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SR - RES-11122 - REHABILITATION OF INTERIOR HISTORIC FEATURES IN MILLS ACT PROPERTIES G��°�°��c� .�GENDA ITEM *: :* o: :� . �o8•..A�4�.•..� November 13, 2018 ro�:�� ReviewedNeri�ed B • TO: Honorable Mayor and Members of the City Council City Manager Finance Directo _�� THRU• R1Ck Otto To Be Presented By: Marissa Moshier, ' Historic Preservation Planner ' City Manager Cons Calendar City Mgr Rpts FROM• William Crouch �� Council Reports _ Legal Affairs • Community Development Director Boards/Cmtes _ Public Hrgs X Admin Reports Plan/Environ 1. SUBJECT Rehabilitation of Interior Historic Features in Mills Act Properties. 2. SUMMARY The current Mills Act Program requirements do not permit interior rehabilitation as part of the eligible work for a Rehabilitation/Maintenance Plan. In September 2018, the City Council requested that the Community Development Department provide information on including rehabilitation of interior historic features in the Rehabilitation/Maintenance Plans of Mills Act Contracts. � � 3. RECOMMENDED ACTION If the City Council chooses, adopt Resolution No. 11122 entitled: A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF ORANGE AMENDING THE MILLS ACT PROGRAM REQUIREMENTS TO ALLOW REHABILITATION OF INTERIOR HISTORIC FEATURES IN REHABILITATION/ MAINTENANCE PLANS FOR MILLS ACT CONTRACTS 4 FISCAL IMPACT No impact. ITEM � . � 1 11/13/18 5. STRATEGIC PLAN GOAL(S) 5. Recognize,promote, and preserve Orange's rich heritage. d) Expand and strengthen processes and practices related to protection and cultural resources. 6. GENERAL PLAN IMPLEMENTATION Cultural Resources Element Goa13.0 Provide incentives and expand education efforts for historic preservation. Policy 3.2 Provide incentives to encourage and support historic preservation. 7. DISCUSSION and BACKGROUND At the request of City Council, staff of the Community Development Department Planning Division has prepared information on the potential to include rehabilitation of historic interior features in the Rehabilitation/Maintenance Plans for Mills Act properties. Including interior rehabilitation in the Rehabilitation/Maintenance Plan will not affect the property tax reduction received by property owners. However, it will allow property owners more flexibility to meet the minimum program requirements. Mills Act Program Background The Orange Mills Act Program was established in 1998 as an incentive to encourage preservation of historic resources. Properties eligible for a Mills Act Contract are contributors to an established historic district or separately listed in or eligible for the National Register of Historic Places or the California Register of Historical Resources. The Mills Act Contract is a legal agreement between the property owner and the City that is recorded against the property. Under the contract terms, the property owner agrees to preserve, maintain, and rehabilitate the historic property in conformance with the SecNetary of the InteNior's Standards fo� the Treatment of Historic Properties (SOI Standards) and with local historic preservation standards. The property owner is required to prepare and complete a Rehabilitation/Maintenance Plan with a timeline for specific work items on the historic property. In exchange, the property owner may receive a reduction in property taxes to offset the costs of rehabilitation. The purpose of the Mills Act Program is to support long-term preservation with a f nancial incentive that is reinvested in historic properties. Under the Mills Act Program, the total property tax collected by the Orange County Assessor decreases because the property is re-assessed using a formula mandated by state law. The City's percentage of property tax revenue received(approximately 14%) does not change. There are currently 234 active Mills Act Contracts with eight new applications for 2018. Rehabilitation/Maintenance Plan Each Mills Act application requires the property owner to prepare a Rehabilitation/Maintenance Plan for the property. Under the current program requirements, the plan must comply with the following: ITEM 2 11/13/18 • The work must be in conformance with the SOI Standards and Historic Preservation Design Standards for Old Towne (or Orange Eichler Design Standards, if adopted). • Only work on the exterior and systems of the historic building (electrical, plumbing, and structural) is eligible. Work on interior features cannot be included. • The total cost of rehabilitation over the ten-year contract term must approximately equal or exceed the amount of estimated tax savings. Staff reviews the Rehabilitation/Maintenance Plans submitted by property owners to ensure that all work meets the SOI Standards. As part of the application process, staff makes a site visit to the property and revises the Rehabilitation/Maintenance Plan in collaboration with the property owner to prioritize safety issues and provide the greatest benefit to the appearance of the historic district as a who�e. In addition, staff confirms that the cost estimate for the Rehabilitation/Maintenance Plan approximately equals or exceeds the property tax savings estimated over the initial ten-year tertn of the contract. After the property owner and staff have agreed on the contents of the Rehabilitation/Maintenance Plan, staff makes a recommendation on the application to City Council. Property owners are required to report to the Community Development Department on the work completed on the Rehabilitation/Maintenance Plan each year and are required to allow staff to conduct inspections of the property once every five years. Interior Rehabilitation under Mills Act Contracts All work on Mills Act properties must conform with the SOI Standards, which axe based on a hieraxchy of recommendations for the treatment of historic features: 1. Maintain original features in good condition. 2. Repair original features that are deteriorated. 3. Replace only the original features that cannot be repaired. Replacement should be in kind, matching the materials, details, and finish. 4. Reconstruct missing original features.The reconstruction should be based on documentary or physical evidence on the building. If the work proposed for a historic interior feature falls into one of these categories, staff recommends that it could be eligible for the Rehabilitation/Maintenance Plan. This approach is consistent with the treatment of historic exterior features and is in conformance with the SOI Standards and the Historic Preservation Design Standards for Old Towne. The work items should be limited to rehabilitation of existing historic features or reconstruction of well-documented missing historic features. Remodeling based on a property owner's personal taste or changes to features that are not historic would not be eligible for the Rehabilitation/Maintenance Plan. The following are examples of interior rehabilitation that meet the SOI StandaNds and could be eligible for the Rehabilitation/Maintenance Plan: b " �dGli ' :.c ai ' i, ' ' �n nP� � r^�, `" � '.a 3�a1 u t : .�� `�' ��6��j � t�nter�co��eatures�ligable„j'o�Rehabal�tat�ayr✓Marn�enance��Pla� : � ��uY,�. �_ o � . �_ _u��, A, �� ;:..TM ._._�� _.��o�P��, �� .�,� r,. .,ie�v,i�. ,�.