Agenda Report
Fullerton City Council
MEETING DATE: APRIL 21, 2020
TO: CITY COUNCIL / SUCCESSOR AGENCY
SUBMITTED BY: KENNETH A. DOMER, CITY MANAGER
PREPARED BY: MATT FOULKES , DIRECTOR OF COMMUNITY AND
ECONOMIC DEVELOPMENT
SUBJECT: MILLS ACT PROGRAM ADOPTION AND GUIDELINES
SUMMARY
Consideration of a Mills Act Program for the City of Fullerton including program guidelines, selection criteria and approval process for the preservation, rehabilitation and maintenance of eligible historic properties.
RECOMMENDATION
Adopt Resolution No. 2020-XX.
RESOLUTION NO. 2020-XX – A RESOLUTION OF THE CITY COUNCIL OF THE CITY
OF FULLERTON, CALIFORNIA, ESTABLISHING A MILLS ACT PROGRAM F OR THE
PRESERVATION, REHABI LITATION AND MAINTEN ANCE OF ELIGIBLE HIS TORIC
PROPERTIES AND ASSOCIATED PROGRAM ADMINISTRATION GUIDELINES
PRIORITY POLICY STATEMENT
This item matches the following Priority Policy Statements:
Infrastructure and City Assets
Fiscal and Organizational Stability.
FISCAL IMPACT
Based on the proposed program guidelines, and assuming that the City processed the maximum number of Mills Act Contracts each year ( ten), the resulting property tax revenue loss would be approximately $4,000 per year and would increase annually based on the number of new contracts added to a maximum annual property tax revenue loss of approximately $20,000 to $30,000 (maximum of 50 properties) . Pursuant to the proposed guidelines, when the number of Mills Act contracts reaches 50, the program would require reauthorization by the City Council in order to continue to approve additional Mills Act Contracts . For reference, t he City’s total property tax revenue is
Mills Act Program and Guidelines
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approximately $45-million dollars per year. Additional discussion of property tax revenue impacts is provided in the discussion section of this report.
DISCUSSION
Mills Act Background
Enacted in 1972, the Mills Act grants participating local governments the authority to enter into contracts with owners of qualified historic properties who actively participate in the restoration and maintenance of their historic properties in exchange for receiving property tax reductions. The Mills Act is codified in both the California Government Code (Article 12, Section 50280 – 50290) and the California Revenue and Taxation Code (Article 1.9, Sections 439-439.4).
In 1976, California voters passed Proposition 7, amending Section 8 of Article XIII of the California Constitution, requiring enforceably restricted historical properties be valued on a basis that is consistent with its restrictions and uses. Sections 439 through 439.4 of the Revenue and Taxation Code sets forth the statutory authority for the assessment of Mills Act properties. Essentially, it provides that valuation of the property be determined by the income approach (potential income if rented) rather than a sales data approach, even for an owner-occupied single-family residence.
In 1985, the Mills Act was amended to shorten the contract period from the initial 20-year period to 10-years, as well as eliminate the mandatory public access requirements and reduce the penalty for cancellation of a contract from 50 percent to 12.5 percent.
In 2012 , the Mills Act was amended to include mandatory inspections of Mills Act properties every five years and to allow cities to recover the cost for providing those inspections through a fee to a Mills Act property owner.
Over 100 cities throughout the state have enacted Mills Act Programs including nine Orange County cities as well as the County of Orange. The Office of Historic Preservation reports that approximately three to four cities adopt Mills Act programs each year.
Basic Principles and Purpose of a Mills Act Program
The Mills Act is an economic incentive program in California for the restoration and preservation of qualified historic buildings by private property owners. The Mills Act authorizes a city to enter into agreements with private property owners of qualified historic properties to rehabilitate and maintain their historic properties in exchange for receiving property tax relief. Mills Act contrac ts are for an initial term of ten years. The contract automatically renews each year on i ts anniversary date and a new ten -year agreement becomes effective, creating a "rolling" contract term that is always equal to the initial ten- year term.
