HomeMy WebLinkAbout05/02/1995, 2 - CULTURAL HERITAGE COMMITTEE RECOMMENDATION TO INITIATE A HISTORIC PROPERTY TAX INCENTIVE PROGRAM. MEETINGD
�A�� city of san t.uis ogispo - -94-
COUNCIL AGENDA REPORT ITEM NUMBER:
FROM: Arnold Jonas, Community Development Director, By: Jeff Hod , Associate Planner
SUBJECT: Cultural Heritage Committee recommendation to initiate a Historic Property Tax
Incentive Program.
CAO RECOMMENDATION: Adopt a resolution establishing the historic property tax
incentive program and authorizing the Mayor to send a letter to the San Luis Obispo County
Assessor initiating the program.
REPORT-IN-BRIEF
This report discusses a historic preservation tool available to cities and property owners called
the "Mills Act" contract. This provision of State law allows qualifying historical properties to
be assessed based on a "capitalization of income" method, rather than the usual method based
on comparative sales data. In some cases, this can result in significant tax savings for owners
of properties which are "enforceably restricted" through a Historical property contract. This item
is returning to the Council for reconsideration after having the Cultural Heritage Committee
(CHC) review additional information and reaffirm its support.
Tax incentives can be viewed as positive, partnership approach to historic preservation. The
City establishes the program, determines which properties are eligible through its authority to
designate locally significant historic properties, and enters into historic preservation contracts
with property owners who choose to participate. The property owner agrees to maintain (and
in some cases, restore) historic properties according to adopted preservation standards in return
for tax benefits.-The County participates by assessing participating historic properties according
to methods outlined by State law.
The County of San Luis Obispo has submitted two letters expressing concerns with the potential
fiscal effects and suggesting alternatives. The County Tax Assessor requests reimbursement for
County staff costs if the program is implemented.
DISCUSSION
Although legally available since 1977, this special tax assessment method has not been applied
in San Luis Obispo County, although other communities have established similar programs,
including the cities of Los Angeles, Santa Barbara, La Verne, Rancho Cucamonga and South
San Francisco. Following up on a presentation at the American Planning Association
Conference last Spring, staff looked into starting such a program in San Luis Obispo. After
meeting with the County Assessor, staff determined that a tax incentive program was feasible
and that it could promote the City's historic preservation goals by encouraging the preservation
and "listing" of historic properties. The CHC has held two public hearings to discuss the
incentive, and determined that it could have significant public benefits.
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Page 2
On February 7, 1995 the City Council considered the earlier CHC recommendation to adopt the
program, heard public testimony, and referred the item back to the CHC. Councilmembers
wanted to allow additional discussion of the program's fiscal implications, particularly with
regard to County tax-receiving agencies. Following is an updated discussion of that issue.
At a public hearing on March 27, 1995 the CHC voted 5-0 (Pinard Absent; one seat vacant) to
recommend that the City Council establish the historic property tax incentive program and that
the Mayor send a letter to the County Tax Assessor initiating the program. The CHC found that
the public benefits of the program were likely to outweigh the expected tax revenue losses; and
that a significant number of Master List properties have been under the same ownership since
1978, thus minimizing the program's possible fiscal effects. The CHC had previously
considered this item in November 1994, and at that time recommended that Council adopt the
program.
General Plan policies strongly encourage the preservation of historic structures. For example,
the Land Use Element provides that:
"Historically or architecturally significant buildings should not be demolished or
substantially changed in outward appearance, unless doing so is necessary to remove a
threat to health and safety and other means to avoid the threat are infeasible. The street
appearance of buildings which contribute to a neighborhood's architectural character
should be maintained. "
To implement preservation policies, the Conservation Element recommends that:
"Accommodations for upgrading buildings having historical significance should be
included in the building code. Zoning regulations and tax rate structures should be
revised to encourage renovation of such buildings. "
The MiGs Act
The Mills Act provides cities and counties with an important historic preservation tool by giving
them the statutory authority to assess designated historic properties differently than non-historic
properties. It is one of the few financial preservation incentives available to owners of historic
properties. To qualify, a property must be designated on a Federal, State or local historic
listing, and must be covered under a Mills Act contract, as defined in Government Code Section
50280.1.
A Mills Act contract is a minimum 10-year guarantee to maintain the property's historic
character and to provide reasonable public access for viewing the property (building exterior in
most cases). The law requires county assessors to assess historical properties under contract by
a "capitalization of income method" instead of the usual "comparative fair market value"
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method. This alternative assessment can sometimes result in lower assessed values, and hence,
lower property taxes for qualifying properties. Mills Act obligations and benefits are
transferable to the new owner upon sale of the historic property.
