‘Fair Deal’ for O.C. Isn’t So Good for Home Buyers : Taxes: They’ll foot bill for developer’s $34-million tollway ‘advance’ with Mello-Roos payments.

It sounded like a fair deal.

In July, the Mission Viejo Co. and county officials said they had devised a new and improved way to speed construction of the San Joaquin Hills toll road. The company would “advance” $34 million to the county in exchange for approvals to build the final, 2,700-unit phase of the Aliso Viejo planned community.

But the fact is that the Mission Viejo Co. won’t advance a dollar, interviews and records reviewed by The Times show. Instead, home buyers in Aliso Viejo--many of whom oppose the tollway--will be socked for the $34 million through a special tax.

This comes despite years of pronouncements from both county and company officials that the tollway would be financed with fees paid by developers and money borrowed against future toll revenue.

“The taxpayers are going to end up paying for roads that the Mission Viejo Co. was always supposed to pay for out of its own pocket,” said Aliso Viejo resident Donald C. Swift, a retired investment broker.

The company and other landowners are able to pass a major share of costs for facilities such as streets and sewers to homeowners through taxes imposed by Mello-Roos districts. A 1982 state law authorized formation of Mello-Roos districts to pay for infrastructure. The law was a response to Proposition 13, the 1978 ballot initiative that limits regular property taxes.

A series of agreements with developers has made Orange County a leader in creating Mello-Roos districts, placing a greater tax burden on new homeowners here than anywhere except Riverside County.

An example is Aliso Viejo, a 20,000-unit community planned by a division of the Mission Viejo Co. The firm estimated last year that property owners there will pay a total of $513.5 million in special Mello-Roos taxes levied over 25 years for roads and other public facilities--an amount 25 times greater than the company’s own projected contribution of $20.5 million.

Far from unique, the Aliso Viejo example of shifting costs is standard in all but a handful of Mello-Roos districts.

Some homeowners argue that such Mello-Roos taxes, which supplement regular property tax bills, are exorbitant--an abuse that mocks the notion of developer-financed improvements in Orange County and elsewhere.

Indeed, according to a report of the California Debt Advisory Commission, local governments have often allowed developers to devise taxation formulas that shift their building costs to the tax bills of the people who buy homes in Mello-Roos districts. As a result, developers have gotten free financing, according to the commission.

Formed often when only one major landowner is around to approve or reject them, these districts levy Mello-Roos taxes on property owners to pay off bonds that are sold to finance construction of roads, schools, libraries, sewer lines and fire stations.

Critics argue that this amounts to taxation without representation.

Mission Viejo Co. and Orange County officials respond that people who move into Mello-Roos districts vote with their feet. Besides, they say, the public gets badly needed public facilities in places that don’t have much of anything yet--without the cost being spread countywide to taxpayers in older, established neighborhoods.

In the late 1970s and early 1980s, the Orange County Board of Supervisors made three key decisions that led to spectacular growth in Mello-Roos financing. Now, some 45 community facilities districts in Orange County have Mello-Roos bond debts amounting to $746.1 million, or 22% of the statewide total, even though Orange County has only 8% of the state’s population.

The supervisors’ three decisions: growth is inevitable; development must pay its own way; and new roads must be paved before new houses are sold.

Builders and developers balked at paying huge sums for infrastructure before receiving cash from the housing projects that new facilities will serve. But after much negotiating, they agreed to put up raw land as collateral for bonds and make payments on the resulting debt until the houses were purchased.

This led in 1987 to landmark agreements between the Board of Supervisors and several foothill-area developers in which Mello-Roos districts would be formed to help pay for $250 million in new roads from Rancho Santa Margarita to east Orange. Ultimately, home purchasers end up footing the lion’s share of the bill.

Attorney John K. Beckley of Aliso Viejo points out that serious inequities exist under this arrangement. For example, just outside Aliso Viejo, in Laguna Hills and Laguna Niguel, homeowners pay $600 to $1,700 less in property taxes annually because they are not included in the Aliso Viejo Mello-Roos district.

Other sore points are major spending projects such as the San Joaquin Hills tollway. For some in Aliso Viejo, the added irony is that they oppose the tollway--regardless of who pays for it.

“We have no choice,” said Dawn Beckley who, like her husband, opposes tollway construction. “We didn’t vote for it. But we have to pay for it.”

For years, officials of the county, the tollway agency and the development company promised the public that this $778-million highway, as well as two other tollways planned to relieve South County’s massive traffic migraine, would be financed 48.5% by development fees. The rest of the money would be borrowed against future toll revenues.

The development fees, which range from $993 to $2,023 per unit depending upon its size, type and proximity to the tollway, are collected when builders or developers obtain their building permits. The money goes to the tollway agency. The fees rise with inflation. Builders say they recover this cost by adding the fees to the sales price of each unit.

