Item Coversheet
CITY OF CARMEL-BY-THE-SEA
CITY COUNCIL
Staff Report 

April  4, 2023
ORDERS OF BUSINESS

TO:

Honorable Mayor and City Council Members 
SUBMITTED BY:

Marnie R. Waffle, AICP, Principal Planner
APPROVED BY: 

Chip Rerig, City Administrator
SUBJECT:Mills Act Policy Discussion 
RECOMMENDATION:
Receive the report and provide direction to staff.
BACKGROUND/SUMMARY:

Executive Summary:

 

The Council discussed the City’s current Mills Act Policy on October 4, 2022 and requested additional information from staff before determining whether or not to pursue potential policy revisions. This report provides an overview of the existing Policy, a discussion of possible modifications, and implementation details from other jurisdictions across the State. Staff is seeking guidance from the Council on Policy modifications, if desired, and would return to Council at a later date with a revised Policy for consideration.


Background/Summary:


The Mills Act was adopted by the State of California in 1972. The City of Carmel-by-the-Sea adopted a Mills Act program as part of the Local Coastal Program in 2004. 


The Mills Act program is an agreement between the City and a property owner of a historic building whereby the property owner benefits from a reduction in property taxes while assuring the City that the historic resource is rehabilitated, maintained, and preserved. Properties must be included on both the Carmel Historic Inventory and the Carmel Register of Historic Resources prior to being eligible for a Mills Act contract.


To be listed on the Carmel Historic Inventory, an assessment of historical significance must be conducted to determine whether the property is eligible. Eligible properties are those which represent at least one theme in the City’s Historic Context Statement; retain substantial integrity; are at least 50 years of age; are associated with significant events or people; embody distinctive characteristics; or yield information important to prehistory or local, state, or national history.


To be listed on the Carmel Register, a property owner must submit a request in writing and their request must be approved by the Historic Resources Board. Listing on the Register provides benefits such as waiver of on-site parking requirements; preservation of existing non-conformities; Federal rehabilitation tax credits; building permit fee reduction of 25%; and, participation in the Mills Act program.


In addition to being listed on the Carmel Historic Inventory and the Carmel Register, a property must be preserved in its historic size, form and design without significant alterations or additions. More specifically, any future addition or alteration must comply with the Secretary’s Standards for the Treatment of Historic Properties. Alterations cannot alter, damage, or diminish any primary elevation or character-defining feature; additions cannot increase the floor area by more than 15 percent beyond the amount established in the documented original or historic design; and, additions cannot result in a second-story addition to a single-story historic resource.


Mills Act Policy

The City’s current policy regarding Mills Act contracts allows for up to fifteen new contracts to be approved over a three-calendar year period (Attachment 1, Resolution 2016-068). The policy was reviewed by the City Council on March 3, 2020 and no changes were made at that time.  


Over the eleven years between 2011 and 2022, the City has entered into a total of 14 Mills Act Contracts. The two calendar years during which the most Mills Act contracts were approved occurred in 2016 and 2022 when a total of 4 contracts were approved each year. In 2022, the City approved the first Mills Act contract for a commercial property, the Carmel Beach Hotel & Spa (formerly known as the Colonial Terrace Inn). 


On October 4, 2022, the City Council discussed potential amendments to the Mills Act policy. The discussion revealed general Council support for the program, with recognition of the community benefit resulting from the preservation and maintenance of historic properties. However, some council members expressed a desire to reconsider the length of the contract,  limit the number of contracts at any given time, and consider a dollar value cap on the tax break. Additionally, a concern was raised about high revenue-generating commercial properties receiving a 20-year tax reduction. Below is a summary of each of these topics.


Length of Contracts & Notices of Nonrenewal

The Council discussion on length of contracts and Notices of Nonrenewal raised questions of whether or not the contracts should be endless, or if they should have a hard end date before a re-application is needed. 


In 2020, the City Attorney worked with staff to review the contract language to ensure the contract is consistent with State law and our local Mills Act program. On March 3, 2020, the City Council approved the standard contract language (Attachment 2). In accordance with State law, the term of the contract is 10 years. Each year on the anniversary date of the contract, one year is automatically added to the term of the contract. This creates a rolling 10-year contract that automatically renews until such time that either the City or the property owner provides a written notice of non-renewal. Essentially, each January 1st, the 10-year contract restarts.


If the City desires to end a contract, the City must provide the property owner with written notice of non-renewal at least 60 days prior to the annual renewal date. Property owners who desire to end a contract must give written notice to the City at least 90 days prior to the annual renewal date. If a notice of non-renewal is provided, the agreement will expire 9 years from the renewal date of the following January 1st. An example is provided below: 


The City enters into a Mills Act Contract on January 1, 2012. The term of the contract is 10 years. The contract expires on December 31, 2021.  


