MJW Investments

Finance: L.A. Project Looks to Underused Funding to Provide Workforce Housing Santee Village gives condominium buyers breaks on property taxes

By Keeley Webster

It took two years, but MJW Investments found a way to offer people purchasing condominiums in its mixed-use Santee Village project located in downtown Los Angeles a break on their tax bills. “We thought it would save them 50 percent on their tax bill, but in this case they have saved two thirds,” said Mark Weinstein, president and chief executive officer of MJW Investments, who was one of the few owners to go through the rigors of implementing the Mills Act to make his units more affordable.

Santee Village, which occupies nine former garment buildings, qualifies for property tax breaks given by the local government under the rarely used Mills Act. These reductions are passed on to the residents, making the historic property more appealing to buyers in the increasingly competitive condominium sales environment.

The tax abatement will apply to the Santee, Eckardt and Cornell buildings, all under construction.

These final three buildings in the seven-building Santee Village project, which includes 445 condominiums and 100,000 square feet of retail, are expected to be completed by summer 2007.

The first three buildings in the project – the Bailey Hat, the Connell and the Brownstein-Louis buildings — were constructed as apartments with a condominium map. Those properties were sold to Dallas-basad LNB Advisors a year ago for $44.7 million.

Although individual property owners as well as income buyers can use the tax abatement, MJW appears to be the first to use the Mills Act to offer tax relief to its buyers.

“It’s the first time I’ve heard it used this way,” said Lewis Feldman, chair of Boston-based law firm Goodwin Procter’s Los Angeles office. “I know it’s made available in other areas, but I personally have not done a deal.”

The Mills Act, introduced by former San Diego state Sen. James Mills in 1972 and enacted by the state in 1976, grants local governments the ability to strike agreements with owners of historic structures for tax abatement, Feldman said.

The municipalities provide a reduction in property taxes based on a formula in exchange for preservation of the historic nature of the property. For an example of how the tax relief works, take a $250,000 home and assume a tax of 1 percent, which would equal $2500 a year. If this tax were recalculated under the Mills Act, the home could be valued at $70,000, providing a tax savings of $1,800 a year to the home buyer, Feldman said.

In order to qualify for benefits under the M ills Act, a building has to be designated either a landmark or historic structure or be located in a historic district.

But in the quick-flip environment, the required 10-year agreement with the city to keep the property historic has deterred many from using the Mills Act, Feldman said. It prevents some owners from being able to establish a viable exit strategy.

If the owner wants to sell before the 10 years is up and either the city or the new buyer doesn’t want to keep it historic, the seller would have to pay a 12 percent to 13 percent surcharge to get out of the contract.

Although Weinstein does intend to sell out of the condominiums and retail portion completely before the 10 years expire, the company orchestrated the tax breaks so each of the unit owners accepts the burden of the time requirement.

Weinstein said he had a team, including his director of development, in-house counsel and chief financial officer, working with the city’s Department of Real Estate for two years to be able to offer the tax abatement to his home buyers.

“My people were obsessed with getting it done,” he said. “The county tax assessor had to make an individual tax bill for each unit. The assessor was great in working with us.”

Weinstein went after the Mills Act designation to make his units more affordable to the area’s workforce.

“We have also reached out informally to firemen, teachers and police to let them know about it,” he said. “And we made the units of a size that we could sell more of them in the $300,000 to $500,000 range.”

The units average 750 square feet to 800 square feet with an average price of $375,000 to $400,000. The project also includes five 1,600-square-foot penthouses that will sell for $1 million to $1.4 million.

With so many $1 million condominiums planned for downtown Los Angeles, Weinstein expects to have an advantage to attract the narrowing buyer pool.

“It’s is definitely a good buffer to incur a quick sell-out,” he said.

Weinstein expects absorption to take six to eight months from the date that marketing begins in October.

The project has another unique aspect: The 23,500 square feet of retail space in the remaining three buildings are retail condominiums. Weinstein has sold 5,300 square feet and said there has been a lot of interest, because retailers don’t typically have the opportunity to acquire space that small.