A measure imposing a one-time transfer tax on pricy real estate that passed late last year has drawn the ire of people in the real estate industry.
Los Angeles voters passed Measure ULA, also known as United to House L.A. and the Homelessness and Housing Solutions Tax, which is set to start April 1.
Detractors say the measure has been misleadingly called a “mansion tax” because the tax will be applied to both residential and commercial properties, imposing a 4% tax on property sales above $5 million and a 5.5% tax on sales above $10 million. At the minimum, that totals $250,000 and $550,000 per sale, respectively. The goal of the initiative is to generate $900 million a year to address the homeless crisis by subsidizing housing and preserving affordable homes.
Fred Gaines, chairman of the Valley Economic Alliance and a land-use attorney at the Woodland Hills law firm Gaines & Stacey LLP, explained that the tax will negatively impact everyone, not just the affluent, as apartment building owners, for example, will be hit hard by the tax and forced to pass on some of the financial burden to their tenants.
“If this was presented as a tax on mansions and apartments, I’m not sure if it would’ve passed,” said Gaines.
Koreatown-based Apartment Association of Greater Los Angeles has joined the Howard Jarvis Taxpayers Association’s lawsuit against the city of Los Angeles to overturn Measure ULA, which imposes a tax on real estate that sells for more than $5 million. The legal action seeks to repeal the ordinance.
Susan Shelley of the Howard Jarvis Taxpayers Association said that the California constitution contains a number of taxpayer protections that have been added by initiatives approved by voters.
“One of these, Proposition 13 in 1978, prohibits ‘sales or transaction taxes on the sales of real property,’” Shelley said. “Over the years, the courts have carved out a limited exception in the case of charter cities; real estate transfer taxes are legal if the money is dedicated to the general purposes of government. However, no local government is permitted to impose a real estate transfer tax for a special purpose.”
The association’s Shelley and Daniel Yukelson, executive director of the Apartment Association of Greater Los Angeles, both think Measure ULA goes against the law.
“Measure ULA is an illegal tax because it’s a real estate transfer tax for a special purpose, meaning the money can be used only for that purpose,” Shelley said. “Real estate transfer taxes for a special purpose are prohibited by Proposition 13 and case law. It does not matter that ULA was an initiative passed by L.A. voters, because the Los Angeles City Charter does not permit legislation by initiative that exceeds what the city government itself is empowered to do.”
Misleading ‘mansion tax’
Sacramento-based Howard Jarvis and Apartment Association seek to invalidate ULA even though it was passed by 58% of the voters last November.
“It was sold as a Robin Hood measure. Rob from the rich, give to the poor,” said Yukelson, who believes the branding of the so-called “mansion tax” has been very misleading. “That’s what everybody thinks. But everyone is going to be paying for it.”
The tax also would be placed on the sale of apartment buildings, office towers, shopping malls, warehouses, logistic facilities and other forms of commercial real estate transactions.
Gaines believes that the hefty tax on apartment building sales will have a ruinous effect.
“Eventually it will get passed along to the tenants and the units,” Gaines said. “It’s certainly does not dovetail with our current massive efforts to deal with housing shortage because of its potential effect on multifamily sales.”
Compounding hardships
He foresees people finding loopholes to avoid the thresholds that will trigger the tax penalty when constructing their sales.
“The question will be what will people do to try to work around it,” Gaines said. “Creative minds will be working on how to avoid it.”
Yukelson believes that the tax measure will compound the hardships which landlords endured during the pandemic.
“After nearly three years of challenging rent collections and no
allowable rent increases due to so-called ‘temporary’ moratoriums, more punitive taxes such as those imposed by Measure ULA is the last straw that will cause property owners to invest elsewhere and never to come back to Los Angeles,” he said.
Yukelson views the tax measure as something which will contribute to the ongoing lack of affordable housing in the region.
“It’s going to discourage (developers) from investing in Los Angeles,” Yukelson said.
Yukelson has no doubt that the money raised by the tax measure will be squandered. He points to Measure HHH, the $1.2 billion bond measure approved by voters in 2016 to build 10,000 new apartments, yet five years later only saw 1,000 HHH-funded units have been created.
“Measure HHH has seen millions raised in bond money that has been wasted,” Yukelson said. “It’s costing the city nearly $800,000 to build a unit.”
