310.02: Community Facilities Districts

Some jurisdictions have passed legislation that creates community facilities districts and permits them to levy a special tax to fund the capital costs of a wide variety of public improvements, as well as the ongoing operation and maintenance costs of a limited number of public services.  Proceeds of the special tax are used to support the sale of tax-exempt bonds for the various capital improvements -- roads, sewer services, schools, police and fire protection services, and libraries -- that are allowed under the legislation.

The assessment that will be used to repay the tax-exempt bonds becomes an ongoing responsibility of the property owner (similar to state and local property taxes).  The assessment lien (and the obligation to pay the assessment) passes with the title to the property when ownership of the property is transferred.  The term of the assessment obligation can be quite lengthy (up to 40 years -- unless the assessment is prepaid).  In some cases in California, prepayment estimates can range from $20,000 to $40,000 for a single-family property, depending on the extent of the improvements that were financed, the size of the dwelling, and the year it was purchased.

Such legislation generally requires full disclosure of the special assessment to any purchaser of a property located in a community facilities district.  Therefore, a lender originating mortgages in community facilities districts should disclose to the appraiser any information that it becomes aware of regarding special assessments on a given property.  The lender also should caution its appraisers in general about the need to be aware of whether or not the subject property and the comparable sales are located within (or affected by) a community facilities district since properties subject to an assessment by one of these districts often compete against properties that are either subject to a significantly different special assessment or to no assessment at all.  The appraiser must consider the reaction of the market (if any) to the assessment for the applicable community facilities district in his or her analysis by analyzing similarly affected comparable sales, and should note the effect of the assessment in the appraisal report.