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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
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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