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For months after Measure ULA was enacted in the city of Los Angeles in April, Coldwell Banker luxury agent Jade Mills was convinced that the new transfer tax on property sales priced above $5 million was not impacting her business much — and it would continue to be that way as luxury homesellers got used to their new reality.
But Mills was jolted back into reality about a month ago when one of her transactions came tearing apart at the seams because of this so-called “mansion tax.”
“On one of our listings, we were about to make a deal,” Mills told Intel. “The sellers were about to sign off and they asked what the expenses would be, and when escrow helped us to calculate the expenses, they canceled the counteroffer. So I think lately people are all of a sudden saying, ‘Wow, no, that 5 percent [tax] makes a huge difference. We don’t want to sell at that number,’ or, ‘We don’t want to reduce our sales price’ because of the ULA Tax.”
Mills is just one of a number of L.A. agents who have seen their business and their clients suffer in the wake of the new tax. As the tax approaches its eighth month in effect and has survived one major legal challenge, developers are also pulling back from opportunities in L.A. as they see how much ULA, which stands for “United to House L.A.,” is impacting their bottom line.
Despite L.A.’s mansion tax not bringing in nearly as much revenue as initially expected, mansion taxes remain popular with the general public and seem to be making a wave across the country. Last spring, the city of Santa Monica launched a new transfer tax on properties selling at $8 million or more, Santa Fe voters just recently voted for an additional transfer tax on properties of $1 million or more and Chicago voters are slated to decide next spring on a new transfer tax for properties at $1 million or more.
Agents in those cities where mansion-tax proposals are either already in motion or slated for the ballot in 2024 fear a similar fate as L.A.: a snail’s pace market where homeowners and investors are either stubbornly refusing to transact until something changes with regulation in these price ranges, or deciding to leave the city altogether.
With transactions at a $5 million-plus price point down significantly since April, the city of Los Angeles has, multiple times, had to downgrade its estimated earnings from the tax, which are slated for affordable housing development, short-term emergency rental assistance, eviction defense and more.
So when homebuyers and sellers refuse to play the game and, as a result, the expected revenues to the city shrink, Intel explores the question: Is a mansion tax an effective solution to a city’s housing crisis?
More than just mortgage rates
In Los Angeles, it’s no secret that as the April 1 effective date of Measure ULA inched closer, luxury homesellers were in a scramble to offload their properties listed over $5 million in order to avoid the 4 percent tax on their sale value, as well as their properties above a $10 million price point, which would incur a 5.5 percent tax.
“Prior to April 1, if you look at [properties priced] $5 million and up, we saw an increase in sales in March, particularly compared to a year ago,” Oscar Wei, deputy chief economist at the California Association of Realtors, told Intel. “When you look at the sales of single-family homes and condos in the city of L.A. in March, for $5 million and up, it actually surged 126 percent compared to the previous year. But if you look at all single-family, condo and townhouse sales for the city of L.A. in March, it actually dropped 28 percent.”
That sharp contrast between surging sales trends for properties priced at $5 million or more versus the declining sales of properties across all price points shows that homebuyers and sellers were responding to the impending enactment of a new fee on their transaction.
At that time, Inman learned that agents started advertising things like “ULA specials,” offering properties with slashed prices or added perks thrown into the deal if they sold before the April 1 deadline.
The data that are currently available in terms of tracking Measure ULA’s impact on the L.A. luxury market is, of course, still limited since the tax has been in effect for less than one year. Additionally, many other factors have also had a negative impact on the city’s luxury market this year which makes it difficult to attribute declining transactions to ULA alone, including the several-months-long writers’ and actors’ strikes, elevated mortgage rates and a dearth of inventory.
Still, when the available data is compared with that of nearby cities like Beverly Hills, Malibu and Manhattan Beach, it seems that ULA is indeed having a dampening effect on L.A.’s luxury market.
During the first quarter of 2023, prior to ULA’s enactment, as sellers were frantic to sell, transactions of single-family homes, condos and townhouses priced $5 million and up in L.A. were up 37 percent year over year, according to data from CAR. However, sales of those same property types were down 33 percent year over year in Beverly Hills, down 71 percent year over year in Malibu and down 75 percent year over year in Manhattan Beach.
Fast-forward to the second quarter — once the new tax had taken effect — and the tables flipped. Sales of single-family homes, condos and townhouses priced $5 million and up in L.A. tanked 77 percent year over year as sales of the same property types improved in nearby areas. In Beverly Hills, $5 million and up properties were only down 22 percent year over year, while in Malibu they were down just 62 percent year over year. In Manhattan Beach, those sales were down less than 6 percent year over year.
As of the third quarter, those figures seem to have mellowed more, with $5 million and up properties down just 38 percent year over year in L.A. and down 29 percent in Beverly Hills. Meanwhile, Malibu and Manhattan Beach saw more significant improvements, with $5 million and up sales increasing 11 percent year over year and 29 percent year over year in those areas, respectively.