Once the owner of a designated historic property enters into a "Historical Property Contract"
with the City, the Assessor must use the alternative assessment method to determine taxes for
that property if it results in a lower tax assessment. After 10 years, one year is added
automatically to the initial term of the contract on the contract's anniversary date, unless notice
of nonrenewal is served by the owner or the City. There is a "recapture" provision for
premature property owner cancellation or breach of contract.
State law also allows cities to collect a fee, in an amount "not to exceed the reasonable cost of
administering this program", as a condition of entering into a historic preservation contract.
Cities are not required to reimburse counties for their costs to administer Mills Act contracts.
Who is Eligible to Participate?
Property owner participation in the program is completely voluntary. Owners of residential and
commercial properties on the City's Master List of Historic Resources would be eligible to
participate in the program. There are 168 properties on the Master List (82 residential; 63
commercial; 13 other). Additional properties meeting the criteria in the City's Historic
Preservation Program Guidelines could be added by the City Council, on nomination by the
CHC. The criteria can be difficult to meet and the number of properties which could be added
to the Master List is expected to be small.
Of the properties which are currently eligible, not all would benefit from the program. For
example, 13 properties are either government-owned or churches and pay little or no property
tax. Many other historic properties have been under the same ownership since the passage of
Proposition 13 in 1978, and consequently, are not likely to benefit from the program.
Approximately one-half of the Master List properties are believed to fall into this category.
Program Benefits
Program benefits extend to both individual property owners and the community at large.
Property owners who choose restoration and preservation over demolition are rewarded through
reduced property taxes. The community receives benefits through preservation and improvement
of historic buildings which represent the community's cultural and architectural heritage. To
the extent that Mills Act contracts are tied to specific requirements for upkeep, architectural
restoration, and correction of building code deficiencies, the tax reduction can defray property
owner costs to maintain and improve historic buildings.
Richard J. Roddewig, in his 1983 article "Preservation Law and Economics", compares income
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COUNCIL AGENDA REP06RT
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and expenses on newer and older buildings from a 1980 survey of downtown offices in the U.S.
and Canada and points out that:
'...gross income per square foot on older buildings is substantially less than on new
buildings, and expenses — except for taxes, insurance and energy — are substantially
higher on older buildings. Total income on older buildings is a little more than 70
percent of new building income. On the average, it costs more to operate the same
amount of space in an older structure than it does in a new buildings. "
It is difficult to quantify the program's potential public benefits; however incentives such as the
Mills Act do appear to help preserve, maintain, and enhance neighborhoods by giving owners
(and prospective owners) and real incentive to preserve and restore historic buildings. They also
help to create a sense of good will, and show that the City (and County) are willing to share in
the cost, as well as the benefits, of historic preservation.
FISCAL MIPACT
Participation in this type of tax incentive program is not likely to significantly affect City or
County tax revenues, although the actual fiscal effects are difficult to determine and depend on:
the number of properties participating, current property uses and last reassessment date, property
condition, and property owner response to the program.
City Fiscal Impact
A worst-case approximation of the reduction of City property tax revenues can be calculated as
follows:
Total assessed valuation of City Master List properties $54,807,482
Total assessed valuation under new assessment method' $27.403.741
New property tax valuation for historic properties $2794039741
To determine the tax revenue impact on the City, the new assessed valuation is then multiplied
by 1.1162 percent (tax rate) to calculate property tax, and then by 18.3 percent to determine the
City's share of the property tax revenue:
$27,403,741 X .011162 X .183 = $55,976
'According to a Deputy Assessor for San Luis Obispo .County, the program could result in a
reduction in assessed valuation of between 33 and 50 percent per property for qualifying historic
properties which have been sold since the passage of Proposition 13.
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Thus, the City could lose approximately$56,000 in property tax revenue annually assuming that:
1) all of the properties on the Master List participated in the tax incentive program; and 2) the
assessed valuation of all properties was reduced by 50 percent. This would represent a reduction
of approximately two percent in the City's total tax revenue ($56,000/$3,647,500)for fiscal year
1993/94. This "worst-case" assumption is highly unlikely, and the actual fiscal effects
would probably be much less than $56,000. About one-half of the eligible properties have
been under the same ownership since passage of Proposition 13, and are not likely to participate
since they already have relatively low property tax assessments.
Other communities with Mills Act programs in place have experienced relatively low
participation rates, typically 10 - 15 percent of the eligible properties. A more realistic
approximation of annual City property tax loss is $5,600 to $8,400.
County Fiscal Impacts
A variety of Countywide agencies receive a portion of property taxes collected in the City of San
Luis Obispo. These include: San Luis Coastal Unified School District (approx. 36%); County
General Fund (approx. 20% after State transfer); Cuesta College (6%); County Schools (4%);
Library (1.9%); Port San Luis Authority (1.6%); Air Pollution Control District (0.1%); and
others. Property tax collection methods are fairly complex, and actual percentages allocated to
each taxing agency vary depending on where the taxed property is located in the County.
