Home Buyers, Some Developers, Dislike Mello-Roos Taxes

No Mello-Roos.

That’s the slogan being used by developer Urban West Communities in newspaper advertising for its new homes in Moorpark.

Another developer, Rancho Vista Development Co., is using a similar pitch in its ads for new three- and four-bedroom homes in Palmdale. Those newspaper ads proudly tout “a complete lack of homeowners association fees and Mello-Roos.”

Mello-Roos is an extra tax imposed on property owners who buy into an area that has public improvements financed through special Mello-Roos tax districts. Although authorized by state law, the actual Mello-Roos tax is not imposed by the state Legislature. Instead, local areas are empowered to set it up.

This obscure tax dates to 1982, when the Mello-Roos Community Facilities Act was sponsored by state Sens. Henry Mello and Mike Roos. The proceeds from Mello-Roos bonds are used to build and maintain all sorts of public facilities. But for many prospective homeowners, Mello-Roos districts mean more taxes--and that’s not too popular.

“Buyers are strongly disinclined to purchase a home if there’s a Mello-Roos district,” said Tom Zanic, vice president of Urban West Communities. “We find that the lack of a Mello-Roos tax gets a positive reaction. Buyers come in and there’s a sigh of relief.”

Buyers are more sophisticated than in the past, Zanic said.

Typically, public improvements, such as roads, sewers or community centers, are financed through so-called general taxes or general obligations--which make up the bulk of property-related taxes and levies. There are also special assessments tacked on to a piece of property as a result of a particular public improvement. And then there are taxes set up in Mello-Roos special tax districts--of which there are probably hundreds in California.

“Mello-Roos came about as a result of Proposition 13 and the inability of government to finance public improvements,” said Lewis G. Feldman, partner at the law firm of Cox, Castle & Nicholson. But, he conceded, special tax districts have developed a bad reputation with some people. Not all home buyers received the kinds of disclosures that they should have been getting about these taxes. And in other states, such as Colorado, many homeowners found their tax bills multiplying when some developers went out of business and left the homeowners responsible for all of the bond indebtedness.

At the community of Northbridge in Valencia, Mello-Roos taxes are adding $400 to $1,700 to the annual tax bills of local homeowners. Buyers will be paying this added tax for 18 to 25 years to finance school construction at Charles Helmers School, said Marlee Lauffer, vice president of community relations at Newhall Land and Farming Co. Some prospective buyers are a bit wary of this extra tax, Lauffer conceded, but “it’s because most folks don’t really understand how a Mello-Roos district works. It’s a benefit to the neighborhood and increases property values.”

Those in Mello-Roos districts find their bill as an extra line on their annual property tax notices. And like regular property taxes, the Mello-Roos payment is also tax-deductible. In California, Feldman said, a Mello-Roos tax can increase 10% of an initial tax total, plus an annual payment escalation of up to 2%.

While this can add up to a significant amount of money, it’s nothing like the giant liens that homeowners in other states faced when they got saddled with extra bills because a developer went out of business and didn’t build as many homes as planned.

On balance, Mello-Roos bonds have been a very good way to finance public improvements, Feldman said. However, home builders advertising no Mello-Roos taxes may be misleading the public a bit, he said. One way or the other, the buyer ends up paying for public improvements--either in the form of taxes or a higher sales price. That’s because homes outside Mello-Roos districts tend to be higher priced. In the end, it’s a bit like choosing whether to lease or to buy a new car.

The difference between paying a higher price for a home and paying an ongoing Mello-Roos tax is usually pretty minimal. That may explain why at least two home builders have decided to increase home prices and do away with the typical 20-year taxation associated with a Mello-Roos district. But “it’s all just a marketing game,” Feldman said.

“Most of the time, it comes down to psychology. It has been a problem trying to sell homes with a Mello-Roos tax,” said Steve Smiley, managing director of the Meyers Group in Encino, a home building advisory firm. “It’s an added payment, and people get scared of it. A lot of the time, people don’t have a clue about these taxes and the developer has to educate the buyer about what they’re paying for. It’s another thorn in the sales side.”

“It’s a marketing liability,” said John Burns, senior manager at KPMG Peat Marwick, which has local offices in Warner Center in Woodland Hills. “Most home buyers are stretching themselves into a house, and Mello-Roos taxes figure into the affordability of a home.”

Home buyers shouldn’t be embarrassed to ask questions about Mello-Roos taxes. What is the maximum Mello-Roos tax? What will the proceeds be used for? Is distribution of the tax equitable between developed and undeveloped land? Are taxpayers being asked to finance benefits outside the district? How many years will the special tax payment last?

There aren’t always absolute answers to all these questions, but it’s important to at least ask.