Mello-Roos
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Mello-Roos is the common name for the Community Facilities District Act, enacted by the California Legislature in 1982. The name comes from its co-authors, Senator Henry Mello of the Monterey area and Los Angeles assemblyman Mike Roos. Mello-Roos enabled “Community Facilities Districts” (CFD’s) to be established by local government agencies as a means of obtaining community funding.
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[edit] History
When California 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, new ways to fund public improvements in respective locales were considered.
[edit] Districts & Taxes
A Mello-Roos District is an area where a special tax is imposed on those real property owners within a Community Facilities District. This district has chosen to seek public financing through the sale of bonds for the purpose of financing certain public improvements and services. These services may include streets, water, sewage and drainage, electricity, infrastructure, schools, parks and police protection to newly developing areas. The tax you pay is used to make the payments of principal and interest on the bonds.
Mello-Roos taxes cannot be deducted if they are assessed to fund local benefits and improvements that tend to increase the value of your property. Mello-Roos taxes may appear on annual county property tax bill with other deductible property taxes. That does not mean one can deduct the Mello-Roos taxes. One may only be able to deduct a portion of the total property tax shown on your bill.
Most of the time, one cannot deduct real estate taxes assessed for local benefits and improvements. However, one can deduct them if they are for maintenance, repair, or interest charges related to those benefits. Some examples of local benefits are:
* Sidewalks * Streets * Sewer lines * Water mains * Public parking facilities * Other similar improvements
To deduct local benefit taxes, one must be able to show the amount of the taxes that are for maintenance, repair, or interest. If one cannot show what part of the local benefit taxes are for these charges, one cannot deduct the taxes.
[edit] New Communities
Many new communities in California, especially those that require new schools and infrastructures such as public parks, roads, etc require Mello-Roos. While property tax is assessed as a percentage of the value of the home, Mello-Roos is independent and could rise or lower and is not subject to Proposition 13. Many builders in California explain the cost of Mello-Roos through the increased percentage of existing property tax, while other builders in California explain it in terms of the amount of payment per month or yearly cost. For example it is not uncommon for one builder in the same master development (e.g. new Orange County community) to explain that the property tax is approximately 1.85-1.95% while another builder in the same development to explain that the property tax is 1.03% with Mello-Roos as $541/month or $6500/year, when all of the above explanations could be equivalent. The extra Mello-Roos payments are billed with the standard property taxes and are due twice a year, and are not subject to Prop 13 increase protections.
In general, new communities in California that require huge infrastructural support (those that do not have existing schools, parks, trails, community centers, etc) require substantial Mello-Roos fees in addition to Homeowners association fees. For example it is not unusual for new Orange County homes ranged in the $500-700K price range to have $6500/year Mello-Roos and $350-$500/month HOA fees in addition to the existing property tax. In rare cases some of the luxury homes and condominiums are known to have $1500/month HOA maintenance and management fees, which happened to be managed by builder's affiliates (Irvine Ranch homes could be managed by the Irvine Management Corporation for example). Many builders in the housing boom of 2001-2007 realize the extra fees turn off potential buyers and cleverly hide the true costs of ownership by calculating Mello-Roos as a percentage of property tax or other clever explanations. For example, it is much more marketable to explain that the property tax bill is approximately 1.85% of the property instead of "one needs to pay $8000/year Mello-Roos extra on top of the property tax, and Mello-Roos could rise independently of the property assessment." Regardless of Mello-Roos, HOA fees for many of these new Orange County communities rise tremendously by the 2nd or 3rd year-- it is not unusual to see a rise of 10-20% a year, though the increase usually plateaus after 5 years. As builders are competing against each other in an extremely tight market it is not uncommon to see them throwing incentives such as giving away free plasma TVs, free counter-top upgrades, free hardwood flooring, waiving the HOA for the first few months, or splitting the HOA fees as "master community vs. building" or "North vs South parks" and such, all in order to diffuse the buyers from realizing the true costs of ownership.
California has one of the lowest property tax rates in the nation, but the true tax burden in some areas, especially newer neighborhoods, may equal rates typical of other U.S. States. [1]
Example 1: Take any typical new Rosedale home in Azusa with Mello-Roos + N HOA + S HOA fees, the total cost relative to the property value is close to 2.6%.
Example 2: A typical Irvine Ranch home in the $650,000 range requires 2.8% of 1) property tax 2) total HOAs 3) Mello-Roos added, which is comparable to many other states.