In the meantime, it’s the heavy-handed laws such as this one that are driving people out of the state, Yukelson said.
“We’re losing taxpayers,” he said. “A lot of millionaires are leaving California. Businesses are leaving.”
Industry participants and observers who spoke with the Business Journal resent Measure ULA. Chris Dyson of Beverly Hills-based residential brokerage The Agency, for example, calls the Measure ULA tax unfair.
“I’m not sure anybody in our business was particularly thrilled by how this was done,” Dyson said. “Everyone would like to see the homeless situation sorted out, but I don’t think this is the best way to go about it.”
Dyson said the measure doesn’t account for any losses.
“If you buy a house for $10 million and sell it for $5 million, and you have a $5 million loss, you still have to pay,” Dyson said.
Gary Weiss, a partner at L.A. Realty Partners, believes that the branding of the measure has been manipulative. Dubbing it a “mansion tax,” Weiss said, “It’s such an easy way to sell to 98% of the community. You’re getting most of the population here in L.A. who don’t have a home over $5 million. But the problem is that somebody is going to pass that additional tax to the consumer whether it’s an apartment renter or an office tenant or a developer who wants to redevelop the property.”
Michael Wiener, an attorney at Century City-based Greenberg Glusker, believes the flaw with Measure ULA is that it applies to the whole value, not just to the value in excess of $5 million dollars.
“Let’s say it’s a $7 million property with $2 million in debt,” he said. “You’re being taxed on the entire $7 million as opposed to just on the $5 million of value if you exclude the debt.”
Wiener also noted the short-term implications of ULA.
“Because it goes into effect April 1, anybody who is trying to sell or restructure the ownership of a property in the city of Los Angeles is trying to get it done before then,” he said.
Weiss doesn’t believe its effect will be as great on larger property owners like Douglas Emmett and the REITs that have properties all over the state and country.
Weiss said the measure will greatly impact smaller developers such as “people who own office buildings or apartment buildings like family offices. When you start getting involved in sales between $5 million and $80 million worth, that’s impactful.”
Weiss warns that the measure will have a ripple effect throughout the industry.
“It’s going to cause less transactions. If this thing goes through, people buying these properties, picking up the extra tax, they’re going to pass it along to whoever the tenant is,” Weiss said.
Henry Manoucheri heads Century City-based Universe Holdings, which owns 3,400 apartment units nationwide. He didn’t mince words regarding Measure ULA.
“It’s a disaster,” Manoucheri said. “What it’s caused now is a rush for those who wanted to sell.”
Manoucheri foresees mayhem once the measure goes into effect.
“After April 1, the volume of deals become available for sale will come down substantially,” Manoucheri said. “It will be harder to buy. The payment of the tax will become an item of negotiation between buyers and sellers.”
Manoucheri evoked the rent and eviction moratorium, which has been running in Los Angeles for more than three years.
“It’s almost like they want to discourage people from investing in Los Angeles,” Manoucheri said.
‘Bureaucratic restraints’
Alexander Apfel serves as vice president of acquisitions and asset management for Concord Capital Partners, a Beverly Hills-based real estate investment and services firm that owns more than $1 billion in real estate assets, including 1,000 units of residential housing nationwide with 200 units in Los Angeles.
“We are not rushing to sell any of our L.A. assets,” Apfel said.
In the short term, he feels his firm may benefit from owners trying to unload properties at reduced prices before April 1.
Gaines does not believe that the tax will be an effective tool against the homeless situation.
“The implementation and collection part of this tax is going to be much more complicated than the proponents anticipated,” Gaines said.
Apfel anticipates that the annual $900 million will diminish year over year as real estate sales slow down.
“Due to various bureaucratic restraints, it costs the city about $700,000 per brand new affordable unit,” Apfel continued. “If you took $900 million and assuming it all goes to the exactly right place it’s supposed to in order to build the new units, divide it by $700,000, you get (nearly) 1,300 units.”
That number of units falls short of addressing the 500,000-unit shortage of affordable housing needed.
“It takes the city so long to build units given the bureaucracy and the red tape,” Apfel said. “You’d be much better off incentivizing developers in a strong fashion because the private developers are always going to be quicker, more efficient and cost effective than the city’s development arm.”