CITY COUNCIL: Ordinance Amending the Mills Act Program in Historic Preservation Ordinance (First Reading)

Meeting Date: 4 May 2010
Prepared by: Sean Conroy, Plng & Bldg Services Manager

City Council
Agenda Item Summary

Name: Consideration of an Ordinance amending the Mills Act program found in the City’s Historic Preservation Ordinance (First reading).

Description: This proposal would amend the application requirements of the Mills Act to eliminate some of the existing standards, place an emphasis on rehabilitation, and allow properties in any zoning district to apply.

City Funds: N/A
Grant Funds: N/A

Staff Recommendation: Approve the Ordinance (1st Reading).

Important Considerations: The Mills Act was enacted by the State of California in 1972 as a way to encourage partnerships between local governments and property owners of historic resources. Local governments are not required to participate in the Mills Act.

For those governments that do participate, a Mills Act contract may be offered to any property that contains an historic resource. The contract must be for at least 10 years and the property owner typically agrees to specific rehabilitation/restoration efforts. In turn, the property owner receives a reduced property tax assessment. The jurisdiction benefits
by having historic resources maintained and enhanced; the property owner benefits by having a reduced tax burden.

Decision Record: The Council continued this item on 6 April 2010 with a request for additional financial analysis on the program.

Attachments:
• Exhibit “A” – Revised Mills Act Ordinance
• Exhibit “B” – Budget Impact Analysis
• Exhibit “C” – Income Approach to Value Examples
• Exhibit “D” – Information submitted by David Hutchings

Reviewed by:

__________________________ _____________________
Rich Guillen, City Administrator Date

CITY OF CARMEL-BY-THE-SEA
DEPARTMENT OF COMMUNITY PLANNING AND BUILDING
STAFF REPORT
TO: MAYOR MCCLOUD & COUNCIL MEMEBERS
FROM: SEAN CONROY, PLNG & BLDG SERVICES MANAGER
THROUGH: RICH GUILLEN, CITY ADMINISTRATOR
DATE: 4 MAY 2010
SUBJECT: CONSIDERATION OF AN ORDINANCE AMENDING THE MILLS ACT PROGRAM FOUND IN THE CITY’S HISTORIC PRESERVATION ORDINANCE (FIRST READING).

