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.

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