Owners and prospective owners of historic California properties would do well to familiarize themselves with the Mills Act. (O.K., O.K. At the outset we acknowledge that some of our friends on the Right Coast, who live in neighborhoods that date back to the 1800's, might find it amusing that, in California, some houses from the 1940's are considered "historic." Just give us a little slack, all right?) Agents also can benefit from having some familiarity with the provisions of the Act.
In short, the Mills Act provides a way whereby owners of designated historic properties may receive significant property tax relief in return for restoring and maintaining their property.
The Mills Act was enacted in 1972. Its provisions are found in sections 50280 -- 50290 of the California Government Code and sections 439 -- 439.4 of the California Revenue and Taxation Code. The Act has been called "the single most important economic incentive program in California for the restoration and preservation of qualified historic buildings by private property owners." What it does is to give participating local governments "the authority to enter into contracts with owners of qualified historic properties who actively participate in the restoration and maintenance of their historic properties while receiving property tax relief."
Under the Mills Act a local jurisdiction may enter into an "Historic Property Preservation Agreement" (HPPA) with owners of historic properties whereby those owners agree "to preserve and maintain the Historic Property and its character-defining features". In return for the owners' pledge, the local jurisdiction agrees that the property's assessed value will be determined by the procedures set out in the tax code.
The Mills Act method of determining a property's assessed value is based on an income approach. It will use actual rents or, in the case of a non-rented property, market-based projected rents. A capitalization rate is computed according to a formula that is distinctive to the Mills Act.
Generally, the valuation of a property based on a Mills Act calculation will be much lower than valuing the property on the basis of purchase price or comparable sales. It is not uncommon for a Mills Act valuation to be 50% or more lower than it would be by using those standard methods. This, then, results in a comparable reduction in property tax.
The Mills Act assessment value is reviewed each year. It can change based on changes of its component factors (e.g. interest rates or projected rents).
The HPPA has a ten-year term. Unless the owner has filed a notice of non-renewal, each year it automatically adds on a one-year extension, thus continuing the ten-year term.
Prior to entering into the agreement, the jurisdiction and owner will have agreed on any restoration work needed, and a time frame by which it is to be completed. There is a significant financial penalty if the owner fails to maintain the property according to the terms of the agreement.
An important point to note is that the terms of the agreement "run with the land." If a property under the Mills Act is sold, the new owner will have the same rights and obligations as did the former owner. Moreover, a new owner will benefit from the assessed valuation received by the original owner.
Not every California city or county participates in the Mills Act program. That must be determined locally. Any property listed on a Federal, State, county, or city register will qualify for the Mills Act program. The property may be commercial or residential, leased or owner occupied.
Not everyone who owns qualifying property will want to participate in a Mills Act program, but it is certainly worth investigating.