L.A.’s Property Market Stagnates as ‘Mansion Tax’ Takes Effect

Measure ULA, L.A.’s divisive new property tax designed to combat the homeless crisis, is splitting opinion and slashing sales.

L.A.’s Property Market Stagnates as ‘Mansion Tax’ Takes Effect

Measure ULA, L.A.’s divisive new property tax designed to combat the homeless crisis, is splitting opinion and slashing sales.

By Selina Kausar

L.A.’s real estate market is contracting. Listings are dwindling. Commissions, slashed. And luxury home sales are down by 55%. But it’s not a case of a sudden mass exodus out of L.A. – instead, many signs point to the controversial Measure ULA, which took effect on April 1.

The months leading up to ULA’s implementation saw a frenetic rush of sales. Some real estate agencies did everything they could to shift luxury houses, like offering fancy sports cars alongside listings as an incentive for buyers or million-dollar commissions to their realtors. Pierre Hajjar is a real estate agent at Keller William Realty Beverly Hills, an agency that specialises in luxury homes in L.A.. Hajjar is one of many who has seen sales diminish into oblivion over the last few months. “It was a mad-dash attempt to take advantage before the tax came [into effect].”

Voters approved Measure ULA, also dubbed the ‘mansion tax,’ last November, with 57.7% approval. It ordered an additional 4% tax on properties priced over $5 million, rising to 5.5% for those valued beyond $10 million. Politicians estimated it would generate up to $1 billion a year to help combat L.A. 's spiralling homeless crisis. The extra revenue would contribute to subsidized housing, rehabilitation, rent assistance and homelessness-related programs. The idea was that those in the city’s wealthiest homes could help support those without a roof over their head. Realtors, developers and luxury homeowners, however, despaired.

“On a $10 million sale, that means the seller would have to pay all the usual taxes and fees as well as an additional $550,000,” Hajjar said.

Before Measure ULA, Mark Wahlberg made headlines for selling his mega-mansion for $55 million in February. Similarly, Brad Pitt sold his Los Feliz compound that had been purchased in 1994, dropping it from the $40 million listing price to close the deal with heiress Aileen Getty at $33 million, days before Measure ULA took hold. If sold now, Wahlberg’s home would come with an additional tax of $3 million and Pitt’s $1.8 million.

And in the months since?

Tumbleweed has been blowing through the luxury real estate market in Los Angeles.

Falling Sales

Only two homes sold for more than $5 million in April, and the outlook has since remained bleak.

Luxury home sales soared straight after the pandemic and have since fallen

“I’ve seen houses listed on the Multi Listing Service [a database featuring property listings in California] sit on the market for multiple months because of this law. For instance, in October, there were 108 homes for sale and only eight of them sold.” Hajjar said. “Sales have definitely gone down, and developers are looking to work outside of Los Angeles.”

And these extra fees are hitting some sellers particularly hard. Lance B. owned an apparel warehouse in Downtown L.A. which he recently sold due to cash flow issues to help save his business. He believes that ULA is more than just a ‘mansion tax’ and risks penalizing those who may need the money. “The mortgage payoff was a large percentage of the sales price and after that payoff and the ULA tax, I barely received any proceeds.” He said.

South Rodeo Drive, which is in the city of Los Angeles, is one of the most expensive streets in the country.

"L.A. is going to turn into a city of people who hold onto their property forever and pass it on to their heirs.”

“It sounds good in theory, but in reality it’ll further increase the threshold at which it makes more financial sense to hold onto a property and rent it out rather than sell it. Who’s going to want to sell off a property they are required by law to sell for at least 10% lower than its market value? L.A. is going to turn into a city of people who hold onto their property forever and pass it on to their heirs.” He said.

“I guess calling it the “mansion tax” was the best way to get the average person who doesn’t read into the propositions they’re voting on tax the rich in order to help the poor. When in reality, the “rich” you’re taxing could be an elderly person who might want to sell off their property to live in retirement comfortably and can’t now because of the amount in taxes they’ll need to pay,” Laila West, a long-term resident of Los Angeles who is apprehensive of the effectiveness of ULA, said.

West feels impassioned that this tax will affect elderly homeowners more than anyone. “Most people who retired and sell their homes aren’t going and working for more income. Some people don’t have retirement plans and have their home equity instead. Meaning everything spent from the point of their deposit is burning money.” Her parents purchased their home in the Pacific Palisades for $75,000 in the 1940s. It is now valued at around $6 million, bringing them just over the threshold needed for a home to be subject to ULA taxes. Because of this, West says it makes no sense for them to consider downsizing post-retirement. "They'd just lose too much money."

This is the view from the home in the Pacific Palisades

She believes that the tax is an additional burden alongside the other expenses of being a homeowner in Los Angeles, such as dealing with property taxes, closing costs and realtor fees.

Proponents, however, argue the tax will do more good than harm. UCLA researchers Shane Phillips and Maya Ofek found Measure ULA would only affect around 4% of real estate transactions each year. While they acknowledged a concern that Measure ULA could lead to a decline in construction and development, they predicted that around 72% of its annual revenue would come from properties sold for over $10 million, representing “a holistic approach to the city’s housing affordability and homelessness crises.”

But these projections may appear lofty in light of current circumstances.