Yet in July, the Mission Viejo Co., the county’s second-largest private landowner, and the county tollway agency announced that a new deal had been struck to speed construction of the 4-mile Aliso Viejo segment of the long-delayed San Joaquin Hills tollway project.

Under the new agreement, the Mission Viejo Co.--anxious to end all of its financial obligations to the financially strapped project--would “advance” $34 million to the county tollway agency.

In return, the county agreed to release its hold on the final phase of Aliso Viejo--2,700 homes to be built over the next five to 10 years. The county had previously approved the first 17,300 units, 5,100 of which were completed as of March and are already home to more than 11,500 residents.

But a review of public documents and interviews with more than a dozen officials show that the Mission Viejo Co. will end its tollway obligations without ever giving the $34 million to anybody.

Here’s how:

* The Mission Viejo Co. will allow the county to use company-owned lands as collateral for Mello-Roos bonds that will be sold to private investors.

* Proceeds from these bonds will be given to the San Joaquin Hills Transportation Corridor Agency, which oversees the tollway project, to build a four-lane segment through Aliso Viejo, between Moulton Parkway near La Paz Road and El Toro Road.

* Homeowners and businesses within Aliso Viejo--including those who already moved into their new abodes before this agreement--will pay Mello-Roos taxes over a 25-year period to pay off the bond debt.

“Is this fair, when the same residents have to pay three times?” asks Beckley. “They pay once when they buy their homes because the price reflects development fees levied by the tollway agency that are passed on to consumers. They pay again when they repay the bond debt. And they will pay a third time--a toll to use the tollway.”

To pass the $34 million “advance” from the Mission Viejo Co. along to homeowners, the county must amend the list of public facilities financed by taxpayers within the district to prevent a Mello-Roos tax increase to homeowners.

County officials have yet to decide which project will be taken off the list to make room for the $34 million in new tollway work.

Much to the surprise of Swift, Beckley and other Aliso Viejo residents, the toll road was among the projects listed when the Mello-Roos district was formed.

The county had already obligated district residents to repay some bonds used to finance preliminary tollway work, even as some real estate sales staffs promised home buyers that they would never have to pay a cent for tollway construction.

In interviews, county officials said they simply wanted to get $34 million for the tollway faster than if they had to wait for the Mission Viejo Co. to complete the Aliso Viejo planned community several years from now.

Orange County Supervisor Thomas F. Riley, whose district encompasses Aliso Viejo and other communities to be serviced by the tollway, said that when he voted to approve the $34-million deal he “didn’t know” that the homeowners would be paying most of the bond debt. But he said other county officials assured him that “everything was OK” and that the arrangement “was proper.”

Riley aide Mark Goodman said the supervisor is satisfied that the arrangement is fair. New home buyers must now sign disclosure forms indicating that they have been informed of the Mello-Roos taxes, Goodman said, and the county never told developers how they could satisfy their tollway obligations.

Moreover, Goodman said, the $34-million arrangement was structured no differently than many others approved by supervisors in recent years, including deals that involve financing for the Foothill tollway between Lake Forest and Rancho Santa Margarita.

Eileen T. Walsh, county public finance director, said that having newcomers pay the debt for new roads and other public facilities is “unfair.” But she quickly defended such policies as “less unfair” than California’s overall property tax system. Under Proposition 13, people who bought their homes before 1978 pay less property tax than their neighbors who moved into identical houses after 1978.

Walsh and Goodman said the home buyers pay government-imposed development fees one way or another, either in the price of new houses or through Mello-Roos taxes.

“I don’t think anybody’s fooled when we say the developer is paying for something,” Goodman said. “I can’t believe the public would be that naive.”

But others in government and construction disagree with such a contention, saying that developers charge as much as the market will bear.

And Goodman’s assertion that people should have known that developers don’t really pay for a significant portion of infrastructure out of their own pockets makes some residents see red.

Juan Delgado, another lawyer who lives in Aliso Viejo, said real estate salespeople never told him that his Mello-Roos taxes included money for the tollway.

“I’m positive about that because I’m the one who brought it up,” Delgado said. “I knew Mello-Roos was out there. I wasn’t ignorant . . . I thought my Mello-Roos bill paid for lighting, schools and streets, not the tollway. The developers were the ones who were pushing for building it the most.”

Adds Hal Pope, an engineer who lives in Aliso Viejo: “It would bother any Southern Californian to have to do this--we’re used to free access to highways. But not only are we going to pay to use the toll road, we also have to pay for it with our Mello-Roos taxes.”

Pope, Delgado, Beckley and Swift were among a dozen Mello-Roos taxpayers who said they were either told that they would not have to pay for tollway construction or believed that developers were footing most of the bill.

Meanwhile, Goodman acknowledged that the latest deal benefits the Mission Viejo Co. financially.

