The headline item of the Planning Commission this evening is certainly the Planning Commission’s latest stab at guttin- I mean, lovingly updating the retail cannabis ordinance, and I’m sure a lot of time will be spent on that item. If you’re into that, you’re in luck: not only will the Planning Commission discuss it for hours, it will come back twice at the City Council level, too. But you won’t find much discussion about it here.

So let’s talk about something far more exciting: historic preservation!

…

Yes, I can hear the crickets chirping, too.

But seriously, there are something interesting things to highlight about the undercard bout happening this evening.

Before we get started I want to make one thing clear: I don’t really have any particular interest in whether 208 Magnolia Street, a.k.a. the “Leroy Anderson House”, is placed on our historic register or not, though I do live a couple of blocks away. I’m sure the applicant is a lovely nice person and I honestly have no idea if Mr. Anderson was particularly influential in the City’s history, so I’ll just take the applicant’s word for it and assume he was.

What I want to talk about instead is that, in my opinion, there should be a local presumption against designating properties as “historic”. First, historic designations that invoke the California Mills Act are entitled to significant reductions in property tax, which can hurt city finances. Second, Proposition 13 itself already heavily incentivizes propertyowners to keep homes the way they are — at great public cost — such that official historic designations often are not necessary to “maintain neighborhood character”. And third, the City’s past practice when it comes to historic preservation, including with respect to the the only other private home to receive such a distinction, isn’t particularly inspiring.

So let’s get started by digging into the numbers.

Costa Mesa derives approximately $54 million of our general fund revenue from property tax, amounting to just under a third of our total estimated revenue from all sources in 2023. Under the Mills Act, the property tax owed by historic properties is determined by the county assessor by a very complicated formula, which we don’t need to belabor here. The bottom line is that the Orange County Assessor estimates that these property tax breaks can range anywhere from 15-60%, making historic designation an incredibly valuable tax asset.

To provide a concrete example, the Leroy Anderson House last sold for $1.9 million in 2021, a valuation which should be netting the City approximately $13,680 in annual property taxes. The Staff Report notes that yearly property tax losses associated with applying a historic designation to the property is likely to be about $2,825 a year, meaning that, in this case, the Mills Act will apply an approximately 20% property tax discount by my estimation. And on top of that, the benefits of the Mills Act contract — an agreement specifying the terms of how the property must be maintained to continue receiving the benefits of the designation — transfers to new owners, granting those new owners the same burdens and benefits of the historic designation.

Now, a 20% property tax discount today on a single property seems insignificant except that, thanks to the way property tax under the Mills Act works, the value of the property used to calculate property tax will be significantly below market value and will likely never reset to market value even if the property is sold. A quick check of Redfin confirms that the property is valued today at close to $2.75 million, a 30% appreciation since 2021. If the house was sold today and reassessed — which it would be if it did not have a historic designation — the City could expect to net an estimated property tax of about $19,800 a year. But if the Planning Commission did apply a historic designation to the Leroy Anderson House, the City wouldn’t just be losing out on just $2,825 annually; it would effectively be losing out on at least $8,945 a year compared to the property tax it would have received if the property were reassessed and taxed normally in the future*, thanks to the compound effects of the Mills Act tax breaks, the reassessment mechanics of Proposition 13, and our present rapid inflation in home prices. And, so long as home prices continue to rise, those effective losses will only get bigger and bigger over time.

And it gets worse: Mills Act contracts are basically impossible to cancel. Not only do they automatically renew on a yearly basis after the initial 10-year term expires, they can only be canceled by the City for cause (such as the propertyowner not sufficiently maintaining the property or making substantial alterations). And even if the City were to do so, absent something drastic like condemning the property using eminent domain, the propertyowner will be assessed a penalty equal to 12.5% of the market value of the property at the time of cancellation. In other words, cancellation could place a financially ruinous burden on the propertyowner, which no city in its right mind would want to impose without egregious cause to do so.

So it’s pretty brilliant to try and get your home placed on a local historic register, especially after it has been substantially remodeled (I’m guessing the stainless steel appliances and Carerra marble countertops boasted about in the 2021 Redfin listing for the Leroy Anderson House aren’t original to the home, and I’m certain the oversized ADU adding a large family room, a fourth bedroom and a garage is not) and you recently bought it at a premium that is getting hammered by the property reassessment mechanics of Proposition 13. You get to have your cake — your beautiful, modern, remodeled home — and eat it, too, enjoying a perpetual 20% tax break. You can even sell that tax break to future owners, further pumping up your future sale price.

