The Mills Act is a California Statewide program that gives Property owners of Historic Homes, who are eligible and enroll in the program, large annual property tax savings (Average property taxes savings from the Mills Act program is 50%!). This program is only for qualifying Historic Properties. The tax savings are intended to be used to restore and preserve historic properties. Each Municipality in the state is responsible for administering its own historic preservation program – so qualifying requirements for the Mills Act will vary from city to city around the state. Beverly Hills, for example, has paid very little attention to Historic Preservation– only starting their historic program in the early 90s, and they have only identified (42) properties in the whole city as historic- everything else could one day be demolished. There is an old joke about this- In Beverly Hills- historic preservation is taking a picture first before you tear the building down. The Mills Act program in Los Angeles does not have any auditing or enforcement departments (Probably because there is no budget for it) so the tax savings are extended on a good faith basis. The lack of oversite is beneficial for LA owners because you don’t have to deal with a bunch of red tape and you can use your property taxes savings however you wish.
The Mills Act (California Government Code, Article 12, Section 50280 – 50290) was enacted in 1972 by the State of California to preserve Historical Properties. The Act is named after the author of the legislation — historian, statesman, and longtime California State Senator Jim Mills from San Diego.
To qualify for the Mills Act Program in Los Angeles your property must be either:
1) a Los Angeles Historic-Cultural Monument (HCM)
2) or A Contributing Structure in a Historic Preservation Overlay Zone (HPOZ)
There are far more contributing structures in HPOZs (35 designated districts and approximately X contributing homes) than HCMs (1180 total and growing by 5-10/ year on average- although about half of them are commercial and not residential properties) in Los Angeles so contributing structure in an HPOZ is the most common way properties qualify for the Mills Act.
Is my property a Contributing or Non-contributing structure in my HPOZ?
Under the HPOZ (Ordinance No 175891) to even become an HPOZ, the majority of homes in the neighborhood must be contributing structures. So the odds are in your favor if you own a home in an HPOZ that it is a contributing structure. The average percentage of dwellings within an HPOZ that are contributing is 65.8%. The percentage of contributing structures varies from a high of 98.6% in the South Carthay HPOZ to a low of 48.5% in the HighlandPark HPOZ.
You can make an educated guess whether a property is contributing by using your intuition – does the property look historic?
Contributing Structures are Historic and Non-Contributing structures are Not Historic. To be historic in real estate terms, properties need to be at least 50 years old (sorry no ‘instant classics’ here). So brand new construction is never contributing. Let’s take a look at an example- above there are three homes in the Spaulding Square HPOZ which is known for 1920s-1930s era colonial revival bungalows mainly craftsmen style. Can you spot the Non-Contributing Structure from Above? Is it #1,#2, or #3?
If you are relying on the contributing or non-contributing information to make a purchase decision, you will need to check officially. Locate the Survey Map for the HPOZ in question and it will either have a list or a map that you can use to ID the target property.
Here is an example of a Contributing Structure List for the Rossmoyne Historic District of Glendale:
Here is an example of a Survey Map from the City of LA for the Adams – Normandie HPOZ:
Contributing structures are color-coded dark Tan and Non-Contributing are color-coded Light Yellow. When in doubt- you can always call and talk to someone in the Historic Preservation office to confirm contributing status by the address.
Properties with assessed values above $1,500,000 for Single Family Residences and $3,000,000 for multifamily/commercial buildings have stricter qualifying requirements. These more expensive properties are required to apply for an exemption with the Cultural Heritage Commission. The City’s view is that owners of more expensive properties are wealthy and don’t need the savings as much as property owners below the threshold. In addition, the state loses more tax revenue on more expensive homes than less expensive homes, so they like to give the contract less to the more expensive ones.
It is important to hurry and complete your contract if you are considering to apply for the program because the city of Los Angeles is capping the amount of property tax revenue it will lose from Mills Act contracts at $1,000,000. I can tell you that we are somewhere near $750,000 at the moment, and at the current rate of applications, Los Angeles will reach its Cap- so don’t wait, if you don’t get your application finished in the future, the opportunity to participate in this program may be gone.