Nevertheless, an approximate "worst case" fiscal impact can be estimated as follows:
Taxes collected under current method
Total Assessed Valuation of Master List Properties: $54,807,482
Tax Collected (.011162 X total assessed valuation) = 6129000
Less 18.3% taxes returned to City of SLOl if 2.0001
Tax revenue available to County taxing agencies $ 5009000
Taxes collected under Mills Act
New Assessed Valuation of Master List Properties: $27,403,741
(reduced by up to 50% due to Mills Act)
Tax Collected (.011162 X total assessed valuation) = 3069000
Less 18.3% taxes returned to City of SLO 56.000
Tax revenue available to County taxing agencies $ 250,000
Therefore, the estimated worst case revenue to County taxing agencies is $500,000 - $250,000
_ $250,000. This assumes that every property in the City eligible to participate in the program
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does so, a highly unlikely scenario. In other cities which have enacted Mills Act programs, the
participation rate is relatively low — 10 to 15 percent. A more realistic of the program's fiscal
impact on County revenues is expected to be approximately $38,000 annually, or about two-
tenths of 1 percent of the total property taxes collected countywide($179,000,000). The County
Tax Assessor's tax loss estimate of $400,000 is higher because it assumes that all qualified
historic properties would receive an average $2,500 tax savings -- a scenario that the Assessor
concedes is unlikely.
Additional City and County staff time will be required to implement the program, including
public information services and updating the Tax Assessors' policies, procedures and equipment.
The Tax Assessor has provided estimates of County costs to implement the program. Assuming
at least 16 properties participate, County staff costs are estimated at $11,400, plus an annual
maintenance cost of$3,500. The City may, but is not mandated to offset County or City costs
to administer the program. The CHC recommended against charging fees for the program,
feeling that this would be contrary to the program's intent and could discourage participation.
If staffing costs to implement the program prove to be significant, the Mills Act allows the City
to charge reasonable fees to recoup processing costs of Mills Act contracts.
To proceed with the program, the City Council should adopt a resolution establishing the
program's purpose and intent, and formally request that the County Assessor establish
procedures for assessing historic properties pursuant to State law. A draft resolution and a copy
of a draft letter is attached. Application procedures will be developed by the CHC and staff,
and included in the updated Historic Preservation Program Guidelines.
ALTERNATIVES
1. Modify the program. The Council could adopt a modified program, possibly including
additidnal eligibility requirements or incentives. For example, some communities limit
the Mills Act program only to a designated few "landmark" buildings; or provide
additional incentives for historic properties, including reduced construction permit fees
for restoration projects; low cost historic loans and grants; and relaxed parking standards
for historic properties. The Council may also establish a fee to offset staffing costs to
implement the program.Staff does not recommend establishing a fee at this time; however
it may be appropriate to set a reasonable fee to defray staffing costs after the City and
County have experience with the program and can more accurately gauge its effects.
2. Do not approve the program. The Mills Act program is voluntary, and the Council
may choose not to participate at this time.
Attachments: Draft resolution, CHC minutes, sample tax calculations, eligible properties,
letters from County staff.
Council Reading File: Background information on the Mills Act.
RESOLUTION NO. (1995 SERIFS)
A RESOLUTION OF THE COUNCIL OF THE CITY OF SAN LUIS OBISPO
ESTABLISHING A HISTORIC PROPERTY TAX INCENTIVE PROGRAM AND
AUTHORIZING THE MAYOR TO INITIATE THE PROGRAM WITH THE
COUNTY OF SAN LUIS OBISPO.
WHEREAS, Article 1.9 of the California Revenue and Taxation Code provides for the
differential property tax assessment of certain enforceably restricted properties to encourage
historic restoration and preservation; and
WHEREAS, the City's General Plan policies encourage the use of tax incentives and
other means to encourage property owners to protect, restore and preserve historic buildings;
and
WHEREAS,tax incentives for qualifying historic properties benefit the entire community
and improve the City's appearance by encouraging the preservation and restoration of heritage
buildings, fostering pride and reinvestment in neighborhoods, and by defraying a portion of the
costs of restoring and maintaining historic structures; and
WHEREAS, the City's Cultural Heritage Committee has considered the potential costs
and benefits of a property tax incentive program, and has recommended the establishment of
such a program pursuant to State law; and
WHEREAS, this City Council has considered the Committee's recommendation and
desires to establish a tax incentive program in the City of San Luis Obispo, based on the findings
herein described;
NOW THEREFORE BE IT RESOLVED by the Council of the City of San Luis
Obispo as follows:
SECTION 1. Fmdings. The Council finds the following:
1. The proposed Historic Property Tax Incentive Program is consistent with the
General Plan, and will implement policies therein calling for the protection,
restoration, preservation and maintenance of historically significant structures; and
2. The proposed Program will benefit the Public by enhancing the Community's
appearance and preserving historically significant buildings which help describe
and document the Community's heritage; and
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Council Resolution No. (1995 Series)
Page 2
3. Adoption of the proposed Program is exempt from environmental review under
the City's Environmental Guidelines and under Section .15308 of the California
Environmental Quality Act.
