Anthony Marguleas Examines the Recently Passed Measure ULA

 

 

 

BY ANTHONY MARGULEAS, Founder of Amalfi Estates

This poorly thought-out Measure ULA will have significant consequences on the economy that will be felt for years.

ULA, which passed in November and is referred to as a “mansion tax,” imposes a new 4 percent transfer tax on property sales in the City of Los Angeles valued between $5 million and $10 million, with the transfer tax rising to 5.5 percent for sales of $10 million or higher.

This tax is for all residential and commercial properties, with some exclusions for churches and nonprofits. Last year this would have affected approximately $20B in properties, of which 727 homes or condos on the residential side and 270 apartment building sales, and 150 commercial sales.

While 4% or 5.5% additional transfer tax may not seem like much, the tax would be added to the city’s existing 0.45 percent transfer tax for an overall city transfer tax of 4.45% on Sales from $5M to $10M, and nearly 6 percent on sales above $10 million.

This new “tax” would come in addition to the county’s 0.11 percent transfer tax, which means a nearly 1000% increase in transfer taxes.

Backers argue the Measure will raise as much as $1 billion annually from the people who can most afford it to create housing for the Angelenos who most need it.

Helping the homeless is an admirable thing. One of Amalfi Estates’ six charity partners is The People Concern, and we have been supporting them for years because of the nonprofit’s excellent work.

The issue is not raising money but fixing a broken system and bureaucratic red tape in Los Angeles.

In 2016, L.A. voters approved Measure HHH, a ten-year $1.2 billion bond measure to address the homelessness crisis by building 10,000 new affordable and permanent supportive housing units.

It has been a failure after six years, with only 1,000 HHH-funded units completed, at an average cost of more than $500,000 each (almost double the cost they had predicted).

UCLA Lewis Center for Regional Policy Studies put out an 18-page white paper click here  in September, written by several UCLA, Occidental, and USC professors, which formed the basis for the ULA. (Editor’s note: The professors and lecturers are urban planners, sociologists and a lawyer.)

This paper had multiple erroneous assumptions and biases. “There is no evidence that the tax would impact rents for commercial or residential tenants. In most cases, transfer taxes are paid by the seller, who will have no legal avenues to pass on costs to tenants in a building which they no longer own.”

Additionally, this report cites multiple studies which show that rents are erroneously determined by the market, not taxes and fees. The paper also states: “Landlords already charge the most they can without losing tenants and facing vacant apartments/retail spaces — this will not change because of new transaction fees.”

This is a highly naïve and uneducated statement from academia rather than business owners and real estate experts.

A similar measure that San Francisco passed came up with a more realistic and less utopian viewpoint: “However, the impact of the recession on real estate sales, the volatility of transfer tax revenues in general, and the possibility of tax avoidance behavior due to the increases all create significant uncertainty around revenue.”

The ULA white papers authors stated the only people that would be affected are large wealthy corporations.

In reality most developers are small business owners. Those developers will now find development projects outside the City of L.A. to avoid paying an additional 4 or 5.5%. This will mean substantial lost revenues for escrow officers, loan officers, title officers, realtors, sub-contractors, and many others.

One of our developer clients said, “The ULA is a game changer for us. We have been building and selling new SFRs in the Pacific Palisades/Brentwood area in the $5 to $6 million range for many years. The new 4% tax on the selling price is equivalent to around 50% of our total project’s profit!  Therefore, we stopped our tear down/lot purchases in the area and shifted our business to other directions.”

Another developer, Jeff Mironer with Province Town Estates, said, “As a small business owner, I develop high-end quality custom homes and apartment buildings. We employ up to 100 highly qualified professionals per project. ULA will hurt us tremendously. With the increased cost for permits (that was already implemented to help the homeless; over 500 percent increase in 5 years), high-interest rates, materials, wages, insurance cost, and shrinking supplies, ULA – additional tax of 4 to 5 percent will cause losses for my company, and small businesses like mine.”

The white paper authors mistakenly state, “We found minimal evidence that the tax would impact some for-profit new construction projects, but developers can adjust their business models to minimize the impact of the transfer tax, and revenues from Measure ULA will fund the construction of a much larger number of deed-restricted affordable homes. Real estate investors who buy too quickly resell — the harmful practice of “flipping” — may be more impacted, which we view as a bonus.  However, the tax will significantly impact those with a short-term investment horizon who routinely ‘flip’ properties. This practice inflates housing prices and can cause evictions.  If a side effect of this tax plan is to discourage flipping and speculation, that is a bonus.”