BACKGROUND & DESCRIPTION
The Mills Act was enacted by the State of California in 1972 as a way to encourage
partnerships between local governments and property owners of historic resources. Local
governments are not required to participate in the Mills Act. For those governments that
do participate, a Mills Act contract may be offered to any property that contains an
historic resource.
The contract must be for at least 10 years and must include renewal provisions. The
property owner typically agrees to specific rehabilitation/restoration efforts that would
take place over the life of the contract. In turn, the property owner receives a reduced
property tax assessment, typically by using the Income Approach to Value rather than the
Market Approach to Value. The jurisdiction benefits by having historic resources
rehabilitated and maintained; the property owner benefits by having a reduced tax
burden.
The City’s Historic Preservation Ordinance is part of the City’s Local Coastal Program
that was certified in 2004. The Historic Preservation Ordinance offers Mills Act
contracts as a potential benefit to property owners of historic resources in the R-1
District, or for commercial properties that provide affordable housing. CMC Section
17.32.100.B establishes findings that must be made by the Council in order to qualify for
a contract. Some of the findings have proven to be problematic and have made
qualifying for a contract difficult.
The City Council continued this item on 6 April 2010, with a request for additional
economic information. The Council also expressed interest in extending the program to
commercial properties, particularly to historic motels.
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Staff Report
4 May 2010
Page 2
Exhibit “A” (attached) includes proposed changes to the existing ordinance to: 1) place
an emphasis on rehabilitation; 2) revise the required findings; 3) open the program to
commercial properties; and 4) allow the Council to establish by Resolution a limit on the
number of contracts that could be approved.
PROCESS
The proposed ordinance would amend the Zoning Ordinance/Local Coastal
Implementation Plan and requires review by the Historic Resources Board (HRB),
Planning Commission (PC), City Council and the California Coastal Commission.
The HRB and Planning Commission reviewed this item on 25 January 2010 and 10
March 2010, respectively.
EVALUATION
The primary focus of the HRB’s and PC’s review of the Mills Act was based on the
following policy question:
“Should Mills Act Contracts be offered primarily to properties with significant
rehabilitation needs or should they be offered to all historic properties regardless
of their current condition?”
The HRB and PC determined that the Mills Act program should be used primarily as a
tool to assist in the rehabilitation/restoration of degraded historic properties. Properties
with a demonstrable rehabilitation need should be given preference over properties with
little or no rehabilitation needs. In that way, contracts that the City approves would result
in rehabilitated and restored historic properties.
Focusing on rehabilitation would benefit not only the property owner, but also the
surrounding neighborhood and the City as a whole. Offering contracts to properties with
little or no need for rehabilitation would have less benefit to the community and may not
justify the reduction in tax income to the City. The proposed amendments would require
an applicant to clearly demonstrate how the tax reductions are necessary to assist in the
rehabilitation of the property.
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Staff Report
4 May 2010
Page 3
Residential: There are approximately 210 residential properties listed on the City’s
Historic Inventory. Properties that could potentially qualify for a Mills Act contract
would be limited by the following considerations:
• Additions: The City’s ordinance does not allow contracts for properties with
increased floor area by 15% or more from the original historic size. Without an
analysis of every property on the inventory, it is impossible to know how many
properties this requirement may disqualify. Staff estimates somewhere between
30% to 40%.
• Proposition 13: California’s Proposition 13 limits the maximum amount of
property taxes that can be assessed and prohibits reassessing a property’s value
unless there is a change of ownership or new construction. Therefore, many owners
of historic properties already enjoy low property tax rates and would not benefit by
a Mills Act contract.
• Rehabilitation: If the Council adopts the proposed amendments, the number of
potential candidates for Mills Act contracts will be further reduced based on the
emphasis on rehabilitation.
Commercial: There are approximately 50 commercial properties listed on the City’s
Historic Inventory. The City’s current Mills Act program does not include commercial
properties, unless they provide affordable housing. The Council has expressed an interest
in extending the program, particularly for historic motels.
The following motels are currently listed on the City’s Historic Inventory:
• Pine Inn (CC District)
• Cypress Inn (RC District)
• L’Auberge (RC District)
• Normandy Inn (RC District)
• La Playa (R-4 District)
• Sea View Inn (R-1 District)
• Colonial Terrace (R-1 District)
• Edgemere (R-1 District)
In general, Mills Act assessments are based on the Income Approach to Value rather than
the standard Market Approach to Value. A key factor to this approach is what a property
can produce in rent. Since rental rates are generally higher per square foot for
commercial property, and particularly for motels, compared to residential property,
commercial properties are generally not likely to see as significant property tax
reductions from the Mills Act as would residential properties. Property tax reductions,
