One thing you are sure to encounter and possibly become confused by when searching for a Florida retirement community is a Community Development District, or CDD for short.
These special districts are prevalent in Florida and serve as a way for developers to finance the construction of certain improvements in their communities without having to put up the money themselves.
Not to be confused with a homeowners association, a community development district shifts the burden of developing infrastructure, maintaining roads and landscaping, building clubhouses and other improvements from the developer to the homeowners in that district.
The way CDDs work is the CDD, run by a board that is chosen by the developer, issues bonds to pay for the infrastructure and other community improvements. Then the homeowners of that community have to pay back the bonds over the course of a number of years, usually 20 to 30. The amount homeowners are assessed for this is added to their tax bill. This can be an unexpected extra expense if you are not familiar with the rules of the CDD.
A lot of people think that as more people move into the community, the amount of assessment will go down. This is not always the case. For example, CDDs can be used to fund clubhouses and golf courses. If the clubhouse and golf course are not self-sustaining and running a growing deficit, who do you think pays for that? Of course, the homeowner.
When CDD’s Go Bad
CDD’s have gone bankrupt in Florida, and more will do so every year while the real estate market stays flat. In fact, according to one article in Florida Trend I was able to find written back in 2010, at the time that article was written Florida had 125 districts in default on $3 billion in bonds. The article remarked that an additional 70 were teetering on default.
CDD financial problems can really only be helped in a few ways. One, an increase in demand for real estate within that district creates the needed revenue to cover bond payments. Or, as has happened in several instances, the bad debt along with the land and improvements on it are bought at such a large discount that the new owners are able to go in and build the community and sell homes at prices that rival those of foreclosures and short sales that have flooded the market.
But just because a certain area is in high demand, it doesn’t necessarily mean their CDD’s aren’t at risk. A perfect example of this is The Villages, home to several CDD’s.
But while they may enjoy good financial health, The Villages CDD’s have come under attack by the IRS, which had an investigation going on for 8 years looking into whether these CDD’s were controlled and run according to the rules that are in place to keep them tax exempt.
The Villages ultimately refinanced the bonds and in turn paid off the original, which led to the IRS dropping the case in 2016.
But the matter led to Florida Governor Rick Scott signing an executive order setting in motion a review of all special districts in Florida by the Office of Policy and Budget.
According to the Governor:
Floridians have a right to know what they’re being taxed for and how that money is spent. This review will bring to light these questions and allow us to identify ways to save taxpayers money and increase accountability.
Proceed With Caution
So what is a prospective retirement community homebuyer to do? Do your homework and proceed with caution.
CDDs are not necessarily a bad thing though, as they can provide a community with amenities and services it otherwise might not get. You just have to be careful and know what you are getting yourself into before buying in a CDD. There are new CDDs popping up all the time so always be sure ask when buying a home if it is in a CDD, and if so, learn as much as you can about the financial health and stability of that particular CDD.