SECTION 2. Historic Property Tax Incentive Program Established. The Council hereby
establishes a tax incentive program known as the "Historic Property Tax Incentive
Program", to be administered by the Community Development Director, on advice and
recommendation of Cultural Heritage Committee, subject to State Law and the following
local requirements.
1. The purpose of the program is to encourage the restoration, preservation and
upkeep of historic structures in the City of San Luis Obispo, including both
residential and commercial properties.
2. Participating properties may be located anywhere in the City. Only those
properties listed in the "Master List of Historic Resources" shall be eligible to
participate in the tax incentive program.
3. To qualify for the program, owners of eligible properties must enter into a
Historical Property Contract with the City of San Luis Obispo. The Community
Development Director is hereby authorized to execute such contracts, subject to
the City's Historic Preservation Program goals, policies and preservation
guidelines, and subject to the requirements of State law.
4. The City Council may amend or terminate the program by resolution at any time,
after holding a public hearing and providing appropriate public and property
owner notice, as required by law.
5. The Community Development Director shall establish application and review
procedures to administer the program. Participation in the program is optional,
and shall be at no cost to the property owner. The City may charge reasonable
and necessary fees to recover costs of executing, filing, and administering
historical property contracts.
SECTION 3. Authorization to Initiate the Program. The Mayor is hereby authorized to send
a letter to the County of San Luis Obispo to initiate the program.
Council Resolution No. (1995 Series)
Page 3
On motion of , seconded by and on the
following roll call vote:
AYES:
NOES:
ABSENT:
the foregoing Resolution was passed and adopted this 2nd day of May, 1995.
Mayor Allen Settle
ATTEST:
Diane Gladwell, City Clerk
APPROVED:
City Attorney
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Draft
MIIV[JTES
SAN LUIS OBNFO
CULTURAL HERITAGE CONM41TTEE
Regular Meeting of March 27, 1995
The meeting convened at 5:30 p.m. in the Council Hearing Room, San Luis Obispo City Hall,
990 Palm Street.
ROLL CALL
Present: Co-Chairman Garth Kornreich, Co-Chairman Dan Krieger, Wendy Waldron,
Victoria Wood. (one seat vacant)
Absent: Leo Pinard.
Staff: Jeff Hook, Associate Planner.
APPROVAL OF MINUTES: On motion of Committee member Wood, seconded by
Committee member Gallagher, the minutes of the regular meeting of February 27, 1995 were
unanimously approved as amended.
THANK LEO PINARD FOR SERVICE TO THE CITY
Since Committee member Pinard was not present, the recognition ceremony was postponed to
the upcoming CHC installation dinner on May 15, 1995.
THANK DOM WITTHOLT FOR SERVICE TO THE CITY
Imke Wittholt was not present. Jeff Hook explained that Ms. Wittholt is a German university
student volunteering her time with the City of San Luis Obispo, and that she had done an
excellent job photographing historic properties which will be maintained in CD-Rom format in
the City's land use inventory.
Jeff Hook introduced two CHC members-elect in the audience, Alice Loh and John Edmisten.
He explained that their terms began April 1. He also noted that Dan Krieger and Victoria Wood
were each reappointed to four-year terms.
Co-Chairperson Krieger welcomed the new and reappointed members.
PUBLIC HEARING ITEMS
1. Historic Property Tax Incentive Program, Citywide (referred by the City Council).
City of San Luis Obispo, Applicant.
Jeff Hook presented the staff report and explained that the CHC reviewed this item last
CHC Minutes, March 27, 1995
Page 2
November, and that the City Council had referred it back to the Committee to consider
countywide fiscal implications of the tax incentive program. The agenda staff report describes
the potential fiscal impact of the program if all of the eligible 170 properties on the Master List
of historic Resources participated in the program, a highly unlikely scenario. Mr. Hook noted
that among California cities which have Mills Act programs, the typical participation rate is
relatively low—about 10 to 15 percent of the eligible properties actually participate. Practically
speaking, a total property tax reduction of $20,000 - $35,000 to county tax-receiving entities
could reasonably be expected based on a 10-15 percent participation rate in the program.
Because many of the City's historic properties have been under the same ownership since the
passage of Proposition 13 in 1978, many of the eligible properties already have relatively low
assessed values, and are not likely to realize tax benefits under the Mills Act, Mr. Hook
explained.
