami-Dade .........18
4. Pasco ..............17
5. St. Lucie ..........14
6. Collier
Manatee ............13
8. Broward
Palm Beach .........12
11. Orange ............11
Source: Florida Department of Community Affairs

Disclosure Discontent

A growing number of people who live in Community Development Districts say they weren't adequately informed about the costs before moving in. Florida law doesn't require the seller of a home in a CDD to voluntarily inform home buyers how much they'll have to pay the CDD or that they can lose their home if they don't pay. The following paragraph is the only disclosure a seller is required to include in closing documents. The paragraph, which is supposed to be in bold and placed before the space reserved for the buyer's signature, is not required when the home is sold a second time.