Agenda Item
City Council
Item #: 6.2. 11/15/2022 File #: 22-0640
TO: Honorable Mayor and Members of the City Council
FROM: Jeff Adams, Interim Community Development Director
1. SUBJECT
Historic Property Preservation Agreements (Mills Act Contracts) for three qualified historic properties.
2. SUMMARY
Mills Act Contracts for three properties in the Old Towne Historic District. These contracts were removed for discussion at the October 11, 2022, City Council meeting, with Council requesting additional property and Mills Act Program information.
3. RECOMMENDED ACTION
Council determination regarding the three Mills Act Contracts between the City of Orange and the identified property owners for the preservation and rehabilitation of qualified historic properties and authorize the Mayor and City Clerk to execute the contracts on behalf of the City.
4. FISCAL IMPACT
The purpose of the Mills Act Program is to leverage property tax savings to support private investment in the preservation of historic properties.
If the three Mills Act applications presented to Council in November 2022 are approved, the City may incur a total reduction of property tax of approximately $2,279 per year. The actual amount of the property tax reduction under the Mills Act Contract will be determined by the Orange County Office of the Assessor, using a predetermined income-based approach to assessment, considering area rental rates and maintenance costs.
The Mills Act Program requires reinvestment of this property tax reduction in preservation of the historic property through the Rehabilitation Plan (Exhibit D) attached to each contract. The Rehabilitation Plan will generate additional revenues from building permit fees, and the local economy will benefit from specialized work in historic preservation by local building contractors and material suppliers. The investment by property owners in these 3 historic properties totals $276,800 over ten years.
The $1,000 application fee for each contract offsets the cost of staff review, property inspection, and this public meeting. The $35 annual fee offsets ongoing costs of administration of the contracts.
5. STRATEGIC PLAN GOALS
Goal 5: Recognize, promote and preserve Orange’s rich heritage b. Expand and strengthen processes and practices related to the protection of cultural resources.
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Item #: 6.2. 11/15/2022 File #: 22-0640
6. DISCUSSION AND BACKGROUND
The three Mills Act applications were previously presented to City Council on October 11, 2022 as a part of a group of six contracts presented to the Council. These properties include:
· 515 S. Grand Street
· 529 S. Grand Street
· 154 N. Shaffer Street
The Grand Street properties are the subject of development applications for the construction of large duplex units, while the Shaffer Street property generated a question about a potential un-permitted accessory dwelling unit (ADU). City Council continued the subject contracts requesting more information about the Mills Act Program, and the ownership status and type of living units associated with each of the three properties. Specifically, the Council was interested in how the construction of additional units on a historic property might affect Mills Act eligibility and how many of the City’sMills Act Contracts involve investment properties.
Staff has determined that the accessory structure at 154 N. Shaffer Street is not being used as an ADU. It appears that the accessory structure is primarily being used as storage. In addition, the proposed project for a unit in the rear of 515 S. Grand Street was denied by the Design Review Committee (DRC) on October 19, 2022. The project at 529 S. Grand Street was approved by the DRC on October 5, 2022. All three properties meet the City of Orange’seligibility criteria for a Mills Act.
Mills Act Criteria:
The Mills Act allows for an owner of a qualified historical property to enter into a 10-year preservation contract with the local government. Per Government Code 50280.1, a “qualifiedhistorical property”is defined as “privately owned property which is not exempt from property taxation, and which meets either of the following:
· Listed in the National Register of Historic Places or located in a registered historic district, as defined in Section 1.191-2(b) of Title 26 of the Code of Federal Regulations. · Listed in any state, city, county, or city and county official register of historical or architecturally significant sites, places, or landmarks.”
In the City of Orange, properties eligible for a Mills Act include:
· Contributors to the Old Towne Orange National Register Historic District · Contributors to the Old Towne Orange Local Historic District · Properties separately listed in the National Register of Historic Places or the California Register of Historical Resources
· Both owner-occupied and income-producing properties are eligible for a contract.
Properties ineligible for a Mills Act include:
· Properties with outstanding code violations are not eligible to apply until the code violation is corrected.
· Properties with delinquent property taxes
· Properties in redevelopment project areas are prohibited, except by special City Council City of Orange Printed on 11/10/2022Page 2 of 5
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Item #: 6.2. 11/15/2022 File #: 22-0640
resolution in cases where it is the only option or financial incentive to avoid demolition of the structure.