however, could still be significant.
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Staff Report
4 May 2010
Page 4
Economic Impact: Staff has assumed that the average market value of properties
receiving a contract would be $1.5 million dollars. This would result in a net loss to the
City of approximately $1,020 per contract (see Exhibit “B”). Staff also assumed that
each 10-year contract would be renewed for an additional 10 years, as provided for in the
Mills Act. Based on these assumptions, the following table demonstrates what the City
could potentially lose in tax revenue (not including inflation) if two contracts were
approved each year.
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
$2040 $4080 $6120 $8160 $10,200 $12,240 $14280 $16,320 $18,360 $20,400
Yr 11 Yr 12 Yr 13 Yr 14 Yr 15 Yr 16 Yr 17 Yr 18 Yr 19 Yr 20
$22,440 $24,480 $26,520 $28,560 $30,600 $32,640 $34,680 $36720 $38760 $40,800
By Year 10 the City could experience a $20,400 reduction in property tax revenue in that
year and have lost approximately $112,200 over a 10-year span. Staff points out,
however, that based on the budget for fiscal year 2009/10, $20,400 would only be
approximately .1% of the total budget.
What the economic analysis does not include is the potential increase in property values
for surrounding properties due to rehabilitation and improvements of the properties under
contract, or the potential increase in the Transient Occupancy Tax for motel properties
that participate in the program.
Cap: Many communities that offer Mills Act contracts have established caps on the
number of contracts that can be approved on a yearly basis. Staff recommends that the
Council establish a cap of no more than two contract approvals per calendar year. The
cap could be established by Council resolution so that it could be revised without the
need to revise the ordinance.
If the Council is interested in establishing motels as a priority, a possible option would be
not to include motels in the cap.
Problematic Criteria: CMC 17.32.100 establishes findings that must be made in order
to approve a Mills Act contract. Several of these findings make qualifying for a contract
very difficult. Below is a list of some of the more problematic findings followed by a
response from staff.
iii. Alterations to the historic resource have been in the past, and will continue to be in
the future, limited to interior work and to exterior rehabilitation and alterations that:
(A) Comply with the Secretary’s Standards, and do not affect the basic form and
design of the original historic resource.
Response: Many historic properties have had additions. The Secretary’s Standards were
not developed until 1992 and the City has not always used them during the design review
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Staff Report
4 May 2010
Page 5
process. It seems inappropriate to require past additions to be consistent with the
Secretary’s Standards when many of the additions occurred prior to development of the
standards, and/or prior to the City’s use of the standards. A caveat has been added to
finding “A” to indicate that it only applies to future alterations.
(B) Do not affect any primary elevation
Response: A strict reading of this finding could disqualify a property if only one window
were altered or removed on a primary elevation. This finding has been revised to be less
restrictive.
(C) Do not alter, damage or diminish any character-defining feature.
Response: This finding would be very difficult to make on any property that has had
even a small addition. Character-defining features could include rafter-tails, windows,
siding material, etc. Therefore, even if a small addition were added at the rear of a
structure, character-defining features most likely would be diminished or damaged. This
finding has been eliminated.
(F) Meet all zoning standards applicable to the location of the property.
Response: It seems inappropriate to require past alterations to conform to current zoning
standards when most alterations occurred prior to the development of the current zoning
standards. A large number of historic properties would not qualify under finding “F” as
most have at least some minor nonconformities (setbacks, height, parking, etc.). This
finding has been eliminated.
Summary: In summary, the Council should answer the following questions:
1) Should Mills Act contracts be offered primarily to properties with significant
rehabilitation needs or should they be offered to all historic properties
regardless of their current condition?
2) Should the existing problematic findings be amended as recommended?
3) Should the ordinance be amended to include historic commercial properties in
the program?
4) Should the ordinance establish a cap on the number of contracts that can be
approved during any given year? If a cap is established, should it exclude
motels applications?
RECOMMENDATION
Approve the Ordinance amending the Mills Act requirements on first reading.
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CITY OF CARMEL-BY-THE-SEA
CITY COUNCIL
ORDINANCE 2010-
AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF
CARMEL-BY-THE-SEA AMENDING THE MILLS ACT PROGRAM FOUND
IN THE CITY’S HISTORIC PRESERVATION ORDINANCE (FIRST READING)
WHEREAS, The City of Carmel-by-the-Sea is a unique community that prides itself in
its historic character; and
WHEREAS, the City has adopted a General Plan and Municipal Code that strive to
protect the village character through clear policies and regulations that guide historic
preservation; and
WHEREAS, the Mills Act was adopted by the State of California in 1972; and
WHEREAS, jurisdictions are not required to implement the Mills Act; and
WHEREAS, participating jurisdictions may establish specific application requirements to
suit local needs; and
WHEREAS, the City adopted the Mills Act as a potential benefit to property owners of
