ORANGE COUNTY VOICES : Homeowners Needn’t Fear Failure of Mello-Roos Projects

The Mello-Roos Act has taken a pounding from critics who have insisted there will be massive defaults by developers and dire consequences for homeowners. Does the Mello-Roos Act need to be reformed, as critics have alleged, or are they just crying wolf? In reality, the chance of a homeowner being left holding the bag for a developer’s failure to complete a project is remote.

Since Californians passed Proposition 13 in 1978 and prohibited government from imposing new property taxes, Mello-Roos revenue bonds have been the chief financing tool used to build hundreds of miles of road and scores of schools, fire stations and libraries, and other public improvements in new communities. The Mello-Roos Act contains many checks and balances to protect homeowners who buy homes in Mello-Roos districts. Let’s look at three:

1) Land secured by Mello-Roos bonds is much more valuable than the cost of a bond.

Virtually all Mello-Roos bonds in California are secured by land valued at least three times greater than the principal amount of the bonds. If builders and developers do not pay taxes owed on the bonds, a local government agency may auction off their property to any bidder who can pay one year of Mello-Roos taxes (about $500,000 on a $5-million bond issue). It is difficult to imagine a situation in which landowners and their lenders will give up property valued at $15 million for failure to make a $500,000 tax payment.

2) Payments to bondholders will continue even if a major property owner fails to pay special taxes.

Each Mello-Roos District has a reserve fund, which is usually sufficient to pay debt service for at least one year and can be used to make up any deficiency resulting from unpaid special taxes. What’s more, foreclosure proceedings will begin quickly. In most cases, failure to pay special taxes will be resolved before any payments to the bondholders are missed.

3) Homeowners will not pay more than a set maximum tax, even if a default occurs.

Even in the unlikely event that a default occurs, homeowners will not be faced with higher property taxes. Mello-Roos is unique among California public finance programs in that a specific maximum Mello-Roos tax must be disclosed to all purchasers of property within a Mello-Roos District. This tax cannot be exceeded under any circumstances, even if a default occurs on the bonds. Most local agencies limit the Mello-Roos special taxes to 1% of estimated property value, or to a total property tax burden of 2% of estimated property value.

If there’s a problem with Mello-Roos, it’s not the way it works but the fact it’s not very well understood. Dave Celestin, president of the Building Industry Assn. of Orange County, announced recently that the BIA/OC was convening a special committee to propose a standard format for disclosing Mello-Roos special taxes to home buyers. The committee will propose disclosure documents that will help home buyers determine the maximum special tax on the home they are purchasing; monthly costs, including mortgage payments, property tax payments, and homeowner association dues, and improvements and services paid for by the Mello-Roos district. These standards will be proposed for adoption by Orange County’s leading home builders.

The way to preserve the integrity of Mello-Roos into its next decade is through education, so that potential homeowners can comfortably make the choice that’s best for them.