Some clever buyers figured out how to get around the tax, explained a founder of a popular real estate software company who speaks to dozens of realtors every day and sees first-hand how they’re navigating around ULA. He asked to remain anonymous because investors in his publicly listed company prohibit him from talking to the media on matters of politics or taxation, including Measure ULA. “It’s terrible that it’s called a ‘mansion tax.’ In West LA, the median listing home price is higher than $5 million. We are not in the middle of Idaho. Secondly, realtors are smart. Some of them are breaking property up into shares sold separately within a family and that’s a lot more attractive to sellers. So, if I’m a buyer, all I have to do is give $4 million to a husband, $4 million to his wife and $4 million to their daughter. That’s my $12 million house paid for, no extra tax.”

According to Kirk Stark, a professor of tax law and policy at UCLA, there is nothing outright forbidding sellers from a practice like this, but it may open the door to other legal implications. "There are various legal doctrines sounding in principles of “substance over form” that frown on such approaches, but nothing is clear cut in that area." He said.

And these workarounds are cutting into Measure ULA revenues. Mayor Karen Bass’ first budget proposal, a $13.1 billion plan, included only a mere $150 million from Measure ULA.

This is still a significant amount, with Councilmember Nithya Raman telling the Los Angeles Times that it’s, “the largest source of revenue…that this city has access to for these uses ever.”

But it’s a far cry from the initial projections of a billion dollars per year.

ULA: A funding maze

According to Jason Ward, an economist at the RAND institute specializing in homelessness and housing, not only were the revenue projections off (he estimates they’ve only raised about 10% of projected estimates), but the money raised by the tax would only contribute to 20-25% of the cost of building new units anyway.

“Publicly funded affordable housing is built using a capital stack, so developers have to find multiple different sources of tax credits or loans to draw up all the money they need.” Ward said. Things get complicated when looking at the numbers. The threshold for new construction under ULA is 25 units, using only union labor. But the other sources of funding under the capital stack have different minimum requirements, that don’t always line up with ULA’s.

“Proponents of ULA assume that the amount of public funding raised by this tax will be matched by other funding programs,” Ward said. But developers are hesitant due to the high costs associated with building under ULA requirements. These requirements include only using union labor when building anything above 25 units. Ward said that this means developers cannot benefit from the same economies of scale that come with larger projects, making building under ULA requirements unappealing to developers. “All of our past research has suggested that this requirement is costly over and above [just] having to pay union level wages.”

Joe Donlin with United to House LA, the campaign that backed Measure ULA, said that although the tax’s initial revenue is lower than projected, the tax “is producing real results.” He said the first $30 million in revenue will be used to “provide rental assistance to keep people in their homes, while another $50 million will be used to fund affordable housing that could begin construction in late February or March 2024,” the latter of which Ward thinks is not the smartest of ideas.

The best use of ULA funds, Ward believes, is not in building new homes but instead supporting measures like rental assistance and other programs to prevent current residents from getting evicted if they fall upon hard times. “That way you don’t experience all the inefficiencies compared to publicly funding new housing projects.”

L.A. City Council declined to comment on this suggestion.

Bass’ conservative projections may also have been cautionary, with two lawsuits earlier this year challenging Measure ULA. One claimed the tax was unconstitutional. But on October 24, a Los Angeles County Superior Court Judge decided against this notion in the Howard Jarvis Taxpayers Association v. City of Los Angeles . The judge found that the arguments put forward by the Howard Jarvis Taxpayers Association and other plaintiffs seeking to invalidate the levy were incorrect, but Stark thinks further legal action is yet to be taken against ULA. "HJTA will certainly appeal – and probably has already – but on the various questions presented here the state courts of appeals have generally decided against the HJTA’s positions." He said. Should an appeal be won, the City will have to pay back any money received through ULA.

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Is ULA solely to blame?

It was thought that areas outside of Los Angeles, like Beverly Hills and Calabasas, which are immune to Measure ULA, would see an influx of interest post-April. However, this has not been the case.

“Another main reason houses aren’t selling is the increase in interest rates. There are two types of people that would buy. Those who want interest rates to increase so that it forces people to sell. And those who will wait until the interest rates decrease. And so, we’re caught in this waiting game,” Hajjar said.

Beverly Hills homeowners, he said, are also notorious for overpricing their homes. “But it’s more of a buyer’s market right now, so people are expecting prices to drop.”

Despite this, the impact of ULA is not to be understated. Preliminary statistical analysis by Ward shows a general decline in sales of homes priced around $2 million - $4 million, with a much steeper drop for homes over $5 million. That decline is in the city of L.A., and not as pronounced in surrounding municipalities. “I would attribute that to ULA,” Hajjar said.

Although the housing market in general has slowed down this year, ULA’s reception remains divided among L.A.’s realtors, buyers, homeowners, long-term residents and developers, and its future uncertain as of yet. But in the grand scheme of the L.A. housing crisis, these issues may be quite small.

"The problem is never going to be fixed or solved or even put a dent into from a tax because there’s always a new wave of homeless people." West said. "In 2020 they had a similar budget to help the homeless and nobody is quite sure where the funds went. Homelessness is still a huge problem in L.A. obviously, so we need to address the root cause of that."

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