Lots to Think About
There’s a shortage of home building lots in Florida. No joke.
Unemployment’s nudging toward 15% in many areas, and in-migration to the state is scarcely half of what it was during the first part of the decade, and new-home sales absorptions are a trickle of what they were when camp outs for community grand openings were the rule.
Still, Florida has a home building lot shortage. Hovnanian has said it’s looking for lots there. So are others.
Too bad they can not put their hands on the more than 60,000 finished, vacant, crying-to-go-vertical lots tied up among a host of failing Community Development Districts. That won’t happen for another year or two, most likely.
As of May 2009, as many as 90 of Florida’s Community Development Districts–of the 384 active districts with $7 billion in bond debt issued on them–showed material signs of distress in handling payments due to bondholders. These districts, which had worked in Florida for a decade as a solid, if creative, means of seeding properly funded new communities. In concept, a CDD is a quick-mix local government with taxing powers that starts out as disproportionately mindful of developers’ interests and eventually passes the baton of management and direction to homeowners who populate the new neighborhood.
They work fine except when two situations occur. One of them is when there’s so much liquidity looking for returns that they result in absurdly plotted residential communities. The other is when there’s no liquidity and no demand for new homes in their market area. Like other investment vehicles, CDDs have their Ponzi-esque need to grow to survive. By nature, they must either please or spread misery. There’s no Zen between for a new CDD. It’s either twice-yearly seven-figure payments–May 1 and November 1–of principle and interest and operations and management fees as taxes or people walk away, or sue, or lose their shirts, or hover around waiting to strike when all of the above is going on.
Many people compare CDD debt to bank debt. For builders and developers, it works quite the same way. It’s non-recourse, so you can turn over the land and walk away, and if the land’s worth less than the money already laid out on roads, water lines, sewar lines, parks, golf courses, town centers and the like, well that’s just the bondholders problem, no?
Bondholders don’t get into bondholding to take much risk, and when the consequences of risk rear their ugly heads, bondholders don’t like it one bit.
What’s more, the bondholders are not the only ones needing to take a hair cut here. CDD bond debt is only one part of the capital stack for most of the big disastrous plans, at least a third of which should never passed anyone’s IRR hurdles during the 2004-to-2007 land orgy. Banks–whose debt is junior to the bondholders–are looking at those non-performing CDDs with blood in their eyes.
If the market and all those lawyers grind forward in predictable fashion, the banks will be holding worthless mortgages, and the bondholders will either be in the land business, or looking for some other tax-free municipal asset play with some pennies to show for their 2006 dollars.
New credit may come in having satisfied bondholders desire to put this thing in the past, and they’ll shut down the CDDs, and the cost of the land will be zippo with 30 to 70 cents paid on the dollar for horizontal development.
Thing is all the lawyers have got to clock their hours first. It’s got to take 12 months for this proceeding and six months to secure that ruling, etc.
So 60,000 finished, vacant, home building lots–some of which might actually represent real estate value in today’s marketplace if they were got for the right price ($0)–will likely remain tied up in legal complexities, even as companies that need them become casualties of the siege.
It’s the same everywhere. Since the price of new homes is already reset lower in the minds of most home buyers, there is a shortage of lots that work at that new price limit.
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