Guest Editorial: Are CDDs a Hidden Way to Tax Homebuyers and Pad Profits?

How did Beruff, Neal, Benderson and other local developers get so rich? One reason may be Community Development Districts. There are at least 75 CDDs in Manatee County http://ourmanatee.com/CDDs-May2012.pdf. Most county residents who live in a CDD are aware that they are receiving an extra tax bill every year to pay back the money the developer borrowed to pay for the infrastructure for their subdivision. Do not confuse CDDs with Home Owners’ Associations (HOAs) which are in addition to CDDs.

This is how it works: A developer buys some land and wants to build a bunch of houses so he can make a lot of money selling them, but houses need infrastructure such as roads, sewer and water lines, schools, etc. and he doesn’t want to tie up his money until he can sell the houses and get his investment back. So, he applies to the county to form a CDD, which allows him to sell tax-free bonds to raise money for the infrastructure. This permits him to use his own money to buy more land, to build more houses, to form more CDDs and to make more money.

But, there is a catch. The builder controls the CDD until at least half the property is sold, and maybe after that and he makes decisions that may not be in the best interest of the homeowners. Also, the homeowners will have to pay back the bonds as well as the interest, thus the extra tax bill.

Some developers have used the bond money to pay for infrastructure at inflated prices and to pay for things that are not usually considered infrastructure such as golf courses and swimming pools. The IRS frowns on this because the bonds are “tax free bonds.” The Villages community (south of Ocala) is a CDD, and they are in big trouble with the IRS, as is the developer, all because certain amenities there were paid for with money from tax-free bonds. Further, the developer was collecting fees for use of those amenities!

Many homeowners don't realize the problems associated with CDDs when they purchase their home. Some of them call it taxation without representation because they don’t have any say in decision making until the homeowners collectively own at least half of the property, which could take many years.

Florida's "Uniform Community Development District Act of 1980" established authority for CDDs. CDDs also create infrastructure at no cost to the local government. Developers love them because they don’t have to use their own money to build infrastructure. Residents like them because the initial cost of their home is (or should be) lower compared to a development without a CDD.

A CDD is controlled by a Board of Supervisors which consists of five members elected by the landowners. Each landowner has one vote per acre (or portion thereof) and that is one of the problems, as the developer initially owns most of the land making them able to elect all of the supervisors, thus having 100% control of the board and control of all decisions made by the board, which may not always be in the best interest of the homeowners.

A CDD has special powers as defined by Florida Statute 190.012. These include but are not limited to:

• Water management and control

• Water supply, sewer, and wastewater management

• Bridges and culverts

• District roads and street lights

• Public transportation and parking

• Investigation and remediation of environmental contamination

• Conservation areas, parks and recreational facilities

• Fire prevention and control

• School buildings and related structures

• Security, but not the exercise of any police power

• Waste collection & disposal

• Mosquito control

This gives the developer enormous power until there are enough homeowners to have a majority on the Board of Supervisors. This could take many years during which the developer would be making irreversible decisions, including spending money which the homeowners will eventually have to pay back along with interest on that debt. These decisions may unfairly benefit the developer and the homeowners will not be able to stop him. That was the case with The Villages.

The bottom line is that CDDs are weighted in favor of the developer especially in the early years. Those who are considering purchase of property in a CDD need to do their “due diligence.” Remember, a lower price may indicate hidden costs such as millions of dollars of debt and interest on that debt that must be paid back by the home owners. Also, new owners will not have control of the CDD for many years which could allow the developer to do such things as sell common ground to the community at inflated prices. In addition, homeowners will have to pay for operation of the CDD as well as any HOA which could be significant. Buyer beware.