How Much Can I save with the Mills Act?
As I said at the beginning, the average savings from a Mills Act Contract is about 50% of your total current property tax bill. 50% is a good default estimate of the savings.
How does the Mills Act lower your taxes? The Mills Act changes the way your assessed tax value is calculated. For tax purposes the lower assessed value the lower taxes. Taxpayers want lower assessed values and the government wants higher assessed values and higher taxes.
The regular method the state levies property taxes is at 1.25% the assessed value. With the Mills Act, the assessed value for calculating taxes is changed from the existing assessed value (for new owners the price they paid for the property, for long term owners their most recent assessment value which Proposition 13 caps at a max 2% per year) to the income-based method of valuation for the assessed value. You don’t really need to understand the reason why the income-based method of valuation is lower than the traditional assessed value approach, you just need to know that it means significantly lower taxes. If you are curious about how to calculate this for yourself here is an example.
Example Scenario: A New Buyer just purchased a $1,400,000 Historic home and is considering applying for a Mills Act contract. The house was rented by the previous owner for $6,200/mo. before the tenant left and he sold it. His current tax bill is $17,500 how much would be his potential savings with a Mills Act Contract?
CURRENT TAX BILL
tax assessed value = $ 1,400,000
Property Tax Rate = .0125
($ 1,400,000 x 0.0125)
Current tax Bill = $ 17,500
MILLS ACT POTENTIAL SAVINGS
Income-Base Method of Valuation:
Monthly Rent: $6,200
($ 6,200 X 12 mo.)
Annual Gross income = $ 74,400
Less Operating expenses = $ 8,000
(insurance, repairs, utilities, management fees)
($74,400 – $8,000 = $64,400)
Net income = $ 64,400
Capitalization rate CONSTANT = 13.66% (Breakdown: Interest component at 6.75%,Historic property risk component at 4%,Amortization component at 1.67%,Property tax component at 1.24% = 13.66%)
($64,400/ .1366 = $468,521)
New Assessed Value = $468,521
Property Tax Rate: .0125
($ 486,090 x 0.0125 = $6,076)
Mills Act taxes = $ 6,076
Annual tax of $6,076 and a TOTAL SAVINGS OF $ 11,423 annually or 66% from $17,500 in this fictious example.
The key to calculating the income approach is determining the rental price. If you are unsure of the rental price ask a real estate agent, use rentometer.com, or search online for comparable rentals.
What are the terms of a Mills Act Contract?
Mills Act contracts are 10-year rolling contracts, meaning a contract automatically renews each year on its anniversary date to a new 10-year term. This means that you have to wait 9 years after giving 90-notice October 1 of non-renewal of your Mills Act contract before you officially end the program. Most owners who get a Mills Act never want to let it go because of the significant tax savings and its a selling point that adds property value. Mills Acts transfer to the new buyer as part of a sale.
Mills Act Property owners agree to restore, maintain, and protect their property in accordance with specific historic preservation standards and conditions identified in the contract. If a property under a Mills Act becomes delapated the city can cancel the contract with 60-day notice for breach and that will trigger the 12.5% contract cancellation fee. The contract transfers with a sale and is binding to all successive owners. The State has the right to inspect the property once every 5 years (they don’t do this but have the authority to).
Note: The cost of canceling the contract is immense- 12.5% of the assessed value of the property.
Note: Mills Acts contracts Start Jan 1 of any given year, so if you are thinking about applying for a mills act in Oct, Nov, Dec you need to hurry if you’d like to finish before Jan 1.
How Do I Apply for the Mills Act?
You can apply for the Mills Act yourself by following the directions of your cities historic preservation program.
I recommend consulting with and/or hiring a Mills Act Preparer to help you prepare your Mills Act application. Mills Act Preparers is a “cottage industry” that has sprung up in recent years, with a handful of people who specialize in preparing Mills Act applications for historic homeowners. Prices can vary but are generally $3,000 – $5,000 range. A Mills Act contract usually covers this fee and then some in the first year.
**The answer to the Spaulding Square question is #3 is the non-contributing structure.**