Santa Clarita, What You Do Know About Mello Roos Can Hurt You!
So 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 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.
Now that we know what a Mello Roos bond is, why are they bad?
Mello Roos bonds are not necessarily bad because of their structure and what they provide the community. What’s bad is that these bonds are not deductable from a homeowner’s income tax, like mortgage interest is. It is similar to Home Owner Association dues. HOA dues are a monthly expense, but they cannot be deducted on your income taxes.
Mello Roos tax fees (and HOA dues) are bad from an economic view.
Here’s a good example: Last weekend I was showing property in Valencia to my buyer clients. They heard that Lennar was offering incentives on their new homes in three locations of Santa Clarita. Lennar is trying to complete their build-out and quickly unleash their housing inventory.
All three Lennar communities in Santa Clarita (West Creek, West Hills, and River Village) have Mello Roos fees. My clients wanted to stop by the Lennar Sales Office in Valencia and investigate if there were some great incentives. Well, the only incentive was a $15k-$20k reduction in price off the home if my client used their approved lender. This was not surprising as this is usually the norm with home builders. However, that was it. No other incentives…unless you consider the fact that their sale prices are non-negotiable…and you get a nice HOA fee and Mello Roos bond to boot!
Here’s where the economics don’t work.
My client is considering buying a new home (they are move-up buyers), but the monthly HOA dues are $225-$250 depending on which Lennar development they choose. The Mello Roos is also variable by development, but it works out to be $400-$450 each month (although it’s paid bi-annually on the property tax bill). So any buyer that purchases a new Lennar home in Santa Clarita will spend up to $700 per month on fees that they cannot deduct from their income taxes – like they can with a mortgage payment.
My client decided that they would rather spend the extra $700 per month in a larger mortgage (where they can at least deduct the interest) buying more home, possibly with a pool.
Heck, they are even considering purchasing a solid “bread ‘n butter” rental house with the extra $700. A very shrewd move. And one that makes all the economic sense in the world.
Let finish by understanding how Mello Roos is assessed and its length of term.
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.
Do you own a home with a Mello Roos bond? What are your thoughts about it? Please feel free to comment about it below.
If we can be of any assistance to you in buying or selling your home throughout the Santa Clarita Valley, please contact us.
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Hi Darryl,
This is an excellent post! Thank you for sharing this information. My husband and I did the math and purchased a home in the Cottage Glen tract (which we later sold) to avoid HOA and Mello-Roos.
Isn’t there also a fee paid back to Lennar at the time the homeowner sells a home within a Lennar tract? I thought I read this in our escrow papers at the time we sold.
Debbie
Hi Debbie,
Thanks for asking that great question. To answer you, I don’t know what fees are due to Lennar (or any other builder that uses a Mello Roos bond for construction) at the time of resale.
I would imagine that it can vary based on the development and the terms of the Mello Roos when it was created. Many Mello Roos vary in terms of length of term and payment, and some bonds can renew for the full term after the first one has been paid off. Many people purchase homes without fully understanding how Mello Roos works and their legal obligations to the terms. Thanks again!
I intentionally looked for a home without Mello Roos. But the realtor lied to me and said there was no mello roos. I didn’t find out until the tax bills was late and I had to paya penalty on top of the mello roos. Sure the house was a great deal in 2008, but it is worth the same or less now. Soon as I can I will sell.
Kathy,
So sorry to hear about your situation on your home. Any caring and thorough Realtor would have reviewed your Preliminary Title Report and all disclosures with you. They would have been able to easily explain that there was a developer or CFD bond placed on the tax bill.
I’m not big on lawsuits, but did you pursue any action from that Realtor’s broker for unlawful disclosure?
So how long do pay this bond for? We bought a house near Golden Valley and Plumm Canyon. How can i know how long I had to pay these taxes? Why is it that just one block away people don’t pay for these house, yet the share the same schools. PLEASE HELP!!!
Sorry, i meant to say, how is it that people dont pay these school bond taxes, and they share the same schools with us. They only live two blocks away
Hi Bruno,
The length of the bond should be stated on your tax bill. If it is not, then check with the L.A. County Clerk Recorder for your property. Below is a better definition to explain the school bond, but in a nutshell, it can vary by development or tract.
“Mello-Roos is a form of financing that can be used by cities, counties, and special districts (such as school disricts). Mello-Roos Community Facilities Districts (referred to as “CFDs”) raise money through special taxes that must be approved by 2/3rds of the voters within the district. A CFD is formed to finance major improvements and services within the district which might include schools, roads, libraries, police and fire protection services, or ambulance services. The taxes are secured by a continuing lien and are levied annually against property within the district.”
I hope this helps you.
Well it has just been found that Lennar is now offering incentives to buy out Artisans Mellaroos… How does that work for other homeowners who already are paying Mellaroos? Does Lennar have to pay for them all now?
Great question Steffanie. I wish I knew the answer. I do know that Lennar is HIGHLY motivated to sell off their existing inventory, and they are advertising the Esperto town homes with no mello roos. My guess is that they will absorb those mello roos fees themselves and take the loss. They need to unload their huge carrying costs on all of these remaining phases.
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