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HOA vs. CDD: Why You Need To Understand the Difference

Imagine finding your dream home – the perfect layout, ideal location, and then, boom. Hidden fees and regulations surface that leave you scratching your head. It’s a common scenario for new homeowners, and often, the culprits are two acronyms you might not fully grasp: HOA and CDD.

While both involve community living, understanding the fundamental differences between HOAs (Homeowners Associations) and CDDs (Community Development Districts) is crucial. Knowing their purpose, how they’re funded, and their governance can help you make informed decisions and avoid potential financial and legal surprises. Whether you’re starting from scratch in your new home in Austin, TX, looking to level up your patio game at your apartment in Miami, FL, or are getting ready to host at your rental house in Orlando, FL, this guide has everything you need to understand these critical community components.

Understanding HOAs: What you need to know.

Jordan Lulich, Esquire, and real estate attorney with Lulich and Attorneys in Florida, explains that Homeowners Associations (HOAs) are formed as private entities governed by a homeowner’s board of directors.

These associations are responsible for maintaining common areas of the neighborhood and enforcing community rules. Essentially, an HOA is a private organization that maintains and manages a residential community. Think of them as the community’s caretakers, ensuring things run smoothly and aesthetically pleasing. Their responsibilities typically include maintaining common areas like landscaping and amenities such as pools and clubhouses, as well as enforcing community rules and bylaws.

HOAs are primarily funded through regular assessments, which can be paid monthly, quarterly, or annually. These fees cover the day-to-day operational costs and contribute to reserve funds, which are set aside for future major repairs and replacements, like a new roof for the clubhouse or resurfacing the community pool. However, sometimes unexpected major expenses arise, and in those cases, an HOA might levy a special assessment on homeowners.

HOAs are governed by elected homeowner boards, giving residents a direct voice in rules and budgets. Community bylaws and rules are the guiding principles, and homeowners have voting rights and the opportunity to participate in decisions that affect their living environment.

What to know about HOA fees

HOA fees typically cover expenses such as insurance, landscaping, water, and maintenance of common areas.
They can also cover trash pickup, repairs, and property taxes on common areas.
In addition to regular fees, HOAs can charge one-time special assessments for unexpected major expenses, such as roof replacement or emergency repairs.
HOA fees are usually paid separately from your mortgage.
Depending on your HOA’s schedule, fees are due monthly, quarterly, or annually.

Can you refuse to pay an HOA Increase?

If you believe an increase in HOA dues or specific fees is unjustified or doesn’t align with the HOA’s governing documents, you can challenge it. This process typically involves following the procedures outlined by the HOA itself. These might include:

Engaging in discussions with the HOA board or management.
Seeking mediation to resolve the dispute.
Bringing the issue up for a vote among other HOA members

Decoding Community Development Districts (CDDs)

Stepping into a different realm, a Community Development District (CDD) is a special-purpose governmental entity. Unlike HOAs, CDDs are typically created to finance and manage the infrastructure of new communities. This includes essential elements like roads, utilities, stormwater management systems, and sometimes even recreational amenities.

As Karrie Hill, JD, and co-team leader with Smart Agent Alliance, explains, “CDDs are public districts created by developers to build and maintain infrastructure such as roads, utilities, and stormwater systems through municipal bonds. Homeowners repay those bonds over decades via annual assessments added to their property tax bill. Think of CDDs as the financing and management engine that made your neighborhood possible.”

The funding mechanism for CDDs is distinct. They are primarily financed through “non-ad valorem assessments” on property owners. These assessments aren’t based on the value of your property, but rather on the benefits received from the infrastructure. CDDs issue bonds to finance these large-scale infrastructure projects, and the costs are then passed on to residents through these assessments. A key takeaway here is that CDD fees are often included directly in your property tax bill, making them a less obvious but significant, ongoing expense.

In terms of governance, CDDs start with a board of directors controlled by the developer who created the community. As the community matures and more homes are sold, control of the CDD board typically transitions to the residents. It’s important to remember that CDDs operate under state law and possess certain governmental powers, which can be different from the private nature of an HOA.

What to know about CDD fees

CDD fees typically cover amenities like community pools, parks, and playgrounds.
They also fund essential infrastructure, including roads, sidewalks, sewer, and water systems.
General maintenance of these facilities is also covered by CDD fees.
CDD fees are incorporated into your annual property tax bill.
CDD fees are tax-deductible.

HOA vs. CDD: Critical distinctions you need to know

James A. Beckstrom, Esq., highlights that while both Homeowners Associations (HOAs) and Community Development Districts (CDDs) are designed to manage and maintain residential communities, they operate differently. HOAs are private organizations established by developers or residents to enforce community rules and maintain common areas such as parks, clubhouses, and landscaping. Their funding typically comes directly from homeowners through monthly or annual dues.

In contrast, CDDs are public, quasi-governmental entities created by local governments to finance and build infrastructure in large developments, including roads, utilities, and stormwater systems. These costs are generally repaid over time through annual assessments added to the homeowners’ property tax bills.

It’s common for a single property to fall under both a CDD and an HOA?

In such cases, homeowners can expect to pay both assessments imposed by the HOA and fees assessed by the CDD. A key distinction is that CDD fees often have a determined lifespan, being assessed for a specific number of years, whereas HOA fees generally continue for the life of the association. Therefore, it is imperative to review your title policy carefully to understand whether your property is in a community development district and/or a homeowner association.

The core difference between an HOA and a CDD lies in their fundamental purpose. An HOA focuses on the ongoing management and aesthetic upkeep of a community, fostering a pleasant living environment. Conversely, a CDD’s primary role is to finance and construct the foundational infrastructure that makes the community viable in the first place.

When it comes to your wallet, the distinction in funding is paramount. HOA fees are typically recurring assessments for maintenance and amenities. CDD fees, however, are non-ad valorem assessments tied to the bond debt incurred for infrastructure. This means CDD fees are often long-term obligations, potentially lasting for many years, and they transfer with the property when it’s sold.

Governance also sets them apart. HOA boards are elected by homeowners, giving residents direct influence. CDD boards, on the other hand, begin under developer control before transitioning to resident control as the community matures. Furthermore, their legal foundations differ: HOAs are typically governed by private covenants, while CDDs are governmental entities established under state law.

Why understanding the difference matters for homebuyers

Ignoring the distinction between HOAs and CDDs can lead to significant financial surprises. CDD fees can substantially increase your overall cost of homeownership, appearing on top of your regular property taxes and any HOA fees. It’s essential to research and understand the specific fees associated with any property you’re considering.

These are not short-term commitments. CDD debt can be a long-term obligation, potentially lasting for decades, and it automatically transfers to you when you purchase the property. This means you’re taking on that financial responsibility for the life of the bond.

Your influence varies; HOAs offer voting rights and a direct voice, but CDD initial decisions may have limited resident input due to developer control. Understanding this governance difference is key.

Which one is better? The buyer’s due diligence

HOA and CDD serve distinct purposes; neither is definitively “better.” Thorough due diligence is crucial for homebuyers to understand financial obligations and community involvement.

By understanding the key distinctions between HOAs and CDDs, you empower yourself to make informed decisions. Don’t be afraid to ask detailed questions about all community fees, governance structures, and long-term financial obligations. Seeking clarification ensures you are comfortable with every aspect of your potential new home, preventing unexpected burdens down the line.