Florida law has permitted the creation of community development districts or “CDDs” since 1980. According to the Florida Department of Economic Opportunity there are presently 593 active community development districts that have been established within the state. These CDDs qualify as governmental bodies in that they are local units of special purpose government that perform special functions as delineated in Chapter 190, Florida Statutes. CDDs frequently have need for short-term and long-term borrowing to fund improvements, repairs and the like. Commercial banks, in considering these loan requests, must consider both the authority of the CDD to borrow, the available collateral for the loan and also the ability of the CDD to pledge the collateral to secure the debt.A district acts through resolutions adopted by its board of supervisors. This is similar to a city or county acting through resolutions or ordinances of its council or commission. Districts have the statutory authority to borrow money and to issue bonds, certificates, warrants, notes or other evidence of indebtedness. Unfortunately, the district statutes don’t define any of these debt instruments. Of concern to lenders seeking to provide short term financing is the issue of whether the debt is deemed a “bond” which, by law, requires a costly and time-consuming validation process. Short-term borrowing is expressly authorized by F.S.190.015 however the statute offers no express definition of what constitutes short-term borrowing. Importantly, the law does provide that bonds maturing more than five years from the date of issue must be validated under the bond validation provisions of Chapter 75, Florida Statutes and it might be inferred from that provision that loans maturing in less than 5 years would not require validation.
Many districts may have debt already validated, but unissued. That presents the opportunity to make a bank loan with a term of more than five years so long as it follows the terms of whatever was validated in the previous validation action. Any district bond is required to be secured by a trust agreement between the district and a corporate trustee (190.017). This means that a third party (the corporate trustee) is interposed between the lending bank and the borrowing district, a somewhat cumbersome, but not unworkable, structure.
Both short-term borrowing and bonds are subject to the interest rate limitation contained in Section 215.84, Florida Statutes, which imposes a limit of 300 basis points over The Bond Buyer “20 Bond Index” published immediately preceding the first day of the calendar month in which the bonds are sold. The 20-Bond Index published on July 31, 2015 was 3.75 percent. Generally, in the case of an instrument bearing a variable rate of interest, if the method for determining the variable rate doesn’t change during the life of the instrument, subsequent increases in the interest rate under that method are permitted. The interest rate can exceed the foregoing limitation if the State Board Administration authorizes such increased rate.
Bonds issued by a district are exempt from Florida documentary and non-recurring intangible taxes (190.021(6)).
Most debt of districts is backed by a pledge of special assessments, although districts also have the power to assess ad valorem taxes and other taxes, fees and user charges. Assessments imposed by the district are liens on the property against which the assessment is imposed, coequal with the lien of state, county, municipal and school board taxes. (190.021(9) and 190.024). If there is a default, the district, not the lender, must foreclose on the lien created by the assessment.
Lending to CDDs creates opportunities for lenders. However, as pointed out here, it is a specialized area in which prior experience lessens the risk.
