Real Property Law
Measure ULA: The Tax Man Cometh – And Taketh
In the November 8 election, voters in the City of Los Angeles savaged the value of so-called “expensive” residential and commercial real estate by adopting Measure ULA (“ULA”). Dubbed the “Mansion Tax,” ULA imposes ADDITIONAL transfer taxes on the sale of residential and commercial properties in Los Angeles, effective April 1, 2023.
Advocates of the tax say the proceeds will be up to $900 million annually, to be used to fund affordable housing and tenant assistance programs. Currently the combined city and county transfer tax is $5.60 per $1,000 of valuation. As of next April Fool’s day, the ULA boosts that by:
- 4% of the total consideration (there is no credit for existing debt) for sales of $5,000,000 or more, up to $10,000,000.
- 5.5% of the total consideration for sales of $10,000,000 or more.
Here’s a hypothetical example. Let’s say a property sells for $5,400,000 before April 1, 2023. The total city and county transfer tax would be $30,240. If the sale occurs after that date, the additional tax would be $216,000, for a grand total of $246,240.
The situation gets even uglier for sales of $10,000,000 or more. In the case of a $10 million sale, ULA would impose a whopping additional tax of $550,000.
The ULA tax cannot be avoided by conveying ownership interests (rather than the property). Nor is the ULA affected if the buyer assumes existing debt as part of the total consideration being paid.
The net effect of the ULA tax will be substantial upward pressure on the pricing of real estate sales that exceed the dollar thresholds. Sellers can try to shift all or a portion of the ULA tax to buyers, but buyers may balk at a sudden proposed jump in price at a time when the market is already being depressed by the effects of sharply higher interest rates. That leaves sellers with two unpalatable options: (a) absorb at least a portion of the ULA tax, meaning a de facto price reduction, or (b) forego the sale.
The costs of the ULA tax will ultimately be passed along to consumers. Apartment rents will increase as building owners respond to higher property costs. The prices for goods and services will rise as manufacturers, retailers and service providers try to recoup the higher costs for their factory, store and office space. Because the ULA tax is local, many sellers and buyers are now shifting their focus to properties outside of Los Angeles, adding additional energy to the vibrant markets in Texas, Florida, and other states.
Legal Chalenge to Measure ULA
A recently filed lawsuit could, if successful, undo Measure ULA. The lawsuit was initiated by the Howard Jarvis Taxpayers Association and the Apartment Association of Greater Los Angeles, and very persuasively asserts that the ULA Tax is constitutionally invalid. The substantive claims in the lawsuit are summarized below:
- Proposition 13 constitutionally prohibits all local governments from imposing special transfer taxes that are not for general purpose. The ULA Tax does not qualify as “general purpose.”
- The Los Angeles City Charter confirms that legislation by initiative may not transcend the prohibition. In other words, the voters may only adopt an ordinance that the City Council would be permitted to do. As noted in item 1, the City Council is prohibited from imposing a special transfer tax, so the voters cannot supersede the prohibition.
- Since the ULA proposed a special tax that was beyond the voters’ power to adopt, the tax is invalid.
We will keep you apprised as the lawsuit progresses.
Bob Weiss leads the real estate and finance departments at Valensi Rose, PLC. He can be reached at email@example.com or 310-601-7010.