The real estate boom of the last decade witnessed an unprecedented growth in the construction of new residential communities. In order to finance the required infrastructure, developers in several states frequently initiated the issuance of billions of dollars in tax free municipal bonds through newly established Community Development Districts (“CDDs”). Funds generated from these bonds were used to finance roads, utilities, retention easements and amenities for the developments, with the expectation that repayment of the CDD bonds would stem from home and lot buyers over the life of the bonds.
The present issue – which was downplayed at the time of CDD creation – lies in the fact that banks which extended loans for the purchase of the land and the construction of new homes within a CDD assumed a junior position to the CDD bonds themselves.
The CDD business model requires one significant premise for success – community growth. The new communities failed to develop as planned, and as a result there were insufficient lot sales and residents to meet the required bond payments. Further, slumping lot sales and depressed property values have prevented developers from repaying land and construction loans to their bankers. As a result, billions of dollars of CDD bonds have fallen into default, as have similar amounts of development debt to banks. Bondholders and banks are left to ponder recovery strategies on assets that currently have a negative present value.
How Focus Can Help
Focus Management Group understands the added complexity which a CDD brings to secured lenders dealing with defaulted debt on over-levered real estate transactions in the current stressed market. Our professionals have the skill to unravel the complicated capital structures and lien rights that occur when defaulted CDD bonds and Tax Certificate sales enter the mix with traditional bank financing. Our team applies decades of experience in real estate development and turnaround engagements to create targeted recovery strategies geared to maximize stakeholder value.
A Sample CDD Engagement
The economic crisis and the consequences of the collapsing real estate bubble caused an abrupt halt in the continued development of the properties owned by a large Florida land developer.
Scope of Engagement
The property’s lender engaged Focus Management Group to serve as the Court-Appointed Receiver with a view to maximize property value and minimize lender losses. The portfolio includes over 7,000 finished and unfinished residential lots, six active and inactive CDD’s, ten HOA’s and numerous lien, entitlement and permitting complexities.
Focus Action
Focus began with an intensive study to determine estimated future lot absorption, carrying costs, selling prices, and delinquent ad valorem and non-ad valorem charges in order to determine the Net Present Value of the projects. With this knowledge, Focus developed a specific ground-up strategy for each community, intended to either minimize future losses or to maximize possible returns. Our analysis resulted in clear, quantifiable options for stakeholders.
Results
Focus Management Group has categorized the communities into three classes based upon the most advantageous outcome for the lender:
- Allow bondholder foreclosure
- Hold for bulk sale
- Hold for continued development
Using this stratification, two communities are contemplated to be turned over to bondholders thereby mitigating risk, while numerous lots have been disposed of through bulk sales and over 4,000 lots are slated for further development.
To learn more about Focus Management Group's experience serving community development districts and their stakeholders, contact Jay Kelley or Keith Hyatt at (813) 281-0062.