� ti �r e _ . Ceilings and Walls Repair of cracked or damaged plaster ceilings and walls to match original condition, including cove ceilings and other decorative details ITEM 3 11/13/18 Removal of paint and/or repair of wainscot/paneling to match original condition Doors and Windows Removal of paint and/or repair of damaged interior doors Repair of original surrounds and trim elements Repair of original interior hardware and replacement of missing hardware to match the historic condition Floors Uncovering,refinishing, and repair of original flooring Cabinetry, Fireplaces, Removal of paint,refinishing and/or repair of original cabinetry and and other Decorative trim elements Features Repair of original fireplace surrounds and mantels Repair of original light fixtures Other original interior features may be eligible for inclusion in the Rehabilitation/Maintenance Plan, depending on the uniqueness of the feature or the specific circumstances of the historic property.The Community Development Director,or designee,will review the requested work item with the property owner prior to making a recommendation on the contract to the City Council. If interior features are permitted in the Rehabilitation/Maintenance Plan, staff will continue to prioritize work related to the exterior of the historic buildings and to life safety improvements, such as seismic retrofit, as these have the largest public benefit to the historic district as a whole. If Council chooses to amend the Mills Act Program requirements, staff recommends capping the amount of interior rehabilitation in the Rehabilitation/Maintenance Plan to no more than 25 percent of the total cost estimate in the plan. This will ensure that the majority of the improvements made under the Mills Act Contract are focused on safety and public benefits to the appearance of the historic district. If interior features were included in the Rehabilitation/Maintenance Plan, the property owners would commit to preserve those features for the life of the contract. In those cases, staff would include interior features in the site inspection prior to contract approval and during the required five-year inspections of Mills Act properties. Effect on Propertv Taxes under the Mills Act Contract Under the state law for Mills Act Contracts, the assessed value of a property with a Mills Act Contract is based on the property's income-producing potential. The formula used by the Orange County Assessor for the Mills Act valuation of a property is based on the property's rental value and an interest rate set annually by the state Board of Equalization. As a result, the property tax reduction does not change based on the amount of work included in the Rehabilitation/Maintenance Plan. Including interior rehabilitation will not directly affect the property tax bill sent to property owners or the amount of property tax decrease realized by the City. The purpose of the Mills Act Program is to reinvest the property t� savings in rehabilitation of the historic property. Under the current program requirements, the amount of tax savings should approximately equal the cost of the work in the Rehabilitation/Maintenance Plan over ten years. If interior features were eligible for the plan,property owners would have more options for work that ITEM 4 11/13/18 meets the minimum costs expected for the Rehabilitation/Maintenance Plan. However, the total property tax savings to the property owner would not increase. Council Action If Council chooses to amend the Mills Act Program requirements, staff has prepared a draft resolution reflecting the discussion in the staff report,provided as Attachment 1. 8. ADVISORY BOARD RECOMMENDATION None. 9. ATTACHMENTS Attachments to Report: 1. Draft Resolution No. 11122 amending Mills Act Program Requirements 2. Existing Sample Rehabilitation/Maintenance Plan for Mills Act Contract 3. Orange County Assessor Sample Mills Act Property Assessments ITEM 5 11/13/18 ,� r ' RESOLUTION NO. 11122 � A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF ORANGE AMENDING THE MILLS ACT PROGRAM REQUIREMENTS TO ALLOW REHABILITATION OF INTERIOR HISTORIC FEATURES IN REHABILITATION/ MAINTENANCE PLANS FOR MILLS ACT CONTRACTS WHEREAS, on August 25, 1998, the City Council adopted Resolution No. 8920, authorizing the implementation of a Mills Act Program in the City of Orange and establishing a policy for historic properiy preservation agreements (Mills Act Contracts); and WHEREAS, the purpose of the Mills Act Program is to provide a financial incentive for historic preservation whereby the property owner may receive a reduction in property ta�ces in exchange for an agreement to preserve, rehabilitate, and maintain a historic property over a minimum ten year term; and WHEREAS, the Mills Act Program in the City of Orange requires property owners to prepare and complete a Rehabilitation/Maintenance Plan for the property, which is incorporated into the Mills Act Contract and identified therein as Exhibit D; and WHEREAS,work included in the Rehabilitation/Maintenance Plan must be completed in conformance with the Secretary of the Interior's Standards for the Treatment of Historic Properties (SOI Standards) and local historic preservation design standards; and WHEREAS, the Mills Act Program requirements established in 1998 prohibit the inclusion of interior historic features in the Rehabilitation/Maintenance Plan for a Mills Act Contract; and WHEREAS, the City Council desires to amend the Mills Act Program requirements to allow property owners to include preservation, rehabilitation, and maintenance of interior historic features in the Rehabilitation/Maintenance Plan for a Mills Act Contract; and WHEREAS,this amendment to the Mills Act Program requirements shall apply to all new contracts and to amendments or updates to existing contracts processed after the date of adoption of this Resolution; and WHEREAS, the City Council conducted a public meeting on November 13, 2018, at which time interested persons had an opportunity to testify either in support of, or opposition to, the amendment to the Mills Act Program requirements. NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Orange hereby amends the Mills Act Program requirements to allow rehahilitation of historic interior Draft Council Resolution No. 11122 amending Mills Act Program Requirements. City Council November 13,2018 features in conformance with the SOI Standards to be included in the Rehabilitation/Maintenance Plan for a Mills Act Contract. Work on interior features included in the Rehabilitation/Maintenance Plans shall be limited to rehabilitation of existing historic features or reconstruction of documented missing historic features, as detailed and presented in the staff report, pages 3 through 4. The Community Development Director, or designee, shall make a recommendation to the City Council on approval of each Mills Act Contract, including the scope, timeline, and content of the Rehabilitation/Maintenance Plan in conformance with the SOI Standards. SECTION 1 —FINDINGS General Plan Conformance The project must be consistent with the goals and policies stated within the City's General Plan. The amendment to the Mills Act Program requirements is consistent with the General Plan goals and policies of the Cultural Resources & Historic Preservation Element in that it encourages the use of incentives to promote the long-term preservation and rehabilitation of historic resources in conformance with the SOI Standards. SECTION 2—ENVIRONMENTAL REVIEW The amendment to the Mills Act