Introduction
One of the common reasons for procuring a historic assessment is to have a building nominated for historic designation (landmarked). There are potential tax incentives, from various sources, for buildings and sites designated on local, state and federal registers. These incentives can be arcane and confusing, with different regulations and terminologies depending on the locale. Here are the basics.
Local Tax Incentives
Municipal incentives vary widely. I have prepared pages on historic designation and related tax incentives at the following links for the cities of Glendale, Long Beach, Los Angeles, Pasadena, San Marino, Sierra Madre, and South Pasadena. For designation and Mills Act eligibility in unincorporated LA County — i.e. areas that are not part of the 88 incorporated cities — go here. Please reach out if you need help understanding the logistics and benefits of historic designation in your community.
Mills Act
The Mills Act, as established in California Government Code Section 50280 et seq., is the most important economic incentive program in California for the restoration and preservation of qualified historic buildings by private property owners. The program is administered and implemented by local governments, not all of whom participate in the program.
If you’re in Los Angeles County, please get in touch to find out whether your jurisdiction participates in the Mills Act program, and to discuss the suitability of your property for Mills Act incentives.
Eligibility Requirements
To be eligible for a Mills Act contract, your property must first be designated as a Qualified Historic Property. The rules and nomenclature vary from place to place, but as a rule a property needs to be designated/landmarked. A designated property is a privately-owned, non-tax-exempt property that is either (a) listed in the National Register of Historic Places or located in a registered historic district, or (b) listed in any state, city, county, or city and county official register of historical or architecturally significant sites, places, or landmarks.
Vaule Caps (where applicable)
There is a Mills Act value cap specific to most localities. For instance in unincorporated LA County — i.e. parts of the county that have not been subsumed into municipalities — there is currently a cap of $2.1M for a single-family residence, $3.2M for a two-family residence, and $6.3M for other land uses. If your locale has a valuation cap and your property exceeds it, then your property is not eligible for Mills Act funding.
Types of work permitted and preferred
The type of work that can be covered by Mills Act funding differs from place to place. As a rule, the regulating authorities (e.g. municipal planning departments and city councils) will be most likely to support work on preserving, restoring or rehabilitating portions of buildings that are visible from the street. Other work, such as interior restoration or buildings systems upgrades, may also be permissible in some places.
The need for qualified Professionals
There is generally a requirement that the work is undertaken in keeping with the Secretary of the Interior’s Standards for the Treatment of Historic Properties, guidelines that urge property owners to consult preservation professionals early in any project. One such professional is the qualified architectural historian, who can assess evidence for the original appearance of the building. That evidence takes the form of the physical fabric of a building, along with documentary sources such as historic building permits, fire insurance maps, and aerial views. The historian will work closely with fabricators (restoration architects, architectural conservators) in preparing the Mills Act work plan.
10-Year Contract and Work Plan
Mills Act contracts are made between the property owner and the local government granting the tax abatement. A contract, complete with work orders detailing renovation plans, is initially for 10 years, with automatic yearly extensions. Historic designation and Mills Act applications can be a lengthy undertaking, so make sure you start the process long before any major renovations.
The contract remains when the property is transferred, meaning that subsequent owners are bound by its terms for the duration of the contract, and they reap the tax benefits. Because the local government and the property owner negotiate other specific terms of the contract, you will need to contact your local government to determine the Mills Act rights and obligations.
Go here for a successful nomination written by me (Appendix F), and for a work plan that I worked on with the client (Appendix G), along with related documents relating to a Mills Act application in the City of Sierra Madre. Bear in mind that the submission process will look different in every locality.
Obligations
When they enter into a Mills Act agreement, property owners agree to restore, maintain, and protect the property in accordance with specific historic preservation standards and conditions identified in the contract. Periodic inspections by city or county officials ensure proper maintenance of the property. Local authorities may impose penalties for breach of contract or failure to protect the historic property. The contract is binding to all owners during the contract period.
Advantages
The property owner who adheres to a Mills Act agreement is entitled to an alternate evaluation of the property for tax purposes, which usually results in a reduced property tax bill. To take one example, the City of Pasadena asserts that the average benefit to homeowners of a Mills Act contract “has been a 51% reduction in property taxes, but it can vary widely.” Generally, owners who have purchased their properties within the last decade at current market-rate prices are most likely to benefit from entering into a Mills Act contract. Property taxes will not increase as a result of a Mills Act contract.
Income Approach to Valuation
As indicated in these state guidelines, the annual savings derive from the fact that valuations of properties under a Mills Act contract are determined by the income approach to value, rather than by the standard market approach. The income approach, divided by a capitalization rate, determines the assessed value of the property. In general, the income of a residential property is based on comparable rents for similar properties in the area, while the income amount on a commercial property is based on actual rent received.
The value of a Mills Act property is ultimately determined by the County Assessor. Because County Assessors are required to assess all properties annually, Mills Act properties may see slight fluctuations in property taxes from year to year.
Federal Incentives
The main tax benefit for entering a property on the National Register of Historic Places is the Federal Rehabilitation Tax Credit.
Only properties that are income-producing and certified as historic structures by the National Park Service are eligible for the Federal Rehabilitation Tax Credit. The program offers a 20% tax credit for qualified rehabilitation expenses. Rehabilitation includes renovation, restoration, or reconstruction of a building, but doesn’t include an enlargement or new construction. The credit is allocated ratably over a 5-year period on your federal income tax return.
I’m a Pasadena-based architectural historian who has written hundreds of assessments for properties throughout Los Angeles County.
If you own a property that is more than 50 years old, schedule a consultation to find out whether historic designation is right for you.