Item 12 - Mills Act
PREPARED BY: Robert Schultz
Town Attorney
Reviewed by: Town Manager and Assistant Town Manager, and Community Development Director
110 E. Main Street Los Gatos, CA 95030 ● (408) 354-6832
www.losgatosca.gov
TOWN OF LOS GATOS
COUNCIL AGENDA REPORT
MEETING DATE: 09/17/2019 ITEM NO: 12
DATE: September 10, 2019
TO: Mayor and Town Council
FROM: Robert Schultz, Town Attorney
SUBJECT: Discussion and Direction on Mills Act Ordinance and Implementation
Program Preparation
RECOMMENDATION:
Staff recommends that Council discuss and provide direction on whether staff should draft a
Mills Act Ordinance and implementation program.
BACKGROUND:
In 1972, the state of California enacted the Mills Act, an economic incentive program to
encourage the preservation of historic buildings. State codes related to the Mills Act include
California Government Code, Article12, Sections 50280 – 50290 and California Revenue and
Taxation Code, Article 1.9, Sections 439 – 439.4.
The Mills Act grants local governments the authority to establish, administer, and implement
Mills Act Historic Preservation Tax Relief Programs (Mills Act programs). Cities and counties
with Mills Act programs can enter into contracts with owners of qualified historic
properties who actively participate in the preservation, restoration, and maintenance of their
historic properties while potentially receiving property tax relief. Property owners must use
any tax savings to extend the life of the structure(s) and protect the historic and aesthetic value
of the property.
The Town Council decided in January 2019 to not include this topic as a priority and goal or as
an Ordinance for the Town Attorney to work on. Due to public comment at subsequent Council
meetings, the Mayor requested this item be placed on the agenda. Therefore, this report only
provides a brief overview of the Mills Act. Due to the FPPC conflict of interest of
PAGE 2 OF 4 SUBJECT: Discussion and Direction on Mills Act Ordinance and Implementation Program Preparation DATE: September 10, 2019
BACKGROUND (continued):
four of the five Council members, only three Council members are hearing this item. Therefore,
the three Council members must unanimously agree to move forward with the future
consideration of a Mills Act Ordinance and associated implementation program.
DISCUSSION:
Most jurisdictions participate in the Mills Act to encourage maintenance and upkeep of older
properties. The Town is fortunate in that its citizens take pride in improving and maintaining
their properties. In addition, the Town’s Historic Preservation Ordinance and Design Guidelines
further protect historical structures and promote an excellence in design which is expected by
the public. Therefore, the Town does not have the same challenges as other jurisdictions in
encouraging the upkeep and improvement of historic properties.
However, if the Council desires to establish a Mills Act program, the Council would need to
adopt an enabling Ordinance and implementation program. The process would require the
Town to adopt its own criteria for establishing qualified historic properties. Since the Town
defines historic properties as contributing structures located within designated historic districts,
individually designated historic structures/sites, or primary structures built prior to 1941 unless
determined not to have significance, the Town could adopt all or some of those definitions for
establishing qualified historic properties under the Mills Act. Attachment 1 is the Town’s
property information on historical residential and commercial properties as a reference for how
many properties could be affected by a Mills Act Ordinance.
The Town would also have to develop an application process and determine how many
contracts will be allowed within its jurisdiction since a formal agreement is required between
the Town and property owner for each Mills Act contract. This is typically done by Council
resolution. As an example, the City of Saratoga limits the number of contracts awarded per
year to three and Campbell allows an annual maximum of ten Mills Act contracts. As part of
the Mills Act application, the applicant would be responsible for preparing an historic report for
the property to document the significance criteria, describe the character defining features, and
provide a detailed list of exterior and interior improvements planned for the property over the
next ten years.
The Town would also have to develop approval, monitoring, and inspection processes for each
individual contract to ensure the owner complies with their contract. The criteria and
processes are very important to ensure that qualifying historic properties are preserved in
accordance with the Secretary of the Interior’s Standards for the Treatment of Historic
Properties. Depending on the number of contracts, this can be a significant staff commitment
potentially requiring additional staff and/or contractors to administer a Mills Act program. In
PAGE 3 OF 4 SUBJECT: Discussion and Direction on Mills Act Ordinance and Implementation Program Preparation DATE: September 10, 2019
DISCUSSION (continued):
addition, penalties would need to be established and enforced in the event of a breach of
contract.
It is also important to understand that a Mills Act contract provides only the potential for
property tax reduction. It is not a guarantee. Each property varies according to its income-
generating potential and current assessed value. The property valuation is determined by the
"income method” set out in U.S. Revenue and Tax Code Section 439.21. A property’s income,
or projected income, less certain yearly expenses, is divided by a capitalization rate to
determine the Mills Act assessed value of the qualified historic property.