The Mills Act is not a subsidy for those seeking to remodel their property or a tool to assist with mortgage payments. The purpose of the program is for the funds saved in property taxes to be utilized for the rehabilitation and maintenance of the property and all work must conform to the Federal Guidelines developed for the treatment of historic properties, known as the Secretary of the Interior’s Standards for Rehabilitation, Building Codes and City design guidelines for historic preservation.
Property owner participation in a Mills Act Program is voluntar y and each contract is subject to review and authorization by the City Council . Mills Act Programs are administered exclusively at the local level allowing cities to customize the program Mills Act Program and Guidelines
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guidelines to meet their program goals. Once a Mills Act contract is approved, the contract remains binding on the property and is automatically passed on to subsequent property owners. If a property owner wishes to terminate the contract, they must provide notification to the city of their intent to terminate and the contract would conclude at the end of its current ten-year term. If the contract is cancelled prior to the end of the ten-year period, the property owner is assessed a penalty fee as established in the State statute (12.5 percent of the current fair market value of the property).
Properties eligible to participate in a Mills Act Program are required to receive periodic (minimum of once every five years) inspections by the City. The City also has the ability to cancel a contract if the property owner violates the terms of the Mills Act agreement by not maintaining the property in accordance with the required standards.
Policy Direction Provided in the Fullerton Plan
The Fullerton General Plan (The Fullerton Plan), adopted in 2012, included a Historic Preservation Chapter (Chapter 3) with the stated purpose to guide the “preservation, protection, restoration, and rehabilitation of historical resources in order to reaffirm their continuing value as a resource contributing to the vitality and diversity of the present.” Further, Policy 4.3 of The Fullerton Plan states “Support projects, programs, policies and regulations to promote the maintenance, restoration and rehabilitat ion of historical resources.” This policy is further supported within the Short-Term Action Plan section of The Fullerton Plan which identifies the development and implementation of a Mills Act Program to provide financial incentive to restore and preserv e historic resources (Short- term Action Item 4.6).
Recommended Mills Act Program Guidelines
Mills Act Programs are administered at the local level which allows the City Council to control the program parameters, including the ability to amend the program guidelines in the future or to terminate the program.
Historic Property Eligibility Criteria –
Pursuant to Section 439 of the Revenue and Taxation Code, a “qualified historical property” is defined as a privately owned property that is not exempt from property taxation and is listed on any national, state or local historic register. The Fullerton Plan and Fullerton Municipal Code contain several historic designations based on the level of significance, these designations include:
National Register
Local Landmark
Significant Property
Historic Districts / Preservation
Zones
Potential / Possible Significant
Properties
With the exception of Potential / Possible Significant Properties and non -historic properties within Preservation Zones , the properties listed above would be eligible to request a Mills Act Contract from the City provided they are privately owned and are not exempt from property taxation. An analysis of the City’s current historic properties contained in Table 6 of the Fullerton Plan (Local Register of Historical Resources) found that there are 66 potentially elig ible properties, with another 17 that are categorized as potentially significant that could become eligible , for a total of 83 properties. Of these potentially eligible properties, those which were purchased prior to 1978 (pre-Proposition 13) or which otherwise pay minimal property taxes, would not see a financial benefit from Mills Act Program and Guidelines
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entering into a Mills Act Agreement. An example of this scenario is the Pierotti House and Gardens (HL -33, National Register) at 1731 North Bradford Avenue. According to the Orange County Assessor’s Office, this property currently pays $1,237.16 in annual property taxes, of which only $882.06 is general levy. As a result of this very low property tax rate, there are no property tax savings from a Mills Act Contract. Another example is the Fuller House (HL-59, Local Landmark) at 150 Hillcrest Drive which has an assessed valuation of $168,000, resulting in an annual property tax rate of approximately $1,680.
For these properties, and others where the Mills Act property tax value (the restricted value) exceeds the current assessed value, there is no property tax savings resulting from a Mills Act Agreement. The lack of property tax savings does not prohibit a property from requesting a Mills Act Contract, but the purpose of the agreemen t would not be for property tax savings.
Program Eligibility Guidelines -
1. Property must be a residential nature / use.
2. Properties must have an assessed valuation of less than $800,000 dollars.
3. Maximum of ten Mills Act Contracts can be approved per calendar year.
4. The cumulative total number of Mills Act Contracts in the City cannot exceed 50 without program reauthorization by a resolution of the City Council.
