CDD FEES - WHAT CAN GO WRONG?
CDD Fees – What can go wrong? Yesterday, we reviewed just exactly what are CDD fees. We examined what they are used for in real estate development and how they work with a new community.
Now let’s look a little more in depth at CDD fees, how they are structured, managed, and some commonly voiced complaints and drawbacks of the CDD.
If you read the last article you now know that financing for Community Development Districts comes from a lending institution, usually in the form of a bond that’s payable over 20 to 30 years.
ARE CDD FEES PROPERTY TAXES?
Payment for these bonds is usually managed by the local taxing authority (sometimes the county or city government), but these are not considered property taxes. The local government does not dictate the amount of the CDD fee’s, the local CDD board is responsible for dictating the fee amount. The fees are an addition to property taxes. They do not contribute any money to municipal expenses, like schools, police and fire, or local government.
Why is this important to understand? Because Florida state law has something called Save Our Home Amendment 10. This State Amendment limits the amount the property tax can increase in a given year for residents of Florida (3% or a percentage of CPI for the preceding year, whichever is less). CDD’s have no such annual increase limit annually. Though it is very rare for CDD fees to increase substantially year over year, its important to understand there is no law to prevent it.
WHAT IS A CDD BOARD AND WHO APPOINTS THEM?
Once the CDD is formed, the real estate developer typically appoints in management board to oversee the CDD. This Board of Supervisors is composed of five appointed board members. Yes, you read that right, the real estate developer is the one responsible for initially appointing the CDD board members.
After a period of time, and after a percentage of development has been completed in the new community, a transition takes place, and the residents begin electing the board members of the CDD themselves.
So now let’s take a look at some of the things that can go wrong and some of the disadvantages of the CDD.
As you can probably guess the real estate developer is going to likely appoint people to the board who are in agreement with their vision and financial interests. However, Florida state law concerning CDD’s does its best to protect the interests of the residents from real estate developers who are solely focused on making as much money as fast as possible and leaving a poorly constructed community infrastructure in the hands of the residents.
Don’t misunderstand, real estate developers are not bad, and in the overwhelming number of cases they develop new communities with the goal of providing quality affordable housing in safe communities to residents while complying with local and state laws.
WHAT ARE COMMON COMPLAINTS ABOUT CDD'S ?
There are some people who complain that CDD’s, when initially formed, are a form of taxation without representation, because the residents are at the mercy of the CDD board and its decisions and an impact on their finance. Theoretically there is no limit to the amount a CDD can increase annually.
CDD fees are typically structured with a 20 to 30 year payoff based on projected sales and development costs for the real estate. In the event some unforeseen circumstance such as a severe economic downturn, or natural disaster occurs, then CDD’s could rise to offset unexpected losses of revenue or increases in expenses.
When CDD board members are elected its important to find board members with some experience in management or real estate. A board of CDD members who have little experience can make poor decisions that could have an economic impact on the community they represent.
Sometimes community members disagree with CDD board members about the allocation of funds, reserve amounts, or maintenance schedules for common areas and infrastructure. As usual, when money is at stake, everyone thinks their own opinion is the right one.
Look, this article isn’t intended to scare you or convince you that CDD’s are bad or risky. There are many advantages of CDD’s and in the next article, CDD Benefits, we will discuss all of the different ways a CDD can be advantageous to housing values and provide outstanding amenities you couldn’t get in other communities.
About the author – Ken O’Brien is a licensed Florida real estate agent in Sarasota, Florida with the December 2020 real estate brokerage. He and his team focus on delivering the best services for their clients in the Sarasota, Florida and Lakewood Ranch, Florida real estate markets.