I was interested in the question of suburban planning by private entities and the somewhat tenuous relationships between private developers, governmental officials, and residents.
One part of this nexus in Florida is a state-sanctioned giveaway to developers through the establishment of “Community Development Districts.” Technically, these CDDs are public governments–like a city–which can perform certain municipal services and raise financing through tax-free bonds. Developers seek to establish CDDs at the early stages of a community’s construction and use their municipal authority to raise money through bonds for infrastructure.
The bonds are serviceable over the long-term, making future homeowners liable for the debt. CDDs are liked by developers since they don’t have to outlay all of the initial infrastructure costs. Homeowners pay the costs through assessments after they buy the property from the developer.
One of the problems with the system is that it can be easily abused. During the early years debt obligations can be racked up while the CDD is controlled by the developer. In the case of The Villages, one of the things I pointed out was that the CDD paid significant sums of money for “improved properties” that were owned by the developer and that there was some criticism that the CDD paid well over the market rate.
The New York Times today has an article discussing an IRS investigation into this very issue. It is hard to get the actual legal angle from the article, but it appears that the IRS is saying that the CDD should have paid taxes on some bonds issued by a Villages CDD since the transaction was essentially benefiting the private developer.
I haven’t seen large studies of CDD financing, but I would guess that what was going on in The Villages is not unusual in other large developments in Florida. If the IRS wins this battle, it could have a significant impact on how developers use this fiancing scheme. Ironic, however, is the fact that any CDD found liable for back taxes is likely no longer controlled by the developer, but by the residents. Thus, the CDD would have to increase its assessments on current property owners to satisfy their liability!