Program requirements is categorically exempt from the provisions of the California Environmental Quality Act (CEQA) per State CEQA Guidelines 15308 (Class 8 - Actions by Regulatory Agencies for Protection of the Environment) and 15331 (Class 31 - Historical Resource Restoration/Rehabilitation). The amendment expands an incentive program to promote the long-term preservation and rehabilitation of historic resources and is consistent with the City Council's prior action adopting the Mills Act Program to encourage historic preservation. It assures the maintenance and protection of the environment through the preservation of historic resources. As required by the Class 31 exemption, rehabilitation of interior features is required to be in conformance with the SecNetary of the Interior's Standards for the Treatment of Historic Properties. There is no environmental public review required for a Categorical Exemption. ADOPTED this day of , 2018 Teresa E. Smith, Mayor, City of Orange ATTEST: Robert Zornado, Chief Clerk, City of Orange � I, ROBERT ZORNADO, Chief Clerk of the City of Orange, California, do hereby certify that the foregoing Resolution was duly and regularly adopted by the City Council of the City of Orange at a regular meeting thereof held on the day of , 2018 by the following vote: AYES: COUNCILMEMBERS: NOES: COUNCILMEMBERS: ABSENT: COUNCILMEMBERS: ABSTAIN: COUNCILMEMBERS: Robert Zornado, Chief Clerk, City of Orange EXHIBIT "D" REHASILITATION/MAINTENANCE SCOPE OF WORK Priority Descri tion of Work Cost Estimate Com letion Date 1. Remove and rebuild cracked front concrete $500 2016 walkway to match concrete sidewalk 2. Remove diseased liquidambar tree in front $400 2016 yard 3. Correct drainage in rear yard with $1,500 2016 installation of underground PVC drain 4. Repair and reweight 12 wood windows $900 2016 5. Remove lattice on front porch railing and $1,400 2016 replace with compatible wood wickets/slats 6. Engage a structural engineer to review $2,000 2016 condition of front porch, including the crack at the base of the southeast column and the potential to remove the non-historic center column. Prepare a plan to mitigate settlement of front orch. 7. Remove non-permitted garage/patio cover at $8,000 2017 rear of house. Repair wood lap siding as necessary on rear elevation of house. Demolition permit required. 8. Install new wood screen door at front door $700 2017 9. Install new wood screen door on back door $700 2017 10. Remove and replace concrete driveway to $18,000 2018 match sidewalk concrete 11. Correct drainage issue causing flooding in $1,500 2018 front yard 12. Seismic retrofit and bolting foundation to $7,035 2019 house 13. Install new compatible wood screens on 11 $4,400 2019 windows 14. Replace knob and tube wiring. Check and $3,000 2020 correct the grounding and polarity on all outlets 15. Remove and repair siding in contact with $3,200 2020 concrete at grade on the east elevation 16. Install new hardware on casement windows $300 2020 17. Re lace galvanized ipes with cop er $4,000 2021 18. Paint exterior of house and garage $6,500 2021 19. Repair, sand and paint front door. Install new $400 2021 hardware Existing Sample Rehabilitation/Maintenance Plan for Mills Act Contract City Council November 13,2018 20. Replace front porch stucco ceiling with $2,700 2022 beaded fir or pine 21. Replace T1-11 siding on rear elevations of $3,000 2022 house with compatible wood siding 22. Replace aluminum window on service porch $1,500 2023 with com atible wood window 23. Replace aluminum window on detached $1,200 2023 garage with compatible wood window 24. Remove unused vents, including chimney $2,000 2025 vent, and repair roof 25. Install new compatible wood siding on $5,000 2025 garage and paint 26. Remove popcorn ceiling with asbestos $3,000 2026 abatement in garage. Refinish and paint ceiling 27. Install new wiring in garage $2,000 2026 TOTAL $84,835 � � . Civic Center Plaza Entrance + CLAUDE PARRISH 625 N.Ross � COUNTY ASSESSOR P.O.Box 22000 • � Telephone: (714) 834-2727 Santa Ana,CA 92702 �� Fax: (714) 834-2814 � `�.•�� www.oc.ca.gov/assessor . • MILLS ACT PROGRAM In 1972 Senator James Mills introduced a little-publicized bill for owners of qualified historical properties. This bill would allow a city to have an agreement with an owner of a qualified historically significant structure. This agreement,known as the"Mills Act"program, binds the owner to maintain the property under the guidelines of the Office of Historic Preservation of the Department of Parks and Recreation, the United States Secretary of the Interior's Standards for Rehabilitation, and the State Historical Building Code. In exchange, the property owner may benefit from a property tax reduction. Properties ranging from residential to income producing commercial properties are recognized under the Act. There are historical properties that may not benefit from this program due to their low base year value. It is important to compare your current assessed value with an estimated historic property value to determine if the Mills Act program would be feasible. Assessment under this program does not change the original base year value and is a valuation that is recalculated every year. It is up to the discretion of the city whether or not to participate in this program and which properties to grant this contract. Contact your local planning department for information regarding the implementation of the Mills Act program or the Special Properties division of the Orange County Assessor's Department for assessment information (714)834-2727. The following is a list of participating cities, contact name, and number: ANAHEIM Christine Nguyen, Associate Planner (714) 765-4942 BREA Adrienne Gladson, Senior Planner (714) 990-7674 COSTA MESA Willa Bownes-Killen, Principal Planner (714) 754-5153 COUNTY OF ORANGE Ruby Maldonado, Planning Manager (714) 667-8855 DANA POINT John Ciampa, Senior Planner (949) 248-3591 HUNTINGTON BEACH Jason Kelley, Senior Planner (714) 374-1553 IRVINE Bill Jacobs, Principal Planner (949) 724-6521 LAGUNA BEACH Martina Speare Caron, Senior Planner (949) 464-6629 ORANGE � Marissa Moshier, Historic Preservation Planner (714) 744-7243 SAN CLEMENTE Jonathan Lightfoot, Comm. Development Tech (949) 388-2320 SAN JUAN CAPISTRANO Sergio Klotz, Asst Development Services Dir (949)443-6329 SANTA ANA Melanie McCann, Senior Planner (714) 667-2746 TUSTIN Scott Reekstin, Principal Planner (714) 573-3016 The following pages contain: • Revenue and Taxation code sections 439�39.4, sections dictating historical property value methodology. • Government code sections 50280-50290, sections defining contract requirements. • Hypothetical historical property valuation. Orange County Assessor Sample Mills U��lare�l 06/19/17 Act Property Assessments 1 City Council November 13,2018 � CALIFORNIA CODES REVENUE AND TAXATION CODE SECTION 439-439.4 439. "Enforceablv restricted" de�ned.For the purposes of this article and within the meaning of Section 8 of Article XIII of the Constitution,property is "enforceably restricted" if it is subject to an historical property contract executed pursuant to Article 12 (commencing with Section 50280)of Chapter 1 of Part 1 of Division 1 of Title 5 of the Government Code. 439.1."Restricted historical propertv"defined. For purposes of this article "restricted historical property" means qualified historical property, as defined in Section 50280.1 of the Government Code,that is subject to a historical property contract executed pursuant to Article 12(commencing with Section 50280) of Chapter 1 of Part 1 of Division 1 of Title 5 of the Government Code.For purposes of this section, "qualified historical property"includes qualified historical improvements and any land on which the qualified historical improvements are situated,as specified in the historical property contract.If the historical property contract does not specify the land that is to be included, "qualified historical property" includes only that area of reasonable size that is used as a site for the historical improvements. 