Expanding the Mello-Roos Law to Fund Environmental Mitigation and/or Affordable HousingDecember 21, 2007Taxation Committee Housing Opportunity Committee Land Use & Environmental Committee Legislative CommitteeThe following is for study only and has NOT been approved by the Taxation Committee, Housing Opportunity, Land Use & Environmental Committee, Legislative or Executive Committees or the Board of Directors.Issue Should the Mello-Roos Law be expanded to allow funding for environmental mitigation and/or affordable housing while otherwise prohibiting Private Transfer Taxes (PTTs)?Action Optional.Options 1. Expand the Mello-Roos Law to allow community facilities districts to be established to also fund environmental mitigation and/or affordable housing and prohibit the imposition of PTTs.2. Do Nothing. Maintain status quo and oppose PTTs and legislation seeking to legitimize the imposition of PTTs by developers.3. Other.Status/Summary There is no political will within the legislature to prohibit the imposition of PTTs. Nor is there the will to place reasonable restrictions on their imposition. Consequently, PTTs will continue to be imposed by developers because existing law does not prohibit their imposition. Expanding the purposes for which Mello-Roos districts may be formed to include the funding of environmental mitigation and/or affordable housing – the primary purposes for which PTTs are now imposed – would have the advantage of placing the funding derived via Mello-Roos districts for these purposes within the heavily regulated statutory structure that has been developed over the years. Mello-Roos funds, for example, have to be spent to benefit the particular development in which they are collected as opposed to PTT funding where there is no requirement that the development be benefited. In fact, expansion of Mello-Roos in this manner could be tied to an outright prohibition on PTTs. Legislators may look more favorably on enacting a prohibition on PTTs if funding for environmental mitigation and/or affordable housing can be derived from another source – namely, via a Mello-Roos district.Discussion “Private” transfer taxes are increasingly being used to settle disputes between builders and environmentalists and/or affordable housing advocates, by builders to proactively avoid a lawsuit by these entities, or to smooth developmentnegotiations with the local government. Typically, in return for an agreement by the environmental or affordable housing organization to not pursue a lawsuit, the builder agrees to the imposition of one or more PTTs through a covenant included in the covenants, conditions and restrictions (CC&Rs) for the homes in the development they are constructing. PTTs have totaled as much as 1.75 percent of the purchase price of a home and are paid by every buyer of a home in the development for 20 to25 years or, even, in perpetuity. The monies generated by a PTT are then directed to the environmental and/or affordable housing organization to fund their activities.A task force was appointed in July 2006 with the charge that it make recommendations as to what actions, if any, C.A.R. should take with regard to PTTs and report to the C.A.R. Board of Directors at the October 2006 business meetings. Among the recommendations included in the task force’s final report adopted by the boardwas that C.A.R. should sponsor legislation to prohibit the imposition of any PTTs. C.A.R.’s legislation, SB 670 (Correa), was not approved by the Senate Transportation and Housing Committee because 2 of 3 Republicans on the committee favored aprohibition while the Democrats and one Republican did not want to constrain the imposition of PTTs by developers for the benefit of environmental organizations, affordable housing advocates, etc.The California Building Industry Association sponsored their own bill on this issue, AB 1574 (Houston), which would have legitimized the imposition of PTTs. However, after winning approval by the Senate Transportation and Housing Committee, AB 1574 reached the Senate Judiciary Committee where the chair ofthe committee told the author that she did not support the measure. As a result, the measure was withdrawn from the committee’s agenda at the author’s request, apparently lacking sufficient support among committee members. It is conceivable that AB 1574 would have been approved by the Legislature and sent to the Governor for his consideration.Clearly, there is no political will within the legislature to prohibit the imposition of PTTs. Nor is there the will to place reasonable restrictions on their imposition. It is possible that CBIA could be successful in legitimizing PTTs. Consequently, absent some other solution, PTTs will continue to be imposed by developers because existing law does not prohibit their imposition. As a result, at the October business meetings, a motion was approved by the Taxation Committee: “That C.A.R. staff explore the option of expanding the use of the Mello-Roos Law to allow funding for environmental mitigation and/or affordable housing, while otherwise prohibiting PTTs, and report back to the committee in January of 2008.”Expanding the purposes for which Mello-Roos districts may be formed to include the funding of environmental mitigation and/or affordable housing – the primary purposes for which PTTs are now imposed – would have the advantage of placing the funding derived via Mello-Roos districts for these purposes within the heavily regulated statutory structure that has been developed over the years. Mello-Roos funds, for example, have to be spent to benefit the particular development in which they are collected as opposed to PTT funding where there is no requirement that the development be benefited. Expanding Mello-Roos in this way will provide another avenue through which environmental and affordable housing organizations can derive funding. In fact, should consideration be given to tying expansion of Mello-Roos in this manner to an outright prohibition on PTTs? Legislators – and Democrats in particular – may look more favorably on enacting a prohibition on PTTs if funding for environmental mitigation and/or affordable housing can be derived from another source – namely, via a Mello-Roos district. Environmental and affordable housing organizations may not be so vehement in their opposition to a ban on PTTs if they can secure funding elsewhere.Currently, a Mello-Roos community facilities district may be established to finance the following services:- Recreation program. - Parks, parkways, and open space maintenance. - Flood and storm protection. - Hazardous substance removal or remedial action. - Museum and cultural facilities operation and maintenance. - Police protection. - Fire protection and suppression. - Ambulance and paramedic. - Library. - School site and structures maintenance.In addition, a Mello-Roos community facilities district may financethe purchase, construction, expansion, improvement, or rehabilitation of facilities, including but not limited to, the following:- Local park, recreation, parkway, and open space. - Water transmission and distribution facilities. - School sites and structures. - Libraries. - Child care facilities. - Facilities for any of the services listed above.
As can be seen, Mello-Roos community facilities districts can be formed to financea variety of facilities as well as the services provided at those facilities. In particular, and important to the discussion here, community facilities districts can already finance park, recreation, parkway and open space facilities and the services provided at those facilities. Consequently, it would not be too much of a stretch for the Mello-Roos Law to be amended to also allow for the funding of environmental mitigation given that so much of what can already be done via a community facilities district is environmentally oriented. However, expanding the Mello-Roos Law to authorize the funding of affordable housing would move significantly beyond the parameters of what is now allowed under the Mello-Roos Law. In fact, C.A.R. opposed SB 1432 – coincidentally authored by Senator Alan Lowenthal, chair of the Senate Transportation and Housing Committee – last year because it would have allowed Mello-Roos districts to fund the construction of affordable housing, a clear departure from the current uses for which Mello-Roos districts are formed. That said, providing affordable housing within the development is arguably as related to improving life within the development as any facility and service now permitted underthe Mello-Roos Law.(Note: A homeowner who purchases a home that requires payment of a PTT as a condition of purchase cannot claim the PTT payment – despite the payment having been made to a non-profit organization – as a charitable contribution and, thus, write the contribution off on their income tax return. Similarly, a taxpayer cannot deduct Mello-Roos taxes if they are assessed to fund local benefits and improvements that tend to increase the value of the property. However, Mello-Roos taxes can be deducted if they are for maintenance, repair, or interest charges related to those benefits. So, while homeowners residing within a Mello-Roos district cannot entirely deduct their Mello-Roos tax payments, they can do so to someextent which cannot be said of PTT payments.)