We would like to revisit the topic of Mello Roos assessments in the Village of Sendero. On April 3rd, we published this article which talked about the history of Mello Roos, why it was necessary in today’s residential real estate market, and what that might mean for homebuyers in Sendero and Gavilan. At that time, using what we knew, we calculated our original estimate of Mello Roos fees and rates for Sendero and Gavilan:
Assume a hypothetical entry-level home in Sendero costs $499,000. A 1.1% base tax rate would yield annual taxes of $5,489. If this particular property was assessed $1,313 in Mello Roos payments, the total tax bill would rise to $6,802 or about 1.36% of the purchase price. The Register makes it sound as though the Sendero Mello Roos fees are going to be on the high side, but frankly, an effective tax rate of under 1.4% for new construction in Southern California is a good deal. During the bubble, homebuyers were assuming effective tax rates of close to 2% when Mello Roos was taken into account. What about a high-end Sendero home? Again, we don’t know how the Mello Roos assessment will be applied, but if we assume a $950,000 home, annual property tax payments at 1.1% will be $10,450. If we add the $5,135 Mello Roos assessment, the total property tax bill rises to $15,585 or an effective tax rate of 1.64%.
So we were predicting an effective combined tax rate (Prop 13 base tax plus Mello Roos assessments) of between 1.36% and 1.64% using a higher starting price ($499,000) than turned out to be the case. We also observed that “That seems about average for Mello Roos assessments on new construction in Southern California.”
Recently, Rancho Mission Viejo Company updated its Frequently Asked Questions page to provide additional information about Mello Roos assessments at Sendero:
However, the overall total annual property tax rate (to include 1.0% base per Prop. 13 plus any existing school and water district bonds plus Mello-Roos taxes) at Sendero is targeted at an average of approximately 1.5% for owners of homes in the gated Gavilán enclave and 1.6% for all other Sendero homeowners, a rate which is much lower than found in many other newer master-planned communities in Orange County and throughout Southern California.
The actual target effective tax rate is 1.5% for Gavilan and 1.6% for Sendero. Not only did we nail it, but we stand by our initial reaction — Mello Roos assessments are a normal cost of purchasing new construction and an effective tax rate in the mid 1.5-1.6% range is reasonable for Southern California, particularly on a large greenfield project that requires all new infrastructure to be built.
Recall what we said about Mello Roos taxes:
Contrary to public opinion, the state of California does not spend the bulk of our property taxes. Rather, “California’s counties, cities, schools, and special districts that depend on the property tax as a primary source of revenue. The property tax raised more than $48.9 billion for local government during 2010-11. These funds were allocated as follows: counties 17 percent, cities 10 percent, schools (school districts and community colleges) 54 percent, and special districts 19 percent.” Source: Board of Equalization. What’s more, California property taxes are subject to Proposition 13, a voter initiative in 1978 that rolled back most property tax assessments to 1975 market value levels and limited the property tax rate to one percent plus amounts necessary to fund local voter-approved bonds, plus limited future property tax increases. … Under Prop 13, real estate is only re-appraised upon a change in ownership or completion of new construction. Otherwise, annual increases are generally limited to no more than two percent. …
With local governments reliant on property tax revenues and limited in the amount of property tax they can collect, governments and developers have looked for ways to fund the infrastructure and community improvements required to build large new housing developments, including roads and schools. One option is to impose the cost of these items on the developer up front and force the developer to pass the cost along to homebuyers in the form of higher home prices. A second option is to make use of Community Facilities Districts, which allow for the sale of bonds to fund these infrastructure and community improvements. The bonds are then paid off through special tax assessments levied on the parcels located within the District. Typically, one of these bonds will have a term of 20 to 30 years, although 40 year bonds are not unheard of. Most CFD bonds can be prepaid by the homeowner if they’d like, and CFD bonds can be renewed or extended under certain circumstances. Community Facilities Districts Bonds are called “Mello Roos bonds” or just “Mello Roos” after State Senator Henry Mello and California Assemblyman Mike Roos, who drafted the law in 1982 in the wake of Proposition 13.
Here is how Rancho Mission Viejo explains the purpose of and need for Mello Roos taxes:
Q: Will residents of Sendero and Gavilán be assessed Mello-Roos fees? If so, how much will residents be assessed?
A: Prior to the passages of California Proposition 13 in 1978, property taxes were commonly 2.5% of the home value and increasing — based on the appreciation the home value. However, starting in 1978, Prop. 13 restricted property taxes to 1.0%, increasing at only 2.0% annually. As a result, cash-strapped cities, counties and government agencies were forced to find new ways to fund new schools and other public facilities and improvements.The Community Facilities Act (commonly known as Mello-Roos) was enacted by the California State Legislature in 1982 and allows Community Facilities Districts (CFDs) to be established by cities, counties and local government agencies as a means of obtaining tax-exempt funding for the construction/improvement of public facilities and key infrastructure including streets, water systems, sewage and drainage facilities, electricity, schools, public parks, and police and fire protection to newly developing areas. The Mello-Roos fee, assessed through property taxes, is used to pay the principal and interest on the CFD bonds. Government agencies serving the vast majority of new master-planned communities in California have found that Mello-Roos funding is beneficial to homeowners because it facilitates the early construction of essential public facilities and improvements as well as reduces home prices and down payments by financing essential public facilities and improvements at tax-exempt rates, over a long period of time (INSTEAD OF ADDING THE COST OF THESE IMPROVEMENTS TO THE PRICE OF EACH NEW HOME).
(Emphasis in the original.)
Sounds like we were doing the same research.
The master developer is required to build all of the infrastructure for new developments like Sendero. This means roads, fire stations, schools, water and sewer lines, electrical transmission, and public recreation facilities. The developer has two choices when it comes to the cost of that infrastructure: (1) add it pro-rata to the purchase price of the new homes, or (2) finance it through the issuance of CFD bonds and allow residents to repay the bonds over time. Neither the developer nor the local government is financially capable of absorbing the full cost of the infrastructure without passing it on to consumers (in the case of the developer) or taxpayers (in the case of the local government) in some form.
Recent Comments