City Council Meeting: November 27, 2012
Agenda Item: 3-J
To: Mayor and City Council
From: David Martin, Director, Planning & Community Development
Subject: New Mills Act Contract at 2009 La Mesa Drive.
The Mills Act is a state law that enables local governments to enter into contracts with owners of qualified historic properties to authorize a property tax reduction. The Mills Act is one of the few financial incentives available to owners of historic properties, and is an important tool for implementing the City’s Historic Preservation Element goals: to promote the designation and long-term preservation of historic resources through the provision of incentives and technical assistance.
The City requires a Mills Act Contract applicant to provide a report prepared by a qualified architect describing the condition of the structure and its restoration and maintenance needs in order to ensure the resource’s historic integrity and structural stability. The recommendations in the architect’s report, if any, are reflected in the proposed 10-year restoration/rehabilitation plan, which details a methodology and a timeframe for addressing the identified issues. All contracts also include an on-going maintenance component as well. Both of these are attachments to the Mills Act Contract entered into between the City of Santa Monica and the property owners. Staff verifies the information contained in the report and may identify additional restoration and maintenance items as necessary.
Execution of the pending Mills Act Contract would result in a reduction in the City’s share of property tax revenue estimated at $12,492 total for the 2012-2013 fiscal year. During the initial 10-year contract period, the City is expected to experience a revenue reduction estimated to be $124,920.
In 1991, as part of a comprehensive revision to the City’s Landmarks Ordinance, the City Council authorized designated Structures of Merit, Landmarks, and contributing structures located in designated Historic Districts to be considered qualified historic properties eligible for historic property contracts submitted pursuant to the provisions of California Government Code Sections 50280-50290. As a result, property owners of such designated historic properties may file a Mills Act Contract application. Aside from other terms, the State enabling legislation specifies that a contract contain a provision for the preservation of the qualified historic property, and restoration and rehabilitation work only when necessary. The City is not obligated to enter into any contract with an owner of a qualified historic property; it is completely at the discretion of the City Council.
Once approved, a Mills Act contract requires the County Tax Assessor’s office to determine the value of the historic property based upon its current net operating income, rather than upon the traditional assessed valuation method resulting, in most cases, in a property tax reduction. For residential or commercial structures that are rented, the net operating income is determined based on actual rents received. For residential and commercial structures that are owner-occupied, the net operating income is determined by the income the property would produce if rented. In exchange for a property tax reduction, the owner agrees to protect, maintain and, if necessary, restore the historic property.
Under the traditional method of determining property taxes, properties are reassessed when sold. However, since Mills Act contracts run with the property, subsequent owners may realize greater tax benefits, as the assessed property value typically increases when the property is sold, resulting in an even greater difference between the property taxes under the assessed valuation method versus the property tax calculation permitted by the Mills Act contract. This can be a significant marketing feature for the property in terms of future sales and is considered an important historic preservation incentive because the property will be maintained. Similarly, the obligations and property tax reduction benefits associated with the Mills Act contract are also binding upon successive property owners during the contract term.
The initial Mills Act contract term is a minimum 10-year period. Each year on the anniversary of the effective date of the agreement, also known as the renewal date, a year is automatically added to the initial 10-year term of the agreement. This effectively makes the term of the contract at least 10 years, but possibly indefinite unless the owner or City submits a notice of non-renewal. A notice of non-renewal could be initiated by the City if the property owner is not fulfilling the obligations (i.e. scheduled improvements or maintenance) specified within their contract with the City. If such a notice of non-renewal were submitted, the contract would remain in effect for the balance of the term remaining, either from its original date of execution if within the initial 10-year term, or from the date of the last one-year renewal of the agreement.
Alternatively, the owner may petition the City to initiate an immediate cancellation, which would result in payment of a penalty equal to 12.5% of the property’s assessed current fair market value, as determined by the County Assessor as though the property were free of the contractual restriction. The City may also cancel the contract in the event of a breach of contract conditions, whereby the property owner would be subject to pay the same 12.5% penalty.
The terms of the contract also state that the agreement may be amended, in whole or in part, if both the owner and the City agree to execute a recorded document to memorialize the contract amendment.
Santa Monica Mills Act Contracts
In addition to the certified architect’s report, financial data is also required as part of the Mills Act Contract application in order to estimate the potential tax reduction and provide guidance to the Landmarks Commission and Council in making a decision on Contract requests. The County Assessor will make a final determination of the taxes due when the approved Contract is submitted and recorded, and will continue to conduct property tax assessments on an annual basis.
Los Angeles County Assessor’s Office data showed that for the 2011-2012 tax year, property value assessments for the 54 Santa Monica historic properties with executed Mills Acts contracts have been reduced between 11% and 82%, with the average reduction being 52%, when compared to their “Proposition 13” values. From these Mills Act contract property value assessments, correspondingly lower taxes have been levied on these properties. Each year, the County Assessor reassesses taxes due for properties with Mills Act Contracts.
