What is a Mello-Roos Community Facilities District?
In 1978, Proposition 13 was enacted by Californians, which limited the ability of many public agencies to finance new projects. In 1982, Senator Henry Mello and Assemblyman Mike Roos affected the passage of the “Mello-Roos Community Facilities Act of 1982” (the act) authorizing local governments and developers to create Community Facilities Districts (CFDs) for the purpose of selling tax-exempt bonds to fund public improvements.
The Act allows any county, city, special district, school district or joint powers authority to establish a CFD, which allows for the financing of public services and facilities. In order to establish a CFD, it must be approved by a two-thirds margin of qualified voters in the district at the time of formation. If there are fewer than twelve registered voters within the district, the vote may be passed by landowners in the district. At the close of the legal proceedings, an established CFD has all the legal privileges of a legally sanctioned government body.
How are CFD’s used?
New development requires infrastructure (streets, sewers, storm drains) and public services (Law enforcement, Fire and Paramedic Services). Local governments are forced to require developers to put in the necessary regional infrastructure for new home developments. Developers have one of two options. The developer can add the cost of this infrastructure to the price of each new home. The homeowner pays more for the home, therefore increasing the amount of the mortgage. Or, many developers opt for establishing a CFD and thus have the power to create the district for future property owners. The CFD has the power to issue tax-exempt bonds to pay for infrastructure or services. The cost is then passed on to the homeowner in the form of annual special taxes. Without the CFD, the homeowner would probably pay more for their home resulting in a higher mortgage payment and would also be paying higher property taxes on the increased cost of the home.