By Daniel Yukelson, Executive Director
Most property owners are unfamiliar with the Mills Act. The Mills Act (California Government Code, Article 12, Sections 50280-50290) is a California state law that allows cities to enter into contracts with the owners of qualified historic structures. These Mills Act contracts require property owners to make improvements to and take steps to preserve their historical properties and in exchange, they are entitled to a reduction in their property tax bill to help offset the costs of continued preservation of the property. The Mills Act is recognized by the State of California as the “single most important economic development incentive program in California for the restoration and preservation of qualified historic buildings by private property owners.
Local government entities establish their own criteria and determines how many Mills Act contracts they will allow within their jurisdiction. As an example, the City of Pasadena Historic Property Contract Program was established by local ordinance in October 2002 under the authority of the Mills Act. Under this Mills Act, local governments may enter into historic property contracts with owners of qualifying privately owned historic properties who agree to rehabilitate, restore and/or maintain their property in accordance with the U.S. Secretary of Interior Standards in exchange for the granting the property tax abatement.
- Mills Act Contracts
Owners of qualified historical properties who participate in a local Mills Act program enter into a formal agreement, generally known as a Mills Act or Historical Property Contract, with the local government for a minimum ten-year term. Contracts are automatically renewed each year and are transferred to new owners when the property is sold. Under the Mills Act or Historical Property Contract, property owners agree to restore, maintain, and protect the property in accordance with specific historic preservation standards and conditions identified in the contract. Periodic inspections by the local government officials ensure proper maintenance of the property. Local authorities may impose penalties for breach of contract or failure to protect the historic property in accordance with the contract. The Mills Act or Historical Property Contract is binding to all owners during the contract period or, in other words, the obligations under and benefits of the contract transfer to purchasers or transferees of the qualified property.
- Reassessment and Annual Reassessment
The Mills Act prescribes a specific, annual appraisal process for historical properties. Count Assessors appraise qualified historic properties as of a January 1st “lien date” and each year thereafter based upon the lower of three calculated values: (i) current market value, (ii) factored base year value (e.g., Proposition 13 valuation), and (iii) “Restricted Value.”
The Restricted Value, which is most often the lowest appraised value, utilizes the income approach to determining the “Restricted Capitalization Rate,” which is based upon four components: (i) an interest component determined annually by the state Board of Equalization, (ii) a level of risk component of 2% for rental properties or 4% for owner occupied properties, (iii) a component for property taxes (based upon the annual tax rate in effect), and (iv) a component for amortization of the improvements made under the Mills Act contract. While all of this may sound complicated, the following is an example of a Restricted Capitalization Rate calculation:
|Interest Component Per State Board of Equalization||+4.25%|
|Level of Risk Component (Assume Owner Occupied)||+4.00%|
|Tax Rate||+1. 200129%|
|Amortization (Assumes 40-Year Remaining Life – Allocate Improvements at 60% of Property Market Value or 1.5% Amortized Per Year over 40-Years)||+1.5%|
|Total Restricted Capitalization Rate||10.950129%|
The Restricted Value is then determined by dividing the net operating income (NOI) by the Restricted Capitalization Rate above. Net operating income is calculated by deducting the market vacancy rate and operating expenses from the “Gross Potential Income” (GPI) of the parcel.
The current market value is based upon comparable property sales transactions, and the factored base year value is the assessed value under Proposition 13.
- Qualified Historical Property
Qualified historic property is typically a property listed on any federal, state, county, or city register, including the National Register of Historic Places, California Register of Historical Resources, California Historical Landmarks, State Points of Historical Interest, and locally designated landmarks. Owner-occupied family residences and income-producing commercial properties may also qualify for the Mills Act program, subject to local regulations. The Mills Act program is especially beneficial for recent buyers of historic properties and for current owners of historic buildings who have made major improvements to their properties.
- Jurisdictions That Have Established Mills Act Programs
California’s four largest cities (Los Angeles, San Diego, San Francisco, and San Jose) as well approximately 100 other city and county governments have established Mills Act programs. Generally, information about local Mills Act programs such as local eligibility criteria, application procedures, and contract terms are available on the local city or county websites, or by calling the local government’s planning or community development departments. The State’s Office of Historical Preservation also maintains a list of local governments participating in the Mills Act program as well as has copies of Mills Act ordinances, resolutions, and contracts that have been adopted.
- Frequently Asked Questions About the Mills Act
Q: What is the Mills Act Program?
- A: The Mills Act provides economic incentives to owners of qualified historical properties to encourage the preservation of residential neighborhoods and the revitalization of downtown commercial districts. The Mills Act is the single most important economic incentive program in California for the restoration and preservation of qualified historic buildings by private property owners. First enacted in 1972, the Mills Act legislation grants participating local governments (cities and counties) the authority to enter into contracts with owners of qualified historic properties who actively participate in the restoration and maintenance of their historic properties while receiving property tax relief. California State Codes Relating to the Mills Act include the following:
California Government Code, Article 12, Sections 50280 – 50290
California Revenue and Taxation Code, Article 1.9, Sections 439 – 439.4
Q: My property or a property I am considering buying is already under a Mills Act contract. What does that mean to me as a property owner?