The program could also require increased County staff hours to "retool" their tax assessment
procedures and to respond to public questions. In response to a question from Ms. Gallagher,
Mr. Hook noted that the Tax Assessor's office had been asked in writing to quantify the
potential tax impacts, but that as yet, that office had not responded. The County Auditor-
Controller's office had provided information on tax rates and calculation methods used in this
report. He explained that he had discussed the program with County Assessor and Auditor-
Controller staff and with school district staff as the program was being developed.
In response to a question from Committee member Kornreich, Mr. Hook explained that under
state law, the County is obligated to implement a Mills Act program in the City of San Luis
Obispo if the Council decides to establish such a program. He noted that the Mills Act allows
the City to collect a fee to defray added staff costs of processing Mills Act contracts.
Mr. Kornreich felt that charging a fee for Mills Act contracts was contrary to the intent of the
legislation to assist owners of historic properties. He also felt that the actual fiscal impact of
the program would be minimal due to the fact that many Master List properties have been in
families for generations and are not likely to participate in the program.
Committee Member Gallagher described the community benefits of historic restoration, including
increased building permit activities and related permit fees, sales of building materials, and the
"domino effect" to encourage other owners in a neighborhood to restore or improve their
property.
Victoria Wood felt that the tax incentive program would encourage property owners to retrofit
downtown unreinforced masonry buildings, thus improving public safety and economic
conditions.
Mr. Hook explained that the Mills Act contract allows cities and property owners to negotiate
CHC Minutes, March 27, 1995
Page 3
the terms of participation, including the need for additional work to restore original architectural
details or to make necessary repairs and complete routine maintenance. He clarified that the
Mulls Act did not require property owners to provide public access to a building's interior,
unless the interior was basis for the building's historic listing, eg. the Fremont Theatre, where
reasonable public access would be required.
In response to a question from Committee member Kornreich, Mr. Hook noted that under the
Mills Act, the tax assessor would calculate a property's assessed value under both the old
method and the "capitalization of income" method, and then use the method resulting in the
lowest property tax.
Dan Krieger said that he had spoke with tax assessors from other counties, and.that he had heard
general support for the Mills Act program.
Co-chairman Krieger opened the public hearing.
In response to a question from John Edmisten, 3055 Bahia Court, Dan Krieger explained that
property owners had to agree to preserve their buildings for at least 10 years to be able to
participate in the program.
Mr. Hook explained that there was a "give and take" implicit in the Mills Act program, in that
private owners received tax benefits in return for preserving and in some cases, improving
historic buildings which are important to the community's character and heritage. In response
to a question from Mr. Edmisten, Mr. Hook knew of no "derelict" buildings on the Master List;
however it was conceivable that historic buildings in poor condition could be added to the Master
List and included in the proposed program on the condition that the building be restored.
Mr. Krieger noted that in addition to the "Quid Pro Quo" nature of the Mills Act, there was a
penalty equal to 12.5% of the property's assessed value for property owner violation of the
terms of a Mills Act contract.
Mr. Hook explained that the CHC had several alternative actions, including recommending that
the Council not adopt the program in view of the potential public cost, both in the City and
County; recommending that the Council adopt the program but consider establishing limits on
the numbers of properties which could participate, or include a one-year review to evaluate the
program; or the CHC could continue the item if it needs more information.
On motion of Astrid Gallagher, seconded by Wendy Waldron, the Cultural Heritage Committee
recommended that the City Council adopt a Historic Property Tax Incentive Program, finding
that the public benefits of the proposed program are likely to outweigh expected tax revenue
losses, and that a significant number of Master List properties have been under the same
ownership since 1978, thus minimizing the fiscal impact of the program.
CHC Minutes, March 27, 1995
Page 4
AYES: Committee members Gallagher, Waldron, Kornreich, Krieger, Wood.
NOES: None.
ABSENT: Committee member Pinard.
Motion carries.
—/ 2
February 3, 1995
City of San Luis Obispo
Proposed Historic Preservation Tax Incentive Program
Following are examples prepared by the SLO County Tax Assessor, using San Luis Obispo City
properties on the Master List of Historic Resources. Figures used are estimates, based on State
codes and current assessment information available.
