Buyers, sellers, investors, welcome back to another installment of Real Estate Jargon, aka, simple explanations of real estate terms not normally found in nature.
In 1982, the California legislature passed the Community Facilities District Act, nick-named "Mello-Roos" after its co-authors, Henry Mello and Mike Roos. The Act authorizes creation of "Community Facilities Districts" that can sell bonds to finance development and maintenance of public infrastructure in specified areas (the "districts"). The Act was the government's response to the taxpayer revolt in 1978 that resulted in the passage of Proposition 13, which limited the ability of local governments to raise property taxes at a rate higher than the rate of inflation. In other words, Mello-Roos assessments were specifically created to raise additional tax revenue in a way that skirted the requirements of Prop 13. Mello-Roos districts survive today because of the obvious need for construction and maintenance of roads, parks, schools, community centers, etc. The Act also allows for expansion of police and fire service to newly developing areas within a community facilities district.
While some see Mello-Roos as a proper way to target the cost of public projects to local residents who derive the greatest benefit from them, others see Mello-Roos as a monument to government inefficiency and corruption. As homeowners living within a district, or home buyers considering the purchase of a home in an existing district, what does it mean to us?
Our first concern is the on-going use of Mello-Roos bonds in the community. Some communities issue Mello-Roos bonds routinely to pay not only for construction of new facilities, but also to fund routine facilities maintenance and other recurring government services. If the community is hooked on Mello-Roos money, it's an indicator that Mello-Roos debt will never be retired - it will simply be periodically replaced with new bonds so that homeowners will be paying Mello-Roos taxes forever. This is not true in all communities, however, as many are able to discipline themselves to use Mello-Roos purely for funding capital projects that are paid off on a specific date. As current or potential homeowners in a district, we should research the use of Mello-Roos in the district to determine if the tax is temporary or functionally permanent.
We also want to know if our Mello-Roos tax payments can reduce our personal income taxes. Unlike regular property tax payments, Mello-Roos tax payments that fund capital projects can't be used as a tax deduction on our personal income taxes. However, we can write off tax payments that go towards Mello-Roos bonds used to fund recurring maintenance and services activities. Our property tax bills should answer this question for us, but our tax professional should confirm whether the deduction is available to us or not.
I hope you found this explanation of Mello-Roos helpful in your home buying or real estate investment decision process. If you have questions about real estate jargon or buy/sell/investment strategies, drop me a line! john@jsrealproperty.com
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Copyright 2011 John A. Souerbry
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