Measure ULA Drives Developers to Acquisitions, Outside City

“The math ain’t mathing,” said Chris Tourtellotte, managing director at Marina Del Rey-based LaTerra Development, on developing new apartment buildings in the City of Los Angeles.

That sums up the seeming political impetus for a state bill that was bound for a floor vote in Sacramento until it got the kibbosh in a sudden move late Thursday night. The legislation, co-authored by Sen. Lena Gonzalez and Assembly member Tina McKinnon and backed by Mayor Karen Bass, could have relaxed the transfer taxes as outlined in United to House LA measure, aka Measure ULA.

That leaves Tourtellotte and other developers stuck with a mathematical challenge.

“You build for $100 million, sell it for $105 million and pay $5.5 million in taxes,” he said. “The tax should be on your profit, not on your sale price. It makes it tough in a city that already has high development impact fees and affordability requirements, and even construction costs are higher and interest rates are higher.”

In order to side step hefty tax bills via Measure ULA after building and then selling a new development, LaTerra is pursuing development in cities in California and elsewhere that are not subject to the “mansion tax.”

The firm is looking in Burbank — where LaTerra opened a 573-unit project in Burbank on Aug. 1 — as well as in San Diego, Orange County and Riverside because the mansion tax is not in effect there, Tourtellote said.

Sean Burton, CEO of Cityview, headquartered in Los Angeles, said his firm is actively developing around the country.

“We haven’t been focused on L.A. because of ULA,” he said.

The one exception is a project that has been in the works since 2021: Cityview’s 489-unit 6136 West Manchester Avenue, which received City Council approval in May. The eight-story, 489-unit project is expected to break ground in 2026 and be complete in late 2028.

“California obviously already has a housing crisis,” Burton said. “Los Angeles has a housing crisis, and this tax is exacerbating it.”

Development in L.A. only works if you have a good land basis, can build above-grade parking and can capture high rents, according to Tourtellote.

LaTerra has two projects that fit that bill — 4112 Del Rey Avenue in Marina Del Rey and 2311 North Hollywood Way in Burbank.

Less building

Measure ULA was approved by L.A. voters in 2022 and went into effect in the city in April 2023 to fund homeless initiatives. It imposes a 4 percent tax on property sales over $5 million, and 5.5 percent on those above $10 million.

“The idea was not to significantly reduce market-rate and affordable housing production,” Tourtellotte said. “That’s not what anybody wants, right? But that’s what’s happening.”

So far this year, the City of Los Angeles issued fewer permits for new apartment buildings with five or more units year-over-year, dropping from 157 developments with 7,609 units in 2023 to 122 buildings comprising 5,156 units in 2024 to 90 buildings with 3,704 units through Aug. 31, according to an analysis by The Real Deal of new building permits issued by the city for the last five years.

Measure ULA is a “major factor” contributing to the slowdown in permits, Drachman said. “It has driven up the cost of building anything since the tax is so punitive given it’s a tax on a transfer, not profits.”

That slowdown is colliding with the city’s already daunting housing mandate to plan for the construction of 456,643 new housing units between 2021 and 2029.

Paul Schon, founder of Hollywood-based Schon Development Group (formerly Schon Tepler), said his firm is not developing because it’s “so expensive” between construction costs, high interest rates and Measure ULA.

Instead, the firm is building accessory dwelling units on firm-owned properties and acquiring value-add, multifamily properties like the 21-unit Mar Vista Lofts at 3992 Inglewood Boulevard in Mar Vista it nabbed for $9 million in December.

“Interest rates put a shock to the environment across the nation … but then what really hammered it down was the mansion tax for the city of Los Angeles,” Schon said.

For the tides to turn, Schon said it would take massive rent hikes or a significant drop in interest rates. The Federal Reserve first hiked interest rates in March 2022 in response to rising inflation.

What’s old is new

LaTerra Development is also acquiring existing apartment buildings.

“Right now you can buy new apartment buildings for less than it costs to build,” Tourtellotte said.

Waterford Property Company’s John Drachman shared a similar sentiment about Measure ULA’s impact.

“Specifically for the City of Los Angeles it makes absolutely no sense to be building projects when it’s a lot cheaper to buy existing projects,” said Drachman, co-founder of the Newport Beach-based multifamily development firm. “If you look at recent trades in places around the city, newer projects are selling for far cheaper than what it would cost to replace.”

At the state level, changes were made in July to the California Environmental Quality Act, or CEQA — enacted in 1970 to balance environmental protection and development but believed to be an effective tool at slowing or stopping development. The changes essentially cut red tape for many multifamily and single-family housing developments.

That alone is not the complete solution to the housing crisis.

“I don’t care about CEQA,” Tourtellotte said. “It’s nice, but if the deal doesn’t work and you can’t find the investors, it doesn’t really matter.”