Residential Properties:
1. XXX Buchon Street. (1800 SF, sold in 1991); 1992193 base value for assessment.
1994/95 assessed value = $321,974
1994/95 estimated taxes = $3,594
Estimated assessed value under the Mills Act:
Est. gross income (rental) _ $1300/month X 12 month = $15,600 EGI/year
Est. expenses: insurance = 500
maintenance = 1000
utilities = 1000
total expenses = $2500/year
Net Operating Income (NOI) = $15,600 - $2,500 = $13,100
Capitalization Rate: interest rate = 9%
historical risk rate = 4% (owner occupied res.)
amortization rate = 5% (est. 20-year bldg. life)
taxes — 1%
Cap rate = 19%
Calculated assessed value under Mills Act using "Capitalization of Income" approach:
$13,100 NOI/.19 = . $68v947 (formula set by State code)
less homeowner's exemption - 7.00
Assessed value = $61,947
Estimated taxes = $61,947 X .01116 (SLO City tax rate .= 1.116%)
$691
Estimated Tax Savings under Mills Act = $3,594 - $691 = $2,903/year
Historic Preservation Tax Program
Page 2
2. YYY Buchon Street: 1975 base value for assessment
1994-95 assessed value = $59,026
1994/95 taxes = $658
Estimated assessed value under Mills Act:
This property is similar to example 1 and has the same income earning potential. Using the
same estimated gross income, expenses, NOI, and CAP rate will result in the same estimated
value of$61,947. This is higher than the current assessed value and no immediate tax benefit
would be gained by the Mills Act.
Commercial Property:
3. XXX Higuena Street: 2-story masonry building, 11,218 SF (1994195 base value)
1994/95 assessed value = $1,050,000
1994/95 est. taxes = $11,720
Estimated assessed value under the Mills Act:
estimated gross income = $128,000
estimated expenses $ 19.000
NOI = $109,000
CAP rate for Mills Act:
interest rate = 9%
historical risk rate = 2% (set by State code)
amortization rate = 5% (est. 20-year life)
taxes = 1%
CAP rate = 17%
assessed value:
$109,000 NOI/.17 = $641,176
Estimated taxes under Mills Act = $641,176 X .01116 = $7,156
Estimated tax savings = $11,720 - $7,157 = $4,563/year
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COUNTY GOVERNMENT CENTER.RM.370■SAN LUIS OBISPO,CALIFORNIA 93408■(805)781-5011
April 17, 1995
Mayor Allen Settle OFFICE of THE
San Luis Obispo City Council COUNTY ADMINISTRATOR
990 Palm Street
San Luis Obispo, California 93401
Re: Historic Preservation Tax Initiative Program
Dear Mayor Settle and Members of the Council:
On May 2, 1995 your Council will be considering a proposal to create a Historic
Preservation Tax Initiative Program which is authorized by State Code enacted in 1977.
Your consideration of program impacts on County operations through reduced tax revenue
and workload increase has been appreciated. County Assessor Dick Frank has corresponded
with you regarding anticipated impacts on the County; most recently on April 6, 1995. I
share the sentiment of Mr. Frank's correspondence. While your staff and advisory committee
can predict potential program value in exchange for cost, we (County staff) can't.
The proposed program would result in a certain loss of tax revenue while generating other
benefits of little or no certainty. Additionally, this program would create costly processes
for determining eligibility, appraisals, contract administration, and property inspections to
name a few. Much of these costs would be borne by the County. Only a small number of
San Luis Obispo City residents would receive the direct benefit of this added bureaucracy.
If you peruse the Government Code sections pertaining to Historical Property you will see
how complex the program can become. It was probably this complexity which led to a later
amendment to the Code allowing for a Contract fee to cover reasonable costs of Program
administration (Section 50281.1). Should your Council decide to develop a Historic Property
Tax Incentive Program, please consider a fee to reimburse County costs related to the
Program at the same time.
In closing, please accept my compliments to you, your Council, and your staff for carefully
considering the potential impacts of this proposed program. Programs such as this received
less scrutiny in 1977 when government revenues were more plentiful. New solutions have
emerged since then which I hope you will uncover. Perhaps you'll invent solutions of your
own. In any event, I trust you'll make the right decision which best serves your community.
Since ,
lee
ROBERT E. HENDRIX
County Administrator
• r
Office of Dick Frank, County Assessor
COUNTY GOVERNMENT CENTER, ROOM 100, SAN LUIS OBISPO, dA 93408 (805)781-5643
44
�4 > > s
April 61 199511# oPo
Mayor Allen Settle
990 Palm Street
.San Luis Obispo, CA 93401 G
RECE 11/ED
RE: Historic Preservation Tax Initiative Program APR 10 1995
Cm oe sao,CA
Dear Mayor Settle/Members of the Council:
I regret the delay in formally providing financial data and items for discussion concerning your .
proposed Historic Preservation Tax Incentive Program, commonly known as the Mills Act.
Unfortunately, the substantial loss of property from recent floods, and the subsequent
reassessment of those properties, has become priority over all other matters.
Although we have not had time to perfect our statistics by studying all properties within your
proposed project, I believe by use of your own staffs presentation, modified to use correct tax
rates and property tax distribution, you will be able to ascertain the probable/possible impact on
other governmental agencies as well as the feasibility of the program itself.
