Richard Weintraub was sitting in a chic Italian cafe in Palisades Village, an upscale Westside L.A. shopping center, when he mentioned that he’s pregnant.
A couple years ago, the developer bought a property on L.A.’s Westside for a luxury spec home project. All in, he estimates he’ll spend $15 million and he thinks the house could fetch $20 million. That $5 million profit will then be cut by $1 million for brokers’ fees. Traditionally, taxes would cut it by perhaps another $1.5 million.
Weintraub, one of Southern California’s savviest and most versatile developers, has pursued everything from an Inland Empire mall redevelopment to a Downtown L.A. cathedral renovation. His single-family builds include a Malibu estate that sold for $49 million in 2018 after it was rented by Beyoncé and Jay-Z.
Now he’s reckoning with a challenge he couldn’t have anticipated: ULA, L.A.’s new property transfer tax, which would chop another $1.1 million off his $20 million sale. Weintraub’s hypothetical gain has shriveled to about $1.4 million — if things go well. If they don’t, he could end up in the red on a multi-year investment.
“So I have to pay money to lose money on a house. I mean, why?” he said. “No, I would not have done this with ULA,” he added. “Absolutely not. Not even a thought.”
By now, however, he’s too far along to not deliver the baby.
The new tax kicks in this month and applies to all commercial and residential sales above $5 million. It’s one of the steepest taxes of its kind in the U.S. — 4 percent on deals between $5 and $10 million and 5.5 percent on deals above $10 million.
Assuming it’s upheld by the courts (legal challenges are underway), the tax will reverberate throughout L.A., impacting everything from Downtown’s office market to Westside neighborhoods’ residential inventory.
But there’s one sector where its impact could be acute: single family spec development — a small slice of the market that, for better or worse, has played a key role in shaping L.A.’s real estate brand.
“It has to change behaviors, and it has to change the market,” said Eric Sussman, a real estate professor at UCLA. “It’s just too significant not to.”
Historic measure
ULA was born in crisis. Anyone who’s set foot in L.A. in the past five years can tell you that the city’s homelessness situation has spiraled tragically out of control. Tent encampments occupy public parks and sidewalks in virtually every neighborhood; on some streets, pedestrians regularly encounter charred belongings and human waste.
The issue was at the center of last fall’s high-profile mayoral election between developer Rick Caruso and the former Democratic congresswoman Karen Bass. After winning the election, Bass made good on a promise to declare a state of emergency to address the crisis.
On the same November ballot, to much less fanfare, was Measure ULA, a citizen initiative backed by a coalition of labor, community groups and affordable housing nonprofits. It’s been labeled “a mansion tax” by many, but it aims to tackle homelessness by raising funds for affordable housing construction. When it passed by a decisive 16-point margin, supporters celebrated a historic victory. The L.A. Times’ editorial board called it “the largest housing ballot measure in American history.” A city analysis estimated it would raise more than half a billion dollars annually.
But the new funding depends on real estate deals actually happening. Industry players, many of whom felt bamboozled, have argued that adding a significant new tax — one that is based on a gross dollar figure, not the seller’s actual profit — will backfire by depressing the market.
“This was not thought out by rational businesspeople, and it defies basic common sense and logic,” luxury broker Stephen Shapiro wrote in an email last fall. “Let’s call it the ‘Let’s get the rich movement.’”
Closing time
The tax could weigh heavily on what has been a hot — and very L.A. — niche. Especially in the last decade, as the global rich continued arriving in Southern California, the city has seen a surge in high-end spec homes in desirable neighborhoods such as Beverly Crest and the Hollywood Hills, often built by some of the industry’s boldest characters.
Last year, a Nile Niami project known as “The One” — the most audacious spec home ever built — sold at auction for a record $141 million. Spec properties on the market now include a 12-bedroom Bel Air mansion listed at $139 million and a nine-bedroom Bird Streets pad at $73 million.
Spec is risky by nature. Developers embark on ambitious projects, often taking on large debt, without knowing where the market will be once the project is completed. Costs can rise unexpectedly, and margins can disappear. A hefty new tax complicates everything.
“Common sense tells you this is going to materially impact [developers’] margins,” Sussman said. “So do they simply stop building in Los Angeles? Or do they increase the pricing?”
Luxury broker Branden Williams shares a listing for a six-bedroom, 14,000-square-foot Bel Air mansion that was completed this year and hit the market in early March at $38 million. Williams, not known for his subtlety, is telling prospective buyers that it’s “the last of its kind.”
“What does it do to the spec market? It’s done,” the broker said. “There’s way too much risk for very little reward.”
Weintraub is also pessimistic. ULA, he said, adds to a broader market picture that’s grown bleak. Construction costs and interest rates have risen sharply. Banks are less interested in lending. And the city has been marred by rising crime and a general perception of faltering quality of life, including from the homelessness crisis that ULA is designed to address. While a similar transfer tax is coming to Santa Monica, other desirable areas nearby, including Beverly Hills, Malibu and Orange County, remain untouched.
“The question is not, ‘Would you invest in Los Angeles?’” said Weintraub. “I would say, ‘Why would I invest in Los Angeles when I have other options?’”
Still, not all high-end spec developers are waving a white flag.
Ramtin Ray Nosrati, who has built well over 100 L.A. luxury homes and has nine projects in development, from the $30 million range up to $100 million, said he’s undeterred.
“I think it’s wiping out a lot of the Joe Blows that came in the industry and don’t have the margins, that can’t really control the costs, and it just doesn’t pencil out for them anymore,” he said.
But Nosrati, who opposes ULA, likens it to “a weather tax” that the market will get used to just as it has to previous increases on things like permitting or title fees. High-end buyers will still want to live in L.A., which means they’ll still need high-end homes.
“This is what I do, and this is what I’m going to do,” he said. “It’s not going to stop us one way or another.”