The development firm already pays tollway fees when building permits are issued. “They didn’t want to have to pay future increases in the fees” caused by inflation, Goodman said, “especially in today’s depressed housing market.”

The $34-million Aliso Viejo agreement for tollway construction, reached in July, is expected to be final by year’s end.

In total, the county, acting through Aliso Viejo’s Mello-Roos district, is entitled to sell about $218 million in bonds to pay for roads and other public facilities. So far, bonds worth $93.7 million have been sold.

Because the bonds return interest to investors, paying all of them off over the projected 25-year period will cost a lot more than the principal sum of of $218 million--a whopping $534 million, according to current estimates.

The Mission Viejo Co.’s share of that $534 million is projected to be $20.5 million. Home and business owners in Aliso Viejo will pay the remaining $513.5 million.

Under that agreement, single-family detached homes of more than 2,400 square feet could be taxed up to $1,697 per unit per year, on top of regular property tax bills.

Company and tollway agency officials defend the $34-million deal by saying the Mission Viejo Co. will more than meet its obligation for the San Joaquin Hills toll road. They say the company has paid Mello-Roos taxes on undeveloped land, allowed its land to be used as collateral for bonds, and has graded portions of the tollway.

The same officials said the $34-million deal was described as an “advance” from the company because in development and government circles, putting up collateral for a bond is considered almost as good as cash.

Mission Viejo Co. spokeswoman Wendy Wetzel said the Board of Supervisors required long ago that “if you need new facilities, the new people should pay for them.”

And, Wetzel said that the combination of regular property taxes and Mello-Roos taxes should not exceed 2% of the assessed value of the homes. “We’re still getting a lot of value for our property taxes.”

Mello-Roos Bonds in Orange County

Mello-Roos districts, also known as community facilities districts, raise money for streets, schools and other public facilities by selling bonds, then levying taxes to repay those bonds. Below is a list of Mello-Roos bond sales in Orange County, by year, as of Sept. 30, 1991. Some districts have sold bonds more than once; some communities have more than one facilities district and have different numbers, such as CFD 87-1, CFD 87-2.

Date Amount Sold (in millions) 1991 6/4 $4.8 8/7 $6.2 8/15 $9.2 1990 2/16 $3.5 4/19 $22.0 6/27 $2.2 7/24 $2.4 9/13 $24.2 9/26 $1.1 9/26 $25.0 10/18 $36.0 11/7 $5.9 11/29 $13.6 7/19 $1.5 11/8 $36.2 1989 1/13 $5.0 2/28 $11.9 3/1 $2.1 3/30 $11.3 5/2 $5.2 5/4 $10.3 6/13 $6.4 6/13 $10.6 6/13 $9.7 6/15 $6.8 10/31 $42.4 11/2 $20.0 11/29 $1.1 1/12 $5.3 3/7 $2.5 9/14 $4.6 10/12 $12.5 10/26 $10.1 11/16 $44.4 11/21 $3.9 1988 4/5 $3.0 7/12 $15.8 8/2 $17.3 8/10 $7.1 10/18 $93.7 11/10 $8.3 11/22 $15.6 12/15 $8.8 12/21 $4.4 5/19 $26.9 5/19 $3.1 10/19 $17.3 1987 9/29 $19.0 10/29 $12.4 11/17 $22.0 1986 4/2 $8.9 12/9 $9.2 1985 5/1 $7.3

