Mello-Roos Tax: What It Is, How It Works, How Long It Lasts

What Is Mello-Roos?

A Mello-Roos is an ad hoc California tax district created to finance a local infrastructure project. Such a district may be created with the approval of two-thirds of voters, and it permits a special tax to be assessed on its residents.

The Mello-Roos Community Facilities Act of 1982 authorized localities to raise funds in this manner. This law, which was named after its sponsors, was a means to allow local governments to bypass the state's 1978 cap on property tax increases.

It remains controversial to this day. In fact, some California developers have been known to advertise their newly-constructed houses as being free of costs related to Mello-Roos, when applicable.

Understanding Mello-Roos

Formally known as a Community Facilities District (CFD), a Mello Roos district may be created by a city, county, or school district.

It allows a local county, city government, or school district to sell bonds in order to finance a specific project or service. Projects permitted under California law range include infrastructure improvements, police and fire services, schools, parks, and childcare facilities.

A Mello-Roos tax assessment may be charged until the bond debt issued for the district is repaid in full with interest. The payment of the tax is usually collected at the same time as the general property tax bill.

The Origins of Mello-Roos

The Mello-Roos tax is named after the sponsors behind the 1982 law authorizing such districts, 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.

The Mello-Roos tax is assessed against land value rather than property value, which is how it gets around the cap imposed by Proposition 13.

Today, Mello-Roos districts are most often used to create infrastructure or support services in and around new developments. They also provide 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

Pros

Advocates of the law authorizing Mello-Roos districts say that they make 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.

Additionally, Mello-Roos districts typically have newer homes and newer amenities. The infrastructure and services of a Mello-Roos community are well maintained and can increase the property value of a home. Mello-Roos communities often have lower crime rates and better school districts. And depending on the district, the Mello-Roos fees can eventually expire.

Cons

Opponents point to the added tax burden on purchasing a home in a Mello-Roos district. This tax burden, they argue, makes it difficult to sell a home. When factoring in homeowner's association fees, the cost of a home can further increase.

Lastly, Mello-Roos taxes are generally not deductible from federal taxes as they do not satisfy IRS requirements for a 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.

The Bottom Line

The Mello-Roos tax in California was created to circumvent legislation that put restrictions on increasing property taxes. The purpose of Mello-Roos is to contribute to the general costs of a residential district: infrastructure improvements, police and fire services, schools, parks, and childcare facilities.

Mello-Roos taxes are a divisive in California and only some districts have them. Depending on a property buyer's requirements, Mello-Roos can be beneficial or negative.