We start here with a dream. The dream was of 1,750 acres near the Gulf side of Florida, north of Fort Myers and south of Port Charlotte. Starting out as raw dirt in late 2005, it would in the next half-dozen years become a thriving place for 738 garden condos, 504 mid-rise condos, 208 coach homes, 360 single-family homes, a golf course, a fitness center, a 60-room hotel, and 85 units of commercial office space.

To jump-start the dream—known as the Tern Bay Country Club Resort—developers set up a local quasi-government that Florida statutes allow to create special purpose districts. This Community Development District (CDD) has the financial and operational clout to move a project from a dream to reality, where real people buy the 1,810 or so homes.

To do that, the CDD uses power to collect tax payments from the property owner first, the developer, and then the home buyers.

The kicker is this: Like a shark has to move constantly and eat often, a new CDD must be propelled forward by new-home demand to live. When growth stops, the youngest of these things die.

With assured tax payments from property owners, developers and, one believed, an endless flow of new homeowners, CDDs also have the power to issue bond debt on those present and future payments. In 2005, Tern Bay's CDD issued $58 million in bond debt to fund infrastructure like roads, water supply, sewers, amenities, and to “put down the lots.” The principal contractor to buy the lots and build was Lennar Homes. In addition to the almost $60 million in bond debt, Ocean Bank fronted $61 million for the project's first mortgage.


Developers had high hopes for Tern Bay Country Club Resort on Florida's Gulf Coast, but its Community Development District soon found itself in trouble.

Fast-forward two years to 2007. More than $33 million in development costs later, Lennar cuts loose from the project. Developer Priority Developers walks as well, apparently forgetting to tell the golf course lawn mower service to stop cutting the grass. The CDD starts missing its payment obligations on operations and management, and the project tailspins into default. Said golf course lawn mower service, Hawkins Environmental, winds up at an advertised foreclosure sale on June 29, 2007, and walks away with title to the entire tract for $100.

What happens when a lawn mowing company picks up title to 1,750 acres for $100? He owes bondholders a lot of money. Clearly, it's a mess.

“Prior to May 2008, we had exactly one default in all the years we've been doing this, and now we've got 90-plus that are in various stages of distress,” says Ed Bulleit, a managing director at Prager, Sealy & Co., which has underwritten the lion's share of CDD bond issuances since their creation. “When CDDs were set up in the 1990s, they represented a small component of the capital stack available to the developer. Like everything else, they overgrew during the 2004-to-2007 period because of the intense demand for instruments for liquidity.”

For more than a year, Tern Bay has been slogging through foreclosure proceedings, with legal complexities too numerous to go into. Now, multiply the Tern Bay case by 120 or 130, with upward of $2 billion in bond debt collateralizing land that may be worthless or at least worth far less than the face value of the bonds outstanding.

It is estimated that 100 to 150 CDDs set up in Florida during the go-go years 2003 to 2007 are either already in distress or are likely headed for default and foreclosure. All told, there are just less than 400 Florida CDDs, with about $8 billion in bond debt outstanding.