historic resources as part of the Local Coastal Program; and
WHEREAS, the proposed ordinance revises section 17.32.100.B of the Zoning
Ordinance/Local Implementation Plan to focus Mills Act contracts on properties that have a
demonstrable rehabilitation need; and
WHEREAS, the Historic Resources Board and the Planning Commission unanimously
recommended adoption of the ordinance; and
WHEREAS, this ordinance will be carried out in a manner consistent with the California
Coastal Act.
NOW, THEREFORE, BE IT RESOLVED THAT THE CITY COUNCIL OF THE CITY
OF CARMEL-BY-THE-SEA does hereby resolve to:
Amend Municipal Code Section 17.32.100.B (Exhibit “A”) amending the Mills Act
program in the City of Carmel-by-the-Sea.
Severability. If any part of this ordinance, even as small as a word or phrase, is found to be
unenforceable such finding shall not affect the enforceability of any other part.
Effective Date. This ordinance shall become effective 30 days after final adoption by the City
Council or the California Coastal Commission, whichever occurs last.
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PASSED AND ADOPTED BY THE CITY COUNCIL OF THE CITY OF CARMELBY-
THE-SEA this ___ day of ________ 2010 by the following roll call vote:
AYES: COUNCIL MEMBERS:
NOES: COUNCIL MEMBERS:
ABSENT: COUNCIL MEMBERS:
SIGNED,
________________________
SUE McCLOUD, MAYOR
ATTEST:
_________________________________
Heidi Burch, City Clerk
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Exhibit “A”
City Mills Act Requirements (revisions shown in strikeout and
underline)
B. Mills Act Historical Property Contracts. (CMC 17.32.10)
1. Purpose. A Mills Act contract under State law is an agreement between
the City of Carmel and a property owner of an historic building listed on the
Carmel Register. The property owner benefits from a reduction in property taxes,
and the City is assured that the historic building is rehabilitated, maintained and
preserved. All Mills Act contracts shall be established, processed and approved
in conformance with California law. The primary purpose for offering Mills Act
contracts in the City of Carmel-by-the-Sea is to assist in the rehabilitation
and long-term maintenance of historic resources.
2. Applicability. All properties listed on the City’s Historic Register in all
districts Properties in the R-1 district that have been, and will be, preserved in
their historic size, form and design without significant alterations or additions are
eligible for Mills Act contracts. Mills Act contracts for properties in the R-4 and
commercial districts shall be limited to those creating new low-, very low- or
moderate-income housing through conversion of existing floor space occupied by
market-rate housing or occupied by nonresidential uses. Properties that are not
currently on the register shall not be eligible for a Mills Act contracts with the City.
3. Term of Contract. All Mills Act contracts shall have a term of 10 years and
one year shall be added to this term annually upon each anniversary date of the
contract unless one or both parties have taken action to terminate the contract.
The City Administrator shall be authorized to initiate contract termination on
behalf of the City based on recommendations of the Department. The contract
rights and obligations are binding upon all successive owners of the property
during the life of the contract. The property retains the lower Mills Act tax rate
when the property is sold. To end a contract, either party may submit a notice of
nonrenewal to the other party. Such notices shall cause the contract to terminate
at the end of the then-current 10-year contract period. Cancellation of a contract
by the City due to noncompliance requires a public hearing and, if cancelled,
results in the immediate termination of the contract and a penalty equal to 12.5
percent of the assessed market value of the property.
4. Contract Requirements. The contract will require that the historic
elements of the property are maintained in good condition. This will include a
plan for maintenance and may include a program to restore deteriorated
elements. All recipients of Mills Act contracts are required to implement a
maintenance plan prepared by a qualified professional and to submit an annual
report to the Department specifying all work that has been done to maintain and
preserve the historic resource over the year in compliance with the approved
maintenance plan. All maintenance work shall be completed in conformance with
the Secretary of Interior’s Standards for Rehabilitation. All Mills Act contracts
shall specify that the maintenance plan shall be updated at least every 10 years
by a qualified professional and approved by both parties.
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5. Applications.
a. Staff shall make available appropriate Mills Act application materials.
Applications for contracts that will commence in the following calendar year shall
be submitted no later than June 30th of each year. This annual schedule
provides sufficient time from receipt of application materials for a
recommendation by the Board, the City Council to approve and the City Clerk to
cause to be recorded approved contracts within the calendar year in which
application materials are received. The contract term would begin January 1st of
the year following the application.
b. The following materials are required for a complete application:
i. A completed application form and all filing fees as established by
resolution of the City Council.
ii. A full legal description of the property attached and labeled “Exhibit A.”
iii. A rehabiliation and maintenance plan for the historic resource prepared
or reviewed by a qualified professional together with a cost estimate of the work
to be done attached and labeled as “Exhibit B.”
iv. Photos of the exterior of the property attached as “to assist in the