Attachment 2 contains various scenarios of potential property valuations of Mills Act property
tax savings on property assessed at $450,000 to $3,000,000. From the scenarios, Mills Act
participants only begin to receive a tax savings each year for property assessed over $450,000.
Therefore, long time homeowners who have Proposition 13 benefits would not be expected to
experience any savings.
In addition, some Mills Act programs have property valuation thresholds in place to ensure that
revenue loss for a jurisdiction is minimized and properties with assessed values higher than
$1,500,000 must apply for an exemption to the threshold valuations and undergo more
rigorous scrutiny of the property’s need for the property tax subsidy.
ALTERNATIVES:
As an alternative to the Mills Act, the Town Council could consider other historic preservation
options as future Strategic Priorities, such as a review of the existing Code and Guidelines,
additional historic surveys and inventory work, or other items.
CONCLUSION AND NEXT STEPS:
The Mills Act is especially beneficial for recent buyers of historic sites, or owners who may have
recently had a property transfer or tax reassessment. Due to the Town’s current development
standards, the Council’s current Strategic Priorities, the workload involved in implementing and
processing Mills Act contracts, and the current Community Development Department
workload, including the General Plan update, there are insufficient staff resources to research,
prepare the analysis, draft an Ordinance, determine appropriate fees, and develop an
implementation program unless the Town Council adjusts work priorities. If the Town Council
decides to move forward, the Council may modify work priorities at the Strategic Priority
discussion in late 2019/early 2020.
PAGE 4 OF 4 SUBJECT: Discussion and Direction on Mills Act Ordinance and Implementation Program Preparation DATE: September 10, 2019
COORDINATION:
This staff report was coordinated with the Community Development Department and Town
Manager’s Office.
FISCAL IMPACT:
If the Council decides to prepare a Mills Act Ordinance, analysis would be required to
determine the fiscal impact to the Town if implemented.
Attachments:
1. Table 1, Property Information
2. Tables 2 - 7, Mills Act Property Tax Calculator Examples
3. Public Comment received by 11:00 a.m. Thursday, September 12, 2019
Table 1
Property Information
Quantity
Non-Designated Residential Properties
Pre- 1941 Properties *754
Post- 1941 Properties 9,234
Designated Residential Properties in Historic Districts or on Historic Sites
*399
Non-Designated Commercial Properties
Pre- 1941 Properties *35
Post- 1941 Properties 797
Designated Commercial Properties in Historic Districts or on Historic Sites
*57
Totals
Designated Properties in Historic Districts, on Historic Sites, or Pre- 1941 *1,245
Post- 1941 Properties 10,031
All Properties 11,276
*Historic Properties
Table 2
Mills Act Property Tax Calculator
Item Factor Amount
CURRENT TAXES
Assessed Value $450,000
Total Property Tax (1)1.2000%$5,400
Property Type (1=Residential, 2=Commercial)1 Residential
MILLS ACT TAXES
Annual Income
Monthly Rent $2.00 /sq.ft./ month
Leaseable Area 2,500 square feet
Annual Rent $60,000
(less) Annual Expenses (2)25%of Annual Rent ($15,000)
Net Annual Income $45,000
Capitalization Rate
Interest (3)3.7500%
Risk Component (4)4.0000%
Tax Rate (1)1.2000%
Total, Cap Rate (Land)8.9500%
Amortization (5)1.6667%
Total, Cap Rate (Improvements)10.6167%
Assessed Value & Taxes
Weighted Average Capitalization Rate (6)10.2833%
Assessed Value (based on Mills Act)$437,601
Total Property Tax 1.2000%$5,251
CHANGE IN TAXES
Decrease due to Mills Act ($149)
Change compared to Current Taxes -3%
(1)Total property tax rate maybe greater than 1 percent due to tax overrides.
Total rate may vary slightly year-to-year, and depends on specific location.
Actual taxes will also depend on share of overrides which are per-parcel rather than a % of value.
(2)Assumes approximately 25 percent of income goes to property maintenance and other operating exp
(3)2016-2017 State Board of Equalization Mills Act interest rate.
(4)Risk component is 2 percent for commercial properties and 4 percent for residential properties.
(5)Amortizes improvements over 60 years.
(6)Assumes that land comprises 20 percent of value and improvements comprise 80
percent of value. Value of land is not amortized.
