San Francisco Apartment Association
SFAA Magazine Archives

July 2004

Debits & Credits

The Mills Act

by Doug Schultz & Alex Yarmolinsky

The Mills Act (the Act) is state-sponsored legislation, enacted in 1976, granting local governments the ability to directly participate in an historic preservation and economic incentive program. The Act allows owners of qualified historic properties to reduce their property taxes in exchange for restoring and maintaining those buildings.

Under the Act, each city or county in which historic property is located must vote to adopt the Mills Act. Upon doing so, each municipality can choose its own requirements and terms of the contract. The requirements may vary in terms of property inspections, spending requirements for the owners, administrative requirements for the city and other related factors. San Francisco adopted the Act in May 1996.

To qualify for the benefits provided under the Act, the structure must be a “qualified historic building.” The designation can be at the local, state or national level. In San Francisco, qualified historical properties are identified as designated city landmarks pursuant to Article 10 of the San Francisco Planning Code and/or structures individually listed in the National Register of Historic Places. The National Register of Historic Places is the official federal list of buildings, structures, districts, sites or objects significant in American history, architecture, archaeology, engineering and culture. As a general rule, a building must be at least 50 years old and a good example of a particular architectural style or associated with a person or event of local, statewide or national historic importance.

In San Francisco, owners who qualify agree to maintain and preserve their resource in accordance with the standards published by the Secretary of the Interior’s Standards for the Treatment of Historic Properties.

Benefits and Drawbacks of the Mills Act
San Francisco benefits from the Act by creating incentives to improve/restore older properties, which in turn improves overall property values in the neighborhood and maintains historic presence.

Building owners can benefit by significantly reducing their annual property taxes. The tax savings can be substantial for property owners, particularly if the building was purchased recently. In San Francisco, owners can expect a potential 50 percent reduction in property taxes. In addition, since the contract attaches to the property and is transferred to any new owner upon sale, it may increase the property’s value and/or marketability.

In addition, the Mills Act has the effect of freezing the base value of the property, thereby keeping property taxes low even as the property increases in value.

The only drawback would be the maintenance requirements/standards imposed by the city. Therefore, preserving the building must be one of the building owner’s goals. If any unsympathetic improvements were made to the building, the city could potentially penalize the owner and/or revoke the agreement.

Who Qualifies to Participate?
Owners of owner-occupied, single-family residences and income-producing residential and commercial properties that are designated as qualified historic properties may qualify for the Mills Act, depending on the terms set forth by the city or county.

The contract is legally binding to both the owner and the city for a minimum of ten years and is automatically renewed annually, unless either party files a notice of nonrenewal.

The city cannot revoke the agreement, unless the owner is found in violation of the contract. The owner may terminate the contract early; however, upon doing so, the owner will have to repay the tax savings and probably submit a fine (some municipalities impose a fine of 12.5 percent of the pre-Mills Act valuation).

Calculating the New Property Tax
The County Assessor’s Office calculates the tax savings for the Mills Act contracts. The Tax Assessor evaluates the property based on its ability to generate income (referred to as the Income Approach to value), rather than the regular method of assessment known as the Market Approach. Property taxes are recalculated using a formula in the Mills Act and the Revenue and Taxation Code. Property valuation is determined by the income method set out in the Revenue and Tax Code Section 439.

For income-producing property, the income (rents actually received or typical rents received for similar properties having similar uses), less certain expenses, is divided by a capitalization rate to determine the assessed value of the property. For owner-occupied property, the determination of income is based on what a property could reasonably be expected to yield (usually based on comparable rents for similar property in the area).

The Mills Act is an agreement that an owner of a qualified property should not enter into halfheartedly. However, if the owner is committed to the upkeep of the property, the Act can provide a significant tax savings to the owner, while preserving an historic property for the city or county in which it is located in.

San Francisco Mills Act Procedure:

Property owners or designated representatives must submit to the Planning Department a completed Mills Act application packet. The packet should contain the following:

  • Mills Act application form.
  • Proposed restoration or rehabilitation plan.
  • Proposed maintenance plan.
  • Historical property contract between the property owner
    and the City and County of San Francisco.

Once a Mills Act application is received, the matter is referred to the Landmarks Preservation Advisory Board (Landmarks Board) for review and comment and recommendation to the Planning Commission. The Landmarks Board will review and comment on the restoration or rehabilitation plan, the maintenance plan, and may comment on the “value” of the property as an historic resource to determine whether the resource is “worth” the reduction of property taxes.

Following the Landmarks Board’s recommendations, the Planning Commission will hold a public hearing to review the Mills Act application and historical property contract. Upon approval by the Planning Commission, the application will be referred to the Board of Supervisors for its review and approval or disapproval.

The Board of Supervisors shall conduct a public hearing to review the Planning Commission recommendation, information provided by the Assessor’s Office, and any other information the Board requires in order to determine whether it is in the public interest to enter into a Mills Act historical property contract. Upon approval, the Board of Supervisors shall authorize the Director of Planning and the Assessor’s Office to execute the historical property contract.
For more information, visit the Planning Department’s Web site at sfgov.org/planning.

The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. Doug Schultz is a CPA and partner in the tax practice at Burr, Pilger and Mayer. Alex Yarmolinsky is a CPA and a manager in the tax practice at Burr, Pilger and Mayer. Both can be contacted at 415-421-5757 . Copyright © 2004 by San Francisco Apartment Magazine. All Rights Reserved.