Mills Act Property Statistics:
As of November 2022, there are 385 Mills Act Contracts recorded and three pending contracts which were approved on October 11, 2022. The tables below provide statistical information about the property and occupancy type of the Mills Act Contracts in the City of Orange. “Absenteeowners”for the purposes of this report is defined as contracts where the property address and the mailing address are not the same. “Absentee owners” is also inclusive of commercial properties and P.O. boxes listed as mailing addresses.
Property Type
Residential 369
Commercial 16
Occupancy
Owner-occupied 270
Absentee owners 115
In addition, staff conducted permit research dating back to 1998, when the Mills Act program was established in the City in an effort to determine the number of Mills Act Properties with permitted ADUs.
The table below provides statistics on Mills Act properties and ADUs in the Old Towne Historic District and historic properties outside the boundary of the Historic District.
ADU/Non-Historic Dwelling Unit Analysis
Properties with a Mills Act Contract and an
ADU
21 Mills Act eligible properties with an ADU123
A more in-depth description of the tax valuation of historic properties with new construction is detailed later in this report.
Property Tax Assessment of a Historic Property under the Mills Act:
Three property values are determined under the Mills Act:
· Base Year Value, or the purchase price under Proposition 13 with an annual 2% rate of increase.
· Fair Market Value, or the potential sale value of the property at the time of the assessment. · Historical Property Value
Per state law, the reassessment of the historic property under a Mills Act Contract is based on the income-producing potential. For owner-occupied property, income is based on potential rental value.
For commercial, industrial, and multi-family properties, income is based on actual rent rolls. The property’sincome less expenses is then divided by a capitalization rate to establish the Historical City of Orange Printed on 11/10/2022Page 3 of 5
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Item #: 6.2. 11/15/2022 File #: 22-0640
property’sincome less expenses is then divided by a capitalization rate to establish the Historical Property Value. The Assessor will base property taxes on the lowest of these three values. This generally results in a significant property tax reduction unless the property already benefits from low property taxes under Proposition 13. However, there is no guarantee that the Mills Act Contract will reduce the property taxes owed.
It is possible that only a portion of a property may be subject to the Mills Act. Historical properties may contain portions that are both restricted and unrestricted. In such instances, a separate factored base year value should be maintained for the restricted and unrestricted portions.
This would be the case for the eligibility of 529 S. Grand Street, should it receive a Mills Act Contract. 529 S. Grand Street is eligible for a Mills Act as it is a contributor in Old Towne Orange. However, the new construction which was approved by the Design Review Committee on October 5, 2022, would not be benefit from the lower tax valuation, as it will not be included in either the Contract’s rehabilitation plan as it is a new building, and not the historic structure. It will have a separate factored base year value for the historical and non-historical parts of the property. An illustrative graphic that identifies the Mills Act eligible and ineligible structures per the approved project plans at 529 S. Grand Street is attached to this report.
Also, the Mills Act Contract’s maintenance/rehabilitation plan specifies the scope of work to be performed. Unless specifically excluded by the contract, improvements existing as of the date of the contract are subject to the lower property tax value. If the improvements are made after the contract issuance date, they are not subject to the lower property tax value, unless specifically included in the contract or with an amendment.
Newly constructed buildings, including accessory structures, accessory dwelling units, and more, are not a historic resource, and therefore are not qualified historical properties per the Government Code section 50280.1 for the Mills Act. According to the National Register Bulletin #15: How to Apply the National Register Criteria for Evaluation, the only newly constructed type of property that is eligible for inclusion under the Mills Act is a reconstructed historic building if the reconstruction is “accurately executed in a suitable environment and presented in a dignified manner as part of a restoration master plan and when no other building or structure with the same association has survived. All three of these requirements must be met." New construction will typically not be a basis for denial.
The new construction at 529 S. Grand Street that was recently approved at DRC will not benefit from the lower tax valuation. 154 N. Shaffer Street and 515 S. Grand Street do not have new construction that would benefit from the Mills Act Contract. In the future, should the property owner decide to apply for an ADU or any new construction, the new construction will not be included in the Mills Act scope of work or the Historic Property Value.
A summary of each application is provided in Attachment 1 to the Staff Report.
7. ATTACHMENTS
1. Table Summary of 3 Mills Act Applications
2. Mills Act Contract MAC-413.0-22 with photograph
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3. Mills Act Contract MAC-414.0-22 with photograph
4. Mills Act Contract MAC-418.0-22 with photograph
5. 529 S Grand Street Illustrative Graphic
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