If it sounds funny, and you think you’ve heard of it, but are still not quite sure what it means…you’re not alone. We’re breaking down Mello-Roos – what it is, and what it may mean to you.
how Mello-Roos came to be.
In 1978 Californians enacted Proposition 13, which limited the ability of local public agencies to increase property taxes based on a property’s assessed value.
In 1982, the Mello-Roos Community Facilities Act of 1982 (Government Code §53311-53368.3) was created to provide an alternate method of financing needed improvements and services.
the Mello-Roos Community Facilities Act of 1982.
The 1982 Act allows any county, city, special district, school district or joint powers authority to establish a Mello-Roos Community Facilities District (a “CFD”) which allows for financing of public improvements and services, including:
- streets, sewer systems and other basic infrastructure
- police protection, fire protection and ambulance services
- schools, parks, libraries, museums and other cultural facilities
By law, the CFD is also entitled to recover expenses needed to form the CFD and administer the annual special taxes and bonded debt.
why would a Mello-Roos CFD be needed?
A Mello-Roos CFD is created to finance public improvements and services when no other source of money is available.
- Mello-Roos CFDs are normally formed in undeveloped areas and are used to build roads and install water and sewer systems so that new homes or commercial space can be built.
- Mello-Roos CFDs are also used in older areas to finance new schools or other additions to the community.
how is a Mello-Roos CFD formed?
A Mello-Roos CFD is created by a sponsoring local government agency. The proposed district will include all properties that will benefit from the improvements to be constructed or the services to be provided.
A Mello-Roos CFD cannot be formed without a two-thirds majority vote of residents living within the proposed boundaries. Or, if there are fewer than 12 residents, the vote is instead conducted of current landowners. In many cases, that may be a single owner or developer.
Once approved, a Special Tax Lien is placed against each property in the CFD. Property owners then pay a Special Tax each year. If the project cost is high, municipal bonds will be sold by the CFD to provide the large amount of money initially needed to build the improvements or fund the services.
how is a Mello-Roos annual charge determined?
By law (Prop. 13), the Special Tax cannot be directly based on the value of the property. Special Taxes instead are based on mathematical formulas that take into account property characteristics such as use of the property, square footage of the structure and lot size.
The formula is defined at the time of formation, and will include a maximum special tax amount and a percentage maximum annual increase.
The Mello-Roos bond tax is usually added to the annual property tax bills.
how long will the charge continue?
If bonds were issued by the CFD, special taxes will be charged annually until the bonds are paid off in full. Often, after bonds are paid off, a Mello-Roos CFD will continue to charge a reduced fee to maintain the improvements.
The Mello-Roos bond tax usually has a duration of 20-25 years and can increase up to 2% annually for the entire duration of the bond. Many Mello-Roos bonds can be paid in full at the time of purchase; however, given the average homeowner moves every 7 years, it is often prudent to spread the payments over time.
important Mello-Roos homeowner tips.
1. Rights to Accelerated Foreclosure.
- It is important for CFD property owners to pay their tax bill on time. The CFD has the right (and if bonds are issued, the obligation) to foreclose on property when special taxes are delinquent for more than 90 days.
- Additionally, any costs of collection and penalties must be paid by the delinquent property owner. This is considerably faster than the standard 5 year waiting period on county ad valorem taxes.
2. Disclosure Requirement for Sellers (California Civil Code §1102.6).
- When reselling a property in a CFD, the seller must make a “good faith effort” to obtain a Notice of Special Tax from the local agency that levies the Special Tax, and provide it to the buyer.
Courtesy of CaliforniaTaxData.com
All information contained herein is for informational purposes only and is not intended to offer advice – legal, financial or otherwise – about specific situations or problems. Information is deemed reliable but not guaranteed. Always consult a professional before making decisions about your real estate situation.