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Thursday Morning Mello Roos Primer – Oh Boy!

Now that you are awake, I threaten to put you to sleep.

The San Diego Union Tribune had an article this morning about airlines promoting ala carte services as a way to stay afloat. In quoting the president of US Airways, J. Scott Kirby, they wrote:

Historically, all passengers paid for checking bags even when they did not bring luggage, because a charge for transporting them was built into the ticket price. Now, Kirby said, “those who want the infrastructure to check bags, will check bags; those that don’t, won’t pay for them.”

Yeah, right. And this statement, naturally, got me thinking about Mello Roos fees.

The “Mello,” as it is familiarly called, is a California thing. It was devised (in theory) to do to new home construction what Mr. Kirby says the airlines are doing to the cost of air travel. First, in case you were itching for a primer this morning, here is the back story.

In 1982, the Community Facilities District Act was approved by the State Legislature. The bill’s coauthors were Senator Henry Mello and Assemblyman Mike Roos — Get it? The impetus for the bill was our famous Proposition 13 which was enacted in 1979 and severly limited the amount of property tax revenues which our local governments had previously enjoyed. With tax revenues limited, revenues which could be earmarked for public improvement projects and new infrastructure, a new source of funds was needed.

In newly developing areas, it became the norm for cities to exact fees and infrastructure improvements from developers as a condition of project approval. In the case of residential development, higher fees and costs meant that the developers would pass these costs through to the home buyers in the form of higher prices on the homes themselves. The Mello allowed an alternative, wherein municipal bonds would be sold to raise the money for required public improvements and infrastructure, and the bond debt would be subsequently passed on to the new homeowners in the form of a Special Tax Lien on the property.

The theory, or propaganda, much like the theory being tossed about by the airline industry, was that rather than imputing the costs of improvements in the price of the home, home prices would be lower since the folks benefiting from the improvements would be funding these costs after purchase. It should come as no surprise that this didn’t happen.

Now, at least in our San Diego neck of the woods, Mello Roos is generally associated with newer development, so those wanting “new” have all but resigned themselves to the Mello Roos burden. Buyers still grumble, but the good news is that since the special tax is based on square footage and not price, homes built prior to the 2000 boom years saw enough appreciation to make the Mello somewhat palatable relative to the total tax bill. Many homes constructed more recently in San Diego County, however, carry a significant Mello burden. In some cases, the effect is to increase the tax rate (based on today’s prices) by as much as 60% or more.

Not all Mellos are created equal, of course. Some run for 15 years, some for 22 or more. Each Community Facilities District has its own rates and sunsets. “How long?” was a question we rarely got until recently, because the buyer just assumed it would be around as long as they would be around. Now that we have a few years under our belts in some of the earlier Mello neighborhoods, we get asked this more often. In Scripps Ranch Villages, for instance, we are told that our Mello Roos runs through 2020, so we can almost see the light at the end of the tunnel.

Finally, here are some of the things that the Mello pays for: Streets, sewer systems, and capital costs associated with police and fire services, schools, parks and libraries. If you aren’t in a Mello Roos district? Then, your city’s general fund gets the nod. The irony, of course, is we all benefit to some extent from the Mello-funded goodies, whether or not we live in a home subject to the special tax.

You can read up on the boring details here. The bottom line is that while the Mello Roos funds public improvements previously paid for by the developer (and passed through in the form of a higher price on the home), the distinction has been all but lost. Buyers would prefer to not have a Mello, but I rarely see a buyer who factors the tax into their offer price. Further, while appraisers in the early days found the Mello to be a consideration, it is all but ignored by appraisers today.

And no matter what Mr. Kirby says, we are all going to continue to pay for the baggage handling infrastructure. It is just that those of us with actual bags will now be paying a little more.

Kris Berg

Kris Berg is Owner and Designated Broker of San Diego Castles Realty. She has been serving San Diego buyers and sellers since 1997.

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  • http://sandiegohomeblog.com Kris Berg

    Cliff – The first to admit when I don’t know what I don’t know, I can’t speak to the mechanics of administration. As for your particular sunset, a title company (or your agent) can find this information for you. Send me an email, if you wish, with your development info if you are in San Diego, and I will see what I can do.

  • Cliff link

    Excellent article. Similar to the infromation you provided about Scripps Ranch Village, I’m interested in determining how long the “Mello” will last in my development? I also would like to know how the administrators of a particular CFD are held accountable. Are there reports and audits that must be filed to validate that the CFD bonds for my development are in fact being invested properly, and specifically for services associated with my deleopment?

    thanks you again….

  • http://sandiegohomeblog.com Kris Berg

    Yes – correct. The current year assessment.

  • Dan Olsen

    Yes, that helps. So I assume the lien amount is not the full amount that will be paid over the life of the district, but only the lien for that year’s assessment – then a new lien is imposed each year (sort of like property taxes). Or is the entire amount a lien but the law just prohibits prepayment?

    I really appreciate your assistance.

  • http://sandiegohomeblog.com Kris Berg

    Dan,

    Ours do not (can not, actually) be paid off at the time of sale. Only the annual amount appears as a lien. Hope that helps!

  • Dan Olsen

    Your summary is very helpful. I work for a county in Oregon that is looking at using something like a Mello-Roos to fund infrastructure for newly developing areas. We now use assessment districts which impose a lien for the entire amount, with annual payments over time. If the property sells, the new lender requires the entire lien to be paid off. My understanding is that does not occur with MR district liens. Is that correct? If the propery’s share of a road improvement, for example, is $10,000 – does that entire amount show up as a lien or is the lien only the amount due each year?

    Thanks for your assistance, I have had a hard time finding an answer.

  • http://sandiegohomeblog.com Kris Berg

    Gerald – Absolutely correct. Strictly speaking, Mellos are special assessments. Regarding the deductability, I always advise to talk to the tax guy. Legality aside, I do not know of anyone who doesn’t write off the Mello. One tax advisor told me he has never seen the IRS take issue with this. I suppose they have bigger fish to fry. Having said that, home owners should get advice on the deductability of the Mello from the right people (not me). My point here was not to assist with tax filing, but just to help people understand what and why it is.

  • http://www.CoastalElite.com Gerald Leonard

    Good morning Kris,

    As a broker and income tax professional, I wanted to make a suggestion, in regard to your Mello-Roos article. It is important for readers to understand that a Mello Roos assessment is not a tax. Your article gives a different impression. I live in south Orange County, where we have several Mello Roos communities and consequently, I am always explaining to prospective buyers and sometimes homeowners of “Mello Roos” properties, that since this is not a tax, it is not an income tax deductible item. Instead, it is a payment for improvements. As such these payments are to be added to the basis of the subject property and not deducted the year in which paid. I know, for many prospective buyers, this makes a difference.

  • http://www.MortgageRates Brian Brady

    This is, without doubt, the single best explanation I’ve ever seen

  • http://sandiegohomeblog.com Kris Berg

    Hi, Joseph. Our office and our home is located in the I-15 corridor, but we are all over the county. Thank you for thinking of us, and we sincerely appreciate your referrals!

  • http://www.longbeachhomeblog.com Joseph Bridges

    Do you guys primarily handle northern San Diego County? My brother and I actually grew up in the East County in San Diego but often have referrals to send to agents in the North County and like the information here.

    Thanks,
    Joey

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  • San Diego Castles Realty
  • 10636 Scripps Summit Court, Suite 153
  • San Diego, CA 92131
  • P: 858.530.2374
  • F: 858.876.1701
  • E: info (at) sandiegocastles.com
  • CA BRE# 01853496

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  • Kris Berg, Broker
  • CA BRE #01241572