439.2.Valuing enforceable restricted historical propertv. When valuing enforceably restricted historical property,the county assessor shall not consider sales data on similar property,whether or not enforceably restricted,and shall value that restricted historical property by the capitalization of income method in the following manner: (a)The annual income to be capitalized shall be determined as follows: (1)Where sufficient rental information is available,the income shall be the fair rent that can be imputed to the restricted historical property being valued based upon rent actually received for the property by the owner and upon typical rentals received in the area for similar property in similar use where the owner pays the property tax.When the restricted historical property being valued is actually encumbered by a lease, any cash rent or its equivalent considered in determining the fair rent of the property shall be the amount for which the property would be expected to rent were the rental payment to be renegotiated in the light of current conditions,including applicable provisions under which the property is enforceably restricted. (2)Where sufficient rental information is not available, the income shall be that which the restricted historical property being valued reasonably can be expected to yield under prudent management and subject to applicable provisions under which the property is enforceably restricted. (3)If the parties to an instrument that enforceably restricts the property stipulate therein an amount that constitutes the minimum annual income to be capitalized, then the income to be capitalized shall not be less than the amount so stipulated. For purposes of this section,income shall be determined in accordance with rules and regulations issued by the board and with this section and shall be the difference between revenue and expenditures.Revenue shall be the amount of money or money's worth, including any cash rent or its equivalent,that the property can be expected to yield to an owner-operator annually on the average from any use of the property pernutted under the ternis by which the property is enforceably restricted. Expenditures shall be any outlay or average annual allocation of money or money's worth that can be fairly charged against the revenue expected to be received during the period used in computing the revenue.Those expenditures to be charged against revenue shall be only those that are ordinary and necessary in the production and maintenance of the revenue for that period.Expenditures shall not include depletion charges, debt retirement,interest on funds invested in the property,property taxes, corporation income taxes,or corporation franchise taxes based on income. (b)The capitalization rate to be used in valuing owner-occupied single family dwellings pursuant to this article shall not be derived from sales data and shall be the sum of the following components: (1)An interest component to be determined by the board and announced no later than October 1 of the year preceding the assessment year and that was the yield rate equal to the effective rate on conventional mortgages as most recently published by the Federal Housing Finance Agency as of September 1,rounded to the nearest one-fourth of 1 percent. G'j��:(atc�c(06/19/]7 2 (2)A historical property risk component of 4 percent. (3)A component for property taxes that shall be a percentage equal to the estimated total tax rate applicable to the property for the assessment year times the assessment ratio. (4)A component for amortization of the improvements that shall be a percentage equivalent to the reciprocal of the remaining life. (c)The capitalization rate to be used in valuing all other restricted historical property pursuant to this article shall not be derived from sales data and shall be the sum of the following components: (1)An interest component to be determined by the board and announced no later than October 1 of the year preceding the assessment year and that was the yield rate equal to the effective rate on conventional mortgages as deternuned by the Federal Housing Finance Agency September 1,rounded to the nearest one-fourth of 1 percent. (2)A historical property risk component of 2 percent. (3)A component for property taxes that shall be a percentage equal to the estimated total tax rate applicable to the property for the assessment year times the assessment ratio. (4)A component for amortization of the improvements that shall be a percentage equivalent to the reciprocal of the remaining life. (d)Unless a party to an instrument that creates an enforceable restriction expressly prohibits the valuation,the valuation resulting from the capitalization of income method described in this section shall not exceed the lesser of either the valuation that would have resulted by calculation under Section 110,or the valuation that would have resulted by calculation under Section 110.1, as though the property was not subject to an enforceable restriction in the base year. (e)The value of the restricted historical property shall be the quotient of the income determined as provided in subdivision(a)divided by the capitalization rate determined as provided in subdivision(b)or(c). (fl The ratio prescribed in Section 401 shall be applied to the value of the property determined in subdivision(d) to obtain its assessed value. _ 439.3.Valuing enforceablv restricted historical propertv where notice of nonrewal given.Notwithstanding any provision of Section 439.2 to the contrary, if either the county or city or the owner of restricted historical property subject to contract has served notice of nonrenewal as provided in Section 50282 of the Government Code, the county assessor shall value that restricted historical property as provided in this section. (a)Following the hearing conducted pursuant to Section 50285 of the Government Code,subdivision(b) shall apply until the ternunation of the period for which the restricted historical property is enforceably restricted. (b)The board or assessor it�each year until the termination of the period for which the property is enforceably restricted shall do all of the following: (1)Determine the full cash value of the property pursuant to Section 110.1. If the property is not subject to Section 110.1 when the restriction expires,the value shall be determined pursuant to Section 110 as if the property were free of contractual restriction. If the property will be subject to a use for which this chapter provides a special restricted assessment,the value of the property shall be determined as if it were subject to the new restriction. . (2)Deternune the value of the property by the capitalization of income method as provided in Section 439.2 and without regard to the fact that a notice of nonrenewal or cancellation has occurred. (3)Subtract the value determined in paragraph(2)of this subdivision by capitalization of income from the full cash value determined in paragraph(1). (4)Using the rate announced by the board pursuant to paragraph(1)of subdivision(b)of Section 439.2, discount the amount obtained in paragraph(3)for the number of years remaining until the termination of the period for which the property is enforceably restricted. (5)Determine the value of the properry by adding the value determined by the capitalization of income method as provided in paragraph(2)and the value obtained in paragraph(4). (6)Apply the ratios prescribed in Section 401 to the value of the property determined in paragraph(5)to obtain its assessed value. 