It has been a little over three decades since the formation of Mello-Roos districts began in California. They are a fairly common feature of housing developments built since the early 1980s. Still, though, many people are unfamiliar with how they work; and more than a few agents are unaware of their disclosure obligations regarding Mello-Roos districts.

In 1982 the California State Legislature passed the Mello-Roos (named for the authors of the legislation) Community Facilities Act. This authorized the creation of Community Facilities Districts (commonly called "Mello-Roos Districts") with the authority to sell bonds (again, commonly known as "Mello-Roos Bonds") which can be used to finance the building of new (not replacement) public service facilities such as streets, sewer systems, storm drains, police stations, and schools.

California's Proposition 13, passed in 1978, placed strict limits on the ability of local jurisdictions to finance local capital improvements. The intent of the Mello-Roos act was to provide an alternative method for financing the construction of new public facilities. A very simplified version of the manner and context in which Mello-Roos financing occurs might go like this:

A developer/owner of a parcel of land applies to local government to finance infrastructure improvements needed for the project. A Mello-Roos district is formed and bonds are sold. The schools, etc. are built. When the new homes are built and purchased, the bonds are paid off by means of a special assessment on these homes (and any other property within the district). The assessments, spread over time like typical bond payoffs, come with the property tax bill and are in addition to the basic tax rate for that area.

It sounds simple, and, really, it is. The problem, unfortunately, is that often purchasers are unaware of the fact that their home is, or to what degree it is, subject to these special assessments. Not only are Mello-Roos assessments in addition to the basic property taxes, they also may be computed differently. It is not unusual for a home with Mello-Roos assessments to pay as much as double the tax bill for a comparably-valued home that doesn't have Mello-Roos.

Usually, knowing the Mello-Roos cost is not a problem with respect to the first purchaser of a new home within a Mello-Roos District. The disclosure requirements of the Bureau of Real Estate are clear, and virtually every developer adheres to them. Rather, the problems are liable to occur with the second and subsequent home buyers.

Two unfortunate things happen. One is that a subsequent buyer may not receive any notice whatsoever of the Mello-Roos bond assessment(s) that will affect his or her home. Most likely they will not show up on a preliminary title report. The other, more frequent, occurrence is that the information the buyer is given may be woefully incomplete.

California Civil Code Section 1102.6b. requires that a seller whose home is subject to a Mello-Roos assessment must make a good faith effort to obtain and pass on to the buyer what is known as a Notice of Special Tax (defined in Section 53340.2 of the Government Code). This notice, the NST, is provided by each agency that levels an assessment on the property pursuant to the Mello-Roos Community Facilities Act. The NST tells the buyer what the assessment is for, how much it is, and – most importantly – how much it may increase. The latter feature cannot be overemphasized. Mello-Roos assessments may increase, according to a known schedule, as the years go by. For example, there may be a Mello-Roos authorization for a fire station in a given community right now; but the station may not be built, and the assessments go into effect, until three years from now. Moreover, many Mello-Roos assessments may be at one rate today, but may increase each year over the next couple of years. These are things a buyer should know.

As mentioned, the law provides that a seller must make a good faith effort to provide the Mello-Roos information to a prospective buyer. As with so many disclosure items, sellers look to their agents to help them with this. Curiously, very, very few agents are of any help in this regard.

Many agents seem to think the work is done if they simply tell the buyer, "this property is in a Mello-Roos district". Others may even provide the buyer with a copy of the tax bill that shows the current assessments.

Of course all of those activities fall short of the requirements of the law. The law, reasonably, wants the buyer not only to know that the property is in a Mello-Roos district, and what the current assessment is, but also, what the future assessments will be.

Fortunately, many of the companies that provide Natural Hazard Disclosure Reports (flood zones, seismic hazard zones, wildfire zones, etc.) also include the required Mello-Roos information. Ordering such reports is pretty much a standard practice these days. Agents should make sure that the Natural Hazard Disclosure Report that they order is one that will also include Mello-Roos information if applicable.

Bob Hunt is a director of the California Association of Realtors®. He is the author of Real Estate the Ethical Way.