When you create a massive tax on the sale of your home, you can expect few buyers..and at a lower sale price. At the same time, developers seeing this, know they should not be building new homes. Los Angeles has created a tax that will quicken the pace of being a DOOM LOOP city.
“And as of April, 2024 the tax has brought in just $215 million over 16 months -– less than a third of the $900 million per year its backers had predicted.
But the actual result of the measure, according to multiple sources, is that ULA has put a damper on all real estate development, resulting in less development of both market-rate and affordable projects. And as of April, 2024 the tax has brought in just $215 million over 16 months -– less than a third of the $900 million per year its backers had predicted.
According to a February, 2023 article in the Real Deal, ULA has dried up multifamily financing in L.A because “The transfer tax makes it difficult to estimate what a property’s value will look like over the next three, five or 10 years — typical hold periods for a multifamily developer and owner. And for construction loans specifically, lenders may not want to convert the loan into a traditional commercial loan when construction is finished, given the uncertainty around how much the asset will be able to sell for once it’s finished.”
When L.A. dies, the obituary should include in the cause of death this tax.
Mansion Tax Fallout: LA Sees Sharp Drop in Housing Production
Angela McGregor, Westside Current, 9/11/24 https://www.westsidecurrent.com/news/mansion-tax-fallout-la-sees-sharp-drop-in-housing-production/article_8552c8c6-6fbf-11ef-a173-37ee037574a7.html?utm_source=westsidecurrent.com&utm_campaign=%2Fnewsletter%2Foptimize%2Fweekly-best-of%2F%3F-dc%3D1726412413&utm_medium=email&utm_content=headline
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LOS ANGELES – The November, 2022 passage of ULA (aka, “United to House L.A.” or the “Mansion Tax”) is perhaps the best evidence of non-profit housing developers’ recently acquired political muscle. SCANPH – the Southern California Association of Non Profit Housing – a membership organization that represents non-profit developers – lobbied hard for the measure.
They promised that ULA would increase the stock of low income housing, and reduce homelessness. It passed with 58% of the vote and went into effect in January of 2023. Roughly 70% of the funds garnered by the transfer tax are earmarked for low income housing; the remainder are mandated to support renter assistance and other homelessness prevention measures.
The only exemption to this new tax is, according to L.A. Housing Department guidelines, “reserved for low income housing developers that are 501c3 non-profits, community land trusts, limited partnerships and limited liability companies having a non-profit or community land trust general partner or managing member with a history of experience in affordable housing development or management.” In other words, private developers of multi-unit housing – even projects with a significant low income component – pay the same 5% tax as billionaires selling multi-million-dollar mansions.
And as of April, 2024 the tax has brought in just $215 million over 16 months -– less than a third of the $900 million per year its backers had predicted.
But the actual result of the measure, according to multiple sources, is that ULA has put a damper on all real estate development, resulting in less development of both market-rate and affordable projects. And as of April, 2024 the tax has brought in just $215 million over 16 months -– less than a third of the $900 million per year its backers had predicted.
According to a February, 2023 article in the Real Deal, ULA has dried up multifamily financing in L.A because “The transfer tax makes it difficult to estimate what a property’s value will look like over the next three, five or 10 years — typical hold periods for a multifamily developer and owner. And for construction loans specifically, lenders may not want to convert the loan into a traditional commercial loan when construction is finished, given the uncertainty around how much the asset will be able to sell for once it’s finished.”
An April, 2024 study from Hilgard Zenith Economics examining residential building permits shows a 19% year over year decrease in residential housing starts between 2023 and 2024. The difference in production between 2022 and 2024 is even more pronounced; two years ago, the city issued three times as many housing permits. The only overall increase in building permits was for so-called ED1 projects – defined as 100% affordable. But these developments only constitute 11% of total output.
“The continued fall in citywide permitting is somewhat unexpected as interest rates have leveled off, local employment numbers have continued to climb and it was theorized that developers might adjust to Measure ULA by now,” Joshua Baum of Hilgard Analytics and Samuel Maury-Holmes of Zenith Economics wrote.
According to the L.A. Business Journal, “Sales are down across all asset types. In quarters two and three of this year, multifamily properties priced above $5 million sold for a total of $320 million. That’s far below the combined $2 billion sold in those same quarters last year.”
“[ULA] sounds good in theory, but in reality it’ll further increase the threshold at which it makes more financial sense to hold onto a property and rent it out rather than sell it.”
As for single family properties over $5 million – the so-called “mansions” that were supposed to have been impacted the most — sales have declined by over 50%. As one property owner told USC’s Selina Kauser, “[ULA] sounds good in theory, but in reality it’ll further increase the threshold at which it makes more financial sense to hold onto a property and rent it out rather than sell it. Who’s going to want to sell off a property they are required by law to sell for at least 10% lower than its market value? L.A. is going to turn into a city of people who hold onto their property forever and pass it on to their heirs.”
Making matters worse, properties are only reappraised for property tax purposes when they change hands, meaning this extreme loss of liquidity, should it persist, may lead to less property tax revenue for the entire state for decades to come.
The local budgetary impacts of ULA’s revenue shortfall might also be dire. The L.A. City budget for fiscal year 2024-2025, apparently drafted before the actual numbers were in, “allocates over $400 million in funding anticipated to be generated by Measure ULA to the formula categories in the measure and enables the city to spend receipts collected by the measure.” It’s worth noting that this city’s latest budget already has a potential $400 million deficit.
Nevertheless, in May of this year, Councilmembers Raman, Hernandez and Harris-Dawson introduced a motion calling upon the L.A. Housing Department, in consultation with ACT-LA, a social justice coalition, to identify ways to use ULA funds to implement a social housing program for Los Angeles, similar to that in Vienna, Austria (known as a so-called “renter’s paradise”).
According to their motion, “Through the social housing developed under Measure ULA, there is an opportunity to explore these alternative forms of ownership, generational stability, and wealth-building for more Angelenos.” According to the online publication Dwell, which interviewed Hernandez about the motion, “It’s a great chance to use quite a bit of suddenly available money”.
A study out of Occidental College, primarily authored by faculty at UCLA’s Luskin Center (home of the Lewis Center, which had authored the pre-election study of the measure deeming its effects on housing production “minimal”) titled “L.A.’s Mansion Tax: An Evaluation of Measure ULA’s First Year” takes a glowing view of the measure’s impacts.
By their estimation, the $192 million raised by ULA in its first 10 months is laudable because it exceeds annual affordable housing revenue from the Federal government, and Proposition HHH’s annual revenue. Nowhere does the study mention the previously promised $900 million, nor ULA’s impact on housing production and high-end real estate sales. “Measure ULA will capture a small fraction of the immense amount of new wealth created by the area’s booming real estate market and put it to productive use,” according to the study.
Efforts to overturn ULA have thus far failed. A measure scheduled for the November, 2024 ballot that would have required a two-thirds majority vote in order to pass taxes like ULA (and would have, therefore, repealed it) was struck down by the California Supreme Court.
The Court stated that the sweeping changes the Taxpayer Protection And Government Accountability Act would enact require an amendment to the state’s Constitution. In April, lawsuits brought against the city by the Howard Jarvis Taxpayer Association and Newcastle Courtyards (representing a family trust) were both dismissed.
According to Los Angeles Business Journal, leaders in the business, real estate, labor and housing advocacy communities are currently working to come up with a “fix ULA” proposal to amend the tax so that it doesn’t continue to chill the production of housing. In the meantime, developers of all types of real estate are going so far as to stop developing housing within Los Angeles, citing business conditions that are, in their view, impossible.