- A: Mills Act contracts are for 10 years initially with automatic annual extensions and stay with the property when sold or otherwise transferred. Subsequent owners are bound by the contract and have the same rights and obligations as the original owner who entered into the contract. Because the local government and the property owner negotiate other specific terms of the contract, you need to contact your local government to determine the rights and obligations a Mills Act contract creates.
Q: How are tax assessments determined for properties under the Mills Act?
- A: The State Board of Equalization has provided guidelines for county assessors for use in assessing properties under the Mills Act.
Q: Does my property qualify for the Mills Act Program?
- A: First, find out if your local government participates in the program. Then, contact our local government or go to its website to see what the local criteria are, and what the process is for applying.
Q: If my local government does not currently have a Mills Act program, what should I do?
- A: Contact the Planning Department or Community Development Department of your local government and ask them to consider adopting the Mills Act Program.
Q: How does the Mills Act benefit local governments?
- A: The Mills Act allows local governments to design preservation programs to accommodate specific community needs and priorities for rehabilitating entire neighborhoods, encouraging seismic safety programs, contributing to affordable housing, promoting heritage tourism, or fostering pride of ownership. Local governments have adopted the Mills Act because they recognize the economic benefits of community reinvestment and the important role historic preservation can play in revitalizing older areas, creating cultural tourism, building civic pride, and retaining the sense of place and continuity with the community’s past.
Just imagine the City of Los Angeles without the iconic Angels Flight Railway, the Bradbury Building, Saint Vibiana’s Cathedral, or the Hollyhock House in Barnsdall Art Park, Crossroads of the World, and other iconic historical landmarks. The Mills Act helps to preserve historical resources such as these for local communities.
Q: How does the Mills Act benefit Owners of Historical Properties?
- A: Owners of historic buildings may qualify for property tax relief if they pledge to rehabilitate and maintain the historical and architectural character of their properties for at least a ten-year period. The Mills Act program is especially beneficial for recent buyers of historic properties and for current owners of historic buildings who have made major improvements to their properties. Mills Act participants may realize substantial property tax savings of between 40% and 60% each year for newly improved or purchased older properties because valuations of Mills Act properties are determined by the Income Approach to Value rather than by the standard Market Approach to Value. The income approach, divided by a capitalization rate, determines the assessed value of the property.
In general, the income of an owner-occupied property is based on comparable rents for similar properties in the area, while the income amount on a commercial property is based on actual rent received. Because rental values vary from area to area, actual property savings vary from county to county. However, in short, the Mills Act can be a powerful incentive that offers potentially significant tax relief to owners of historic properties.
Q: What is a Qualified Historic Property?
- A: A qualified historic property is a property listed on any federal, state, county, or city register, including the National Register of Historic Places, California Register of Historical Resources, California Historical Landmarks, State Points of Historical Interest, and locally designated landmarks. Owner-occupied family residences and income-producing commercial properties may qualify for the Mills Act program, subject to local regulations.
Q: What is Office of Historic Preservation’s role in the Mills Act program?
- A: The Office of Historic Preservation provides Mills Act information to local governments and uses information provided by local governments to maintain a list of communities participating in the Mills Act program as well as copies of Mills Act ordinances, resolutions, and contracts that have been adopted. The Office of Historic Preservation; however, does not participate in the contract negotiations, is not a signatory to the Mills Act contract, and has no authority over the administration of the Mills Act program.
Q: May I use hollow dual pane to replace the single layer glass of my home’s windows?
- A: This is the age-old question about windows of historic properties. Use of materials will be looked at on a case-by-case basis but the important idea to remember is that an owner’s obligation is to maintain the historical appearance of the house, so the use of historic materials is tantamount to that.
Q: What about a property that is considered a Historical Cultural Monument? What is the difference between that and the Mills Act?
- A: The designation of a property as a Historic-Cultural Monument basically paves the way for a Mills Act contract. Though it is extremely rare, you can have one without the other; however, it would not make sense for any property owner to have a Historic-Cultural Monument designation and a property and not seek the tax benefits offered under the Mills Act. The Historic-Cultural Monument status recognizes a building, structure, site, or plant life as important to the history of the city, state, or nation, and that status provides eligibility for the Mills Act program, providing a Historical Property Contract that can result in a property tax reduction. This status also allows for the use of the California Historical Building Code and owners of Historic-Cultural Monument status properties may purchase and display a plaque showing that the property has Historic-Cultural Monument status.
Daniel Yukelson is currently the Executive Director of The Apartment Association of Greater Los Angeles (AAGLA). As Certified Public Accountant, Yukelson began his career at Ernst & Young, the global accounting firm, and had served in senior financial roles principally as Chief Financial Officer for various public, private and start-up companies. Prior to joining AAGLA, Yukelson served for 12 years as Chief Financial Officer for both Premiere Radio Networks, now a subsidiary of I-Heart Media, and 3 years for Oasis West Realty, the owner of the Beverly Hilton and Waldorf Astoria Beverly Hills where he was involved with the development and construction of the Waldorf.