rehabilitation and maintenance of the property attached as “Exhibit D”.
6. Review Process.
a. Upon submittal of a complete application, staff will prepare a staff report
for review by the Board. The Board shall consider each application for a Mills Act
contract and make recommendations to the City Council to approve, approve
with conditions or deny the application.
b. The City Council shall, in a public hearing, consider recommendations
from the Board and resolve to approve, approve with conditions, or deny the
proposed contract with sufficient time for action by the City Clerk so that
recordation of approved contracts occurs prior to December 31st of the year in
which the application is received.
c. To grant approval of a Mills Act contract, the Board and City Council shall
make all of the following findings:
i. The building is designated as an historic resource by the City and is listed
on the Carmel Register.
ii. The proposed rehabilitation and maintenance plan is appropriate in
scope and sufficient in detail to guide long-term maintenance. Required
maintenance and rehabiliation should be more significant than just routine
maintenance that would be expected for any property.
iii. Alterations to the historic resource have been in the past, and will
continue to be in the future, limited to interior work and to exterior rehabilitation
and alterations that:
(A) Comply with the Secretary’s Standards (future additions only), and do
not affect the basic form and design of the original historic resource , and
(B) Do not significantly alter affect any primary elevation, and
(C) Do not alter, damage or diminish any character-defining feature, and
(D) Do not increase floor area on the property by more than 15 percent
beyond the amount established in the documented original or historic design of
the resource, and
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(E) Do not result in any second-story addition to a single-story historic
resource. , and
(F) Meet all zoning standards applicable to the location of the property.
iv. The Mills Act contract will aid in offsetting the costs of rehabilitating
and/or maintaining the historic resource. and/or will offset potential losses of
income that might otherwise be achieved on the property.
v. Approval of the Mills Act contract will represent an equitable balance of
public and private interests and will not result in substantial adverse financial
impact on the City.
d. Upon approval of a contract by the City Council, the City Clerk shall
transmit the contract, with the appropriate fee, to the County Recorder’s Office.
The property owner is responsible for all filing fees. After recordation, the
recorded contract shall be transmitted to the County Assessor. The Assessor
calculates the exact tax savings. Property owners are required to report to the
State Office of Historic Preservation that a Mills Act contract has been
completed.
e. The City Council may establish by Resolution a limit on the number
of contracts that can be approved during any calendar year.
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Executive Summary
Supplement to Documents Previously Provided By David D. Hutchings
For April 6, 2010 Carmel City Council Meeting Pertaining to the Mills Act
Disagreement with Proposed Exhibit A
My disagreement with Exhibit A centers around the language stated as the “Primary Purpose”
for offering the Mills Act”. It is my belief that the current proposed language is not in compliance
with the California Code, the California Guidelines, and the Ca. OHP Tech. Bulletin #12.
Staff recommends that Exhibit A should read:
“The primary purpose for offering Mills Act contracts in the City of Carmel-by-the-
Sea is to assist in the rehabilitation and long term-maintenance of historic
resources”.
It is my belief that Exhibit A to be in compliance should read:
“The primary purpose for offering Mills Act contracts in the City of Carmel-by-the-
Sea is to assist in the rehabilitation and / or long term-maintenance of historic
resources”.
Point / Authorities and Brief Discussion for My Belief:
1. Ca. Code 50281(b) (1) clearly states “For the preservation of the qualified historic
property and when necessary to restore and rehabilitate the property”.
Mandating rehabilitation rewrites the “when necessary” provision of the law. The
Code only mandates long-term preservation / maintenance, not rehabilitation.
2. Ca. Guidelines state “When property is placed under such a contract, the owner
agrees to restore the property if necessary, maintain its historic character, and use it
in a manner compatible with its historic characteristics”.
Ca. Guidelines requires restoration only if necessary, but mandates maintenance of
the historic character of the property.
3. The Ca. OHP Mills Act Property Tax Abatement Program Technical Assistance
Bulletin #12 states “The Mills Act program is especially beneficial for recent buyers of
historic properties and for current owners of historic buildings who have made major
improvements to their properties”.
The Ca. OHP Bulletin #12 does not say “who will make major improvements to their
properties but rather says who have made major improvements to their properties.
4. The City of Monterey (the nearest major city) in their criteria clearly state that “The
Mills Act Contract will serve to offset the costs of rehabilitation and/or maintaining the
cultural resource”.
City’s Discretion to Determine Approved Mills Act Contracts Would Not Change
Because approval of the Mills Act by the City is discretionary, the City’s discretion to
determine which properties are approved if my proposed language was implemented would not
change. The City could still only approve Mills Act contracts for historic properties requiring just
rehabilitation but would not exclude for consideration historic properties already fully restored
requiring long term-maintenance to preserve historic character.