Date District 1991 6/4 Newport-Mesa Unified School Dist. CFD 90-1 8/7 Saddleback Valley Unified School Dist. CFD 89-1 (Robinson Ranch) 8/15 Los Alamitos Unified School Dist. CFD 90-1 1990 2/16 La Habra Redevelopment Agency CFD 90-1 4/19 Orange County CFD 86-2 (Rancho Santa Margarita) 6/27 Brea CFD 1990-1 7/24 Huntington Beach CFD 1990-1 9/13 Orange County CFD 87-4 (Foothill Ranch) 9/26 Orange County CFD 87-1 (Dimensions Business Park) 9/26 Placentia CFD 89-1 (East Placentia) 10/18 Orange County CFD 87-3 (Mission Viejo) 11/7 Orange County CFD 87-5D (Rancho Santa Margarita) 11/29 Cypress CFD 1 (Sorrento Homes) 7/19 Los Alamitos Unified School Dist. CFD 90-1 11/8 Capistrano Unified School Dist. CFD 87-1 (Aliso Viejo) 1989 1/13 Santa Ana Mtns. Water Dist. * CFD 5 2/28 Orange County CFD 87-5B (Rancho Santa Margarita) 3/1 Orange County CFD 88-2 (Lomas Laguna) 3/30 Orange County CFD 87-B (Coto de Caza) 5/2 Orange County CFD 87-9 (Santa Teresita) 5/4 Orange County CFD 87-6 (Baker Ranch) 6/13 Anaheim CFD 89-1 (Sycamore Canyon) 6/13 Anaheim CFD 89-2 (The Highlands) 6/13 Anaheim CFD 89-3 (The Summit) 6/15 Orange County CFD 87-5C (Rancho Santa Margarita) 10/31 Orange County CFD 86-1 (Rancho Santa Margarita) 11/2 Orange County CFD 87-7 (Los Alisos) 11/29 Trabuco Canyon Water Dist. CFD 8 1/12 Orange County CFD 88-1 (Aliso Viejo) 3/7 Saddleback Valley Unified School Dist. CFD 8 9/14 Orange Unified School Dist. CFD 89-1 10/12 Capistrano Unified School Dist. CFD 88-1 (Rancho Santa Margarita) 10/26 Orange Unified School Dist. CFD 89-2 11/16 Capistrano Unified School Dist. CFD 87-1 (Aliso Viejo) 11/21 Saddleback Valley Unified School Dist. CFD 89-4 1988 4/5 Brea CFD 88-1 (Fairway Center) 7/12 Orange County CFD 87-3 (Mission Viejo) 8/2 Santa Ana Mtns. Water Dist. CFD 7 8/10 Orange County CFD 87-1 (Dimensions Business Park) 10/18 Orange County CFD 88-1 (Aliso Viejo) 11/10 Orange County CFD 87-5A (Rancho Santa Margarita) 11/22 Orange County CFD 87-2 (Portola Hills) 12/15 Orange County CFD 87-4 (Foothill Ranch) 12/21 Santa Ana Mtns. Water Dist. CFD 8 5/19 Irvine Unified School Dist. CFD 86-1 5/19 Irvine Unified School Dist. CFD 85-1 10/19 Orange County CFD 86-1 (Rancho Santa Margarita) 1987 9/29 Santa Ana Mtns. Water Dist. CFD 7 10/29 Orange County CFD 86-2 (Rancho Santa Margarita) 11/17 Yorba Linda CFD 87-1 1986 4/2 Santa Ana Mtns. Water Dist. CFD 2 12/9 Saddleback Valley Unified School Dist. CFD 86-1 1985 5/1 Santa Ana Mtns. Water Dist. CFD 2

* Later renamed the Trabuco Canyon Water District

Date Purpose Interest Rate 1991 6/4 K-12 school facilities 6.993% 8/7 K-12 school facilities 7.754% 8/15 K-12 school facilities 7.355% 1990 2/16 Marketplace Shopping Center 7.837% 4/19 Bridges, highways 7.563% 6/27 Imperial Center East 7.314% 7/24 Street improvements Golden 7.765% West/Ellis streets 7.765% 9/13 Bridges, highways 7.952% 9/26 Streets 8.034% 9/26 Multiple capital improvements 8.149% 10/18 Multiple capital improvements 7.767% 11/7 Streets 8.257% 11/29 Multiple capital improvements 8.287% 7/19 K-12 school facilities 6.020% 11/8 K-12 school facilities 8.331% 1989 1/13 Multiple capital improvements 8.139% 2/28 Streets 7.513% 3/1 Multiple capital improvements 8.005% 3/30 Streets 7.969% 5/2 Multiple capital improvements 7.896% 5/4 Streets 7.896% 6/13 Multiple capital improvements 7.366% 6/13 Multiple capital improvements 7.360% 6/13 Multiple capital improvements 7.362% 6/15 Streets 7.393% 10/31 Multiple capital improvements 7.343% 11/2 Multiple capital improvements 7.675% 11/29 Water supply, storage 7.585% 1/12 K-12 school facilities 7.452% 3/7 K-12 school facilities 7.898% 9/14 K-12 school facilities 7.323% 10/12 K-12 school facilities 7.548% 10/26 K-12 school facilities 7.417% 11/16 K-12 school facilities 7.578% 11/21 K-12 school facilities 7.641% 1988 4/5 Streets 7.910% 7/12 Streets 8.040% 8/2 Multiple capital improvements 8.435% 8/10 Multiple capital improvements 8.279% 10/18 Multiple capital improvements 8.058% 11/10 Streets 7.748% 11/22 Multiple capital improvements 7.791% 12/15 Multiple capital improvements 7.924% 12/21 Multiple capital improvements 8.014% 5/19 K-12 school facilities 8.033% 5/19 K-12 school facilities 5.960% 10/19 K-12 school facilities 7.654% 1987 9/29 Multiple capital improvements 9.574% 10/29 Multiple capital improvements 8.913% 11/17 Bridges, highways 8.764% 1986 4/2 Wastewater treatment Unavail. 12/9 K-12 school facilities 7.206% 1985 5/1 Wastewater treatment 12.042%

Source: California Debt Advisory Board