439.4.Valuin�propertV under this article. No property shall be valued pursuant to this article unless an enforceable restriction meeting the requirements of Section 439 is signed,accepted and recorded on or before the lien date for the fiscal year in which the valuation would apply. t;'j�ilratec!Ob/l I/I7 3 CALIFORIVIA CODES GOVERNMENT CODE SECTION 50280-50290 50280. AAnlication. Upon the application of an owner or the agent of an owner of any qualified historical property, as defined in Section 50280.1, the legislative body of a city,county,or city and county may contract with the owner or agent to restrict the use of the property in a manner which the legislative body deems reasonable to carry out the purposes of this article and of Article 1.9 (commencing with Section 439) of Chapter 3 of Part 2 of Division 1 of the Revenue and Taxation Code.The contract shall meet the requirements of Sections 50281 and 50282. 50280.1.Qualified historical propertv. "Qualified historical property" for purposes of this article,means privately owned property which is not exempt from property taxation and which meets either of the following: (a)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. (b)Listed in any state,city, county,or city and county official register of historical or architecturally significant sites,places,or landmarks. 50281.Contract provisions.Any contract entered into under this article shall contain the following provisions: (a)The term of the contract shall be for a minimum period of 10 years. (b)Where applicable,the contract shall provide the following: (1)For the preservation of the qualified historical property and,when necessary, to restore and rehabilitate the property to conform to the rules and regulations of the Office of Historic Preservation of the Department of Parks and Recreation, the United States Secretary of the Interior's Standards for Rehabilitation, and the State Historical Building Code. (2)For an inspection of the interior and exterior of the premises by the city, county, or city and county,prior to a new agreement,and every five years thereafter,to determine the owner's compliance with the contract. (3)For it to be binding upon,and inure to the benefit of,all successors in interest of the owner. A successor in interest shall have the same rights and obligations under the contract as the original owner who entered into the contract. 50281.1.Fee requirements.The legislative body entering into a contract described in this article may require that the property owner, as a condition to entering into the contract,pay a fee that shall not exceed the reasonable cost of providing the service pursuant to this article for which the fee is charged. 50282. Automatic renewal or notice of nonrenewal.(a)Each contract shall provide that on the anniversary date of the contract or such other annual date as is specified in the contract,a year shall be added automatically to the initial term of the contract unless notice of nonrenewal is given as provided in this section. Each contract shall also provide that after five years,and every five years thereafter,the city,county, or city and county shall inspect the interior and exterior of the premises to determine the owner's continued compliance with the contract.If the property owner or the legislative body desires in any year not to renew the contract,that party shall serve written notice of nonrenewal of the contract on the other party in advance of the annual renewal date of the contract.Unless the notice is served by the owner at least 90 days prior to the renewal date or by the legislative body at least 60 days prior to the renewal date, one year shall automatically be added to the term of the contract. (b)Upon receipt by the owner of a notice from the legislative body of nonrenewal,the owner may make a written protest of the notice of nonrenewal.The legislative body may,at any time prior to the renewal date, withdraw the notice of nonrenewal. (c)If the legislative body or the owner serves notice of intent in any year not to renew the contract,the existing contract shall remain in effect for the balance of the period remaining since the original execution or the last renewal of the contract,as the case may be. (d)The owner shall furnish the legislative body with any information the legislative body shall require in order to enable it to determine the eligibility of the property involved. Upclat,ec!(16/13/.17 4 (e)No later than 20 days after a city or county enters into a contract with an owner pursuant to this article,the clerk of the legislative body shall record with the county recorder a copy of the contract,which sha11 describe the property subject thereto.From and after the time of the recordation,this contract shall impart a notice thereof to all persons as is afforded by the recording laws of this state. 50284. Cancellation of contract. If the legislative body determines that the owner has breached any of the conditions of the contract provided for in this article or has allowed the property to deteriorate to the point that it no longer meets the standards for a qualified historical property,the legislative body shall do one of the following: (a)Cancel the contract by following the procedures specified in Sections 50285 and 50286. (b)Bring any action in court necessary to enforce a contract,including,but not limited to,an action to enforce the contract by specific performance or injunction. 50285. Notice of cancellation and hearin�. No contract shall be canceled under Section 50284 until after the legislative body has given notice of, and has held,a public hearing on the matter.Notice of the hearing shall be mailed to the last known address of each owner of property within the historic zone and shall be published pursuant to Section 6061. 50286. Cancellation fee.(a)If a contract is canceled under Section 50284,the owner shall pay a cancellation fee equal to 12'/z percent of the current fair market value of the property, as determined by the county assessor as though the property were free of the contractual restriction. (b)The cancellation fee shall be paid to the county auditor,at the time and in the manner that the county auditor shall prescribe,and shall be allocated by the county auditor to each jurisdiction in the tax rate area in which the property is located in the same manner as the auditor allocates the annual tax increment in that tax rate area in that fiscal year. (c)Notwithstanding any other provision of law,revenue received by a school district pursuant to this section shall be considered property tax revenue for the purposes of Section 42238 of the Education Code,and revenue received by a county superintendent of schools pursuant to this section shall be considered property tax revenue for the purposes of Article 3 (commencing with Section 2550)of Chapter 12 of Part 2 of Division 1 of Title 1 of the Education Code. 50287. Court action as a�ternative to cancellation.As an alternative to cancellation of the contract for breach of any condition, a landowner that is a parry to the contract may bring any action in court necessary to enforce a contract including,but not limited to, an action to enforce the contract by specific performance or injunction. 