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SR - - STATUS REPORT AND PROPOSED EXPANSION OF PROGRAMAGENDA ITEM 1. SUBJECT Status report and proposed expansion of the Mills Act Program. 2. SUMMARY At the request of City Council, the Community Development Department reviewed the current Mills Act Program and prepared a report on the program's history, current status, and potential changes to the application criteria and number of contracts accepted per year. This request was prompted by demand in the Old Towne historic districts combined with the possibility of designating the Eichler Tracts as local historic districts, thereby making those additional properties eligible for the program. Based on this report, staff recommends increasing the cap on the number of new contracts approved per year and including additional application criteria to ensure the highest quality applications receive first priority, as described below. 3. RECOMMENDED ACT Direct staff to prepare a resolution to amend the Mills Act Program as follows: • Revise the cap on the number of contracts approved per year from 10 to a maximum of 20. The new cap would accommodate the current demand within the Old Towne historic districts and the increase in eligible properties with the addition of the Eichler Tracts. • Incorporate priority criteria into the Mills Act application and rank applications based on how they meet the criteria so that the highest quality applications receive first priority for approval by City Council. These criteria should rank the uniqueness of the property, the amount of investment in preservation, and the necessity for rehabilitation based on the condition of the property. Require preparation of a Historic Structure Report for any property that exceeds $1,200,000 in assessed value before approval of a Mills Act Contract. The majority of single - family residences would be exempt from this requirement. Those properties potentially resulting in the largest decrease in property tax revenue to the City would be required to develop a plan for rehabilitation with a qualified historic preservation consultant. An annual growth rate calculator, based on the County Assessor's annual rate of increase in assessed value, will be added to ensure this amount adjusts over time. Increase the annual fee for a Mills Act Contract from $30 to $100 per year to offset the costs of program administration. 4. FISCAL IMP The City may incur a loss of property tax revenue of approximately $400 per Mills Act Contract per year. The actual amount of property tax reduction under each Mills Act Contract will be determined by the Orange County Office of the Assessor, using a predetermined income -based approach to reassessment, considering area rental rates and maintenance costs. Rehabilitation of properties under the Mills Act Contract also generates additional revenues from building permit fees, and the local economy benefits from additional work for building contractors and material suppliers. The application fee of $1,000 for each contract offsets the cost of staff review of the application and the initial property inspection. The annual fee for the contract is currently $30. This fee does not completely offset the cost in staff time of managing the program. Under the state legislation enabling the Mills Act program, Mills Act properties must be inspected once every five years. An inspection costs approximately $500 in staff time and /or consulting fees. Increasing the annual fee for Mills Act properties from $30 to $100 would offset the cost of ongoing administration and five -year inspections associated with the program. 5. STRATEGIC PL GO Goal 5 Recognize, promote and preserve Orange's rich heritage. Strategy B Expand and strengthen processes and practices related to protection of cultural resources. 6. GENERAL PLAN IMPLEMENTATION Cultural Resources and Historic Preservation Element: Goal 3.0 Provide incentives and expand education efforts for historic preservation. Policy 3.2 Provide incentives to encourage and support historic preservation. 