CDDs - The Good, The Bad, and The Ugly
CDDs (Community Development Districts) are special purpose taxing and residential development districts created in 1980 through passage of Chapter190, Florida State Statutes.
The purpose of the Chapter 190 law was and is to promote housing development through use of tax-free bonds that developers use to lower the cost of homes in these residential communities. Developers issue bonds to pay for initial infrastructure (clearing, grading, sewers, roads, water supply, utilities, etc.). The original construction bonds are assigned to the CDD's initial residents and eventually paid off by residents over periods of 10-30 years.
The main advantage of CDDs is that housing is initially less expensive since major development costs are deferred and are financed through the use of tax-free bonds. However, the main disadvantage of CDDs is that housing costs are inflated over time as the bonds need to be repaid by residents. Common property owned by CDDs is tax-exempt as government-owned property.
Concept Can Work Well - In general, the concept works well and the goal of promoting residential housing development is usually achieved.
Developers like the Chapter 190 law because they are able to offer housing at a lower initial cost than would otherwise be the case. Thus, risk is reduced and costs are conveniently shifted to residents. This cost-shifting maneuver is sometimes not recognized as such by residents. There are also incentives for developers to build attractive common facilities because developers recognize that a ready (and some would say "captive") market customer exists to eventually purchase the common facilities.
County governments like the Chapter 190 law because developments that might otherwise not be built are in fact built because of the tax incentives and pricing advantages. Property tax revenues are eventually higher than would otherwise be the case since the developments are, in fact, built.
Residents like the Chapter 190 law because the initial buy-in cost of a house often appears lower than otherwise would be the case. This is because initial infrastructure and facilities costs are deferred and not part of the initial house purchase price.
Furthermore, residents frequently do not realize that attractive common facilities are not owned initially by a CDD development and will have to be purchased eventually by the residents from the developer, often at inflated prices, thus increasing house prices.
In most cases, residential CDDs are successful. The initial government of supervisors appointed by the developer will eventually give way to those elected by the residents. Residents will then have the final word on all operating issues and any further development of the community. Residents will also have the opportunity to replace the CDD form of government with a municipal form of government at a special election several years into the life of the CDD. In these many ways, the CDD format can function well over the years.
Concept Often Does Not Work Well - Unfortunately, developers have sometimes perverted the concept of the Chapter 190 law and turned it to their advantage at the expense of the residents.
How do they do this?
First, developers maintain control of the major decision-making mechanism in CDDs though unusual maneuvers and formation of special CDD districts. These maneuvers allow developers to effectively make all the major decisions in the CDDs, often for their own advantage. Residents are not allowed to make these major decisions.
Second, developers appoint their own hand-picked board supervisors on these special CDD boards. These supervisors are often friends, business associates, or employees of the developer. Residents never have the opportunity to elect these supervisors who make all the major decisions, mostly at the direction of and often for the benefit of the developer.
Third, developers appoint administrators, without regard for the wishes of residents, who represent developer views and who often ignore the needs and interests of residents.
Fourth, if a developer's initial plans for CDD revenues do not eventually materialize, residents may be assessed further for operating expenses. For example, several CDDs in Florida, expecting integrated golf course revenues to pay for substantial CDD operating expenses, had recourse against residents when optimistic golf revenue plans failed to materialize.
Fifth, developers use special appraisal techniques, approved and accepted by their hand-picked boards, to sell common properties back to the residents in the CDDs, often at grossly inflated prices. Residents may initially buy into the development not realizing that common properties are not owned by the development, and that they, the residents, will have to eventually buy back these facilities at inflated prices. Some residents complain that they paid a higher price for their lot and house believing that the cost of common property was built into the higher prices. Then they feel like they are forced to pay again to purchase common property a second time.
Sixth, a variety of lawyers, accountants, consultants, etc., often work for combinations of developers, county governments, CDD boards, etc., in ways that suggest conflict-of-interest problems. However, the Chapter 190 law effectively exempts these operatives from state conflict-of-interest laws. The losers here are often residents who end up on the wrong side of the conflict-of-interest issue and have no advocate for their interests.
Orlando Sentinel Articles - The Orlando Sentinel published an award-wining series of articles on CDD problems in October, 2000. (These are still available on the Orlando Sentinel web site in the archives section for a small fee.) The key article in the series was entitled "Top Dollar For Plain Old Stuff." It explained the series of deals here in The Villages from 1996 to 1999 involving an $84 million payment for $8.8 in real property.
The $8.8 million value was determined by appraisers in Lake and Sumter counties. An "income-approach" appraisal method, however, was used rather then a "market-based" appraisal technique for the sale transaction. The Sentinel said that the economic consultant who devised the appraisal technique worked for both The Villages developer (seller) and the VCCDD (buyer) in this transaction.
Tax-free bonds valued at $84 million were issued to make the payment to the developer. These bonds will be repaid over 20-30 years from the "maintenance fees" paid by residents. Although it was not certain that monthly maintenance fees could be used for debt service for the purchase of common properties, the purchase was approved by CDD supervisors hand-picked by the developer. Residents had no say about whether to accept the deal or assume the debt that they are obligated to repay. Many residents now view this as an example of "Taxation Without Representation."
The Sentinel also pointed out that the University of Florida urban planning professor, who wrote some of the original 1980 law, said that the goals of the law are still worthwhile; but that some of the abuses by developers suggest that major portions of the law need to be completely revised.
Furthermore, a Volusia County attorney, who is both a lawyer and a developer, has said that CDDs are a means of "legalized land fraud."
Summary - In summary, CDDs can be a worthwhile form of local government with many advantages for the residents. However, some developers have taken advantage of the system and pervert the concept for their own advantage.
Residents in CDDs need to ask questions, be involved, and study how their government works. Often these CDD problems flourish because residents are apathetic and literally allow the problems to persist due to their "I don't want to get involved" attitude. Apathy is the fuel that can turn CDDs into resident rip-offs.
Thanks to Mr. Jan Bergemann, President of Cyber Citizens For Justice, Inc., (CCFJ) for his input on this article.