Program Administration Guidelines -
1. Institute an inspection fee for Mills Act properties to recover the City costs associated with providing this service as permitted by the Government Code.
2. Establish an annual self-certification requirement by Mills Act property owners and utilize Fullerton Heritage to perform inspections between the mandated City inspections every five years. Fullerton Heritage has indicated that they would offer this service to the City at no charge.
3. Institute an application fee for the preparation of Mills Act Contracts, including any property improvement / rehabilitation schedules, which recovers the full City cost.
Based on the estimated time and materials required to prepare these documents, the fee for a Mills Act Contract would be $1,520 with an annual fee of $85.
4. Establish a Ten-Year Rehabilitation / Maintenance Plan that will accompany all Mills Act Contracts which specifies the type of rehabilitation / maintenance that will be completed by the property owner during the contract period along with estimated costs for this work. The value of the work completed should equal the property tax savings achieved under the Contract.
Property Tax Revenue Impacts
The City of Fullerton receives $0.1564 of every $1.00 of property taxes, with the remaining portion going to the County, Sch ool Districts and Special Districts. As a result, the estimated loss in property tax revenue to the City as a result of a Mills Act Program would be a 15.64% reduction in the general tax levy portion of the property tax (1.0%) for each property with a Mills Act Agreement . Additional taxes such as special assessment charges are not included in the general levy property tax component and not affected by Mills Act Contracts.
Mills Act Program and Guidelines
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The amount of annual property tax revenue loss to the City is dependent on the assessed valuation of the property applying for a Mills Act contract. The calculation of a Mills Act property tax savings is performed annually by the Orange County Assessor’s Office using the income method which takes the projected income, subtracts expense s and divides that by a capitalization rate to determine the new assessed value, referred to as the Restricted Value. The Restricted Value, the Assessed Value and the Factored Base Year value are compared and the lowest of the three becomes the new value for assessment of the one percent property tax assessed to the property.
For example, a property with an assessed valuation of $500,000 without a Mills Act contract would pay $5,000 a year in property tax (1%). The City receives 15.64% of the $5,000 which equals $782. Using the income method described above to determine the Restricted Value for this same property results in a value of $255,613.12 for a new annual property tax of $2,556.13 and a savings of $2,443.87 per year for the property owner. The City’s portion of the reduced property tax is equal to 15.64% of $2,556.13 or $399.78.
Therefore, the resulting in loss in City property tax revenue is the difference between $782 (original revenue received) minus $399.78 ( adjusted revenue received) which equ als a loss of $382.22 in City property tax revenue annually for this property.
Under the proposed program guidelines, the City would limit the number of Mills Act Contacts that can be granted to no more than ten per calendar year. Further, the City would cap the total number of Mills Act contract properties at fifty before requiring re - authorization of the program by resolution of the City Council. Using those program assumptions, and assuming that the City processed the maximum number of agreements each year (ten), the resulting property tax revenue loss in year one of the program would be approximately $4,000 and would increase annually to a maximum annual property tax revenue loss of approximately $20,000 to $30,000 (maximum 50 properties) when the program would require reauthorization by the City Council to continue. For reference, the City’s total property tax revenue is approximately $45-million dollars per year.
Role of the Landmarks Commission
The Community and Economic Development Department ( Planning Division) would be responsible for preparing application materials, meeting with applicants, notifying eligible properties and, with assistance from the City Attorney’s Office, preparation of Mills Act Contracts for consideration by the City Council.
The Planning Commission, acting as the Landmarks Commission, would also continue to review requests to have a property added to the City’s Historic Register, therefore making it potentially eligible to receive a Mills Act Contract. The Landmarks Commiss ion would also be responsible for reviewing certain proposals to rehabilitate, modify or add to properties that are listed on the Historic Register pursuant to Fullerton Municipal Code Chapter 15.17 and 15.48.
Attachments:
Attachment 1 – PowerPoint Presentation
Attachment 2 – Draft Resolution 2020-XX
Attachment 3 – Mills Act Program Guidelines