BRADENTON, Fla. - Community development districts in Florida have sold billions in so-called dirt bonds in recent years and many are now distressed, while some have defaulted.

The problem likely will get worse before it gets better, says one economist.

Henry "Hank" Fishkind is president Fishkind & Associates Inc. in Orlando. The firm helped form more than 75 CDDs in the state that sold more than $3 billion of bonds in just three years during the recent real estate boom.

Since the early 1980s developers across the state have used CDD bonds to finance infrastructure improvements, such as streets and sewers, in advance of homes or other structures being built. The developer then sells lots, and individual property owners then pay off the bonds through assessments. But the housing bust in Florida has thrown a wrench in the works.

"Our firm is not predicting any significant recovery in the Florida real estate market until 2011," Fishkind said. "Unfortunately ... it will take a fundamental recovery in the real estate market to support stronger payments of debt service."

He said most of the districts his firm worked on are doing well, for now.

"Are there more defaults? Of course. Are they distressing? Sure," Fishkind said. But he added that CDD loans are generally outperforming real estate loans as a category, even though in some cases banks that hold mortgages on the land have stepped up to make bond payments.

"There have not been many foreclosures yet and I hope there are not too many more," he said.

Fishkind believes that older, more mature districts will encounter fewer financial problems than those that came into being more recently at the height of the real estate boom.

Richard Lehmann, who publishes the Distressed Debt Securities Newsletter in Miami Lakes, began paying special attention to monitoring Florida dirt bonds - and potential defaults - in August with the launch of the Florida Community Development District Report, a subscription-based Web site at www.floridacddreport.com.

The site says there are 600 CDD districts in Florida, 438 of which were established in the period from 2003 through 2008. They issued $6.5 billion of municipal bonds to finance infrastructure. Many have not completed infrastructure build out,

Lehmann maintains that over 100 of these districts are in default on $3 billion of bonds.

"We've got 105 defaults so far since the middle of last year and 98 on our watch list," he said, explaining that the watch list typically contains the names of CDDs largely owned by developers that have not yet sold lots to homeowners who are then assessed for bond payments.

Lehmann's "default" list contains districts in various degrees of trouble, including those that dipped into reserves to make a bond payment, those that did not make an interest payment, those that did not make a payment on principal, and those in which the developer or builder declared bankruptcy or the district itself foreclosed on property after bond payments were missed.

Lehmann said details like bond-pricing information still must be added to the site. But that is difficult to obtain, he said, because a handful of institutional investors are holding onto much of the CDD debt.

"Those that have gone on the auction block have been fetching 27 to 40 cents on the dollar," Lehman said.

That was the case with the defaulted bonds sold by Tison's Landing Community Development District, according to data from EMMA, the Electronic Municipal Market Access platform operated by the Municipal Securities Rulemaking Board.

Tison's, a 218-acre, 680-lot planned residential development in Jacksonville, sold $10.3 million of 2005 Series A bonds maturing in 2037 and $26.55 million of 2005 Series B bonds maturing in 2011. Like most CDDs, Tison's bonds were unrated and uninsured.

According to EMMA, the last time Tison's Series A bonds traded was on Aug. 21 when a customer bought $110,000 of bonds with a 5,625% yield that originally sold for 99.627. They garnered 27 cents on the dollar. The last Series B trade also was on Aug. 21 when a customer bought $1.6 million for 30 cents on the dollar.

The developer, Yellow Bluff Development LLC, defaulted on the bond payment before the first debt-service payment was due in the spring of 2008, said Tison's attorney, Jonathan Johnson at Hopping Green & Sams - a firm based in Tallahassee that is general counsel for approximately 160 CDDs in Florida.

"They simply walked away from the project," Johnson said, referring to the developer that owned the land.

With about $31 million of debt outstanding, the CDD then foreclosed on the developer and scheduled the property to be auctioned off on Aug. 18.

"Just prior to that time, our bondholders sold their interest in the bonds to a new group and as the majority bondholder they requested that the district postpone the auction," Johnson said. "We've currently scheduled the auction for mid-October."

No homes were ever built at Tison's, but the district did spend bond proceeds to put in master improvements like roads, water, sewer, and stormwater facilities, as well as a recreation center and pool.

While Tison's did go through default and foreclosure, Johnson said it is not the norm even though many of Florida's CDDs are experiencing a wide variety of distress.

Some of that distress is worsened because newer districts, like Tison's, were unable to get homes built before the real estate market crashed, he said.

"What we really have is tremendous real estate problems in Florida so we have districts like Tison's with land that is in full foreclosure," Johnson said. "We have others where smaller pieces are in foreclosure and others where landowners are working to restructure the debt or establish forbearance agreements."

He considers Lehmann's definition of default to be very broad. "A default is not necessarily the same on every deal," he said. "Dipping into reserves is not always a default under the indenture."

Johnson said he recently had a CDD that dipped into its reserve fund to make a principal and interest payment. A few weeks later, when tax certificates were sold on properties within the district, he said the reserve fund was replenished.

"Is that the same as when the developer walks away?" Johnson asked. "It is a different level of distress."

Fishkind said that CDDs - particularly those that have already used reserves to make bond payments - could experience greater problems as the next bond payments come due in November and next year.

Dipping into reserves, Lehmann said, is a signal of trouble that investors should know about.

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