HOA and CDDs

An HOA is a home owners association. There are also property owners associations (POA). A home sometimes can be located in (or within) multiple HOAs. A master or principal HOA with several or multiple neighborhoods within, each having its own HOA. There are dues that are payable either monthly, quarterly or annually. There are disclosure, budget and financial documents associated as well as rules and regulations. The declaration of Covenants, Conditions, and Restrictions (CCRs) is important regarding what is allowed, not allowed, required and even subject to fines. So if you are a Baltimore Ravens fan, for example, and insist on a Purple front door, you might want to read the CCRs to ensure compliance.

There are guard gated HOA communities, gated HOA communities and non-gated HOA communities.

Some like HOAs while others dislike them. If you presently do not live within an HOA community or are unfamiliar with HOAs in general, why not take some time and research or inquire about HOA particulars?

For example, look at the two images below. Both are map sketches of lots within the same HOA community. Lot #1 (the image on the left) is 1.55 acres. Lots #21 and 22 (the image on the right) are a combined 1.19 acres. The HOA dues for the residence on the 1.55 acre parcel are $442 per month. However, the HOA dues for the residence on the slightly “smaller” 1.19 acre combined parcel are $884 per month. What? Why? Apparently because there are two combined lots. Seriously? Yep. So, does the HOA provide individual professional landscaping services or maintenance for its residents as possible justification for the exorbitant difference? Nope, residents pay independently and privately for their own individual landscaping and maintenance needs. Are all HOA communities structured as such? No, just some. Which is why it is important to research and ask in advance.

The acronym CDD is widely used. There’s Customer Due Diligence, Collaborative Drug Discovery and there’s even a CDD used to measure temperature called Cooling Degree Days. Those are just a few.

CDDs in real estate are Community Development Districts. In simple terms, it’s an arrangement in various states between county governments and developers. It allows developers to establish master-planned communities then finance the cost of community amenities within the neighborhood(s). What does that entail? Simply put, the cost of the community amenities are paid by the residents of that community operating under that CDD. The assessment (or fees) are usually due annually, found on one’s property tax bill as a Non-Ad Valorem assessment. The line item will usually reflect something like: ‘ABC CDD’ or ‘XYZ CDD’.

Not common knowledge is that many CDD assessments have two portions. A debt service portion, usually a 20 or 30 year bond with a fixed interest rate, and an operations and maintenance (O&M) portion. Believe it or not, if you want to pay off the debt service portion you usually can. You would just need to contact the right person working on the CDD team and request a payoff quote. Besides, not sure if CDD interest is IRS FORM 1098 eligible, like with mortgage interest?

Most CDDs have websites and some even have user friendly portals allowing access via a parcel ID number. Upon entering a parcel ID number, a breakdown of operations & maintenance (O&M) vs Bond information can be seen. To give an example, the Non-Ad valorem assessment on the annual tax bill reflects $2,365.58. The print option from the CDD website shows: $364.24 for O&M and $2,001.34 as a Capital Assessment Series. Actually, in this example there are two bonds but one was recently paid off by the builder. Interesting, yes. The CDD website display page for the parcel in question also shows the Capital Balance for the Bond, which is: $26,426.99, with 28 years remaining.

Here’s where it gets interesting. The developer has already kicked the can down the road, leaving pro-rata debt for the resident homeowner (that’s clear). Depending on how long the homeowner plans on keeping the home, the question entertained might be: “why pay off a debt that I too can kick down the road?”

Interestingly, many are cognizant of credit card interest, loan interest and lender or mortgage interest. But what about bond interest? No, not 1099 interest income on instruments like Savings Bonds, the interest that is paid on Bond debt by the homeowner? The $26,426.99 balance mentioned above with the $2,001.34 annual Non-Ad Valorem assessment paid over 28 years yields about $29,610.53 in interest since the total to be paid is $56,037.52. That’s roughly 6.25% in fixed interest with no form 1098 from the CDD, unless CDDs provide residents with a form 1098 reporting the annual interest paid?

There’s probably a small percentage of homeowners that pay off CDD bond debt. Perhaps home buyers who pay cash that plan to leave the home to surviving family members as an inheritance?

In addition to HOA dues and CDD assessments, some communities offer club memberships. Some are optional, others are required. Often there are colorful brochures available outlining membership dues and various fees. So, depending on the state and where applicable, make sure you receive timely disclosures for any dues, fees and assessments.