7. DISCUSSION and BACKGROUND Development of the Mills Act Progra In 1998, Resolution No. 8920 was adopted by City Council to establish a pilot Mills Act Program in Orange, as an incentive to encourage preservation of historic resources, particularly in the overlapping National Register of Historic Places Old Towne Orange Historic District and local Old Towne Orange Historic District (collectively, Old Towne historic districts). Nine contracts were approved under the pilot. In 1999, City Council made the program permanent and established a cap of 20 new contracts per year to minimize the potential cumulative reduction in property tax revenues. In 2010, the cap was reduced to 10 new contracts per year. Number of Mills Act Contracts Approved Per Year Approval Year Number of Contracts 1998 9 1999 28 2000 13 2001 6 2002 7 2003 12 2004 8 2005 19 2006 20 2007 20 2008 9 2009 11 2010' 10 2011 9 2012 10 2013 9 2014 10 1 2015 1 b 1 ' In 2010, City Council instituted a cap of 10 new Mills Act Contracts per year. ITEM 3 09/13/2016 Mills Act Eligibility Under the program established by City Council, a property may be eligible for a Mills Act Contract if it is: • A contributor to the Old Towne Orange National Register Historic District • A contributor to the Old Towne Orange Local Historic District • Separately listed or eligible for the National Register of Historic Places or the California Register of Historical Resources • Owner- occupied or income - producing • Privately owned and not exempt from property taxation Application Process and Contract Terms In any calendar year, applications are accepted on a first -come, first - served basis, prior to August 1. The application fee is $1,000, payable at the time of application submittal and non - refundable. Each application includes a Rehabilitation/Maintenance Plan for repairs to the property over the initial 10 year term of the contract. In years when more than 10 applications are received, those additional applications are deferred to the following year. Mills Act Contracts run for a ten year term and are automatically renewed each year on the anniversary of the contract's approval by City Council. In effect, the contract is always 10 years away from termination, unless the property owner or the City submits a notice of non - renewal. The property owner must provide written notice of non - renewal to the City at least 90 days prior to the renewal date, or another year is automatically added to the contract. Following submittal of a notice of non - renewal, the contract will be terminated at the end of the current ten year term. If the City finds that the property owner has not complied with the contract terms, the City may initiate proceedings to cancel the contract. The property owner may also petition the City for immediate cancellation. A penalty of 12 1 /2 percent of the property's assessed fair market value may be imposed for a cancelled contract. In Orange, all of the contracts that have been approved by City Council remain in effect. There have been no cancellations or non - renewals to date in the program's 18 years. Mills Act Properties As of July 2016, there are 217 historic properties with Mills Act Contracts. This is approximately 16 percent of the 1,300 properties that are eligible for a contract under the current program criteria. Staff has received the maximum 10 applications for 2016. Two additional applications were received prior to August 1 and will be deferred to 2017. The typical Mills Act property is an owner - occupied, single- family residence in the Old Towne historic districts. The following tables provide a summary of the properties with contracts. ITEM 4 09/13/2016 Mills Act Property Designations Contributors to Old Towne historic districts 209 Individually eligible outside Old Towne 8 Mills Act Property Types Single- Family Residences 199 Multi- Family Residences 10 Commercial 8 Mills Act Owner Occupancy for Residential Properties Owner Occupied 155 Non -Owner Occupied 54 Tracking Mills Act Properties To improve tracking of property owners' fulfillment of the obligations of the contracts, since 2014, staff has implemented an annual progress reporting process for Mills Act properties. In January /February of each year, annual progress report forms are mailed to Mills Act property owners, along with an invoice for the annual fee. Property owners are asked to document on the form the rehabilitation and repair items that they have finished in the previous year, including receipts and photographs of the work. Staff has also begun implementing a five -year inspection program as required by the state Mills Act legislation. Properties with the oldest Mills Act contracts, approved in 1998 and 1999, are being inspected in 2016. The inspections include on -site meetings with the property owner and include both exterior and interior of the buildings. With the assistance of a qualified historic preservation consultant, a total of 40 properties will be inspected in 2016. Seventeen of the 40 properties have been inspected to date. 2 Residential occupancy is based on County Assessor's data for fiscal year 2015 -16. Multi- family properties are included in the owner- occupied total if the owner lives in at least one of the units. Owner occupancy is not required by the current Mills Act Program and may change at any time. ITEM 5 09/13/2016 Property Taxes under the Mills Act Contract Property Assessments Per state law, reassessment of a property under a Mills Act Contract is based on the property's 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. Property tax reductions will vary based on each property's income - producing potential and current assessed value. Improvements to the property also increase its assessed value. Under a Mills Act Contract, the Orange County Assessor's Office produces three assessments for the property: 1. Factored Year Base Value. The value of the property at the time of its most recent sale plus an annual appreciation rate not to exceed two percent. The rate of appreciation changes each year. 2. Market Value. The current fair market price of the property. 