50288.Acquisition bv eminent domain.In the event that property subject to contract under this article is acquired in whole or in part by eminent domain or other acquisition by any entity authorized to exercise the power of eminent domain,and the acquisition is determined by the legislative body to frustrate the purpose of the contract, such contract shall be canceled and no fee shall be imposed under Section 50286. Such contract shall be deemed null and void for all purposes of determining the value of the property so acquired. 50289.Propertv under contract annexed to citv.In the event that property restricted by a contract with a county under this article is annexed to a city,the city shall succeed to all rights,duties, and powers of the county under such contract. 50290.Consultation bv local agencies and owners.Local agencies and owners of qualified historical properties may consult with the State Historical Resources Commission for its advice and counsel on matters relevant to historical property contracts. I��datect()fi119/.17 5 STATE BOARD OF EQUALIZATION LETTER TO ASSESSOR NO.2005/035 Although the assessor is required to establish a new base year value upon a change in ownership or completed new construction involving restricted historical property, such property is not subject to supplemental assessment.As provided in Revenue and Taxation Code section 75.14. Note: Parcel that is subject to a Mills Act contract may receive a partial supplemental assessment if a portion of that property is not recognized as a"qualified historic structure". TERMS USED TO DETERMINE NET OPERATING INCOME REVENUE Revenue shall be the amount of money or money's worth,including any cash rent or its equivalent,that the property can be expected to yield to an owner-operator annually on the average from any use of the property pernutted under the terms by which the property is enforceably restricted. EXPENSES Those expenditures to be charged against revenue shall be only those that are ordinary and necessary in the production and maintenance of the revenue for that period.Expenditures shall not include depletion charges, debt retirement, interest on funds invested in the property,property taxes,corporation income taxes, or corporation franchise taxes based on income. The following examples are not all inclusive nor do all categories apply to every property: DO INCLUDE expenses like these if paid by the properry owner: 1. Propertyinsurance 2. Water and sewer 3. Utilities 4. Garbage collection 5. Property management 6. Maintenance and repairs* 7. Landscaping 8. Professional fees *A repair keeps your property in good operating condition.It does not materially add to the value of your property or substantially prolong its life.Repainting your property inside or out,fixing gutters or floors,fixing leaks,plastering, and replacing broken windows are examples of repairs. Remodeling a kitchen or bathroom, replacing a roof,or extensive restoration are considered capital expenditures/improvements. NEVER INCLUDE: 1. Property taxes 2. Investor income taxes 3. Replacement reserves 4. Capital improvements 5. Depreciation IiJ�ilptecL(t6/19/17 6 EXAMPLES OF HISTORICAL PROPERTY VALUATIONS UNDER R&T CODE 439 FOR 2017 The following examples are for demonstrative purposes only. Applicant's actual calculation may differ depending on varying factors. • • � � � 1,300 square foot, 3 bedroom, 2 bathroom, single-family residence built in 1909. 2015 Base Year value $485,000 Estimated allocated values land $388,000 80% improvements $97,000 20% Factored Base Year Value 2016 CPI 1.525% $492,396 2017 CPI 2.000% $502,243 Current fair market value as of 01/01/17 $550,000 Estimated remaining life 30 years Owner occupied(eligible for a Homeowners Exemption ) . Potential Gross Income (annual� $1,900 per month) $22,800 Less Vacancy&Collection loss -5% 1 140 Effective Gross Income $21,660 Less annual expenses -25% 5 415 Net Operating Income $16,245 Capitalization rate: 1) Interest component 3.75000% (State reported rate) 2) Risk component 4.00000% (owner occupied SFR rate) 3) Property tax component 1.10733% (tax rate from area) 4) Amortization component 0.66700% 20%* (1/30) Total 9.52433% Improvement allocation Reciprocal of the remaining improvement life Capitalized Net Operating Income $16,245 / 0.0952433 $170,563 . . Factored Base Year Value: $502,243 Fair Market Value: $550,000 Historic Property Value: $170,563 Enrolled value: $170,563 v1�dur�d n6��y�� ' • � ' � ' 1,300 square foot, 3 bedroom, 2 bathroom, single-family residence built in 1909. 2015 Base Year value $485,000 Estimated allocated values land $388,000 80% � improvements $97,000 20% Factored Base Year Value 2016 CPI 1.525% $492,396 2017 CPI 2.000% $502,243 Current fair market value as of 01/01/17 $550,000 ' Estimated remaining life 30 years Non-owner occupied (not eligible for a Homeowner's Exemption) . Potential Gross Income (annual @ $1,900 per month) $22,800 Less Vacancy&Collection loss -5% 1 140 Effective Gross Income $21,660 Less annual expenses -25% 5 415 Net Operating Income $16,245 Capitalization rate: 1) Interest component 3.75000% (State reported rate) 2) Risk component 2.00000% (non-owner occupied rate) 3) Property tax component 1.10733% (tax rate from area) 4)Amortization component 0.66700% 20%* (1/30) Total � 7.52433% Improvement allocation% Reciproca/of the remaining improvement life Capitalized Net Operating Income $16,245 / 0.0752433 $215,899 . , Factored Base Year Value: $502,243 Fair Market Value: $550,000 Historic Property Value: $215,899 Enrolled value: $215,899 v��t�«<:�i n�i�yi�� 8 Revised per Council direction on 11/13/2018 G��°�°��c� AGENDA ITEM � - *: �.* o: :a �� November 13 2018 ��. � 9y. �., 1 .o F rme.ms.•`,FC 7 �Otnvrt�� Reviewed/Verified By: TO: Honorable Mayor and Members of the City Council City Manager Finance Director THRU' R1Ck OttO To Be Presented By:Marissa Moshier, ' Historic Preservation Planner City Manager Cons Calendar City Mgr Rpts FROM' Wllllam CrouCh Council Reports Legal Affairs . Community Development Director Boards/Cmtes _ Public Hrgs X Admin Reports Plan/Environ 1. SUBJECT Rehabilitation of Interior Historic Features in Mills Act Properties. 2. SUMMARY The current Mills Act Program requirements do not permit interior rehabilitation as part of the eligible work for a Rehabilitation/Maintenance Plan. In September 2018, the City Council requested that the Community Development Department provide information on including rehabilitation of interior historic features in the Rehabilitation/Maintenance Plans of Mills Act Contracts. 