At this point, you’re probably thinking: but who cares? It’s only one house, right? The issue is that this scenario — historical architecture, loose tie to a prominent Costa Mesan, modernizing renovations and a recent sale at remarkably high prices — undoubtedly applies to many, many homes in Eastside Costa Mesa, all of which would be happy to also get a similar property tax deduction. So it seems like a terrible idea for the City to permit these kinds of designations without evidence of substantial historical significance. It’s true that $2,825 a year, or even $8,945 a year as I’ve estimated, in property tax losses are drops in the bucket compared to the City’s overall revenue. But multiplied across ten, twenty, or fifty such comparable homes, and with losses compounded by property value appreciation, it could add up to a massive hole. In fact, Mills Act abuse has led some cities to impose moratoriums on historical designations precisely because the cumulative property tax losses have been much larger than anticipated.

Besides, the City doesn’t even need to spend this kind of money to ensure that the overall neighborhood character is preserved. Proposition 13 already does this better than the City ever could.

Given that this entry is already getting long in the tooth, I’m going to assume you’re already familiar with Proposition 13. The point I want to make is that, when the State of California was called on to defend Proposition 13 in the Supreme Court, it declared its primary interest in the policy was its “interest in local neighborhood preservation, continuity, and stability.” And not only has Proposition 13 furthered this interest, it’s probably worked too well. Thanks to Proposition 13’s favorable treatment of long term residents and its sharp penalties for reassessment due to redevelopment or sale, Californian homeowners stay in their homes longer than homeowners in other states, and they are far more likely to pursue internal renovations that do not substantially change the structure or appearance of their homes. So Eastside has remained the Eastside we know and love not due to City historic preservation policy, but in large part because of State tax policy. So I’m not sure we need to do a lot more general preservation than Proposition 13 — at great cost to the City’s coffers, mind you — already provides.

Finally, I’m not particularly convinced the City is all that committed to using its historical properties to educate the public about the City’s history or civic traditions anyway. Certain exceptions notwithstanding, I’m not familiar with many plaques or public monuments of any kind that highlight the City’s history. Yes, if you look closely, the sidewalks on Newport Boulevard contain plaques commemorating the businesses that used to operate there. But, for example, Harper Park contains no information, plaque or signage to indicate that it was named after George Harper, the founder of Harper, CA, which was the forerunner town to Costa Mesa. When we miss little layups — like failing to spend a penny to alert visitors of the significance of a park named after the literal founder of the town — it’s hard to get excited about the City’s actual expressed interest in educating the public about lesser figures who once lived in our private homes.

But maybe that’s just because the powers-that-be seem to love to kick around Harper Park. So let’s look at the only other private home in Costa Mesa to win a Mills Act contract so far, the so-called Huscroft House on Bernard Street. Admittedly the Huscroft House has a very colorful history, one that involved it housing a city museum for a time, so I’m not going to quibble with its designation as a historic place. But I do wonder what that historic designation has done for the City other than to further ensure the Huscroft House won’t be redeveloped or substantially altered. For example, the Costa Mesa Historical Society doesn’t list the Huscroft House in its guide to local building history, and I can’t find any information or interior photos of the property online. And if I there is a plaque commemorating the Huscroft House’s role in Costa Mesa history on or near the property, I had trouble finding it. So how much public good are our historic designations doing?

Worse still, a quick Google search reveals that the Huscroft House’s address is now listed as the main address of a sober living home. I mean, I think those recovering from addictions are as entitled to live in whatever lovely accommodations they can afford just like the rest of us. But I don’t think “sober home operator” was top of mind as the intended recipient of such property tax largess when the historical designation was applied to Huscroft House back in 2008.

In sum, I have no objections to preserving Costa Mesa’s history for future generations, and I will happily admit doing so will require protecting particularly significant properties from redevelopment. I also agree with the idea behind the Mills Act that preserving such properties is neither cheap nor easy, and that likely the only way you’ll have any properties preserved is to compensate propertyowners for that burden. But that doesn’t mean we should jump to declare every property “historic”. In my view, the long-term public costs and modest public benefits mean that such designation should be granted only in the most deserving of circumstances, and only to a handful of privately owned properties. A few here and there is fine. But at scale, we should beware mission creep beyond historic preservation.

* Here’s how I calculated that number: $13,680 (estimated annual property tax without Mills Act designation) minus $2,825 (Staff annual value estimate of Mills Act deduction) equals $10,855/year (estimated annual property tax with Mills Act designation). If the home was sold today for $2,750,000 without the Mills Act designation in place, the estimated annual property tax would be $19,100/year. However, thanks to the Mills Act benefits transferring to the new owner, the actual annual property tax if the historic designation had been applied would still be $10,855/year. $19,100/year minus $10,855/year equals $8,945/year in property taxes foregone. Obviously this number will go up (if property values continue to rise) or go down (if they begin to fall) depending on market conditions.