Some New Home Buyers Get Surprised by Tax Bill

Sometimes home buyers find out that development fees can come in a different and often surprising package: a higher tax bill.

Not all infrastructure required by new subdivisions is paid for by development fees. Sometimes roads, water and sewer lines, and schools in new housing tracts are paid for with a special type of bond issue, which is then paid off with additional property taxes paid only by the homeowners in that tract.

Sometimes these financing deals are arranged with a traditional assessment district, in which each homeowner is assessed proportionally, according to the benefit he or she receives from the facility being built.

More and more often, however, the bonds are issued through a so-called “Mello-Roos district,” under which a developer can commit the homeowners in advance to a higher property tax rate than Proposition 13 would otherwise allow.

In a typical Mello-Roos district, named after the two state legislators Henry J. Mello (D-Watsonville) and Assemblyman Mike Roos (D-Los Angeles) who sponsored the legislation, a county or school district works with a developer to float a bond issue before the tract is built.

After the homes are sold, all homeowners are required to pay the same amount of tax (no matter how valuable the house is or how much benefit they receive from the facilities) each year. Since 1983, $1.2 billion in Mello-Roos bonds have been floated in California, most often in Orange and Riverside counties.

The additional tax is tacked onto the 1% general property tax bill.

But that doesn’t mean home buyers are willing to absorb these costs completely. “Home buyers are getting more sophisticated,” says Cary Lowe of Coussoulis Development Co., a home builder in Redlands. “There’s really market resistance to a total property tax rate that exceeds 2%. Buyers are more and more expecting to see a discount for that on the sales price.”

And home buyers are better informed as well.

After a few home buyers in early Mello-Roos districts were jarred by surprisingly high tax bills, the state Legislature passed a new law last year requiring Mello-Roos obligations to be recorded with the county recorder so that it will appear as part of a home buyer’s title search.