Property owners are required to obtain all applicable entitlements such as Certificates of Appropriateness, and all associated building permits, for work proposed in the 10-year restoration/maintenance plan. Furthermore, all work proposed in the 10-year restoration/maintenance plan must comply with “The Secretary of the Interior’s Standards for the Treatment of Historic Properties with Guidelines for Preserving, Rehabilitating, Restoring & Reconstructing Historic Buildings” (Weeks & Grimmer, 1995).
Property owners are also required to submit a report to the City on a biennial basis to demonstrate compliance with contract terms. In 2011, staff initiated and completed a contract monitoring effort for 48 of the 50 existing contracts and concluded that all are in compliance with the contractually agreed upon terms for improvements. In early 2013, staff will initiate its latest effort for the monitoring and reporting on all 54 existing contracts to ensure that terms and obligations are being fulfilled and the properties are appropriately maintained.
There is only one new application for consideration in 2012, the property at 2009 La Mesa Drive. In addition to the specific restoration and repair obligations listed below for this property, its Mills Act Contract would include a standard requirement for ordinary maintenance and upkeep throughout the Contract’s term for work such as roof, plumbing, and electrical systems maintenance.
2009 La Mesa Drive
Known historically as the Kathryn Grayson estate, the house at 2009 La Mesa Drive is a two-story English Cottage/Tudor Revival styled residence. A Mills Act Contract application was filed on July 17, 2012. The existing single-family residence was designated a City Landmark on November 8, 2010 primarily based on its architectural significance, but also as the former residence of entertainer Kathryn Grayson.
As part of the Mills Act application, an architect’s report was prepared by Robert Chattel Architecture. The report assesses the condition of the primary residence and identifies repair, restoration/rehabilitation and maintenance needs (Attachment A) along with a general schedule for completion of work. The subject property has been undergoing significant interior and exterior restoration and rehabilitation work since 2011, including the in-kind replacement of all stucco cladding, new roofing materials, repair of historic windows and other exterior features. All work has been subject to Certificate of Appropriateness review and found to be in conformance with the Secretary of Interiors standards.
As discussed more fully in Attachment A, all of the identified issues have been addressed in the on-going restoration and rehabilitation work that has been completed on interior and exterior of the residence. The building is in excellent repair but, as with all historic properties, it will require on-going maintenance to ensure preservation of the landmark.
Attachment A also contains the estimated financial analysis for the property at 2009 La Mesa Drive.
Staff estimates that the new contract would result in an estimated property tax reduction of 86.6%. Most recently, the owner paid $90,204 in property taxes.
The Landmarks Commission reviewed the Mills Act Contract request at its September 10, 2012, October 8, 2012 and November 12, 2012 meetings. The Commission discussed at length the completeness and appropriateness of this application, and the findings and recommendations contained within the architect’s report. Overall, the Commission recognized that the City’s current enabling legislation and application requirements are broad and do not place restrictions or limitations on Mills Act contract applicants, other than to be the owner of a designated landmark, structure of merit or contributing structure in a designated historic district. The Commission, however, expressed a belief that the intent of the Mills Act should be to provide an owner of a landmark property with financial relief that will help fund rehabilitation/restoration work that is critical to maintain the condition and integrity of the resource. The Commission felt that this specific request for 2009 La Mesa Drive, which involves a single-family residence that has been fully rehabilitated and restored in accordance with the Secretary of the Interior’s Standards, while technically eligible for contractual consideration, does not meet the commonly perceived intent of the Mills Act program to offset rehabilitation and restoration costs. After much discussion, the Commission voted unanimously to direct staff to forward a recommendation to the Council in opposition to the application. Despite the Commission’s recommendation, staff continues to support the applicant’s request for a Mills Act contract. The City’s Mills Act program was developed as a financial incentive to encourage owners to preserve and maintain historical properties. It does not mandate any current or future restoration and/or rehabilitation work to the historic resource. Since the property meets the City’s application requirements, staff continues to support the request.
In general, this contract provides a subsidy to the property owner in exchange for maintaining an historic resource that is considered valuable to the City. If a Mills Act contract were not executed, the property tax obligations for the property are approximately $90,204, of which $14,433 would be earmarked as City revenue. Execution of this Mills Act Contract for 2009 La Mesa Drive is estimated to reduce the annual property tax obligation for the property to $12,127, with a reduction in revenue to the City from $14,433 to $1,940 (a net loss of $12,492) for the FY 2012-13 fiscal year. The combined value of this subsidy within the initial contract period of ten (10) years is approximately $124,920.
The $12,492 of annual revenue loss is not significant in terms of total property tax revenues collected from all properties in the City and therefore, no budget actions will be taken to adjust revenue budgets. A summary financial analysis table is included as Attachment A.
Prepared by: Scott Albright, AICP, Senior Planner