BRADENTON, Fla. — Florida Gov. Charlie Crist and his cabinet today will be asked to approve higher interest rates than allowed by law, which six community development districts may need to pay in order to issue tax-exempt bonds to finance infrastructure improvements for the construction of new homes, condominiums, and commercial and industrial projects.
The higher rates could be needed to compensate investors due to volatile real estate and bond market conditions, according to bond counsel, underwriters, and a financial advisory firm hired by the state to review the interest rate exceptions.
“There are really two fundamental reasons why we’re seeing these transactions above the statutory maximum and those are market conditions in the municipal market and the blowout of credit spreads that have occurred because of the subprime slide,” explained Florida Division of Bond Finance director Ben Watkins, who assisted in reviewing the interest rate exceptions or waivers.
Community development districts are special-purpose entities created under Chapter 190 of Florida law. They enable builders and developers to sell tax-exempt revenue bonds secured by assessments to finance all of the costs associated with infrastructure such as roads and transit facilities, utilities, sewer and water systems, recreation facilities, and more. CDD bonds are usually sold unrated and uninsured to accredited investors.
The law states that CDD bonds can bear interest at a rate not to exceed an average net interest cost rate computed by adding 300 basis points to The Bond Buyer 20 Bond Index published immediately preceding the first day of the calendar month in which the bonds are sold.
Letters seeking interest rate exceptions for the six CDDs stated that the sum of 20 Bond Index in effect for January 2008 was 4.44% and that adding 300 basis points results in a maximum interest rate of 7.44%.The CDDs requested various interest rate waivers based on several factors, including whether the development was new or under construction.
“We haven’t exceeded [the state cap] yet and all of these interest rate waivers are a precautionary measure in case the issuer needs it,” said Kenneth Artin of Bryant Miller Olive PA, who is bond counsel for the Arlington Ridge Community Development District and Pine Air Lakes Community Development District.
The two CDDs plan to issue $11 million of special assessment bonds and $4 million of revenue bonds, respectively. Prager, Sealy & Co. is the underwriter for the Arlington deal while Banc of America Securities LLC is the underwriter on the Pine Air deal.
Arlington is seeking an interest rate exception not to exceed 8.125%. The CDD is a 486.64-acre development consisting of 940 single-family homes, 94 multi-family town homes, a golf course, and recreation areas in Lake County. Arlington’s proposed bond issue is to finance infrastructure in a phase of the development where no homes currently exist, Artin said.
The Pine Air Lakes CDD also is asking for an interest rate exception not to exceed 8.125%. Pine Air Lakes is a 150-acre retail, commercial, and office park in Collier County.
“I don’t think the expectation is that interest rates are going anywhere near that number,” Artin said “We’re doing this merely out of an abundance of caution.”
The Torrey Groves Community Development District wants to sell $14 million of special assessment revenue bonds with Raymond James & Associates Inc. as underwriter. The CDD is seeking an interest rate exception not to exceed 8.5% and plans to use proceeds for infrastructure associated with a 105-acre development of 670 condominiums, villas, and single-family homes as well as commercial and retail space in Hardee County.
When the Torrey Groves bonds price in March or April, the interest rate could exceed the state limit due to current market conditions, said a Dec. 13 letter explaining the need for a higher rate signed by Raymond James vice presidents Tom Green and Alex Bugallo.
“This request is made in the context of one of the most difficult markets to complete land-based financings in Florida in recent years,” the letter said. “The significant slowdown in the residential real estate market and the overall credit crisis resulting from sub-prime mortgage defaults has caused interest rates and credit spreads for CDD financings to double and in some cases triple.
“Institutional buyers are requiring these higher spreads to compensate them for the perceived risks of owning land-based bonds in the currently weak development market,” the letter continued. “We expect that spreads will remain high or widen even further as the residential development market in Florida continues its contraction.”
The Raymond James letter concludes with the expectation that other interest rate exceptions would be forthcoming.
And among the six waivers before the governor and cabinet tomorrow is Two Creeks Community Development District, which is asking for an interest rate exception not to exceed 9% — the highest of all six waivers being sought.
Two Creeks proposes to issue $11 million of capital improvement revenue bonds. Banc of America Securities, the underwriter, could not be reached for comment and neither could bond counsel, William Tyler at Nabors, Giblin & Nickerson PA.
Documents filed with nationally recognized municipal securities information repositories show that Two Creeks has experienced the impact of the housing market decline in Florida.
The CDD, which is planning to build 624 single family homes in Clay County, issued $13.1 million of bonds in October 2006 to fund a portion of the district’s capital improvements. At the time, the CDD had seven builders with contracts to purchase approximately 90% of the 624 lots anticipated to be developed within the district.
In a “Notice of Material Information” filed with NRMSIRs in November, Two Creeks told investors, “The homebuilding industry in Florida is currently undergoing significant slowing of new home sales and new home closings, as well as an increased rate of cancellation of new home purchase contracts, as compared to recent years.”
“Since October, 2006, five of the builders have defaulted on their lot purchase contract and forfeited in excess of $2,000,000 of deposits to the Developer,” the NRMSIR notice said. “The other two original builders have significantly re-negotiated their lot takedowns and prices.”
Public Resources Advisory Group, which was hired by the state to review all of the interest rate waivers, said Two Creeks proposed new bond issuance was necessary because project costs exceeded proceeds from the 2006 bond issue.
PRAG found all six interest rate waiver requests “reasonable” after reviewing market conditions, including the Buckeye Park Community Development District, which wants to sell $16 million of revenue bonds with Banc of America Securities as underwriter. The district is seeking an interest rate exception on the bonds not to exceed 8.125% and plans to use proceeds for infrastructure related to a 137.5-acre light industrial park in Manatee County.
The sixth waiver being considered today is that of the Beeline Community Development District. It is seeking a rate not to exceed 8% for the sale of $11.5 million of bonds with Prager Sealy as underwriter. Beeline is a 960-acre commercial and industrial development in Palm Beach County.
It is not clear whether the governor or cabinet members will discuss the increase in interest rates, which is passed along to homeowners who pay assessments in CDDs, or whether timing of the transactions will be questioned given the high number of foreclosures as well as unsold new homes and condominiums on the market in Florida.
Currently, there are 547 active CDDs in Florida with the power to issue bonds, state records show. Since Florida’s CDD law was enacted in 1980, more than $11 billion of debt has been sold, according to Thomson Financial.