On the first anniversary date of the contract, January 1, 2013, one year is automatically added to the contract term. The new contract expiration date is December 31, 2022. 


On the second anniversary date of the contract, January 1, 2014, one year is automatically added to the contract term. The new contract expiration date is December 31, 2023.


However, on November 1, 2014, 60 days prior to the third anniversary date of January 1, 2015, the City issues a Notice of Nonrenewal. The contract expiration date is now fixed at December 31, 2023. Additional years are no longer automatically added to the contract term.


To date, the City has not issued any Notices of Nonrenewal, and no property owners have issued Notices of Nonrenewal.  If the City were to issue such notices no later than November 1, 2023, all of the existing Mills Act contracts would expire on December 31, 2032.


The homeowners of the four contracts approved last year, in 2022, would see a property tax benefit for 10 years whereas the homeowner whose contract was approved in 2011 would see a property tax benefit for 20 years. 


If the Council directs staff to issue a Notice of Nonrenewal on all 14 existing contracts, they would expire at the end of 2032 and the City would have zero Mills Act contracts, assuming the City did not enter into any new contracts between 2024 and 2032. 


Staff is seeking direction from the City Council on whether to issue Notices of Nonrenewal and if so, under what circumstances and when.


Potential Policy Restrictions

Following the October 4, 2022 City Council meeting, staff reached out to 73 jurisdictions throughout California to gather data on their Mills Act programs. A total of 40 responses were received. Of those, most did not impose any restrictions on properties seeking a Mills Act contract. Those jurisdictions include: Berkeley; Brea; Campbell; Chico; Chula Vista; City of Monterey; Encinitas; Fontana; Huntington Beach; Los Altos; Monrovia; National City; Oakland; Palm Springs; Placentia; Pomona; San Juan Capistrano; Santa Ana; Santa Monica; Truckee; Ventura; and Ventura County. Some jurisdictions, including but not limited to Pacific Grove, Palo Alto and San Mateo, do not have active Mills Act programs. A minority of respondents reported at least one restriction on either the annual number of contracts permitted; assessed valuation limits; land use limits; or tax revenue loss. A summary of these restrictions are shown in the table below and provided as Attachment 3. 



Staff is seeking direction from the City Council on whether to amend the Mills Act Policy to place limits on the annual number of contracts, assessed valuation, land use type or annual tax revenue loss. 


Other Items of Interest

Application Fees & Inspections: The current application fee for a Mills Act Contract is $3,584. The fee is set at an amount intended to cover staff’s time processing the application. Following approval and recordation of the contract, homeowners are required to obtain design review approval and/or building permits to carry out the improvements in their rehabilitation plans. Additional fees are collected for these applications and includes the associated inspection costs for the work being performed.


Monterey County Tax Assessment Process: Upon approval of a Mills Act contract by the City Council, the contract is signed by all parties and recorded in the Monterey County Assessor’s Office. The County Assessor is tasked with the responsibility of calculating the property taxes in accordance with sections 439-439.4 of the Revenue and Taxation Code which states, in part, that restricted historical properties shall be valued based on a prescribed income capitalization method rather than on sales data (Attachment 4). Staff has reached out to the County Assessor and requested a representative attend the Council meeting to respond to specific questions regarding the assessment of Mills Act contract properties.


FISCAL IMPACT:
The City accepts a diminished tax base from properties with Mills Act Contracts in exchange for assurances that historic resources will be rehabilitated, restored, and maintained.
PRIOR CITY COUNCIL ACTION:

On June 8, 2010, the City Council adopted Resolution 2010-42 approving a limit of three Mills Act Contracts for residential properties within a calendar year and requiring the City Council to evaluate the program again in five years. 


On September 13, 2016, the City Council adopted Resolution 2016-068 limiting the number of Mills Act Contracts to fifteen during any three-calendar-year period and requiring the City Council to evaluate the program after three years.


On March 3, 2020, the City Council reviewed the Mills Act policy and did not make any changes. The Council also reviewed and accepted standard contract language for Mills Act Contracts.


On October 4, 2022, the City Council discussed the Mills Act policy and directed staff to return at a later date with additional information.


ATTACHMENTS:
ATTACHMENTS:
Description
Attachment 1) Resolution 2016-068
Attachment 2) Standard Mills Act Contract
Attachment 3) Mills Act Program Survey
Attachment 4) Mills Act Guidelines for the Assessment of Enforceably Restricted Historical Property