3. Historical Property Value. Based on the property's income - producing potential through a formula established by the state legislation enabling the Mills Act Program. This formula is based on the rental market for properties and on an interest rate set annually by the state Board of Equalization. Property taxes will be based on the lowest of the three assessments. As such, there is no guarantee that the Mills Act Contract will reduce the property taxes owed. There are 11 Mills Act properties in Orange that currently receive no benefit from the contracts, because the properties' Factored Year Base Value and /or Market Value are less than the Historical Property Value. In fiscal year 2015 -2016, the average property tax reduction was $2,970. The maximum reduction was $10,215 for the property at 350 S. Glassell Street. City's Unrealized Property Taxes In the Old Towne historic districts, the City receives 13.57 percent of the collected General Levy (1 percent) property tax. 3 In 1998, it was estimated that the Mills Act program would result in a property tax reduction to the City over a 10 year period of between $71,400 and $210,000 for 89 contracts, or $2,359 per Mills Act Contract. In 2010, staff prepared a memo which estimated that the cumulative reduction in property tax revenue to the City from 1998 to 2010 was $299,978 for 162 Mills Act Contracts. This equals approximately $1,852 in cumulative unrealized property tax 3 The General Levy (1 percent) property tax is allocated as follows: • Orange Unified School District General Fund/Educational Revenue Augmentation Fund: 62.59 • Orange County: 16.12 % • City of Orange: 13.57 % • Rancho Santiago Community College: 7.76 % The percentage of property tax allocated to the City of Orange is determined by the Tax Rate Area (TRA) in which the property is located. There are multiple TRAs in Orange, and property tax allocations to the City from these TRAs range from approximately 11 percent to 18 percent of every tax dollar. For the purpose of this memo, staff used the percentage from the TRA that encompasses the Old Towne historic districts, or 13.57 percent. The Eichler Tracts of Fairhaven and Fairhills are in a different TRA that has an allocation to the City of 13.67 percent. ITEM 6 09/13/2016 revenue to the City per contract. Based on Orange County Assessor's data, the City's portion of unrealized property tax revenue from the Mills Act Program totals $85,031 for fiscal year 2015 -2016. This total encompasses 211 contracts. For 2015 -2016, the City's unrealized property tax averages to approximately $403 per contract. Because all three assessed values for a single property fluctuate in any given year, the total reduction in property tax revenue to the City will change annually. However, if the average reduction per contract remains approximately level, then the City can anticipate an average loss of property tax revenue of $4,000 per year for every 10 contracts approved. This reduction in revenue is compounded on top of the annual loss from existing contracts. Alternative Prop-ram Frameworks Caps on Approved Contracts Other municipalities have instituted caps on Mills Act applications. These caps typically fall into two categories: • Caps on the total number of contracts approved annually • Caps on reductions to property tax revenue to the City Since the beginning of the program, Orange has had a cap on the total number of contracts approved per year. The number of applications received fluctuates each year. Since the 10 contract cap was instituted in 2010, staff has processed an average of nine contracts per year. In some years, more than 10 applications are received and those additional applications are deferred to the following year. Other cities have addressed fluctuations in demand by creating a flexible cap on the number of contracts. The City of Riverside has instituted an annual average of seven contracts with no more than 10 contracts approved in any year. This type of cap allows the number of contracts approved per year to expand or contract based on the number of applications received, while maintaining an annual average that limits the total