Santa Clarita, What You Do Know About Mello Roos Can Hurt
So what is Mello Roos?
In 1978 Californians enacted Proposition 13, which limited the
ability of local public agencies to increase property taxes based on a
propertyâ€™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 â€œCFDâ€) 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.Â Whatâ€™s bad is that these bonds are
not deductable from a homeownerâ€™s income tax, like mortgage interest
is.Â It is similar to Home Owner Association dues.Â 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.
Hereâ€™s a good example:Â Last weekend I was showing property in Valencia
to my buyer clients.Â They heard that Lennar
was offering incentives on their new homes in three locations of Santa
Clarita.Â Lennar is trying to complete their build-out and quickly
unleash their housing inventory.
All three Lennar communities in Santa Clarita (West
Hills, and River
Village) have Mello Roos fees.Â My clients wanted to stop by
the Lennar Sales Office in Valencia and investigate if there were some
great incentives.Â Well, the only incentive was a $15k-$20k reduction in
price off the home if my client used their approved lender.Â This was
not surprising as this is usually the norm with home builders.Â However,
that was it.Â No other incentivesâ€¦unless you consider the fact that
their sale prices are non-negotiableâ€¦and you get a nice HOA fee and
Mello Roos bond to boot!
Hereâ€™s where the economics donâ€™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.Â The Mello Roos is also variable by
development, but it works out to be $400-$450 each month (although itâ€™s
paid bi-annually on the property tax bill).Â 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 â€œbread â€˜n butterâ€
rental house with the extra $700.Â A very shrewd move.Â 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.Â 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
Do you own a home with a Mello Roos bond?Â 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