The Real Benefits of Mello-Roos
As always, today's families recognize the importance of living in a community that's as desirable as their home itself. Mello-Roos enables critical community facilities to be provided whenever they're needed at a lower cost ultimately to homeowners. By doing so, Mello-Roos ensures a higher quality of life for every family in that community. Perhaps most importantly of all, Mello-Roos helps preserve the value of your new home investment.Where did Mello-Roos Come From?
When Proposition 13 passed in 1978, it severely limited the ability of local governments to use property taxes to construct public facilities and services. As a result, Californians were forced to find new ways to fund public improvements in their respective locales. The Mello-Roos Community Facilities Act of 1982 was co-authored by Senator Henry Mello of the Monterey area and Los Angeles assemblyman Mike Roos. Enacted by the California legislature, the Act enabled "Community Facilities Districts" (CFD's) to be established by Counties, Cities and School Districts as a means of obtaining this crucial community funding. Today the colloquial name for the Facilities Act of 1982 is simply "Mello-Roos."
What Public Facilities are Funded by Mello-Roos?
The Problem: Before Proposition 13, state and local governments used income collected through property taxes to build new roads, schools and other necessary community facilities. In order to continue building residential areas, these same governments were forced to require builders of new communities to pay for these public facilities. Consequently, these funds were added to the cost of the new homes. These price increases hurt new home buyers and fewer people were able to afford these higher priced homes.
The Solution: Since state funds are not available to provide the quality of facilities necessary in every community in California, Mello-Roos makes the acquisition of timely financing possible. In addition, Mello-Roos can provide financing for other vital community needs. These needs include the construction and maintenance of public roads, traffic light systems, storm sewers, water mains, police stations, fire stations, ambulance services, public libraries, recreational parks, museums and cultural facilities. Now homeowners are paying for these improvements through their Mello-Roos Community District as part of their property taxes, spread out over 20 years or more instead of as an initial increase in their home purchase price.
How is Community Funding Provided?
Let's say, for example, that plans for a new school are approved in your Community Facilities District. To finance the school, tax exempt municipal bonds are issued. These public bonds are repaid (or secured) over an extended time through the levy of a special tax (Mello-Roos) on properties that benefit from the facility. This tax is usually added to the annual property tax bills (over a 20-25 year period) of residences within the CFD. Commercial and industrial property owners are also subject to Mello-Roos. All proceeds raised from Mello-Roos assessment must be used exclusively to finance the specific public facilities and/or services that were authorized in your CFD.
How Much Will I Be Assessed?
This will vary from one CFD to another. Typically, an adopted formula that relates to the size of the home (square footage or lot size) is used to determine the amount of an individual assessment. In general, the special taxes and assessments do not exceed 1% to 1.5% of the market value of new homes. Moreover, the total amount of all annual taxes (including property tax) usually does not exceed 2% to 2.5% of the home's market value.
Will My Mello-Roos Tax Increase
It can. However, this special tax can increase only at a maximum rate of 2% per year over a 25 years period. On the other hand, it's possible that this tax will decrease, should state or other funds become available that could be used to reduce existing bond indebtedness, or be used to construct new facilities in lieu of additional bond sales.
Can I Choose How to Pay for Mello-Roos?
Yes. As already mentioned, the special assessment can be added to your property tax bills until your portion of the tax is paid off. A schedule of maximum special tax payments over a period of 25 years is available to homeowners prior to the close of escrow. Those who purchase a new home also have the option to pay for their Mello-Roos tax in it's entirety at the time they buy. However, because statistics indicate that the average homeowner in California moves every 7 years, it's often prudent to spread the payments over time.
Why Can't Builders Bear the Cost of these Facilities?
They can. But ultimately, the builder must recover these considerable costs in the form of higher home prices. Commercial construction loans acquired by builders typically incur higher rates of interest than CFD financing, which accrues at significantly lower rates.
Does Mello-Roos Makes Sense?
Not all new home communities are affected by Mello-Roos special taxes. For example, sometimes a new neighborhood is built within existing communities. Because public facilities are already in place, they are not subject to Mello-Roos taxes. However, as cities expand into adjacent undeveloped areas and farmland, newer developments will continue to use the Mello-Roos device to finance improvements we all take for granted in our neighborhoods. Mello-Roos lowers these costs a bit since CFD (Community Facilities Districts) financing is less expensive than what builders would have to charge to underwrite commercial loans.
So California voters approved Proposition 13 to lower their taxes. Our lawmakers took the constraints we imposed on State and local government spending and developed a way to fund all the infrastructure we expect in a new home development. They did it by collecting Mello-Roos assessments from those homeowners in new neighborhood developments instead of taxing all California voters. I wonder how many of those new home owners voted for Proposition 13?
What's the Bottom Line?
New home developments often advertise sale prices which do not emphasize special assessments like the Mello-Roos. Between HOA's and Mello-Roos and other assessments, you can easily see an additional 2% monthly charge based on the sale price. Since this is not a developer added cost, but one that is imposed by local government, these homes look like huge bargains. Not entirely meant to be misleading, it is a little bit like advertising a brand new car without the tires. Check the fine print. This is your local Community Facilities District answer to Proposition 13. It is a way of coping with a difficult situation. Instead of the State, County or local Communities footing the costs for these street lamps and schools - you the new neighborhood homeowner are the bottom line.
Warmest Regards,
Mark Thorngren
Much of this article was shamelessly copied from title company reports. Namely Fidelity National Title Company and Chicago Title. Two very fine and naively trusting supporters of my business. Special thanks to Tammie Coulter of Stewart Title Company for her mastery of this subject.
The preceding summaries are provided for informational purposes only. For a more comprehensive understanding of the legal/tax consequences of Mello-Roos, appropriate consultation is recommended with an attorney and / or a CPA for specific advice.
www.markthorngren.com
mark@markthorngren.com
(805) 443-3366
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