amount of property tax loss to the City over time. Other municipalities have chosen to implement a cap on the loss of property tax revenue. The Los Angeles County Mills Act Program has a cap of $300,000 in annual property tax loss. This method requires close coordination with the County Assessor to ensure that staff can accurately track the reductions in property taxes in any year. Priority Criteria Other municipalities, including the cities of Los Angeles, Beverly Hills, and Pasadena, have developed additional assessment criteria for Mills Act Contracts. These criteria are included in ITEM 7 09/13/2016 the applications, so that property owners can describe in more detail the benefits of their projects to preservation of historic resources in their communities. These criteria may include: • Necessity — Does the property require financial incentives, beyond private investment, to ensure its preservation? To meet this criterion, the property should be substantially deteriorated or require significant investment in rehabilitation or restoration. • Uniqueness — Is the property a distinctive example of a historic property? This may include an unusual architectural style or an important association with a historic person or event. • Investment — Will the rehabilitation result in greater private investment in the property's preservation, beyond general maintenance? Rehabilitation should include seismic retrofitting, significant upgrades to the building systems, and restoration of historic features. Rather than processing applications on a first -come, first - served basis, the priority criteria are used to rank the applications in those years when more than the cap are received. Those contracts with the highest scores, meeting the most criteria, receive first priority for the reviewing body's determination. In Orange, incorporating priority criteria into the applications would help to ensure that the applications approved are of the highest quality and result in a substantial investment in historic preservation. Cap on Assessed Value Some municipalities also include a cap on the assessed value of the property. In the City of Los Angeles, a property's assessed value may not exceed $1.5 million for a single family residence or $3 million for multi - family, commercial or industrial properties to be eligible for a Mills Act Contract. In Los Angeles, the Cultural Heritage Commission may grant an exemption to allow the contract to be approved, if the contract is for an exceptional property that would otherwise be in danger or demolition or substantial alteration. For an exemption, the application must be accompanied by a Historic Structure Report, assessing the condition and rehabilitation needs of the property, prepared by a qualified historic preservation consultant. A rehabilitation plan prepared by a professional is not required for properties that do not exceed the valuation cap. In Orange, the majority of Mills Act properties are valued below $1,200,000. Eight properties with existing contracts are valued at more than $1,200,000, before the Mills Act reassessment. Four are commercial properties, three are single family residences, and one is a multi - family residence. Requiring a Historic Structure Report for these properties would ensure that the properties which result in the largest reduction in property tax revenue to the City will receive the highest quality rehabilitation under the contract. This cap can be increased annually based on the County Assessor's annual rate of increase in assessed value under Proposition 13. ITEM 8 09/13/2016 Expansion of the Mills Act Promm and Property Owner Interest The demand for new Mills Act Contracts in the Old Towne historic districts varies each year. Staff has received more than 10 applications for new contracts in two out of the three past years. As property values in Old Towne increase, staff anticipates that interest in the program will grow. If all three Eicher Tracts were established as local historic districts, an additional 306 historic properties would be eligible to apply for contracts. This is an increase in the number of eligible properties of approximately 23 percent. Many property owners in the Eichler Tracts have expressed interest in the Mills Act Program. In the Old Towne historic districts, there were a large number of Mills Act applications in the initial two to three years of the program. Similarly, requests for the contracts in the Eichlers Tracts would likely be high in the initial two to three years after the historic districts are established. Staff anticipates that the increased interest in the Old Towne historic districts, combined with the Eichler Tracts, will regularly result in more than 10 applications per year. A cap of 20 new contracts per year