Using your staff's analysis, dated March 22, 1995, the County Auditor has estimated the loss
calculations more correctly to represent the fiscal impact of this program.
Total parcels primary group 160
Total 1994/95 gross assessed value $54,8079482
Corrected tax rate .011162
Corrected total property taxes in project $611,761, say $612,000
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April 61 1995 +.
Page Four '
Your staff estimated losses at the 33% and 50% ratios. The Assessor's staff used three actual
examples of various types of properties. Using the three examples from Assessor's staff(see City
staff report), there were property tax reductions of(1) $2,903, (2) 0, (3) $4,563 for a total loss
of$7,466 or an average of$2,488 per parcel; say $2,500.
$2,500 X 160 PARCELS = $400,000 TOTAL POTENTIAL TAX LOSS
Based on a potential loss of$400,000 each agency would have losses of over twice the amount
of loss indicated in the 33% loss column.
From the above calculations, under a"worst case scenario" where all properties within the project
participate,property tax losses range from$180,865 at 33%to$274,037 at 50 %and, based upon
three actual examples, total property tax loss could run to $400,000. We believe the loss based
on actual examples is probably closest to the truth.
Please keep in mind any of the tax loss estimates are for a single year and do not include 11%
override for bonded indebtedness. The loss continues for the life of the contract and will actually
be 11% per year greater than shown in the examples.
The Assessor agrees with your staff that any of these "worst case scenarios" will probably not
happen under your Council's current plans to admit only 160 properties; however, if future
councils decide to admit the secondary grouping of 344 parcels, or make this a citywide/all
property program, the impact would far exceed any of the above "worst case scenarios".
MINIMUM TAX LOSS:
For further consideration by your Council, let's assume that your staff report is correct and that
the participation rate will be limited to only 100/6 to 15% of the current properties designated for
this program. THAT WOULD MEAN THAT THE CITY IS CREATING A SPECIAL TAX
RELIEF PROGRAM FOR ONLY 16 TO 24 PROPERTIES.
We believe that regardless of the number of properties participating, the Assessor's actual
example approach will serve as the most accurate estimate of property tax loss.
16 properties at $2,500 = $40,000 Total tax loss all agencies *
24 properties at $2,500 = $60,000 Total tax loss all agencies *
(* Does not include 11% loss for bonded indebtedness)
The tax loss to all agencies over a 10 year period will exceed $400,000 to $600,000.
April 6, 1995
Page Five
COUNTY COSTS: .
The Assessor's Office will be required to reappraise each participating property on an annual
basis. Initial costs to develop a separate program will approximate $5,000. Annual market rent
studies will approximate $2,500. Each original set-up and appraisal per parcel is estimated at
$180, and the annual revision is estimated at a cost of approximately $60 per parcel.
For 16 parcels, the total initial cost is estimated at $11,400 with an annual maintenance cost of
$3,400 to $3,500.
For 24 parcels, the total initial cost is estimated at $12,800 with an annual maintenance cost of
$3,900 to $4,000.
No estimate has been made of the additional time required by Assessor's staff to answer public
inquires or for the additional costs applied to properties that go through the assessment appeal
process.
ADDITIONAL CONSIDERATIONS:
Besides the financial impact and the costs associated with developing a program which may be
for a very small/limited number of owners, I believe your Council should give consideration to
several other questions.
1. Based on our experience with similar programs, we believe the cost to the City for legal
counsel (contracts), inspectors, providing information to the public, and presentation of
each contract to the Council will be significant; at least several hundred dollars to initiate
a contract and some type of on-going expenses to maintain the contracts, program, etc.
2. The City previously had a funded program to be used directly for maintenance. We
understand this program was eliminated as a budget reduction based on non-necessity.
3. 'The City already has the planning tools to ensure that properties of historical significance
are not allowed to be demolished, etc.
4. What restrictions can be enacted to prevent other properties from petitioning future
councils for admission into the program? Based upon your attorney's statements during
the last time this was considered, all properties within the City could be eligible for
admission to the program.
1
April 6, 1995
Page Six '
5. What assurances does the city have that the tax savings will be used to maintain the
property? If there are no assurances, will this simply become a tax benefit for a few
property owners with the tax loss being made up by all other tax payers?
6. There were indications that each contract would be specialized. If each contract is
specialized, this.will be an expensive proposition and will also increase the amount of
time required by Assessor's staff. We suggest that, if you adopt this program, the
contract be standardized.
7. Once a contract has been signed, can that contract be modified? If so,what modifications
would be allowed?
8. The City should consider an inspection program to ensure that those properties receiving
the tax benefit are, in fact, being maintained in accordance with the ideals of this
program. Has the City considered the cost of inspecting these properties and perhaps
what will happen if the properties are not maintained?
