Mills Act Program
Do you own a great old building in Redondo Beach? Are you interested in incentives that can help you restore and maintain your building? Our Mills Act Program can help by allowing qualifying owners to use a portion of their property taxes to maintain their building.
The Mills Act is a state tax incentive law that allows cities to enter into contracts with the owners of historic structures. This contract provides a method of reducing property taxes in exchange for the continued preservation of the property. Property taxes recalculated using the special Mills Act assessment method can be reduced 50 percent or more!
On October 6, 1992 the Redondo Beach City Council acted to endorse the approval of Mills Act contracts with owners of locally-designated historic properties. Based on this action, the Preservation Commission is attempting to promote awareness and use of the Mills Act as an incentive for the preservation of local historic buildings.
How it works...
This State law enables the City Council to enter into 10-year contracts with owners of historic properties in which the owners agree to maintain and, if necessary, rehabilitate their historic structure. The contract renews itself annually; hence, the owner is always 10 years from termination unless there is a notice of nonrenewal. Either the property owner or the City may elect not to renew for any reason. The effect of nonrenewal is to terminate the contract at the end of the current ten year term. The owner may also petition the City to initiate an immediate cancellation. If cancelled, a penalty equal to 12 1/2 percent is imposed. The City may also cancel the contract, but only in the case of breach of the contract conditions.
Who is eligible...
To qualify for the Mills Act in Redondo Beach, a building must first be designated as a local landmark, or be a contributing structure within a designated local historic district. This requires application to and approval by the City's Preservation Commission.
Calculating property tax...
Mills Act contracts are unusual among preservation incentives in that tax benefits are available not only for income property, but also for owner occupied property. Property valuation is determined by the "income" method set out in Revenue and Tax Code, Section 439.21. Generally, the income, or projected income, less certain expenses, is divided by a capitalization rate to determine the assessed value of the property. When a property is owner occupied, the determination of "income" is based on what a property could reasonably be expected to yield, or an amount stipulated in the contract as the minimum income to be used. The income projected for owner occupied property is based on comparable rents for similar property in the area or, if insufficient rental information is available, the income that it could reasonably be expected to produce under prudent management. In the case of income producing property, the income amount is based on rent actually received and on typical rents received for similar property in similar use.
The capitalization rate for both owner occupied and income property is determined by adding together in interest component, a historical property risk component, an amortization component and a property taxes component.
Interest component is determined by the State Board of Equalization by September of the year preceding the assessment year and is based on the effective rate on conventional mortgages as determined by the Federal Home Loan Bank Board. In recent years, this rate has ranged from 8% to 10%.
Historical property risk component is 4% in the case of owner occupied single family dwellings. In all other cases, the property risk component is 2%.
Amortization component is a percentage equal to the reciprocal of the remaining life of the improvements. Although this calculation varies by individual structure, as an estimate, a typical remaining life of a frame building would be 20 years (or 0.05); for masonry buildings the remaining life might be up to 50 years (or 0.02).
Property taxes component is defined as the "percentage of the estimated total tax rate applicable to the property for the assessment year times the assessment ratio. Typically, this component will be 1% (0.01 post-Prop. 13 tax rate).
Hypothetical example of property tax calculation
|Current assessed valuation||= $ 250,000|
|Current taxes||= $ 2,500 ($250,000 X 0.01)|
Recalculation using Mills Act assessment method
|Gross income||= $ 14,000 ($1200 mo. X 12)|
|Less expenses||= $ 2,000 (insurance, repairs, utilities)|
|Net income||= $ 12,400|
|Capitalization rate||= 18% (mortgage rate @ 8%
+ risk component @ 4%
+ tax rate @ 1 %
+ amortization @ 5%)
|New valuation||= $ 68,888 ($12,400 / 0.18)|
|New taxes||= $ 688 ($68,888 X 0.01)|
TOTAL SAVINGS OF $1,812 in annual property taxes
The Mills Act offers owners of historical buildings in Redondo Beach the opportunity to realize significant property tax savings in exchange for preserving their buildings and acts as a tangible incentive for the City's preservation program. For more information regarding landmark designation and applying to enter into a Mills Act agreement, please contact:
City of Redondo Beach
415 Diamond Street
Redondo Beach, CA 90277