A SHORT PRIMER ON HOAs and CDDs
By Mark LeMenager
Home Owners Associations (HOA) and Community Development Districts (CDD) are very common in central Florida, almost every new development has one or the other or both. When looking at any community it is very important to add the HOA fees and the CDD assessments together to get a true picture of community costs.
What are they? The simplest way to think of them is to split land into Private and Public. HOAs govern Private property while CDDs govern Public property.
An HOA is a non-governmental body which basically sets and controls community standards for private property. Things like what colors of houses are acceptable and when do you need to repaint, how long the grass should be, what color curtains can show through the windows, and etc. The HOA may own and/or control community property and amenities, such as a swimming pool or club house. If the HOA owns or controls the property then such property is not public, it is private.
The only goal of an HOA is to preserve the property values of it’s members.
The Board of Directors of an HOA is elected by property owners, not by registered voters. They are not a governmental body and are not subject to Florida‘s Sunshine laws. HOAs typically employ a management company to administer the rules and the cost of the management company is usually one of the largest expenses.
HOAs are funded by fees which are paid directly to the HOA. If owners don’t pay their fees, an HOA’s main recourse is to take the owner to court and file a lien on the property. Many HOAs have had serious financial difficulties due to their inability to collect their fees.
A CDD is a special governmental body designed to develop (build) infrastructure and facilities in new communities. Things like roads, sewers, water systems, drainage, and parks. Any land or facilities owned by the CDD is public property. At the beginning of its existence a CDD will issue bonds to pay for the initial building. The bonds are typically 20 to 30 years, kind of like a mortgage on public property.
CDDs are popular because it is an easy way for a developer to pay for infrastructure without having to finance it themselves. Without a CDD the developer recoups it’s costs as they sell each lot. With a CDD, they can sell the lots for less because there is already effectively a mortgage on it. Virtually no one is ever told what the CDD “mortgage”, ie, bond balance is on their lot or home.
In theory, one goal of a CDD is to transfer everything it owns to other governmental bodies or to HOAs and then cease to exist. For example, the roads get transferred to the County, the sewers and water system to a utility company, parks to an HOA, and etc. This is a 20 to 30 year process and as the concept is relatively recent, few if any have transferred everything and ceased to exist. Transfers to a private group like an HOA is not allowed under the current rules, so things like parks may be problematic.
The Board of Supervisors of a CDD is initially elected by the land owners and then over time by the registered voters who live within it’s boundaries. Typically within 5 to 8 years after they begin, CDDs are entirely elected in the general elections. The Board of Supervisors is a governmental body and is subject to Florida‘s Sunshine laws. Basically this means that Board members may not have any contact with each other on CDD matters except at public meetings. CDDs typically employ a management company to administer the district between meetings, but the cost of the management company is rarely one of the largest expenses.
CDDs are funded by assessments on property, which are collected together with property taxes. CDD assessments are not part of the tax rate. They are not taxes. They are a non-ad valorem assessment and are not actually deductible on your federal income taxes (although virtually everyone does). Collecting assessments is rarely a problem for a CDD, since unpaid property tax bills are almost always bought by investors in special tax sales.
Depending on the type of CDD, the repayment of the bonds issued to build infrastructure is not the only major expense. It is fairly typical for administration and maintenance to be 35% of the CDD assessment. And while the CDD will someday cease to exist, these costs will never go away and they are not necessarily stable and predictable. These costs will be shifted to whatever agency takes over responsibility for the particular item when the CDD winds down. For example, the County may take over the roads or the HOA may take over the parks. If, for example, the roads were poorly done and are falling apart, then someone will have to pay to repair them and it will be reflected in either your ad valorem property tax rate, if they have already been transferred to the County or in your CDD maintenance assessment if they have not been transferred.
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