9. Property owners entering the program must be.aware that severe penalties are applied if
they attempt to remove the property prior to expiration of the contract. These penalties
are paid directly to the State of California and do not benefit any local authority. There
may be circumstances in which a property owner finds it economically necessary to cancel
the contract,thus encountering the severe penalties. These penalties could exceed any tax
savings made by the property owner.
SUGGESTED ALTERNATIVES:
Instead of adopting the Mills Act, the City could:
A. Initiate a program whereby (based on an annual inspection) a property owner, who
demonstrates proper maintenance of their historic property, could request reimbursement
of the City's share of the property tax bill.
B. Re-establish the pool of funds available to assist property owners with the costs of
maintenance. Accept applications up to a set amount, say $500.00 annually, providing
the owner show where the funds were spent.
C. Invite the Historical Society to hold an annual event (Barbecue, open houses, etc.) with
the proceeds going towards the maintenance of these properties. Perhaps the City could
match the funds up to a set amount.
April 6, 1995
Page Seven
CONCLUSION:
The argument is made that this tax reduction incentive will ensure that properties are properly
maintained, thus increasing the value of surrounding properties and increasing the property tax
base. In my 35 plus years as a real estate appraiser/investor, I do not believe that argument has
.merit. Pride of ownership is not enhanced by tax savings, but by personal pride and the desire
to maintain and improve an investment. This argument also fails to consider that neighboring
properties, not in the program, can detract from general economic value by their design, use, or
maintenance.
If the Historic Property Tax Initiative Program is a tremendous success with the majority of
properties entering the program, the tax loss to other agencies, and the expense. to-the City and
the County for maintaining the restricted value, is significant
If the program is as limited as your staff indicates,then the question should be, ARE THE TAX
BENEFITS TO A FEW WORTH THE TAX LOSS AND THE COSTS OF
IMPLEMENTATION?
Aren't there better ways to achieve the same results?
The City does not appreciate unfunded mandates, and the County Assessor agrees with that
sentiment If your Council does direct your staff to proceed implementing the Mills Act, the
County Assessor respectfully requests a method be established to reimburse the County for all
expenses.
Sincerely,
DICK Re
County Assessor
c: David Romero, Vice-Mayor, City of San Luis Obispo
Dodie Williams, Member, San Luis Obispo City Council
Bill Roalman, Member, San Luis Obispo City Council
Kathy Smith, Member, San Luis Obispo City Council
Robert Hendrix, Administrator, San Luis Obispo County
Rory Livingston, Assistant Superintendent, San Luis Coastal Unified School District
DF:dvm
I, TING AGENDA
DATES-2-9S ITEM #=
April 27, 1995 COUNGL CDD DIR
❑ FIN DIR
CAO 13 FIRE CHIEF
Mayor Settle and City Council Members EY ❑ PW DIR
City of San Luis Obispo IV CUERKrORIG ❑ POUCE CHF
990 Palm Street ❑ MW TEAM ❑ REC DIR
San Luis Obispo, CA ❑�/ FILE ❑ UTILDIR
J• Q ❑ PERS DIR
SUBJECT: Historic Preservation Tax Incentive Program
Dear Mayor Settle and Members of the City Council:
My wife and I own and live in a house that would be eligible for the proposed Historic Preservation Tax
Incentive Program. This letter is undoubtedly self-serving, but we want to provide the Council with a
personal perspective from one family that stands to benefit from the proposed Program.
We know times are tough all over, but since we bought the Fitzpatrick house in 1993 (our first house: a
$200,000, 2-bedroom fixer-upper with great curb appeal), we've watched our$1,000 monthly adjustable
rate mortgage increase by nearly fifty percent to $1,500, while at the same time our expected total family
earning potential has decreased because of personnel cutbacks with the State. Also, we now have child
care expenses that we did not have before. What this means is that.we have not been able to carry out all
of the home improvement plans we had when we bought the home, including seismic retrofit, removal of
architectural inconsistencies, and landscape construction. _
We've calculated that with adoption of tite Program, our property taxes could be reduced by about$1,500
per year. We would be happy to provide assurance to the City that any money saved through the
Program would be spent on home improvements that would preserve the historic integrity of the
property. Your positive action on this item could help our family maintain and improve the safety and
appearance of one of the City's oldesfwooden residences.
Thank you in advance for your attention on this subject. If we can answer any questions about this letter,
please feel free to call us at 542-0478.
Sincerely,
�S LcUd/f'L-
Randy& Shayne LaVack
670 Islay
San Luis Obispo, CA 93401
RECEIVED
cc: Jeff Hook , , A 2 7 199) RECEIVED
'ANCITM�r4poon CA APR 2 7 1995
CIN CLERK
SAN LUIS OBIB°^ C'`'