New Housing Law Creates Welfare Exemption Applicable to Special Taxes for Properties Within CFDs
ASSEMBLY BILL (AB) 1743 (Statutes of 2019, Chapter 655) – New housing legislation, Assembly Bill (AB 1743), adopted in 2019 and effective January 1, 2020, creates disclosure and default questions for new Mello-Roos community facilities districts.
The Mello-Roos Act of 1982, as amended, California Government Code Section 53311, et seq. (“Mello-Roos Act”) provides for the formation of community facilities districts (“CFDs”), authorization to levy special taxes by such CFDs and issuance of bonds, and related securities, to fund facilities projects for various types of public agencies. The Mello-Roos Act is commonly used by entities that do not have development planning approval, such as school districts, public water districts and other types of special districts. Pursuant to the provisions of the Mello-Roos Act, authorized special taxes of a CFD are used to support payments of principal and interest on securities issued by, or on behalf of, CFDs.
AB 1743, adopted by the Legislature and signed into law in 2019, requires, and provides for, an exemption of authorized special taxes of a CFD for improved real property receiving a welfare exemption (“Welfare Exemption Property”) for CFDs that adopt their special tax ordinance after January 1, 2020. The mandatory statutory exemption applies at the time that a CFD is formed but would also apply to property within a CFD that becomes Welfare Exemption Property at a future point in time. This means that property that may be subject to a special tax within a CFD at the time of its formation may transition to Welfare Exemption Property some period of time after the CFD is formed and after a CFD issues bonds.
The Mello-Roos Act provides for a similar exemption for property owned by a governmental entity at the time a CFD is formed. However, specific statutes contained in the Mello-Roos Act provide that taxable property within the boundaries of a CFD, and subject to authorized special taxes, which is acquired by a governmental entity, either through a negotiated purchase arrangement or eminent domain proceedings, generally remain subject to the authorized special taxes even after their ownership is vested in another governmental entity (see California Government Code Sections 53317.3 and 53317.5.
AB 1743 contains no similar provision with respect to Welfare Exemption Properties located within CFDs. This means that CFDs formed and adopting their special tax ordinance after January 1, 2020, and that subsequently issue bonds secured for repayment through the pledge of special tax revenues, may be at risk of default if a significant portion of the property within that CFD were to later transition to Welfare Exemption Property. We note that public entities which are not cities and counties may not have control of land use decisions within the boundaries of CFDs formed by such a special district. The absolute statutory exemption from special taxes has also raised questions as to the potential enforceability of mandatory prepayment requirements which might be included in a rate and method of apportionment for a new CFD. Lastly, the potential for interruption of the collection of special taxes potentially raises a disclosure issue for purposes of federal disclosure laws when a CFD, or its parent entity, issues and sells bonds of a CFD secured for repayment through such special tax revenues.
Our Firm is aware that efforts are underway to provide for some type of clean up legislation which would address the foregoing issues. Public agencies which are in the process of, or are considering, forming CFDs should be aware of the foregoing issues and may wish to consult with their special tax consultants, bond counsel, financial advisors and/or disclosure counsel concerning such matters. AALRR is able to provide legal advice and guidance concerning the formation of CFDs, the provisions of the Mello-Roos Act and various questions relating to the issuance and repayment of securities from a bond counsel perspective.
This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.
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