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What
is Mello-Roos?
Background:
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 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. The services and improvements
that Mello-Roos CFDs can finance include streets, sewer
systems and other basic infrastructure, police protection,
fire protection, 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 is a Mello-Roos CFD Needed?
A CFD is created to finance public improvements
and services when no other source of
money is available. 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. 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 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
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 the 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.
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 CFD will continue
to charge a reduced fee to maintain the improvements.
IMPORTANT TO KNOW:
• 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.
•
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.
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