Real Estate Articles
The Mello-Roos Community Facilities Act of 1982 provides a versatile method
of financing public facilities, infrastructure, and services associated with
new development. It is more flexible than either assessment district or general
obligation bond financing, and can finance a wider range of facilities and
services at interest rates that are typically 3 to 4% below conventional financing
rates.
Use of Mello-Roos is expected to continue its rapid growth in the post-Proposition
13 era. After a slow start in 1983 (with a single bond issue of $8 million),
Mello-Roos financings mushroomed to 58 issues in 1989, totaling over $750 million.
Almost one-third of these were for school facilities.
Ironically, in the first years after passage of the Mello-Roos Act, many developers
viewed it suspiciously as simply another vehicle by which public agencies could
impose additional burdens on their projects. More recently, however, developers
have begun to regard Mello-Roos as an important tool in the development process;
one that can often mean the difference between the success and failure of a
project.
What is a Mello-Roos District?
A Mello-Roos District, or “Community facilities district,” is a
financing district formed under the Mello-Roos Community Facilities District
Act of 1982 (the “Act”). The Act is found at Government Code section
5311, et seq. It provides designated local agencies (including cities, counties,
school districts, and all other municipal corporations and districts) with
authority to form Mello-Roos District to finance a broad array of public facilities
and services through imposition of special taxes approved by a two-thirds vote
of the qualified electorate of the District. The vote is either by registered
voters or, if there are fewer than twelve registered voters within the proposed
District, by landowners. The facilities or services may be funded either through
bonded indebtedness secured by the special taxes or directly from the special
tax proceeds on a “pay-as-you-go” basis.
What facilities can be financed by Mello-Roos?
A Mello-Roos District may finance the purchase, construction, improvement,
expansion or rehabilitation of any real or tangible property with an estimated
useful life of 5 or more years. The District may also finance the planning
and design work associated with the authorized facilities.
Authorized facilities include, but are not limited to:
- Park, recreation, parkway, and open-space facilities
- School sites and buildings
- Libraries
- Child care facilities
- Natural gas pipeline facilities, telephone, electrical, and cable TV facilities
- Any other governmental facilities to which the legislative body creating
the Mello-Roos District is authorized to contribute revenue, construct,
own, or operate.
What services can be financed by Mello-Roos?
A Mello-Roos District may finance one or more of the following services:
- Police protection services, including the provision of services for jails,
detention facilities, and juvenile halls
- Fire protection and suppression services
- Ambulance and paramedic services
- Flood and storm protection services, including the operation and maintenance
of storm drainage systems
- Removal or remedial action for the cleanup of any hazardous substance related
or threatened to be released into the environment.
How is the special tax apportioned?
Mello-Roos taxes have been called “designer taxes” in recognition
of the great flexibility accorded the legislative body in apportioning the
tax. The tax may be apportioned in any manner that is fair and reasonable,
except ad valoreim, i.e., based upon the value of the property. The tax imposed
under the Mello-Roos Act is a special tax and not a special assessment, and
therefore need not be apportioned on the basis of benefit to any property.
On the other hand, there is no prohibition against a benefit-based tax. Possible
bases for apportionment of special taxes include:
- Unit of Property (e.g., per acre, per lot, per dwelling unit, or per square
foot)
- Consumption of Usage (e.g., estimated gallons of water used, gallons of
wastewater treated, vehicle trip generation, etc.); and
- Equivalent Dwelling Unit (a formula based upon the level of benefit enjoyed
by a standard dwelling unit and adjusted upward or downward for other types
of property according to benefit received).
What changes can be made to a Mello-Roos District after its formation?
After establishment of the District and approval of the special tax, new facilities
or services may be added, or the maximum special tax may be increased or decreased.
Any of these changes, however, requires procedures almost as involved as those
for formation of the District, including adoption of an initial resolution
(the “resolution of consideration”), notice to landowners or residents,
a public hearing and a 50% protest procedure, a vote by the legislative body
to put the issue on the ballot, and an election with two-thirds voter approval
requirement for the changes.
Territory may also be annexed to an existing District after formation. It need
not be contiguous to land within the District. The procedures for annexation
are similar to those for other changes, including adoption of a resolution
of intention to annex, a public hearing at which a majority either within the
existing District or the territory slated for annexation can protest and nullify
the annexation, and a two-thirds vote requirement. The vote, however, is only
by the qualified electors of the area proposed to be annexed, not those of
the existing District.
How is the special tax levied and collected?
The tax rate specified in the resolution of formation and submitted to the
voters is the maximum tax that may be levied by the district. The special tax
actually levied is almost always lower than the maximum rate, and is determined
by the legislative body each year as necessary to meet the debt service requirements
on any outstanding bonds and other obligations of the District for the forthcoming
year.
Once levied, the special tax is collected twice a year in the same manner as
other property taxes. Properties of the state, federal, or other local governments
are exempt from the special tax. The special tax is subject to the same penalties,
foreclosure procedures, and sale and lien priorities in the event of delinquency
as ad valorem taxes.
What disclosures are required concerning the special tax?
Within 15 days after voter approval of the special tax levy, the District must
record a notice of special tax lien with the County Recorder, including the
rate and method of tax apportionment. From the date of recordation, all persons
are deemed to have notice of the tax lien. The notice imposes a lien on all
non-exempt property within the District; the lien continues in force until
the special tax obligation is paid off or the special tax ceases to be levied.
The act also prescribes specific requirements for disclosure of Mello-Roos
taxes. These apply to the sale or lease for a term exceeding five years of
any lot, parcel, or unit of a subdivision for which a public report from the
California Department of Real Estate is not required. The prospective purchaser
or lessee must be furnished with, and must sign, a written notice containing
all of the following information:
- A heading entitled “NOTICE OF SPECIAL TAX” in at least 8-point
type
- A statement that the property is or will be subject to a special tax
- The maximum annual amount of the special tax and the number of years for
which it will be levied; and
- The types of facilities or services to be paid for with the tax.
Failure to give the required notice, or to obtain the buyer or lessee's acknowledgment
of the notice, does not invalidate the sale or lease or impair the tax lien.
However, willful violation of the notice requirements subjects the seller to
liability to the purchaser for actual damages and attorneys; fees, as well
as to a fine of up to $500.
Courtesy: First American Title.
