Mello-Roos is a response to the passage of Proposition 13 (AKA “Prop 13”) in 1978.
Prop 13 puts a cap on how high the city could increase the assessed value of the property in a single year. As such, cities were having a hard time paying for the construction of more schools, parks, fire stations, roads, etc for the new families moving into newly built houses.
Over time, income from the property taxes coming in could, in theory, pay for the additional infrastructure, but that would require families to live in their newly built house with no local parks, schools, roads, etc for quite a few years.
So the cities started insisting the home developers build the additional infrastructure along with the new housing. Otherwise, they would not be allowed to build at all.
However, the developers building the houses couldn’t feasibly lower their profits any further. They ended up raising prices of the newly built homes to compensate for the added expense. However, this made the houses too expensive to sell. No one could afford the houses.
In 1982, Senator Henry Mello, and Assemblyman Mike Roos legislated a way around Prop 13. Now developers could legally take out a bond to build the infrastructure and pass on the bond payments on to the new homeowners.
Mello-Roos legally circumvents Prop 13 because it is not levied on the assessed value of the property. It is a flat payment to pay off the bond. Thre is a one-time extension to keep the Mello-roos payments going. Never the less, Mello-roos do normally get paid off eventually…over the course of up to 40 years.
Homeowners even have the option to pay off their property’s share of the bond early. This would allow them to live out the rest of their days in a Mello-roos free home. They can even sell the property to the next owner Mello-roos free! How to do so is a blog post for a later time.
Mello Roos has such a stigma and brings down the sales price of a home, but why was it invented? See a new fun twist on the Mello Roos Origin story.
With the Tax Cuts and Jobs Act signed into law back in December 2017 there are a few new rules that home sellers should know about.
An infographic with a few bits of important tax information that first-time buyers should be aware of.