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Article of the Month for March 2004 Printer friendly version

Mello Roos Bonds

In 1982 California state Senator John Mello and Assemblyman Mike Roos co-authored legislation known as the Mello Roos Community Facilities Act. The Act, which became effective January of 1983, gives local agencies and developers the ability to raise money for new public works in local areas. The burden of repaying the cost of such facilities is allocated, according to the benefit received, over the individual property parcels located in the local improvement district rather than to all county taxpayers at large.

A Mello Roos bond for schools, for example, may be assessed against local home owners in accordance with the size of their respective homes. The more bedrooms you have the more kids you probably have and therefore the more benefit the new school is for you versus the owner of a much smaller home.

Bonds are sold to generate the cash to pay for the Mello Roos improvements within a defined district. The affected property owners then pay back the debt over a 15 to 30 year period in the form of a special tax lien against their properties within the district. Such a lien remains against each affected property, until it is fully paid, even though such property may be sold and resold several times in the interim.

The Mello Roos tax is collected by being added to the regular property tax installments that come due twice a year from the county tax collector. The tax collector just serves as a conduit to collect the tax and pass it on to the particular assessing entity.

Typically developers of residential subdivisions ask local governments to create a special Mello Roos tax district to raise funds to pay for local improvements for their new development-such as new streets, sewers, storm drains, sidewalks, parks, street lights, fire stations, libraries, etc. However, since Mello Roos assessment districts can be formed by agencies too, rather than just builders, such special taxes can become liens against properties built prior to passage of the Act in 1982.

School districts are turning to Mello Roos to levy the cost of building new schools to the areas needing them, thus avoiding financial burdens on unbenefited areas. School districts must receive a two-thirds voter approval to invoke the Mello Roos tax.

Sellers of real property must disclose to prospective buyers the existence of any Mello Roos bonded assessment against their property by obtaining a "Notice of Special Tax" form from the levying agency and providing it to their prospective buyers. By statute, the notice must contain at least the following three items of information:
1) The maximum amount that the current year's special tax could possibly reach;
2) The maximum total amount remaining that the Mello Roos tax could ever escalate to; and
3) The maximum amount of time that the yearly tax could possibly extend into the future.

Sellers should send the taxing entity a request (return receipt requested) for the notice in addition to phoning for it. The phone number for the taxing entity appears on the regular property tax bill. Thus if the notice is not forthcoming the seller can give their buyer a copy of their written request to demonstrate their good faith attempt to comply with the law.

The Mello Roos bond is an unusual lien in that the unpaid principal balance is customarily passed on from seller to buyer without any offset to the seller. So, as far as figuring your bid at the trustee's sale goes, just determine the past due amount and any up-coming installments that would occur during your planned holding period (in the same manner as you would the regular property taxes).

Since the Mello Roos assessment is coupled with the regular tax bill, it's existence will become apparent whenever you do your regular check-up on the status of a property's taxes prior to the Trustee's Sale.

Information provided by this website is for informational purposes only and is not a substitute for professional advice. Please consult your investment advisor and/or attorney before entering into any transaction. Read our privacy policy.

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