would re- establish the limit created by City Council in the first 12 years of the program. The 20 contract cap allows room for fluctuation in the number of new contracts processed per year, while still limiting the total reduction in property tax revenues to the City. With the expanded application criteria, the increased cap will encourage additional investment by property owners in high - quality preservation of more historic properties. The 20 contract cap will respond to both the increased demand from Old Towne property owners and provide adequate incentives to support historic preservation for Eichler property owners. Staff recommends that a restoration of the annual 20 contract cap from the beginning of the program is warranted to meet the requests from property owners. 8. ATTACHMENTS 1. Mills Act Program Supplemental Information 2. City Council Resolution No. 8920 3. Minutes of City Council Meeting on August 25, 1998 4. City Council Staff Report, dated July 13, 1999 5. Minutes of City Council Meeting on July 13, 1999 6. City Council Staff Report, dated April 13, 2010 7. Minutes of City Council Meeting on April 13, 2010 8. Mills Act Application ITEM 9 09/13/2016 CITY COUNCIL MINUTES SEPTEMBER 13, 2016 3. CONSENT CALENDAR (Continued) 3.27 RESOLUTION NO. 10978 (C2500.C) A Resolution of the City Council of the City of Orange adopting the Biennial Revisions to Employee Positions and Titles in the Conflict of Interest Code for the City of Orange. ACTION: Approved. MOTION - Murphy SECOND - Alvarez AYES - Alvarez, Whitaker, Smith, Murphy, Nichols For Item 3.9, Mayor pro tem Murphy abstained. Item 3.19 was pulled and heard separately. All other items were approved as recommended. END OF CONSENT CALENDAR * * * * * * ** 4. REPORTS FROM MAYOR SMITH Mayor Smith pointed out the City Treasurer Richard Rohm has attended every City Council meeting and thanked him. 5. REPORTS FROM COUNCILMEMBERS - None 6. REPORTS FROM BOARDS, COMMITTEES, AND COMMISSIONS - None 7. ADMINISTRATIVE REPORTS 7.1 Status Report and Proposed expansion of the Mills Act Program. (C2300.I.2) Historic Planner Marissa Moshier gave the staff report. City staff can review approximately 40 historic properties per year for compliance with Mills Act requirements. Financial penalties are available for properties that do not meet their Mills Act requirements. The City Council found consensus agreeing that they prefer there should be no cap on the number of Mills Act contracts the City processes in a year. There should be no prioritization of applications. No Historic Structure Reports will be required. No change in the fees for applications. Currently, properties are eligible for a Mills Act Contract if they are privately owned contributors to the Old Towne Orange National Register historic District, the Old Towne Orange Local Historic District, or are eligible for the National Register of Historic Places or the California Register of Historic Places. Properties within the Eichler Tracts are not yet eligible for Mills Act Contracts. PAGE 9 CITY COUNCIL MINUTES SEPTEMBER 13, 2016 7. ADMINISTRATIVE REPORTS (Continued) City Manager Rick Otto mentioned that staff is working on plans to make the inspections of Mills Act properties more efficient. Councilmember Whitaker asked staff to return with numbers indicating what it costs the city to complete inspections versus what we charge. PUBLIC SPEAKER: Al Ricci — Spoke in favor of the Mills Act Contracts and wants to see no cap on the number of applications. Spoke against the prioritization of properties. MOTION — Murphy SECOND - Alvarez AYES - Alvarez, Whitaker, Smith, Murphy, Nichols Moved to direct staff to prepare a resolution to amend the Mills Act Program as follows: Remove the cap of ten Mills Act contracts per year and review the program in one year. 8. REPORTS FROM CITY MANAGER - None 9. LEGAL AFFAIRS - None 10. ITEMS RELATING TO THE SUCCESSOR AGENCY OF THE ORANGE REDEVELOPMENT AGENCY - None 11. PUBLIC HEARINGS 11.1 Conduit Bond Financing for Casa Ramon Apartments. (C2500.G.1.5) Time set for a public hearing to consider the issuance by the California Statewide Communities Development Authority of multifamily housing revenue bonds for the Casa Ramon Apartments. THE MAYOR OPENED THE PUBLIC HEARING. PUBLIC SPEAKERS: Debbie Lane — Questioned what was going to happen with the residents during the rehabilitation of the complex. Todd Cottle — Indicated that the owners will work with the residents and will pay for temporary housing during construction. THE MAYOR CLOSED THE PUBLIC HEARING. RESOLUTION NO. 10975 A Resolution of the City Council of the City of Orange approving the issuance by the California Statewide Communities Development Authority of multifamily housing revenue bonds for the Casa Ramon Apartments. PAGE 10