LA transfer tax could impact luxury home segment

Supporters 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.

But many industry players, especially in the luxury sector, have a different opinion.

The proposal in question is Measure ULA, an initiative backed by a coalition of social advocates and affordable housing groups who collected enough signatures to secure its place on the November ballot. The measure, referred to as a “mansion tax,” would impose a new 4 percent transfer tax on property sales in the City of Los Angeles valued between $5 million and $10 million, with the tax rising to 5.5 percent for sales of $10 million or higher.

“It is a major threat,” said Dan Yukelson, executive director of the Apartment Association of Greater Los Angeles. “It sounds great. 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 is going to come back and bite us in the ass.”

The tax would be added to the city’s existing 0.45 percent transfer tax, for an overall city transfer tax of nearly 6 percent on sales above $10 million, and would come in addition to the county’s 0.11 percent transfer tax.

The money would be paid by the seller and apply to both residential and commercial properties. Property data shows that in 2021 it would have applied to about 4 percent of all city property sales, including around 700 single family transactions — less than 3 percent of all single family sales — and about 270 apartment building sales and 150 commercial sales.

The $5 million and $10 million thresholds would be tied to inflation and would likely rise. Proponents say that the tax, had it been in place last year, would have generated $923 million, money that would be earmarked specifically for affordable housing production and homelessness prevention programs.

“Measure ULA represents a holistic approach to the city’s housing affordability and homelessness crises,” a team of researchers, including UCLA and USC professors, wrote in a white paper published last month. The measure, the academics concluded, would “have a positive impact on the city’s housing crisis, while having no effect on the average Angeleno.”

Two similar measures are also on the ballot in Santa Monica (a city where home prices and rents are even higher than L.A.): One would add a 5.7 percent tax on deals higher than $8 million and would continue indefinitely, while the other would add a 2.5 percent tax on deals above $8 million that would expire after 10 years unless it’s extended by the City Council. The city already charges a 0.6 percent transfer tax on deals above $5 million.

‘Game-changer’ or ‘knockout blow’?

Along with dozens of social-minded nonprofits and political groups — United Way, immigrant rights group CHIRLA, the L.A. County Democratic Party — Measure ULA has the support of affordable housing developers, including the nonprofits EAH Housing, Century Housing and Community Housing Works.

“I truly believe it would be a game-changer for us,” Stephanie Klasky-Gamer, president of one supporter, the nonprofit homeless housing developer L.A. Family Housing, recently told the L.A. Times, citing the benefits of the measure’s consistent revenue stream.

But many luxury brokers and homeowners see only looming pain — if they’re aware of the potential new tax at all.

“It’s amazing how many people don’t know about it,” said Westside Estate Agency cofounder Stephen Shapiro. “That’s scary.”

Even Shapiro was unaware of the ballot measure until several weeks ago, when another broker asked him about it. Then he promptly sent out an email blast, from the Westside Estate Agency account, to some 10,000 industry contacts.

“Vote NO on Ballot Measure ULA,” read the subject line.

If the measure were written differently it might not be so bad, Shapiro explained, but he sees a fundamental problem with the way the proposal is structured. It calculates the tax amount based on the total sale figure regardless of the seller’s net profit or loss — meaning a homeowner already facing a big loss, or whose home value increased only because of major work he or she put in, would still be hit with an effective penalty.

Shapiro’s email blast gave the example of a buyer who purchased a home for $6 million, then sold it for $5 million, which would amount to a $1 million loss, not counting closing costs, plus a new $200,000 tax bill.

“The real issue is that this was not thought out by rational businesspeople, and it defies common sense and basic logic,” the email read. “Let’s call it the ‘Let’s get the rich movement,’” Shapiro added in an interview. “It’s so ill conceived.”

With weeks to go before the election, opposition is mounting. Jason Oppenheim, the reality television star and founder of the Oppenheim Group, has emerged as a prominent opponent, sending his own agency email blasts. A Sherman Oaks-based coalition of homeowners and small businesses, called Angelenos Against Higher Property Taxes, has mounted a formal opposition campaign that blasts the measure as a wasteful “special interest giveaway” to affordable housing developers, a line echoed by the politically conservative Los Angeles Daily News editorial board. Some homeowners are also exploring legal options.

Some residential developers have begun speaking out, including Aeries Development founder Billy Lehman Goodyear. After he heard about the tax, Lehman Goodyear recently told the L.A. Times, he actually pulled out of a land deal in Brentwood where he planned to build two houses, because he calculated that the project would no longer pencil out.

“This new tax … will render the work of many home developers unprofitable and will force many to cease developing in the city of Los Angeles,” he wrote to the newspaper. “For many, this tax will be the knockout blow.”

Yukelson, of the landlord group AAGLA, argues the tax’s impact would also cascade into the rental market, because it will tamp down development of market-rate housing units and further limit supply — a consequence that’s also bad for renters.

“The last thing we need is more taxes,” he said. “It just makes it more difficult to entice people to get into this business if they know they’re going to have to pay that kind of exit fee to sell these properties.” He predicted that more developers would spurn the City of L.A., where bureaucratic red tape is already notorious.

Market impact

Although the measures are unlikely to have a widespread impact on a residential market that’s currently more affected by rising interest rates, some analysts predict a transfer tax would slow luxury sales, particularly for homes priced around the $5 million threshold in L.A. or the $8 million threshold in Santa Monica, where both sellers and buyers are more likely to be put off by the new cost.

“At least at the margins, 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 kind of undermines the broader growth in the housing market.”

In progressive L.A. County, both cities’ ballot measures would seem to have a decent chance of passing — although it’s also telling that neither L.A. mayoral candidate has come out in support of Measure ULA. Instead, they both emphasize that the city — which over the last several years has received $1.2 billion in bonds for affordable housing from Proposition HHH — needs to spend the money it already has for affordable housing more wisely.

“While I would support the idea of a dedicated revenue stream for homeless housing and services,” Caruso said in a statement, “I believe we must first demonstrate to the public they can trust the government to utilize these funds effectively.”