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.
Recommended Action
Staff recommends that the
City Council adopt the attached resolution authorizing the City Manager to
negotiate and execute a Historic Property Preservation Agreement (Mills Act
Contract) between the City of Santa Monica and the property owner of the designated
City Landmark at 2009 La Mesa Drive.
Executive Summary
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.
Background
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.
Discussion
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.
Analysis
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.
Commission Action
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.
Financial
Impacts & Budget Actions
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
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Approved: |
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Forwarded to Council: |
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David Martin, Director Planning and Community Development |
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Rod Gould City Manager |
Attachments:
A.
2009 La Mesa Drive:
(Partial
attachments are not available in electronic format. Entire document is available for review at
the City Clerk’s office and the Libraries.)