More than 50 of Tampa Bay's community development districts are in or near default, a condition that could have serious ramifications for thousands of homeowners across Tampa Bay and accelerate the decline of already troubled Florida banks.
Developers use CDD bonds, or "dirt bonds," to build roads, utilities and clubhouses. Of Tampa Bay's 115 community development districts, 28 have already defaulted and another 25 could be teetering toward insolvency. That's 46 percent of the total.
They include some of the biggest names in Tampa Bay residential real estate: New River and Longleaf in Pasco County; SouthBay and Live Oak Preserve in Hillsborough County; and Sterling Hill and Southern Hills Plantation in Hernando County.
Developers initially make CDD payments but gradually shed the expense as home buyers assume their proportional share. When the housing market collapsed, developers were left covering payments on unsold land.
The result has been massive defaults totaling nearly $700 million in the Tampa Bay area alone. Another group of neighborhoods, indebted to the tune of $476 million, are on a "watch list" owing to lackluster sales.
"Wow. Those are amounts I can't even get my hands around," said Mark Straley, a Tampa lawyer who helped set up CDDs around Tampa Bay.
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In a pattern familiar to Tampa Bay residents behind on their house payments, developers are being foreclosed on by their bondholders, restructuring bond deals and in some cases relinquishing land to cover outstanding debt. That leaves thousands of Tampa Bay homeowners who bought in those neighborhoods in a predicament.
Will default reduce the appeal of these neighborhoods and snip property values? Will the builder they assumed would finish the community turn over remaining lots to a lesser builder? And, perhaps most troubling, will neighborhood upkeep suffer when CDD payments go missing?
"If the developer doesn't make his debt service, he also doesn't make operations and maintenance payments. Nobody cuts the lawn and trims the hedges and hours are cut at the clubhouses,'' said Richard Lehmann, a Miami Lakes businessman who tracks the state's nearly 580 CDDs in a publication called Debt Securities Newsletter.
Among the biggest development's on Lehmann's "watch list" is Connerton, the new town that was supposed to rise south of State Road 52 in central Pasco County. Terrabrook, the developer, has made its payments. But it miscalculated when it invested $45 million to build a giant clubhouse, miles of roads and other infrastructure. After selling only 200 homes, Terrabrook has been trying to sell the project at a loss and leave Florida.
Connerton's quagmire illustrates the stickiness of the CDD issue, complicated by the fact that most of these developments also carry huge bank mortgages.
When a development goes broke, the law ensures that CDD bondholders get repaid first. Since land values have crashed so badly, that means little or no money is left to pay off the bank mortgages on the same property. Banks can foreclose on the property. But that would obligate them to start making CDD payments in place of the insolvent developers. Few banks want to take on that debt.
The problem is epitomized by the south Hillsborough County community of SouthBay/Little Harbor. The developer defaulted last year on $57.4 million in bonds. But if and when the land reverts to CDD bondholders, the banks, which loaned the project $100 million, could lose every penny still outstanding.
So what started as a bond crisis could quickly spiral into a regional banking crisis.
"One way or another, the district is going to get its money," said Brian Lamb, whose Tampa company manages dozens of CDDs in and around Tampa. "But that leaves little for the banks."
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Needless to say, developers loathe the publicity that CDD default brings. Perry Reader, developer of Pasco's Longleaf community, is negotiating with bondholders after his company, Crosland, defaulted on $23.7 million in construction debt.
"There's been a slowdown in sales, and we're caught with the ramifications," said Reader, whose neighborhood sports traditional front porches, a "village green" and a small downtown. "What's important is that the community stay healthy."
Lehmann considers a district in default when it can't make payments from current revenue and dips into emergency reserves. Even when bondholders agree to restructure debt, Lehmann doesn't drop neighborhoods from the default list. That's led to threats from development lawyers who think he's hurting sales by downgrading them prematurely. Lehmann scoffs at that notion. He publishes a list of CDD defaults on the Web site www.floridacddreport.com.
"They want to have their cake and eat it too," he said. "They can't make the payment, but they don't want to be marked down as a defaulter."
Other Tampa Bay developers are surrendering to the market. The latest phase of the once stellar-selling Meadow Pointe community in Wesley Chapel — called Meadow Pointe IV — will likely revert to bondholders. Developers, led by Clearwater businessman Lee Arnold, plan to deed the land to creditors.
A bunch of other communities, most of which barely got off the ground before the market plunged, are prime CDD foreclosure candidates. They include Cordoba Ranch in Lutz, New Port Estates on Gandy Boulevard in Tampa, Concord Station in Land O'Lakes and Riverwood Estates south of Zephyrhills.
Insiders like Lamb and Straley still vouch for CDDs as financing vehicles. By appearing in a homeowner's property tax bill, CDD assessments are much easier to collect, unlike homeowners association fees, which usually are paid out of pocket.
Most examples of Tampa Bay neighborhoods turning shabby for lack of home sales are not CDD neighborhoods. Still, no one has underwritten CDD bonds in Tampa Bay since the housing slump took hold in 2007.
Lamb anticipates changes to CDD rules to prevent developers from drawing on the money too fast ahead of home sales.
"There's not a more secure way to finance construction," Lamb said. "The mechanism still works. It will come back."