Dan Yukelson, executive director of the Apartment Association of Greater Los Angeles, said,  “It’s a great rallying cry for voters — ‘We’re going to take all this money from rich people and help the homeless.’ In the long run, this will bite us in the ass.”

The single most significant source of campaign contributions to Measure ULA is construction unions because ULA mandates strict project labor agreements to only unionized workers and significantly inflates costs. The measure benefits existing affordable housing developers, many of whom are financial supporters of the Measure. The Los Angeles Daily News called ULA a “special interest money grab.”

Jon Coupal, president of the Howard Jarvis Taxpayers Association, said, “Angelenos should ask themselves why these groups sponsored and paid to put Measure ULA on the ballot.” He answers, “It’s affordable housing developers who will benefit from the billions of taxpayer dollars.”

The college professors who wrote the white paper also reference San Francisco and Culver City passing similar measures with solid voter support. However, rather than using those cities which spread the tax across all price ranges of properties, each having a different tax rate, San Francisco has six price ranges, each having a different tax rate, or Culver Cities has four price ranges of properties each having a different tax rate, they chose the City of Los Angeles to only have only two price points and tax rates.

San Francisco passed Proposition W on November 8, 2016 election and Proposition I on November 2020, establishing a marginal tax rate with six brackets.

• 0.6% for properties between $250,000 and $1 million;
• 0.75% between $1 million and $5 million;
• 2.25% between $5 million and $10 million;
• 5.5% between $10 million and $25 million;
• 6% for those over $25 million.33

So, the City of L.A.’s tax on $5M to $10M homes is 78% higher than San Francisco’s.

Similarly, Culver City passed Measure RE on November 3, 2020, establishing a marginal tax rate with four brackets.

• 0.45% on transactions under $1.5 million;
• 1.5% between $1.5 million and $3 million;
• 3% between $3 million and $10 million;
• 4% for those $10 million and over.

In addition to not equitably spreading the tax cost to all property’s price ranges (like Culver City and San Francisco did), ULA targeted a couple of geographical areas.

For instance, Brentwood and the Palisades make up almost half (44%) of all the residential transactions sold over $5 million in the city of L.A., with Bel Air being a distant third with 58 sales.

In 2021, Brentwood had 118 homes sell from $5M to $10M, and 55 sell over $10M, totaling 173 transactions worth $1,767,770,500. The Palisades had the second most transactions with 105 sales from $5M to $10M and 38 over $10M, totaling 143 transactions worth $1,345,472,226

The study also does not factor in the past five years; we have had the most significant appreciation rate in decades. We are currently going into a depreciating market, with home sales slowing considerably.  Year to date, Brentwood residential transactions are down 27% compared to last year, and the Palisades is down 20%.

Santa Monica recently passed a similar transfer tax measure of a 5.6% transfer tax on transactions over $8 million.

“It’s going to hold some sellers back, or at least cause them to think twice,” said Jordan Levine, an economist with the California Association of Realtors.  “It undermines the broader growth in the housing market.”

Instead, the city — which over the last several years has received $1.2 billion in bonds for affordable housing from Proposition HHH — needs to spend more wisely the money it already has for affordable housing.

Additional concerns are the havoc this will have on comparable sales.  Sales prices will be off as sellers and buyers try and pay commissions or other closing costs directly or out of escrow.

A $6 million sale that would use a $5.5M sale (that now sells for $4,999,000) will be affected. This, in turn, will lower future capital gains and property taxes collected. If the IRS can directly not collect the 1/3 that goes for capital gains on the difference of an average $5.5M sale that sells for $5M, they will lose $166,000 per transaction.

Additionally, the LA County tax assessor will miss out on the 1.25% tax on the $500,000 ($6,250) or $62,500 over ten years.

I predict we will see a significant increase in homes selling for $4,950,000 to $4,999,99 and $9,950,000 to $9,999,999 compared to the previous year by sellers working to lower their transfer taxes. This tax should be spread out over all price ranges and factored into what property values are doing.

If someone buys a home for $6 million and a year later sells it for $5 million,  with Measure UAL, they still need to pay a $200,000 tax on top of losing a million in equity.

With sales commission and other closing costs, a seller needs to sell for 10% more than they purchased to break even, which may work in an appreciating market, but we are going into a depreciating market.

While many predict an increase in properties coming on the market to try and sell by April 1, 2023, I don’t see that happening. Sellers don’t want to come on before Christmas, and even if they are able to come on the market in early January, it is doubtful they will be able to get into escrow and close escrow by April 1, especially given the current slowing market.

Additionally, several sellers told me they were planning on selling their home, and now, due to this onerous tax, they have decided not to sell.