Economic & Planning Systems, Inc.9/10/2019
Table 3
Mills Act Property Tax Calculator
Item Factor Amount
CURRENT TAXES
Assessed Value $750,000
Total Property Tax (1)1.2000%$9,000
Property Type (1=Residential, 2=Commercial)1 Residential
MILLS ACT TAXES
Annual Income
Monthly Rent $2.00 /sq.ft./ month
Leaseable Area 2,500 square feet
Annual Rent $60,000
(less) Annual Expenses (2)25%of Annual Rent ($15,000)
Net Annual Income $45,000
Capitalization Rate
Interest (3)3.7500%
Risk Component (4)4.0000%
Tax Rate (1)1.2000%
Total, Cap Rate (Land)8.9500%
Amortization (5)1.6667%
Total, Cap Rate (Improvements)10.6167%
Assessed Value & Taxes
Weighted Average Capitalization Rate (6)10.2833%
Assessed Value (based on Mills Act)$437,601
Total Property Tax 1.2000%$5,251
CHANGE IN TAXES
Decrease due to Mills Act ($3,749)
Change compared to Current Taxes -42%
(1)Total property tax rate maybe greater than 1 percent due to tax overrides.
Total rate may vary slightly year-to-year, and depends on specific location.
Actual taxes will also depend on share of overrides which are per-parcel rather than a % of value.
(2)Assumes approximately 25 percent of income goes to property maintenance and other operating exp
(3)2016-2017 State Board of Equalization Mills Act interest rate.
(4)Risk component is 2 percent for commercial properties and 4 percent for residential properties.
(5)Amortizes improvements over 60 years.
(6)Assumes that land comprises 20 percent of value and improvements comprise 80
percent of value. Value of land is not amortized.
Economic & Planning Systems, Inc.9/10/2019
Table 4
Mills Act Property Tax Calculator
Item Factor Amount
CURRENT TAXES
Assessed Value $1,000,000
Total Property Tax (1)1.2000%$12,000
Property Type (1=Residential, 2=Commercial)1 Residential
MILLS ACT TAXES
Annual Income
Monthly Rent $2.00 /sq.ft./ month
Leaseable Area 2,500 square feet
Annual Rent $60,000
(less) Annual Expenses (2)25%of Annual Rent ($15,000)
Net Annual Income $45,000
Capitalization Rate
Interest (3)3.7500%
Risk Component (4)4.0000%
Tax Rate (1)1.2000%
Total, Cap Rate (Land)8.9500%
Amortization (5)1.6667%
Total, Cap Rate (Improvements)10.6167%
Assessed Value & Taxes
Weighted Average Capitalization Rate (6)10.2833%
Assessed Value (based on Mills Act)$437,601
Total Property Tax 1.2000%$5,251
CHANGE IN TAXES
Decrease due to Mills Act ($6,749)
Change compared to Current Taxes -56%
(1)Total property tax rate maybe greater than 1 percent due to tax overrides.
Total rate may vary slightly year-to-year, and depends on specific location.
Actual taxes will also depend on share of overrides which are per-parcel rather than a % of value.
(2)Assumes approximately 25 percent of income goes to property maintenance and other operating exp
(3)2016-2017 State Board of Equalization Mills Act interest rate.
(4)Risk component is 2 percent for commercial properties and 4 percent for residential properties.
(5)Amortizes improvements over 60 years.
(6)Assumes that land comprises 20 percent of value and improvements comprise 80
percent of value. Value of land is not amortized.
Economic & Planning Systems, Inc.9/10/2019
Table 5
Mills Act Property Tax Calculator
Item Factor Amount
CURRENT TAXES
Assessed Value $1,500,000
Total Property Tax (1)1.2000%$18,000
Property Type (1=Residential, 2=Commercial)1 Residential
MILLS ACT TAXES
Annual Income
Monthly Rent $2.00 /sq.ft./ month
Leaseable Area 2,500 square feet
Annual Rent $60,000
(less) Annual Expenses (2)25%of Annual Rent ($15,000)
Net Annual Income $45,000
Capitalization Rate
Interest (3)3.7500%
Risk Component (4)4.0000%
Tax Rate (1)1.2000%
Total, Cap Rate (Land)8.9500%
Amortization (5)1.6667%
Total, Cap Rate (Improvements)10.6167%
Assessed Value & Taxes
Weighted Average Capitalization Rate (6)10.2833%
Assessed Value (based on Mills Act)$437,601
Total Property Tax 1.2000%$5,251
CHANGE IN TAXES
Decrease due to Mills Act ($12,749)
Change compared to Current Taxes -71%
(1)Total property tax rate maybe greater than 1 percent due to tax overrides.
Total rate may vary slightly year-to-year, and depends on specific location.
Actual taxes will also depend on share of overrides which are per-parcel rather than a % of value.
