The Mills Act was named after James Mills, a former state senator from San Diego. It was patterned after the California Land Conservation Act of 1965, better known as the Williamson Act. After World War II, as California’s cities grew, the property taxes on farmland surrounding the cities skyrocketed, forcing farmers to sell their land to pay the taxes. The Williamson Act provided that if a farmer signed an agreement to continue working his land for the next ten years, the property tax would be based on the income the farm generated.
During the 1970s, when sky-high property taxes were forcing people to sell their houses, Mills worked to come up with a similar state law to protect historic homes.
“This was before Proposition 13, which radically limited property taxes,” Mills says in a recent interview. “So at that time, if somebody was living in a historic house or a house that should be preserved, and it was in an area where the property values were increasing — let’s say, close to a downtown area would be a typical area — the property values would go so high that people couldn’t afford to live in the house anymore. They would have to sell it.
“The house would be sold and torn down, and something would be built on the site that would produce enough income to pay the property tax. So that’s where the bill came from originally. It said if people were willing to sign agreements that said they were willing to not alter the exterior of the property for ten years, the property tax, the assessed valuation, would be based on the value of the existing structure as an income-producing property. So if a house was in an area where the property values were going through the roof, the house would still be taxed on the basis of its value as an investment to produce the rent that could reasonably be expected on the house.”
The agreement is a ten-year contract, automatically renewed each year indefinitely. In the city of San Diego, the contract is granted by the Historical Resources Board, whose 11 members are appointed by the mayor and confirmed by the city council. Both the property owner and the City have the right to cancel the contract, but the property is locked into the contract for ten years following cancellation, and the building’s exterior cannot be altered during that time. According to Gary Kendrick of the Tax Assessor’s Office, if the City were to cancel a contract this year, the property tax benefit would be phased out over the next ten years, at which time the house would be assessed at the Prop 13 value. Because the Mills Act agreement stays with the house and not the owner, it’s one way homeowners can protect their home from being torn down after they die.
The main responsibilities of a homeowner with a Mills Act contract are to preserve the building, following the Secretary of the Interior’s Standards for the Treatment of Historic Properties, created by the U.S. Department of the Interior’s National Park Service.
The standards focus on four categories: preservation, rehabilitation, restoration, and reconstruction. The standards apply to the exterior only. Owners can upgrade the interior — remodel the kitchen or bathroom, install modern lighting — to make their home function for their family’s needs.
“Nobody wants to live in a museum,” Louise Torio says. “It’s all about living in a historic house with today’s needs.”
As for How the Tax Break Is Calculated
Kendrick says the Assessor’s Office bases its assessment of a Mills Act house on rents charged for houses in the surrounding area that are of similar size and have comparable attributes.
“It actually is pretty complicated,” Kendrick says, “and we let the computer do it for us. What it does is it values [the property] as if it were an income property. It comes up with an artificially low value. As rents go up, the Mills Act value goes up. If rents go down, the Mills Act value goes down.”
As a simple example, Kendrick says that if a home with a Prop 13 assessed value of $327,000 could be rented for $1500 a month, the reassessed value using the Mills Act formula might be $137,000. The homeowner’s property taxes would drop from $3270 to $1370, saving 58 percent a year.
In return for receiving the tax break, Kendrick says, the homeowner gives up a number of property rights.
“They’re giving up the right to tear down that house,” he says. “You may have to go to the particular jurisdiction for special permission whenever you’re going to make changes on the property. What’s in the contract varies from jurisdiction to jurisdiction. Some cities are stricter than others on what they allow you to do with a Mills Act property.”
San Diego adopted the Mills Act in 1995. The County, Chula Vista, Coronado, Encinitas, Escondido, La Mesa, National City, Oceanside, and San Marcos also issue Mills Act contracts to property owners.
“And if a person that has been granted the Mills Act breaks the contract,” Kendrick says, “there’s a penalty of 12.5 percent of the market value of the property — not the Prop 13 value, not the Mills Act value, but the market value of the property. So we have not had anyone break their contract in the county of San Diego.”
For example, if the owner of the $327,000 home broke the Mills Act contract and the home would fetch $600,000 if sold today, the owner would be fined $75,000.
To be eligible for the Mills Act program in San Diego, a house must first be designated by the Historical Resources Board as historically significant. Currently, the City requires that the property meet at least one of five criteria:
• The property exemplifies a historical, cultural, or engineering development.
• The property is identified with a significant person or event.
• The property embodies distinctive characteristics of construction or craftsmanship.
• The property represents the work of a master builder, designer, or architect.