Paul Salazar of Hilton & Hyland said that not only has Measure ULA reduced the number of transactions taking place within the city of L.A., but it has also, perhaps inadvertently, served to reduce home values to a degree. Homesellers who might have initially priced a property at $5 million or $5.2 million are instead starting their pricing below that $5 million tax threshold to avoid the added cost.
In fact, it does not even make sense for a seller to price anywhere between $5 million and $5.2 million, Salazar explained, because that extra $200,000 will just be going to paying the tax.
“If you sell at $5.2 million, your net, if it’s an all-cash deal … a $5.2 million is the exact equivalent as a $5 million,” Salazar said. “In between $10 million and $10.55 million, same thing. It’s a wash. Why would you sell in that range? It makes no sense.”
Based on data Salazar pulled from the MLS between April 1 and Nov. 17, one home sold in the $5 million to $5.2 million price range. During the same period in 2022, prior to ULA, 22 properties sold in that price range.
A cratering commercial property market
For developers and those seeking out commercial real estate, it also seems the gains of being in a city like L.A. are starting to be outweighed by the price of the ULA Tax. Since the tax is levied on all real estate transactions, it also impacts commercial properties, including multifamily, industrial, office and retail.
“I think ULA was a real mistake and is materially impacting the ability of people to build new housing,” Sean Burton, chief executive of multifamily investment and development firm Cityview, told the L.A. Business Journal.
During the first quarter of 2023, prior to Measure ULA going into effect, commercial real estate sales valued over $5 million hit a total of $2.4 billion in transactions, according to data from Colliers provided to the L.A. Business Journal. By the second quarter, when the tax had gone into effect, those transactions sharply declined to just $260 million. By the third quarter, sales of properties over $5 million had inched upward slightly to $300 million.
Looking at the breakdown across each commercial asset class, the negative impact from year to year is clear. Multifamily properties priced over $5 million, for instance, sold for a total of $320 million during the second and third quarters of 2023 combined, a far cry away from the combined $2 billion they sold for during those quarters in 2022, according to Colliers.
The combined total transaction volume on office sales was $199 million during the second and third quarters of 2022, but only reached $82 million during those quarters in 2023, Colliers reported. Meanwhile, industrial properties sold for a total of $594 million during Q2 and Q3 of 2022 combined, but this year those sales only hit $37 million, according to Colliers’ data.
Retail property sales were also way down year over year, hitting only $49 million in sales volume during Q2 and Q3 of 2023 combined compared to $496 million during the same period in 2022, Colliers’ data shows.
Salazar, who often works with developers across the city, said those developers are a lot more hesitant to take on tear-down opportunities within the city of L.A. these days because there’s one more expense to be added to their net sheet, cutting into their bottom line.
“So now those [tear downs] are worth 4 percent less or 5.5 percent less because, even though [the developer] is not paying for the ULA [initially], the developers who are buying it are considering the cost of ULA when they’re going to go sell it,” Salazar said. “It’s actually more than 4 percent or 5.5 percent because they’re looking at the 4 percent of the after-repair value.
“Let’s say, for instance, typically a brand-new construction sells for $5 million,” he continued. “That developer usually buys it for around $2 million. So if you buy a house for $2 million and you’re going to pay that ULA at around $5 million, that’s $200,000. And $200,000 of the $2 million, that’s 10 percent. So now these developments, these tear downs, are worth 10 percent less.”
A fraction of the revenue
Proponents of Measure ULA applauded its passage in 2022 for the nearly $1 billion dollars the tax was expected to raise for housing and homelessness support in a city that has been plagued by an affordable housing crisis for years.
Initially, proponents estimated the tax would bring in about $900 million per year to aid such efforts. By March 2023, the city downgraded that estimate to $672 million. One month later, Mayor Bass’ first budget proposal included just $150 million in expected revenue from the tax’s first year. As of October, the city’s housing officials acknowledged they had made about $100 million from the tax’s first six months in effect.
The most recent budget figure was chosen both out of caution in case legal challenges against the tax went through and the city had to repay back the tax revenue, but also because of how much transactions at the $5 million-plus price point have dropped off since the tax went into effect.
In late October, L.A. County Superior Court Judge Barbara Scheper dismissed a lawsuit challenging Measure ULA, emboldening the measure’s advocates. One of the plaintiff’s lawyers, Keith Fromm of Newcastle Courtyards, said they plan appeal the decision, however.
Given how little the tax has actually brought in compared to initial estimates, agents wonder if the grief it’s causing the real estate community is actually worth the resources it will provide for the city’s housing woes.
“There are homeless people on the street, it’s very unfortunate, it’s very sad, and there’s no easy solution,” Michael Nourmand, president of Nourmand & Associates, told Intel. “So you’re going to have this punitive tax on people — other than a progressive tax where everyone contributes, which would make more sense, but OK — so let’s just try to tax the rich as much as we can so that we force them all to leave town or live nearly six months and a day outside of California to avoid paying taxes — and then you don’t even have a thing to build?
“I thought [the city] was going to take $0.80 or $0.90 on every dollar to build [housing], and then you look and it’s like less than $0.30 or $0.40 on the dollar used to build.”
