When Proposition 13 (1978) restricted property taxes and briefly eliminated the use of general obligation bonds, private builders lacked access to public capital that was used to pay for the public works needed to support new developments, the State Legislature responded with the Mello-Roos Community Facilities Act. Mello-Roos Act bonds can finance any type of local public infrastructure, making them a useful and desirable way to pay for the public works infrastructure. The revenue stream that pays for these bonds comes from special taxes levied on the parcels affected. These parcel taxes are fixed amounts charged to each lot, without regard to the amount of benefit received by any specific parcel. To comply with the constitutional requirement for two-thirds voter approval for new special taxes, the Mello-Roos Act allows landowners to cast ballots if the affected property has less than 12 registered voters. For example, the developer of a large uninhabited area can approve Mello-Roos Act by casting the sole “yes” vote.
The earliest use of Mello-Roos Act bonds was to build new schools for new subdivisions, avoiding the political entanglements that a school district might face when trying to convince voters in a district-wide election for general obligation bonds. Because builders wanted public capital for new schools, they readily agreed to vote for the bonds. Once the property is subdivided into marketable lots and houses, the new home buyers, not the builder, pay the parcel taxes that retire the bonds. In short, those who pay the taxes weren’t there when the bonds passed. The impacts of development on public facilities (in a time of reduced revenues) have increased reliance on developer exactions to finance new infrastructure which mitigates these impacts. Such developer exactions can come in the form of local infrastructure such as streets, curbs and gutters; regional infrastructure such as parks, highway widening and freeway on-ramps; or cash payments (such as “trip fees”) to finance local and regional mitigation measures. Many public agencies have recognized that, by accessing the bond market through the creation of Mello-Roos special tax and special assessment districts, they can assist developers in financing new infrastructure. In return, the public agency can receive infrastructure improvements which provide a public benefit beyond simply mitigating the direct impact of new development. Additionally, Public agencies have recognized that through the creation of assessment districts, lower cost funds can be made available to existing property owners to make significant and costly alterations to their properties which significantly benefit the general public, such as installation of fire sprinkler systems in high rise buildings and seismic strengthening of commercial and residential structures.
Assessment and Mello-Roos Financing
Mello-Roos and assessment financing are secured by a lien on real property, and that lien is superior to all mortgages even if those mortgages pre-date the special tax or assessment lien. It is the superiority of that lien which attracts investors to Mello-Roos and assessment bonds. If these vehicles are used to finance publicly-owned improvements, interest on the bonds is typically exempt from federal and state income taxes. Tax exemption lowers the interest rate paid to purchasers of these bonds, and thus decreases the special tax or assessment lien paid by property owners.
The key advantage of Mello-Roos and assessment financing of public infrastructure is appealing to developers. There are limits to the amount a commercial bank, insurance company or other traditional lenders will loan to any given developer or project. Borrowing money for public infrastructure through Mello-Roos as an assessment bond preserves the developer’s credit capacity for other purposes. This benefit can be important if financial institutions have reduced their capacity for lending.
The advantages of these financing tools to subsequent property owners or tenants are not immediately obvious. Since Mello-Roos and assessment bonds carry a tax exempt interest rate, the developer’s cost to finance certain infrastructure improvements is lower than with more traditional taxable forms of financing. However, real estate prices paid by subsequent property owners or tenants are more a function of the real estate market than the cost of development. Therefore, in order for the real estate market to fully reflect the existence of Mello-Roos or assessment financing on a particular property, and for subsequent property owners to realize any benefit, the existence of Mello-Roos or assessment financing must be fully disclosed to all purchasers of property throughout the life of the assessment in a comprehensible and timely manner.
