Buying Distressed Assets

CDDs...another opportunity?

Posted on Thursday, February 11, 2010

Investors in Florida’s distressed community development districts are expecting increasing defaults on bonds sold during the state’s real estate boom years.

November payments showed a sharp increase in the number of CDDs drawing on debt-service reserves or not paying interest. More than 40%. May 2009 80 districts with approximately $1.7 billion in bonds outstanding experienced similar difficulties.

These "dirt bonds" are repaid from special assessments on homes sold in the district. An additional complication is the growing use of so-called Series B bonds, which were to be repaid out of the sale proceeds of houses. B bonds accounted for about 35% of the total debt issued for the districts and about $700 million of B bonds either drew against their debt-service reserves or failed to make interest payments on the November due dates.

Florida has more than 500 ¬active CDDs. Since the early 1980s, the districts issued more than $11 billion of debt to pay for infrastructure such as roads, water, and sewer systems.

About 25% are concentrated in the Tampa area. Many are not built out.

Factors stressing the districts include high foreclosure and unemployment rates, rising property tax and homeowner’s insurance rates, tight credit conditions reducing the number of buyers qualifying for mortgages, a large supply of unsold vacant land, and an oversupply of new and existing residential units.

Recovery will depend on a number of factors, the biggest being the overall housing market and the willingness of banks to lend.

One Tampa attorney said "I am representing several banks right now that have significant investments in developments with large CDD bond debt. The borrower’s failure to maintain the bond debt is a huge problem as the bond holders are really not equipped to handle ongoing maintenance costs of the development without the income stream that they expected to receive from the bonds. Banks are similarly having problems justifying further investment in the development when the CDD debt is close or above to the fair market value of the property."

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