Understanding Community Facilities Districts (CFDs) and Mello-Roos Tax

A Community Facilities District, commonly known as a CFD or Mello-Roos, is a special district created under the California Mello-Roos Community Facilities Act of 1982. These districts are established by local governments such as counties, cities, or special districts to finance critical public infrastructure and community services that support both new developments and existing neighborhoods.

Why Are CFDs Created? Mello-Roos or CFDs are needed because the standard property tax base, which is typically capped at 1% was established by Proposition 13 in 1978 to limit property tax increases. While it provides a stable revenue source, it doesn't account for the high costs of infrastructure projects like roads, sewer systems, schools, parks, and public safety facilities required for community growth. A property's assessed value, often isn't sufficient to cover the full cost of necessary public infrastructure and community facilities—especially in new developments. Building new communities or upgrading existing ones often involves significant upfront costs that exceed what standard property taxes can support. For example, constructing a new street network, water lines, or schools requires substantial investment that cannot be fully covered by existing tax revenues.

What about New Construction? In California, a CFD bond is used in new construction projects to finance the development of public infrastructure and community facilities necessary for a community to grow and be functional. Here's how the process typically works:

• Formation of the CFD: Local government agencies, such as counties or cities, establish a Community Facilities District (CFD) through a formal approval process, which requires a two-thirds majority vote of landowners or residents within the proposed district.
• Issuance of Bonds: Once the CFD is approved, the district often issues bonds—called CFD bonds—to raise the large amounts of capital needed upfront for construction costs. These bonds are essentially loans that the district takes on to fund the infrastructure investments immediately.
• Use of Bond Proceeds: The funds obtained from selling these bonds are used directly to finance the construction of essential public improvements, such as roads, sewer and water systems, parks, schools, and other facilities necessary for new residential or commercial developments.
• Repayment of Bond: The CFD commits to repaying these bonds over time through the collection of special taxes levied on properties within the district. These taxes are secured by a lien on the properties and are usually included as an annual line item on the property tax bill.
• Construction and Infrastructure Development: With the bond funds, developers can proceed with building homes or commercial spaces once the required infrastructure is in place, facilitating community growth.
• Post-Construction: After the bonds are paid off (often 20-30 years), the district may continue to levy reduced ongoing special taxes for maintenance and upkeep of the infrastructure. Understanding Your CFD Taxes CFD taxes are secured by a lien on your property, similar to a mortgage. This means that until the bonds issued by the district are fully paid, property owners are responsible for paying these taxes, which can significantly impact the overall cost of homeownership. In California, CFD taxes are usually included as a line item on your annual property tax bill. In some cases, the district may send separate bills.

Buyers should be aware of this tax obligation before purchasing, Disclosure Requirements When selling a property located within a CFD, sellers are legally required to disclose the existence of the CFD Special Tax to prospective buyers. Buyers are encouraged to review their property tax statements carefully to identify any CFD charges.

In Summary While the existing 1% property tax base is valuable for maintaining local government functions, it often doesn't generate enough revenue to fund the large-scale infrastructure needed for new developments or significant upgrades. CFDs and Mello-Roos taxes fill this critical funding gap, ensuring communities have the necessary facilities and services to thrive. Understanding CFDs taxes can help you make more informed decisions about property investments and ownership.

Always consult your real estate professional or tax advisor for specific guidance related to your property. 

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