A community development district (or CDD for short) is a special purpose government framework permitted by Florida Statutes and used by local governments and developers to shift the burden of developing infrastructure, maintaining roads and landscaping, building clubhouses, and other improvements to the homeowners in that district or area.
In this article, we're going to talk about what CDD's actually are, what to look out for, and how to calculate what you'll be required to pay if you choose to buy a home within a CDD.
The general idea with a CDD is that you shift the burden of paying for infrastructure and development to those who directly benefit, which typically means homeowners in those newly developed areas.
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.
In the early days of a development, since the developer is the primary landowner this makes sense, but once a certain percentage of homes are sold control over the decision-making process shifts to the actual homeowners.
The massive cost of building the infrastructure are financed by the developer with a key CDD incentive, which is tax-free municipal bonds.
What's Included in a CDD Fee?
There's actually a detailed list of what can be provided for by a CDD that includes:
- water management and control
- water supply
- wastewater management
- bridges and culverts
- district roads and streetlights
- public transportation and parking
- investigation and remediation of environmental contamination
- conservation areas
- parks and recreation facilities
- fire prevention and control
- school buildings and related structures
- waste collection and disposal
- mosquito control
Obviously not all CDD's will have each of those items.
The amount homeowners are assessed for these is added to their tax bill.
Rather than paying for everything up front when they buy their home, homeowners pay the ultimate costs for the infrastructure over a span of 15 to 30 years but they also have to pay for the ongoing upkeep of that infrastructure for as long as they live in the district.
That's an important point a lot of people don't understand.
They hear about people paying off their bond and they think that's it, but no, there will always be a CDD maintenance fee to cover the cost of maintaining everything.
The Downsides of CDD's
CDD's can go bad, and many did during the 2007-2009 recession.
CDD's have gone bankrupt in Florida. In fact, according to one article on Florida Trend 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”.
This is just another reason why it's vitally important that you find and work with an agent who really knows what's going on where you're thinking about buying. It's their duty to help point this kind of stuff out to you.
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 large discount that the new owners are able to go in and build the community and sell homes at prices that are attractive enough to generate a flood of new sales. 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 which is home to several CDD's. As you probably know, The Villages is the most popular retirement community in Florida.
The Villages CDD's have come under attack in the past by the IRS which had an investigation going on for several years looking into whether these CDDs have been controlled and run according to the rules that are in place to keep them tax exempt.
The probe ended in 2016.
What is the prospective retirement community home buyer to do?
Do your homework and proceed with caution.
CDD's are not necessarily a bad thing 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're getting yourself into before buying in a CDD.
There are new CDDs popping up all the time, so always be sure to 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.
Do CDD Fees Go Away?
Remember that you will be required to pay both a CDD infrastructure assessment and a maintenance assessment.
The infrastructure assessment can be paid off and many homeowners choose to do that. You'll see some resales advertise with the statement, “no bond”, or “bond paid”.
But you'll ALWAYS have the CDD maintenance assessment to contend with.
That will never go away.
How CDD Fees Are Calculated
Here's how the CDD infrastructure and maintenance assessments are calculated.
Now, you'll never have to do this calculation yourself but I think it just helps to see how they come up with the numbers.
For simplicity's sake we'll use some nice big round numbers.
Let's say the infrastructure construction costs $10 million, and there are a thousand acres within the district and the specific unit within the district your home is located in has 100 acres and there are 200 lots.
The math would be $10 million divided by 1000 acres, which equals $10,000 per acre.
Remember, your unit has 100 acres at $10,000 per acre, or a million dollars for your unit.
A million dollars divided by the 200 lots equals $5,000 bond per lot for your unit.
The annual CDD maintenance assessment is calculated in much the same way except it is based on the annual budget established by the board of supervisors for each district, rather than the one-time fixed infrastructure cost.
Whether you're working with a new home sales agent from the development or an outside realtor, they should be able to tell you what the current CDD assessments are due for each property you see.
Are CDD Fees Tax Deductible?
Now, as I said earlier, the amount you'll have to pay for the CDD will come on your property tax bill, which naturally begs the question are my CDD assessments deductible on my federal tax return?
Well, the IRS says that it is not deductible because it is an assessment not an ad valorem tax.
Lots of people just go ahead and deduct it because the check is made out to the tax collector for the entire amount. The tax collector keeps the taxes due and sends the remainder of the money to the CDD, but technically only a portion of that check is actually property taxes.
Do people go ahead and deduct the full amount and get away with it?
I'm sure they probably do but they're not supposed to and I'd strongly advise you against trying to gyp the IRS.