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Community Development Districts

Dirt Bonds Drying Up In Florida

BRADENTON, Fla. — ­Investors in Florida’s distressed community development districts should expect an increasing number of defaults, primarily on bonds sold during the state’s real estate boom years, a new report by ­Interactive Data Corp. warned yesterday.

Semiannual payments due in November showed a sharp increase in the number of CDDs drawing on debt-service reserves and those not paying interest, the report said.

Of the approximately $5.6 billion of outstanding special assessment-secured dirt bonds under surveillance by Interactive Data, about $2.4 billion, or more than 40%, drew against their debt-service reserves or failed to make interest payments in November. 

“This represents a large increase from May 2009 when 80 districts with approximately $1.7 billion in bonds outstanding experienced similar difficulties,” Interactive Data’s report said.

The CDD bond sector has been one of the hardest hit in Florida because of the recession’s traumatic impact on the state’s overbuilt real estate market and foreclosures. The so-called dirt bonds are repaid from special assessments on homes sold in the district.

However, Interactive Data’s report cites as an additional complication the growing use of so-called Series B bonds, which were to be repaid out of the sale proceeds of houses.

The report said overall, 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, according to state records. Since the early 1980s, the districts issued more than $11 billion of debt to pay for infrastructure such as roads, water, and sewer systems.

More mature CDDs that are built out or nearly built out have experienced fewer problems, said Jay Abrams, chief credit analyst at FMSbonds.com based in Florida.

“The ones that are mostly built out eventually will be completed and will be fine,” Abrams said. “If you have districts that were in the early stages and didn’t have any build out, you might have more question as to the longer term.”

However, a significant amount of Florida dirt bonds were sold during the 2004-2007 real estate boom and nearly all of the bonds under Interactive Data surveillance that either drew on reserves or failed to make payments were sold in that period.

 The report covers 96 districts geographically dispersed across Florida, though about 25% are concentrated in the Tampa area, Interactive Data said. Many of the districts are not built out, and some exist with simply infrastructure and no homes.

Some of that debt sold during the real estate boom was structured with only semiannual debt-service reserves, Interactive Data analyst Edward Krauss told investors in a Web presentation yesterday.

With many tapping reserves to make the first semiannual payments last May, and even more districts tapping reserves in November, “it won’t take much before they are not able to pay debt service,” Krauss said.

And the districts are likely to continue under pressure for some time, Krauss noted. He cited as factors stressing the districts Florida’s 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.

Additionally, Krauss said analysts do not see anything in Florida’s real estate market now that leads them to believe that a turnaround is near. That’s despite the fact that other severely stressed areas are seeing real estate markets bottom out or are showing signs of improvement, such as the areas around Denver and even some parts of California where land-secured bonds also are sold, Krauss said.

Recovery of Florida’s dirt-bond sector will depend on a number of factors, the biggest being the overall housing market and the willingness of banks to lend, said Abrams, who believes some CDDs never will be built out while others will eventually produce income — but at a lag.

“It’s too early to know which of [the CDDs] are going to succeed and which ones won’t,” Abrams said.

Dan Seymour contributed to this story.

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