City of Los Angeles Mello-Roos Procedures
On November 1, 1994, the Policies and Procedures for Mello-Roos and Special Assessment Districts was amended and approved by the City Council. An interdepartmental Mello-Roos Review Committee was created to review applications for Mello-Roos bond financing. The City’s Mello-Roos Policy establishes the procedure by which all Mello-Roos bond financing applications are reviewed by the City. These City's procedures are summarized as follows:
- A 25 question "Mello-Roos and Assessment Financing Program Application Form" is submitted to City Planning along with an initial $5,000 application deposit filing fee.
- The Infrastructure Subcommittee including the Director of Planning (Chair), the City Engineer and the General Manager of LADOT, review the application for compliance with planning, engineering and transportation approvals and confirms that the improvements to be funded with bond proceeds are consistent with City Mello-Roos program policies. The Finance Subcommittee including the City Administrative Officer (CAO), the City Attorney, and City Treasurer reviews the application and makes recommendations on the financial structure of the proposed project. The CAO overseas the establishment of the district and development of financing.
- The Review Committee, comprised of the Infrastructure Subcommittee and Finance Subcommittee, considers the public benefits offered by the applicant and makes a preliminary assessment of the project feasibility. The Review Committee’s recommendations are transmitted to the Mayor and City Council.
- The City Council may grant Provisional Approval and authorize staff to proceed with a more comprehensive project review. Provisional Approval is not the final authorization for funding.
- To proceed with the comprehensive project review, the CAO has to be authorized by City Council to retain the necessary consultants such as a bond counsel, financial advisor and special tax consultant who specialize in the creation of Mello-Roos Districts. All City and consultant costs associated with the project review, creation of the Mello-Roos District and development of financing will be paid by the Developer. The Developer is required to make a deposit with the City that will be used to pay consultant costs during district formation and issuance of bonds. Certain consultant costs are also recoverable through the proceeds of a bond issuance if, and when, bonds are issued. City policy requires that proposed projects using Mello-Roos bond financing must provide “extraordinary public benefits” to justify use of the City’s debt capacity. Public benefits are described as features that go beyond mitigating project impacts and provide benefit to the surrounding region.
Extraordinary Public Benefit
Mello-Roos and assessment debt reduces the City’s overall debt capacity for the benefit of a private development. The transfer of this limited City asset to benefit a private development mandates a City policy that conditions approval of Mello-Roos and assessment financing on the receipt of an Extraordinary Public Benefit from the project financed.
Distinguishing Extraordinary Public Benefit from simple-mitigation measures to be carried out by the developer can be a difficult task. Therefore, the application for Mello-Roos and assessment financing contains the following information:
- A section titled “Extraordinary Public Benefits” which requires the applicant to describe in detail the nature of such Benefits offered.
- An explanation of which factors should be considered by the City as evidence of Extraordinary Public Benefit.
- A statement that exaction measures provided pursuant to a development agreement the applicant has negotiated with the City may be listed as a part or all of the Extraordinary Public Benefits required for this financing.
The following factors will be considered by the City as evidence of Extraordinary Public Benefit in evaluating all applications for financing (on large-scale multiphase projects, the City may evaluate Extraordinary Public Benefit based on the benefits provided by the entire project rather than evaluating each phase separately):
- Regional Benefit
- Accelerated Improvements
- Additional Public Improvements
- Environmental Benefit
- Low-income Housing and Economic Development
BOE Role in the Mello-Roos Process (Gregg to review)
(Edmond) In general, the City does not have many Mello-Roos projects because the City's current infrastructure is very "built-out and is rare that a particular project would require extensive off-site infrastructure to connect the project to necessary public services.
BOE's role in the Mello-Roos process includes:
- Participation on the Review Committee through participation on the Infrastructure Committee (sub-committee to Review Committee)
- Review of the application to determine what infrastructure should be included
- Verification that the infrastructure was built to plan and established costs
The following is the BOE process for Mello-Roos District review:
- Gregg/Randy to provide a list of processes currently being used (Use of bond staff, use of B permit staff for estimating and verifying construction meets construction works standards and specs, and BCA to provide inspection to confirm the project was built to the plans and specs, etc)