In August, the city approved $57 million for the development of multifamily affordable housing within the city as part of a Measure ULA expenditure plan for the 2023-2024 fiscal year.
“I tell you, ‘I’m going to charge you $10,000 to build chairs,’ and then I tell you, ‘Well, actually, I’m only going to spend $2,500 building chairs, which everybody needs,’” Nourmand continued. “What? I read the [plan] and I was like, ‘Am I getting punked?’”
Another agent objection is how a legal initiative that was billed as something like a rallying effort to tax the rich is now having negative ripple effects on so many more people than just the city’s high-net-worth individuals.
“I don’t think what people realize is when there’s less transactions, that’s one of the things that funds public schools: property tax,” Nourmand said. “It’s not the only thing, but it’s one of the coffers.
“Then what happens when you say, ‘You know what? Who cares about the millionaires?’ And then you realize, ‘Wait, every time a house sells, real estate agents get paid, title companies get paid, escrow companies get paid, inspectors get paid, contractors get paid.’ … There are all these people that money exchanged hands with. People don’t see that part of it.”
Only the beginning
L.A. is not the only city in the U.S. grappling with the reality — or at least the possibility — of a new “mansion tax.”
Santa Fe recently passed a 3 percent tax on residential sales over $1 million, but the tax, which the buyer would be responsible for, only applies to the home’s value after the first $1 million.
Chicago is also contemplating such a measure. It will hit the ballot in 2024 and would place additional taxes on properties valued at $1 million or more, adding a 2 percent tax on the first $500,000 of the sale after $1 million, and a 3 percent tax on any amount above $1.5 million, which the buyer would be responsible for.
In cities that struggle with homelessness and high housing costs, agents say it’s not that the real estate community and more well-to-do homeowners don’t support the idea of helping with the problems. To these real estate professionals who spoke with Intel, it simply feels like one more straw hitting the camel’s back after long stretches of struggles — and it’s unclear to them that the benefits are worth it.
Los Angeles, for instance, has had to grapple with rising mortgage rates, the rising cost of construction, low inventory, the dual SAG-AFTRA and WGA strikes, and now the ULA Tax, all of which have served to create a kind of “perfect storm” driving people away from transacting within the city of L.A., Salazar said.
“People are getting tired of all this stuff,” Salazar told Intel. “They’re tired of the city not taking care of the homeless situation, tired of the crime that’s gone up, tired of a lot of things — a lot of policies. It’s almost like, if you look at San Francisco and what happened to that city during COVID and what’s going on with that city now. I’m not saying the city of L.A. is at that level, but a lot of people are just not happy.
“So, yes, 100 percent, ULA is definitely not the only reason why people are starting to move out of L.A., out of California — it’s not only LA, it’s also all of California — it’s just everything, you pile it on, and ULA is another thing on the list where you’re like, ‘OK, this is what broke the camel’s back. We’re going to get out of here.’”
These factors have driven more people to Beverly Hills, Culver City and sometimes Malibu, Salazar surmised, noting that it was almost certainly contributing to home values rising in Beverly Hills recently.
Nourmand added that ULA is just one more factor that makes the city feel less business-friendly, causing a lot of developers to expand their reach elsewhere.
“It’s a very frustrating time to be in business in L.A.,” Nourmand said. “On the real estate side, you have tons of new rules that are lousy. You have very one-sided employment laws against employers. You have very high insurance costs for businesses and people who own real estate. You have a lot of competition for talent, so there’s pressure on wages and retention, interest rates have been high … It’s just a lot of red tape in every direction that you look at, and it compresses the margins.”
Brian Blount of Sotheby’s International Realty | Santa Fe acknowledged that his city certainly has an affordable housing problem that requires action, but he felt that the new mansion tax, which passed with an overwhelming, near-75 percent majority, was just a bit of “low-hanging fruit” that politicians knew could easily get passed, but which will not actually provide that much financial support to the cause.
The Santa Fe tax is expected to raise about $6 million annually for the city’s affordable housing trust fund, which is drawn on to build and maintain low-income housing, in addition to helping low-income residents afford mortgage and rent payments.
Like L.A. agents, Blount is also aware that at this point his clients feel like they’re “being nibbled to death” with different regulations and expenses, and the fear that a drastic step away from the market on the part of homebuyers and sellers — like what’s happening now in L.A. —was on his mind.
“Remember, it just takes one straw to break the camel’s back,” Blount told Intel. “This is one more straw. By itself, I don’t think it will be a big burden, but I think all of the straws together are a big burden. The biggest straw right now in terms of sellers listing a house is the golden handcuffs of interest rates … So you put that together with, ‘Oh, now I’ve got to pay a tax on top of that?’ It just makes everything harder.”
Despite the challenging circumstances they’re facing today, L.A. agents aren’t giving up on the city, they told Intel. Salazar was heartened by the fact that the strikes had resolved and noted that L.A. still sees strong investment from foreign buyers, particularly from China, Saudi Arabia, Europe, Mexico and Canada.
“Agents are resilient,” Mills told Intel. “And most of us love what we’re doing. So we’ll get through this, too.”