(2)Assumes approximately 25 percent of income goes to property maintenance and other operating exp
(3)2016-2017 State Board of Equalization Mills Act interest rate.
(4)Risk component is 2 percent for commercial properties and 4 percent for residential properties.
(5)Amortizes improvements over 60 years.
(6)Assumes that land comprises 20 percent of value and improvements comprise 80
percent of value. Value of land is not amortized.
Economic & Planning Systems, Inc.9/10/2019
Table 6
Mills Act Property Tax Calculator
Item Factor Amount
CURRENT TAXES
Assessed Value $2,500,000
Total Property Tax (1)1.2000%$30,000
Property Type (1=Residential, 2=Commercial)1 Residential
MILLS ACT TAXES
Annual Income
Monthly Rent $2.00 /sq.ft./ month
Leaseable Area 2,500 square feet
Annual Rent $60,000
(less) Annual Expenses (2)25%of Annual Rent ($15,000)
Net Annual Income $45,000
Capitalization Rate
Interest (3)3.7500%
Risk Component (4)4.0000%
Tax Rate (1)1.2000%
Total, Cap Rate (Land)8.9500%
Amortization (5)1.6667%
Total, Cap Rate (Improvements)10.6167%
Assessed Value & Taxes
Weighted Average Capitalization Rate (6)10.2833%
Assessed Value (based on Mills Act)$437,601
Total Property Tax 1.2000%$5,251
CHANGE IN TAXES
Decrease due to Mills Act ($24,749)
Change compared to Current Taxes -82%
(1)Total property tax rate maybe greater than 1 percent due to tax overrides.
Total rate may vary slightly year-to-year, and depends on specific location.
Actual taxes will also depend on share of overrides which are per-parcel rather than a % of value.
(2)Assumes approximately 25 percent of income goes to property maintenance and other operating exp
(3)2016-2017 State Board of Equalization Mills Act interest rate.
(4)Risk component is 2 percent for commercial properties and 4 percent for residential properties.
(5)Amortizes improvements over 60 years.
(6)Assumes that land comprises 20 percent of value and improvements comprise 80
percent of value. Value of land is not amortized.
Economic & Planning Systems, Inc.9/10/2019
Table 7
Mills Act Property Tax Calculator
Item Factor Amount
CURRENT TAXES
Assessed Value $3,000,000
Total Property Tax (1)1.2000%$36,000
Property Type (1=Residential, 2=Commercial)1 Residential
MILLS ACT TAXES
Annual Income
Monthly Rent $2.00 /sq.ft./ month
Leaseable Area 2,500 square feet
Annual Rent $60,000
(less) Annual Expenses (2)25%of Annual Rent ($15,000)
Net Annual Income $45,000
Capitalization Rate
Interest (3)3.7500%
Risk Component (4)4.0000%
Tax Rate (1)1.2000%
Total, Cap Rate (Land)8.9500%
Amortization (5)1.6667%
Total, Cap Rate (Improvements)10.6167%
Assessed Value & Taxes
Weighted Average Capitalization Rate (6)10.2833%
Assessed Value (based on Mills Act)$437,601
Total Property Tax 1.2000%$5,251
CHANGE IN TAXES
Decrease due to Mills Act ($30,749)
Change compared to Current Taxes -85%
(1)Total property tax rate maybe greater than 1 percent due to tax overrides.
Total rate may vary slightly year-to-year, and depends on specific location.
Actual taxes will also depend on share of overrides which are per-parcel rather than a % of value.
(2)Assumes approximately 25 percent of income goes to property maintenance and other operating exp
(3)2016-2017 State Board of Equalization Mills Act interest rate.
(4)Risk component is 2 percent for commercial properties and 4 percent for residential properties.
(5)Amortizes improvements over 60 years.
(6)Assumes that land comprises 20 percent of value and improvements comprise 80
percent of value. Value of land is not amortized.
Economic & Planning Systems, Inc.9/10/2019
ATTACHMENT 3
From: Mark Secchia <mark@secchia.com>
Sent: Sunday, September 01, 2019 1:47 PM
To: Council <Council@losgatosca.gov>
Cc: Laurie Duthie xx <lduthie@logitech.com>
Subject: Support of The Mills Act
Dear Town Council,
We are writing to you in support of Los Gatos adopting the Mills Act.
We love living in a beautiful and historic neighborhood, and look forward to future generations
enjoying it as well.
We certainly would have no problem pledging to rehabilitate and maintain the historical and
architectural character of our property for at least the initial contracted ten-year period, as
well.
Than you for your time and service,
Mark Secchia and Laurie Duthie
130 Edelen Avenue
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