3. RECOMMENDED ACTION If the City Council chooses, adopt Resolution No. 11122 entitled: A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF ORANGE AMENDING THE MILLS ACT PROGRAM REQUIREMENTS TO ALLOW REHABILITATION OF INTERIOR HISTORIC FEATURES IN REHABILITATION/ MAINTENANCE PLANS FOR MILLS ACT CONTRACTS 4 FISCAL IMPACT No impact. ITEM 7.1 1 11/13/18 5. STRATEGIC PLAN GOAL(S) 5. Recognize, promote, and preserve Orange's rich heritage. d) Expand and strengthen processes and practices related to protection and cultural resources. 6. GENERAL PLAN IMPLEMENTATION Cultural Resources Element Goa13.0 Provide incentives and expand education efforts for historic preservation. Policy 3.2 Provide incentives to encourage and support historic preservation. 7. DISCUSSION and BACKGROUND At the request of City Council, staff of the Community Development Department Planning Division has prepared information on the potential to include rehabilitation of historic interior features in the Rehabilitation/Maintenance Plans for Mills Act properties. Including interior rehabilitation in the Rehabilitation/Maintenance Plan will not affect the property tax reduction received by property owners. However, it will allow property owners more flexibility to meet the minimum program requirements. Mills Act Program Back�round The Orange Mills Act Program was established in 1998 as an incentive to encourage preservation of historic resources. Properties eligible for a Mills Act Contract are contributors to an established historic district or separately listed in or eligible for the National Register of Historic Places or the California Register of Historical Resources. The Mills Act Contract is a legal agreement between the property owner and the City that is recorded against the property. Under the contract terms, the property owner agrees to preserve, maintain, and rehabilitate the historic property in conformance with the Secretary of the Interior's Standards for the Treatment of Historic Properties (SOI Standards) and with local historic � preservation standards. The property owner is required to prepare and complete a Rehabilitation/Maintenance Plan with a timeline for specific work items on the historic property. In exchange, the property owner may receive a reduction in property taxes to offset the costs of rehabilitation. The purpose of the Mills Act Program is to support long-term preservation with a financial incentive that is reinvested in historic properties. Under the Mills Act Program, the total property tax collected by the Orange County Assessor decreases because the property is re-assessed using a formula mandated by state law. The City's percentage of property tax revenue received(approximately 14%) does not change. There are currently 234 active Mills Act Contracts with eight new applications for 2018. Rehabilitation/Maintenance Plan Each Mills Act application requires the property owner to prepare a Rehabilitation/Maintenance Plan for the property. Under the current program requirements, the plan must comply with the following: ITEM 7.1 2 11/13/18 • The work must be in conformance with the SOI Standards and Historic Preservation Design Standards for Old Towne (or Orange Eichler Design Standards, if adopted). • Only work on the exterior and systems of the historic building (electrical, plumbing; and structural) is eligible. Work on interior features cannot be included. • The total cost of rehabilitation over the ten-year contract term must approximately equal or exceed the amount of estimated tax savings. Staff reviews the Rehabilitation/Maintenance Plans submitted by property owners to ensure that all work meets the SOI Standards. As part of the application process, staff makes a site visit to the property and revises the Rehabilitation/Maintenance Plan in collaboration with the property owner to prioritize safety issues and provide the greatest benefit to the appearance of the historic district as a whole. In addition, staff confirms that the cost estimate for the Rehabilitation/Maintenance Plan approximately equals or exceeds the property tax savings estimated over the initial ten-year term of the contract. After the property owner and staff have agreed on the contents of the Rehabilitation/Maintenance Plan, staff makes a recommendation on the application to City Council. Property owners are required to report to the Community Development Department on the work completed on the Rehabilitation/Maintenance Plan each year and are required to allow staff to conduct inspections of the property once every five years. Interior Rehabilitation under Mills Act Contracts . All work on Mills Act properties must conform with the SOI Standards, which are based on a hierarchy of recommendations for the treatment of historic features: 1. Maintain original features in good condition. 2. Repair original features that are deteriorated. 3. Replace only the original features that cannot be repaired. Replacement should be in kind, matching the materials, details, and finish. 4. Reconstruct missing original features. The reconstruction should be based on documentary or physical evidence on the building. If the work proposed for a historic interior feature falls into one of these categories, staff recommends that it could be eligible for the Rehabilitation/Maintenance Plan. This approach is consistent with the treatment of historic exterior features and is in conformance with the SOI Standards and the Historic Preservation Design Standards for Old Towne. The work items should be limited to rehabilitation of existing historic features or reconstruction of well-documented missing historic features. Remodeling based on a property owner's personal taste or changes to features that are not historic would not be eligible for the Rehabilitation/Maintenance Plan. The following are examples of interior rehabilitation that meet the SOI Standards and could be eligible for the Rehabilitation/Maintenance Plan: Interior Features Eligible for RelZabilitation/Maintenance Pl�cn Ceilings and Walls Repair of cracked or damaged plaster ceilings and walls to match original condition, including cove ceilings and other decorative details ITEM 7.1 3 11/13/18 Removal of paint and/or repair of wainscot/paneling to match original condition Painting previously painted surfaces Doors and Windows Removal of paint and/or repair of damaged interior doors Repair of original surrounds and trim elements Repair of original interior hardware and replacement of missing hardware to match the historic condition Floors Uncovering, refinishing, and repair of original flooring Cabinetry, Fireplaces, Removal of paint, refinishing and/or repair of original cabinetry and - and other Decorative trim elements Features Repair of original fireplace surrounds and mantels Repair of original light fixtures Other original interior features may be eligible for inclusion in the Rehabilitation/Maintenance Plan, depending on the uniqueness of the feature or the specific circumstances of the historic property.The Community Development Director,or designee,will review the requested work item with the property owner prior to making a recommendation on the contract to the City Council. If interior features are permitted in the Rehabilitation/Maintenance Plan, staff will continue to prioritize work related to the exterior of the historic buildings and to life safety improvements, such as seismic retrofit, as these have the largest public benefit to the historic district as a whole. If Council chooses to amend the Mills Act Program