Developers that used Community Development Districts (CDDs) to finance infrastructure for master planned communities face dual hazards: the lack of buyers and deflation. The lack of buyers means that the developer must pay the assessments that buyers would have paid. Deflation in lot prices means that the projected profit for the entire project might not be enough to repay any developer equity and any traditional bank debt for infrastructure that the CDD financing did not cover. The below article will examine the typical fact pattern for a project with CDD and bank financing and some issues that lenders should analyze.
The CDD is located in XYZ County, Florida and was established in 2007. In 2007, the CDD issued 2007 A Bonds and 2007 B Bonds (Bonds) for approximately $20 million. The CDD covers approximately XX acres and was designed to contain YY residential units together with an amenity center. Whiteacre Development Company, LLC (Developer) purchased the property for approximately $15 million and used an acquisition and development loan with XYZ Bank (Bank) for the acquisition of the property and construction of all infrastructure that the CDD did not construct which, for this CDD, is the amenity center. At the time the Bonds were issued, the Bank acquisition and construction loan was $25 million. The manager for the CDD confirmed that neither the Developer nor the Bank have paid the CDD assessments due April 1, 2009. A graphic representation of this structure lease is available at http://www.foley.com/files/CDDStructureChart.pdf.
Essential CDD Structure Facts
- The CDD imposes assessments against the project land to obtain income for the repayment of the Bonds, for which assessments are usually repaid in installments as follows:
- A Bonds are usually paid back over 30 years by the purchasers of lots, parcels, or units.
- B Bonds are usually paid back over a five-to-seven-year period by the Developer at each closing of a lot, parcel, or unit.
- CDD assessments have same priority as ad valorem taxes, meaning that the unpaid assessments have priority over any mortgages.
- Assessments are collected via two methods:
- The tax collector can collect the assessments with the normal tax bill (“on the roll”), which is the usual method of collection after the original developer sells the lot, parcel, or unit to a buyer. The assessments are due the same time ad valorem taxes are due, and the enforcement procedure for this method is the same as for ad valorem taxes, which involves the following:
- Sale of tax certificates.
- Tax deed two years after the tax certificate.
- The CDD can collect the assessments against the Developer via direct pay agreements (“off the roll”), which is the usual method of payment until the Developer sells the lot, parcel, or unit. This method of assessing involves the following:
- The assessments are usually due in sub-annual installments at least twice a year and usually a few days prior to the dates that most bond principal and interest payments are due: November 1 and May 1 of each year.
- If the sub-annual assessment is late, the entire assessment (not just the annual installment) is accelerated.
- The CDD enforces the assessment default via a foreclosure similar to any commercial foreclosure. For a discussion of the current acceleration and foreclosure law, please see Foley’s previous alert on Florida CDDs at http://www.foley.com/publications/pub_detail.aspx?pubid=6037.
- The Bank makes loans to the Developer for acquisition and/or development of infrastructure such as the amenity center.
- The economic downturn flattens or slows sales of lots, parcels, or units to the point that:
- The Developer cannot pay the taxes, assessments, or interest and principal on the Bank’s acquisition/development loan.
- The economic downturn may have decreased the value of the project.
- Is the Bank monitoring the Developer’s payment of the assessments?
- What are the assessment installment payment schedules for the A and B Bonds?
- Is the Developer paying the assessments directly to the CDD or is the tax collector collecting the assessments?
- Is the assessment debt accelerated if an installment payment is late?
- Can the Bank make a late payment of the assessment after it has been accelerated?
- If the project’s value is more than the accelerated assessment debt, should the Bank allow the default in the payment of the assessments and acceleration?
- If the project’s value is more than the amount of the accelerated assessment debt, but not enough to cover the Bank’s debt, what are the Bank’s options?
Bank Decision Tree
- The Bank debt is behind the entire assessment debt.
- Immediate action is required by the Bank if the assessments are being collected directly from the Developer and a late payment of any installment for the assessment causes an acceleration of the entire assessment.
- If the project’s value is over and above the entire assessment debt, the Bank should not allow the default in the payment of the assessments and avoid acceleration, with the following in mind:
- Preserving the installment payment schedule of the A Bonds may be beneficial to the valuation of the project.
- Late payments are not authorized by the statutes, but it is possible to negotiate non-statutory Settlement Agreements with CDDs and the holders of the Bonds in late payment instances.
- If the project’s value is over the amount of the entire assessment debt, but not enough to cover the Bank’s debt, it is time to consider negotiating for a reduction in the Bond principal and the supporting assessment.
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If you have any questions about this Legal News or would like to discuss the topic further, please contact your Foley attorney or the following individuals:
Emerson M. Lotzia
Robert M. Rhodes