July 23, 2014

Community Development Districts

Down and Dirty: $3 Billion in 'Dirt Bonds' Are in Default

They were used for boom-era real estate developments.

| 7/1/2010
Monterra development in Cooper City
Monterra development in Cooper City [Photo:Eileen Escarda]

Searching the debris field left by the crash of the real estate market in Florida, investors Armando Codina and Jim Carr found a salvageable project. Monterra, in south Broward County, had location — equidistant from I-75 and I-95, a short hop to Miami. Hollywood-based home builder Tousa had bought the site, a dairy farm, in the boom and envisioned 1,610 homes.

To finance construction of streets, water pipes and other infrastructure, Tousa used a vehicle fairly common in new developments in Florida. With the county’s blessing, it created for Monterra a community development district, a quasi-governmental entity that can borrow money in the bond market and tax its property owners to pay the bonds off.

The Tousa-controlled district — one of 73 formed in Florida in 2005 — sold $129 million in bonds. Developers make the initial payments on CDD bonds, known as “dirt bonds,” with homeowners assuming a bigger share of the debt service as they buy homes.

But real estate collapsed, Tousa went bankrupt in 2008 and the bonds, like plenty of dirt bonds in Florida, tumbled in value. Codina and Carr bought the Monterra bonds at a discount, along with the land backing them as well as the mortgage on that land. Now, with their low basis in the property, they are turning a profit by selling new homes for prices competitive with what foreclosed homes, short-sale deals and other new homes in the area fetch.

Jim Carr
Builder Jim Carr and business partner Armando Codina bought the community development district bonds for the Monterra development in Cooper City at a 29% discount. [Photo: Eileen Escarda]

In the tangled world of current real estate finance, not all dirt bond disasters are likely to work out so neatly.

As of May, Florida had 125 districts in default on more than $3 billion in bonds, the single biggest muni bond default wave in at least 30 years, says Richard Lehmann, a Forbes columnist and publisher of Miami Lakes-based Distressed Debt Securities. He says another 70 districts are teetering toward default. Troubled Florida community development districts became such a hot topic that last year he launched floridacddreport.com just to track them.

Another firm, Bedford, Mass.-based Interactive Data, says $2.4 billion, or more than 40%, of the $5.6 billion in dirt bonds it monitors, failed to make interest payments in November or had to draw against reserves to do so. “That’s certainly an unprecedented state of affairs,” says Mark Heckert, senior director of evaluated services for Interactive.

Nearly all the bonds were issued from 2004 to 2007 and represent projects across Florida, though a quarter are in the Tampa area.

Tags: Banking & Finance, Housing/Construction

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