requirements, staff recommends capping the amount of interior rehabilitation in the Rehabilitation/Maintenance Plan to no more than 25 percent of the total cost estimate in the plan. This will ensure that the majority of the improvements made under the Mills Act Contract are focused on safety and public benefits to the appearance of the historic district. If interior features were included in the Rehabilitation/Maintenance Plan, the property owners would commit to preserve those features for the life of the contract. In those cases, staff would include interior features in the site inspection prior to contract approval and during the required five-year inspections of Mills Act properties. Effect on Pronertv Taxes under the Mills Act Contract Under the state law for Mills Act Contracts, the assessed value of a property with a Mills Act Contract is based on the property's income-producing potential. The formula used by the Orange County Assessor for the Mills Act valuation of a property is based on the property's rental value and an interest rate set annually by the state Board of Equalization. As a result, the property tax reduction does not change based on the amount of work included in the Rehabilitation/Maintenance Plan. Ir�cluding interior rehabilitation will not directly affect the property tax bill sent to property owners or the amount of property tax decrease realized by the City. The purpose of the Mills Act Program is to reinvest the property tax savings in rehabilitation of the historic property. Under the current program requirements, the amount of tax savings should ITEM 7.1 4 11/13/18 approximately equal the cost of the work in the Rehabilitation/Maintenance Plan over ten years. If interior features were eligible for the plan,property owners would have more options for work that � meets the minimum costs expected for the Rehabilitation/Maintenance Plan. However, the total property tax savings to the property owner would not increase. Council Action If Council chooses to amend the Mills Act Program requirements, staff has prepared a draft resolution reflecting the discussion in the staff report,provided as Attachment 1. 8. ADVISORY BOARD RECOMMENDATION None. 9. ATTACHMENTS Attachments to Report: 1. Draft Resolution No. 11122 amending Mills Act Program Requirements 2. Existing Sample Rehabilitation/Maintenance Plan for Mills Act Contract 3. Orange County Assessor Sample Mills Act Property Assessments ITEM 7.1 5 11/13/18 CITY COUNCIL MINUTES NOVEMBER 13, 2018 5. REPORTS FROM COUNCILMEMBERS Councilmember Nichols reported that she attended Orange resident and veteran Glenn Smith's house as he was honored by Reborn Cabinets, Inc. and presented with a new bathroom as part of the nationwide program"Baths for the Brave." 6. REPORTS FROM BOARDS, COMMITTEES,AND COMMISSIONS 6.1 Report from City Council Ad Hoc Committees related to Homelessness: Community Communications Councilmember Alvarez asked Police Chief Kisela to give a brief status report on the security of the Santiago Creek area and the calls for service. Chief Kisela reported that the calls for service have decreased in that area. In addition, Community Services is sweeping Santiago Creek twice a week keeping the trail clean and safe for the community. Furthermore, the Orange County Sheriff's Department has been present and patrolling the riverbed as well. He also asked City Manager Otto about the public speaker's comment regarding a homeless shelter in the CiTy of Orange, and City Manager Otto clarified that a homeless shelter is not being proposed for the City of Orange at this time. Cities and Non-profit Collaboration Mayor Smith reported that she met with United Way, and noted an article in the Orange County Register about United Way's efforts to provide more services to the homeless in Orange County. She also met with the Gloria Suess, Director of Mary's Kitchen here in Orange. Ms. Suess has noticed less loitering and has seen an improvement in the behavior of those receiving services. She also asked Mayor Smith to express appreciation to the community for all of the donations and volunteer hours. County Enga�ement Councilmember Whitaker reported that Propositions 1 and 2 were both approved in the recent election. These measures will be providing funds that will be allocated for supportive housing and emergency shelters. Mayor pro tem Murphy met with County Board of Supervisors Do and Bartlett in an ongoing effort to keep communication lines open. 7. ADMINISTRATIVE REPORTS 7.1 Rehabilitation of Interior Historic Features in Mills Act properties. (C2300.I.2) A Resolution of the City Council of the City of Orange amending the Mills Act Program requirements to allow rehabilitation of interior historic features in Rehabilitation/ Maintenance Plans for Mills Act Contracts. Historic Planner Marissa Moshier provided a staff report and reviewed the current program requirements and noted that examples of potential interior features were included in the staff report. If Council chooses to amend the Mills Act Program requirements, staff recommends capping the amount of interior rehabilitation in the Rehabilitation/ Maintenance Plan to no more than 25 percent of the total cost estimate in the Plan. PAGE 10 CITY COUNCIL MINUTES NOVEMBER 13, 2018 7. ADMINISTRATIVE REPORTS (Continued) During discussion,Historic Planner Moshier answered Council's questions regarding what interior features would be included and the process potential applicants go through before submitting an application. Council discussed adding interior paint to the table of Interior Features Eligible for Rehabilitation/Maintenance Plan that was included in the staff report, and asked staff to include the 25%maximum recommendation in the proposed resolution. Public S eakers: Robert Imboden— spoke in support of approving the resolution; however, asked Council to reconsider the 25%maximum. • Jeff Frankel—spoke in support of approving the resolution. City Attorney Winthers suggested adding the additional wording "capping the amount of interior rehabilitation in the Rehabilitation/Maintenance Plan to no more than 25 percent of the total cost estimate in the Plan"in the resolve paragraph of the resolution after"...as detailed and presented in the staff report,pages 3 through 4." MOTION —Whitaker SECOND —Murphy AYES —Alvarez, Whitaker, Smith, Murphy,Nichols Moved to approve amended Resolution No. 11122 with added wording of"capping the amount of interior rehabilitation in the Rehabilitation/Maintenance Plan to no more than 25 percent of the total cost estimate in the Plan," and the inclusion of interior painting to the Interior Features Eligible for Rehabilitation/Maintenance Plan table. 7.2 Extension of the Employment Agreement with the City Manager Richard Otto. (A2100.0; AGR-6198.A.2) MOTION —Alvarez SECOND —Smith AYES —Alvarez, Whita.ker, Smith, Murphy,Nichols Moved to approve extension of Employment Agreement with City Manager Richard Otto. 7.3 Appointment of a City Clerk. (C2500.C) MOTION —Murphy SECOND —Whitaker AYES —Alvarez, Whitaker, Smith, Murphy,Nichols Moved to appoint Pamela Coleman as elected City Clerk. RECESS: The City Council took a recess at 8:04 p.m. and reconvened at 8:21 p.m. with all members present. 8. REPORTS FROM CITY MANAGER City Manager Otto reported that staff will be using a new staff report format beginning with the December 11 City Council meeting. PAGE 71