What is Mello-Roos
Mello-Roos is a way for municipalities in the state of California to finance significant projects and make substantial improvements to their districts. This type of financing may be used by counties, cities, school districts or other particular kinds of districts.
The financing comes from a specific tax that must be approved by two-thirds of the district’s voters. It is generally used to fund projects such as libraries, schools, ambulance and fire service, roads and police work.
BREAKING DOWN Mello-Roos
The Mello-Roos tax is named after Henry Mello and Mike Roos of the California legislature, who sponsored the 1982 legislation establishing this form of financing. Today, Mello-Roos is often used to help create infrastructure such as roadways in areas of new development. The system also provides the funding necessary to make improvements in older areas, which have lost population and no longer bring in enough property tax to cover necessary costs.
Mello-Roos districts, also known as Community Facilities Districts (CFD), have specific requirements for property owners. When potential buyers look at a house in a CFD, the selling agent is mandated to disclose that the home lies within such a district. In this way, the buyer understands that their property taxes will be higher than those in other municipalities.
Mello-Roos taxes are usually listed as a special line item on a property’s annual tax bill, though occasionally the district will choose to send homeowners separate bills for that tax alone. These taxes are not generally deductible on one’s federal taxes. While there are some exceptions, most Mello-Roos taxes do not satisfy the IRS’ qualifications to be deductible.
The Costs of Buying in a Mello-Roos District
Mello-Roos taxes can make new development possible in places where the regular state budget would not be able to accommodate it. For example, a developer may be prepared to purchase a large piece of land and construct a new community that could house 500 families. However, without adequate roads, sewer lines or access to the power grid, this development would not be viable. If the developer must fund this infrastructure out of pocket, they’ll necessarily have to raise the prices on the homes to cover the cost. A Mello-Roos tax allows the developer to sell the homes at a lower price because the cost of infrastructure development has been secured through the tax.
On the other hand, even if the tax helps keep new home prices in the district low, the annual cost of the fee may be a deterrent for some potential buyers. In some cases, it could make the cost of living the Community Facilities Districts (CFD) prohibitive. 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.