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