How does Mello Roos in San Ramon work? If the house sells at 70% of the original price, does Mello Roos

Asked by george, 94539 Fri Mar 20, 2009

amount stay same or adjust to reflect the new price. Assume that the old tax rate was 1.7% including state property tax. Would the new rate be 1.7% or something like 1.9%?

Assumption: $1,000,000 house
State and local Tax: 1.25%; 12,500 per year
Mello Roos related: 4,500 per year

New: $700,000
State and Local Tax: 1.25%: 8,750 per year
Mello Roos related: 4,500 or 3,150
Effective Tax Rate: 1.9% or 1.7%

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Answers

7
Steve Reilly, , Danville, CA
Thu Mar 26, 2009
George,

You're thinking is exactly right, a homebuyer should look at the added monthly payment burden of a CFD/Mello Roos assessment and understand it is the equivalent to getting a mortgage that is ten's of thousands of dollars.

To answer your question on what happens if people don't pay, the answer is the individual owner who doesn't pay, can get foreclosed. The bigger issue for City's and municipalities is that if enough people don't pay (usually because the homes are in foreclosure) then the bond will default on a payment. While it's technically not the City that is responsible for the bond, it is essentially the City or municipalities credit rating that will be destroyed.

For instance let's say there's a masterplanned comunity in the Central Valley like Windemere. Further let's say that each house in the community has to pay $3,000 per year in CFD's. Now let's assume that 50% of the houses go into foreclosure and the people stop making payments and this triggers a default on the CFD bond.

Now when the City that this masterplanned community is located tries to go to the municipal bond market to raise a sewer bond for residents, what do you think the interest rate the City wil be able to get? Who will underwrite the bond?? and Who will buy the bonds?

The answer is that investors will be gun shy and the cost to borrow money will be significantly higher than before the CFD in the master planned community defaulted.
0 votes
thingswillge…, Both Buyer And Seller, San Ramon, CA
Mon Mar 23, 2009
googled and found this.

Can a Mello-Roos district foreclose on my home?

Bonds issued by a Mello-Roos district constitute a lien against your property. If you fail to pay a Mello-Roos special tax, the district may foreclose on your home and use a portion of the proceeds to collect the unpaid amounts. It is important to know that accelerated foreclosure laws apply to Mello-Roos districts, which means that a district can initiate foreclosure 150-180 days after your payment is overdue.

• Is my property subject to 180 day accelerated foreclosure?

If your property is part of a Mello-Roos District (Community Facilities District), a 1915 Act Assessment District, or certain other special financing districts, your home is most likely subject to accelerated foreclosure. While the County must wait for five years to foreclose on a property because of delinquent taxes, Mello-Roos and Assessment districts can begin foreclosure proceedings 150
0 votes
george, Both Buyer And Seller, 94539
Mon Mar 23, 2009
Steve

Thank you for a very detail answer.

From the rough calculation, the CFD payment is between between $50-90K loan in San Ramon at the current interest rate(5%).

What happens if too many people cannot or does not pay the CFDs? Does it get distributed over the paying homeowners(similar to HOA) or does the payment gets a lien on the house? If it is the latter, who is responsible for paying it off? The original mortgage holder or the new buyer?

Also, what happens if municipal bond goes into default as you noted as a possibility? Higher taxes for the existing property owners?
0 votes
Steve Reilly, , Danville, CA
Mon Mar 23, 2009
George,

There are several types of property taxes or assessments. The first kind are what are refered to as AD VALOREM, which is latin for "according to value". As it implies ad valorem taxes are based on the assessed value of real estate. So if the house sells the ad valorem tax gets reset. It also can be reset through a re-assessment, either up or down, but the up adjustment is capped by Prop. 13.

Mello Roos, also know as Community Facilities Districts (CFD's) are a fixed assessment. They are typically used to pay for the "backbone" infrastructure in a new subdivision. So if you look at a place like Windemere, before the first house was sold the developers had to spend millions of dollars putting in the streets, storm drains, sewers lines, etc. Since this upfront expense is so large typically developers will create a CFD which is a way to raise capital based on the value of the land, actually, the CFD district sells bonds. When you're paying you'r CFD assessment what you're really paying is the interest on the bond, which is why is doesn't adjust according to the value of the real estate.

The last type of property tax is usually refered to as a parcel tax, again this is not tied to propertyy values, but instead is a set tax. In our area we always have school parcel taxes as well as a mosquito control parcel tax. As their names imply, these taxes are used for specific purposes unlike general property taxes which just go to the county.

Your analysis is correct, if the value of real estate goes down, and the CFD or Mello Roos assessment is relatively high, you can very easily end up with an "Effective" tax rate well over 2%.

As a real world example, there are several masterplanned communities in the Central Valley where the CFD assessment is over $3,000 per year. If the price of a house drops to $150,000, which in some cases it has, then the "effective tax" on that house would be well over 3% per year.


In short this is why many savy buyers will pay more for a home in an area without a CFD or mello roos.


If you ever watch TV sometimes you'll see a commercial for Stone and Youngberg offering "tax exempt" municipal bonds. These are typically CFD bonds and Stone and Youngberg is the bond underwriter. Over the course of the next few years you'll begin to hear in the news about municipal bond defaults, because if enough homeowners in a subdivision don't pay, then their won't be enough money for the bond payment.
0 votes
george, Both Buyer And Seller, 94539
Sat Mar 21, 2009
The answer provided by Planningtobuy was that the Mello Roos or other bond related tax are fixed amount, not tied to the price of the home.

Thus, in the case I have outlined, the effective tax rate is 1.9% not 1.7%. I hope this helps.
0 votes
Peter, , 94539
Sat Mar 21, 2009
Could you share the answer here? I am interested in knowing how it works too. Thanks
0 votes
george, Both Buyer And Seller, 94539
Fri Mar 20, 2009
Planningtobuy

Thanks for the information. BTW, you should keep on posting on Trulia. Do not let few rude people get under your skin. Just ignore them. I think you add a good valuable information to the site.
0 votes
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