Lofty preservation plan: developers using Mills Act to provide tax breaks for condo buyers.

WHEN Mark Weinstein faced the prospect of developing the largest adaptive reuse project in Los Angeles, he dug into a piece of state legislation and found a new way to use it to save money for individual condo buyers.

But it wasn't easy.

"It was definitely an arduous process," Weinstein said of getting the Mills Act Program approved so that individual homeowners at his Santee Village project could see their property taxes cut by 50 percent to 70 percent. "My team was relentless in getting it done."

The Mills Act is an economic incentive program for the preservation and restoration of historic buildings. The state legislation, enacted in 1972, is used by developers of commercial buildings or those who restore historic homes so they can enjoy property tax breaks in exchange for saving old buildings.

But the legislation was significantly reinterpreted by Weinstein, whose company, MJW Investments, redeveloped old downtown buildings into the Santee Village lofts project, and arranged to have the tax savings passed on to the buyers, who can save thousands of dollars a year.

"We are thrilled that they are using the Mills Act in this very creative and innovative way for condo sales," said Linda Dishman, executive director of the Los Angeles Conservancy. "This is the first time it has been done in the city, and we hope it's a new way of doing condo sales."

In a cooling downtown condo and loft market, the program could become a tool to move units.

"I'm sure eventually other people will do it too," said Weinstein. "We are fortunate in that we have done it already."

Seven buildings

Santee Village spans a block of Los Angeles Street in downtown's fashion district and features a combination of 445 for-sale and rental units. The project, which is a joint venture between MJW of Los Angeles and New York-based Phoenix Realty Group LLC, will include a total of four for-sale buildings and three rental buildings upon completion.

The three rental buildings opened in May 2004, and the first for-sale building, The Textile, was opened in December 2005. The Textile, a 12-story, 64-loft building from 1928, is almost fully occupied and residents there are already experiencing the benefits of the Mills Act.

The three remaining for-sale loft buildings--featuring 216 units in all--will open in July or August 2007 and residents in those buildings will receive Mills Act benefits, Weinstein said. Upon completion of the three buildings, the project will include a total of about 70,000 square feet of retail space.

John Noguez, real estate appraiser specialist for the Los Angeles County Assessor's Office said that though the Mills Act, which was written by former San Diego state Senator James Mills, is a fairly well-known law, he does not know why developers haven't used it for the benefit of individual homeowners.

"Even until recently, large developers weren't using it (for income producing property)," said Noguez, who has worked at the assessor's office for 22 years. "It was more focused on homeowners who sought the Mills Act for their own homes."

Since the Mills Act was designed to encourage the preservation of historic buildings, to be considered for the program, buildings must qualify as historic on a list like the National Register of Historic Places. All of the Santee Village buildings were constructed between 1912 and the late 1920s and were the first multi-story buildings in the area that housed textile manufacturing facilities.

Under the program, the local government and a property owner enter into an agreement and property tax is reduced using a valuation approach that looks at comparable rents for nearby similar properties. Because county assessors review properties annually, the property tax at a Mills Act property can increase slightly each year, Noguez said.

Under the program, a Santee Village loft owner wh9 purchases a unit for $525,000 would pay about $2,303 a year in property tax. Without the program, the loft owner would pay about $6,875.

Noguez speculated that no city had previously allowed the legislation to be used in this way because many waited to see how it would work elsewhere.

Others to follow

At least two other downtown loft projects are expected to use the Mills Act for their loft owners. The Rowan Lofts and the Tomahawk Building Lofts are both projects in the process of getting Mills Act approval, Noguez said.

Weinstein said that prior to the Santee Village development he has used the Mills Act to reap savings on other buildings, and when he discovered the possibility of using the act to pass savings along to individual homeowners he began a process that took a couple of years to complete.

Planning for Santee Village began in 2001, and the buildings were designated as historic the same year. The MJW project was initially conceived as a rental development, but a shift in the condo market made for-sale units desirable.

Jay Stark, managing director of the Phoenix Realty Group, said that to get the Mills Act tax program approved for Santee Village homeowners, MJW had to do extensive research on the legislation and took "five or six months trying to convince the city of Los Angeles you could do it this way."

"MJW was persistent enough and structured it in a way that buyers at Santee can take advantage of the Mills Act," Stark said. "It's a great adaptation of taking a good tool and making it better."

Despite the difficulty associated with using the Mills Act Tax program for the project, the developers say the tax incentive will be an important tool for attracting buyers to downtown in today's market.

Stark said that the tax incentives can be used as an effective marketing tool in selling units.

"It's just another tool in the tool box and a way to differentiate yourself," Stark said. "In real estate we are in a transitioning market and buyers are being really picky. If you can offer them more value then they may go with you and not the next guy. This is one tool to just build a better mouse trap."

By DANIEL MILLER

Staff Reporter