What Is a Mello-Roos?
A Mello-Roos is an ad hoc California tax district created to finance an infrastructure project. A district may be created only with the approval of two-thirds of voters and permits a special tax to be assessed on its residents. The state law allowing such districts was implemented in 1982 as a way for local governments to bypass the state's 1978 cap on property tax increases.
The Mello-Roos tax law remains controversial. California developers have been known to advertise their newly-constructed houses as "No Mello-Roos!"
A Mello-Roos Community Facilities District (CFD) may be created by a city, county, or school district.
A Mello-Roos allows a local county or city government or school district to sell bonds in order to finance a specific project or service. Projects permitted under California law range from infrastructure improvements to police and fire services, schools, parks, and childcare facilities.
- A Mello-Roos is a special tax assessment district created in California to finance local infrastructure or services.
- The tax is applied only to residents of the district that benefits from the project.
- The law permitted Mello-Roos districts was created to allow communities to raise money for local projects despite the restrictions of Proposition 13 property tax caps.
The tax assessment may be charged until the bond debt issued for the district is repaid in full with interest.
The Origins of Mello-Roos
The Mello-Roos tax is named after the sponsors of the law, California State Sen. Henry Mello and State Assemblyman Mike Roos.
Their bill was a workaround for Proposition 13. That 1978 amendment to the California Constitution limits property taxes to 1% of assessed value and caps the rate of increase on the assessment to 2% per year.
Realtors must inform potential buyers if a home is in a Mello-Roos Community Facilities District.
The Mello-Roos tax is assessed against the land but is not based on the assessed value of the property. That is the way it gets around the cap imposed by Proposition 13.
Today, Mello-Roos is most often used to create infrastructure or support services in and around new developments. It also provides a way to make improvements in older and less affluent neighborhoods that are no longer bringing in enough property taxes to cover basic services.
Pros and Cons of Mello-Roos
Advocates of the Mello-Roos law say it makes new housing construction possible, and at a lower cost to the eventual buyers. A developer planning a large new community could either balk at the price of funding new infrastructure in and around the community or pass on the cost by raising the prices of the homes.
Opponents point to the added tax burden and the potential difficulty of selling a home that has a special tax assessment tied to it.
Mello-Roos taxes generally are not deductible from federal taxes as they do not satisfy IRS requirements for the deduction.
Fine Print on Mello-Roos
The bond issued by a CFD is considered a lien against a property and failure to pay the tax can quickly result in foreclosure since Mello-Roos districts are subject to accelerated foreclosure laws.
Realtors are required by law to inform potential buyers if a home is in a CFD and thus is subject to a special tax assessment.
Mello-Roos taxes are usually listed as a line item on a property’s annual tax bill, though occasionally a district will send homeowners a separate bill. County assessors' offices maintain records of Mello-Roos districts.