Los Angeles Offers Lessons on Dangers of Real Estate Transfer Tax

By Sarah Holder, Bloomberg printed in Crain’s Chicago Business | January 13, 2024

The new villain on the seventh season of the hit reality real estate show Selling Sunset wasn’t a sassy new luxury broker not there to make friends. It was a real estate tax.

“Makes me nauseous even thinking about it,” real estate agent Mary Bonnet said of the so-called mansion tax in the season’s first episode, as she surveyed the living room of a $26 million eight-bedroom home in Brentwood.

The tax, known as Measure ULA, was pitched in 2022 as a fix to Los Angeles’ dire housing crisis. Passed by ballot measure with 58% of voters in favor, the measure created a new land transfer fee on real estate transactions over $5 million, and directed the proceeds to affordable housing projects, tenant protections and homelessness prevention efforts.

Researchers projected it could earn the city upwards of $900 million annually, money that could start bringing people off the streets. But since Measure ULA went into effect in April, it has only raised about $142 million — far off track of reaching that estimate.

A mix of political and economic forces have helped to slow sales of high-value real estate. In the year after the mansion tax passed last November, national interest rates spiked and home sales slumped, while strikes shut down Hollywood. But resistance to the tax may have also influenced the market. In March, sellers rushed to push through sales before it went into effect. Landlords and an anti-tax lobbying group challenged the tax in court, delaying the disbursement of funds for affordable housing.

Concerns that the tax is a chief obstacle to selling luxury homes have been amplified by a Netflix-sized megaphone: On Selling Sunset, agents have been able to share concerns with millions of global viewers. “You don’t have as many buyers out there trying to buy; we don’t have as many sellers willing to sell,” Bonnet, who is vice president of The Oppenheim Group, said on camera.

Some critics say the tax is also deterring the development of multifamily housing that would help alleviate housing constraints. “To say that this tax has been counterproductive is an understatement,” said Bonnet in a follow-up email to Bloomberg CityLab.

The backlash in LA comes as many cities look to advance similar measures. “I think we could preemptively declare 2024 to be the year of the mansion tax,” said Andrew Boardman, a local policy analyst for the Institute on Taxation and Economic Policy, a left-leaning think tank.

As the housing market stabilizes, the real estate industry adapts, and various lawsuits move through the appeals process, advocates say the tax will prove its worth. By November, monthly sales over $5 million had nearly tripled since cratering in April, bringing in nearly $14 million for Measure ULA.

“It’s not a silver bullet, even at its fullest manifestation,” said Greg Good, a senior advisor to the Los Angeles Housing Department. “But it is the closest thing to a needle-mover that we’ve even come close to.”

Other cities faced with local housing crises of their own aren’t waiting to jump aboard the mansion tax train. Nearly 70% of Santa Fe voters approved a tax on residential real estate sales over $1 million in November 2023, with the proceeds earmarked for affordable housing; Chicago voters will have the chance to decide on a similar tax this year. In Seattle, the vast majority of voters approved a broader property tax increase that’s expected to raise nearly $1 billion to support low-income renters over seven years.

And while the “mansion tax” branding and momentum may feel novel, applying taxes on real estate transfers to fund public priorities is tried and true. Such measures already exist in more than a dozen other localities, including New York City and San Francisco, according to Boardman.

“Economically, practically, politically, they’ve proven quite effective, especially within the very limited toolbox of local government finance,” he said.

Until now, most of these transfer taxes have done their job “really without much fanfare or controversy,” Boardman said. The story is different in Los Angeles.

Not Just Mansions

In the campaign for Measure ULA, the sell to voters was simple: Help us pay for affordable homes by taxing super-expensive ones.

“It seems like a no-brainer — we still think it’s a no-brainer — to put a tiny tax on mega-mansions to have a big impact on our affordable housing crisis and to prevent our growing crisis of houselessness,” said Joe Donlin, the director of United to House LA, a coalition of more than 100 advocacy groups, tenants’ rights organizations, nonprofits and unions that authored and organized around Measure ULA. Seventy percent of the proceeds are meant to be put toward affordable housing production, and the other 30% to homelessness prevention.

The redistributive impulse has inspired other cities, says Yonah Freemark, a senior research associate at the Urban Institute’s Metropolitan Housing and Communities Policy Center. “People do not think that the distribution of resources in our society are fair, and think that one way to fund affordable housing is to ask that there be some redistribution.”

But one of the biggest sticking points among LA developers is that despite the marketing, Measure ULA doesn’t only apply to mansions. Although single-family homes represent the largest share of its projected revenue at 38%, the tax also applies to most multifamily developments, office buildings and hotels.

“If the community really knew that this was a tax on every single property that exists north of $5 million, I don’t know if the outcome would be the same,” said Richard Heyman, a real estate developer in the LA area and the founder of Heyman Development. This isn’t unique to Los Angeles, says Boardman: Nearly all US property transfer taxes apply to more than just single-family homes.

Because Measure ULA applies to apartments that could include affordable units, there were fears even before the tax passed that it could deter the development of sorely needed housing.

With construction costs, inflation and interest rates all elevated, developers consider the tax another blow. Sellers must pay an extra 4% of the entire purchase price for any sales over $5 million, or an extra 5.5% on sales over $5 million. The tax “creates a layer of extra precaution for people to really start a project,” said Jason Somers, the founder and chief executive officer of Crest Real Estate, an LA-based project management firm for the industry.

A 2022 UCLA study somewhat assuaged concerns about affordable housing, suggesting that the tax would have little impact on multifamily construction, in part because developers rarely sell their properties right after building them.

Experts say the cost of the tax can also make it harder for developers to get financing from banks, however. Shane Phillips, the housing initiative project manager at the UCLA Lewis Center for Regional Policy Studies and one of the authors of the UCLA paper, warns that because of this, applying the tax to first sales of multifamily units could kill more affordable apartments than it ends up paying for.

Phillips would advocate for more exemptions in Measure ULA to encourage new construction. “I don’t think we really need to be giving a break to $5 million-plus single-family homes. But pretty much everything else, I really think we do want to encourage them to be built,” said Phillips.

Other research on the impact of real estate transfer taxes on development is limited, said ITEP’s Boardman. It may take a few years to understand what Measure ULA is doing to LA’s apartment-building pace, if anything.

‘Shaking the Snow Globe’

The luxury home-selling frenzy of last March wasn’t a coincidence. “Everyone is trying to sell any house over $5 million before the mansion tax comes into effect,” said Jason Oppenheim, president of the Oppenheim Group, as he urged Selling Sunset agents to expedite sales in episode three. “We can’t afford to wait.”

But it’s been more than nine months, and Los Angeles Finance Department data shows that even at the peak in October, the number of transactions over $5 million was almost half of what it was in October 2022. Aaron Kirman, a luxury real estate brokerage owner in the LA area, says that’s because for high-net-worth clients buying and selling individual homes, the tax has been prohibitive.

“I’ve had many sellers say that they simply cannot afford to or do not want to sell their home as long as this measure ULA is in place,” said Kirman, founder and CEO of AKG at Christie’s International Real Estate. “And I’ve had many buyers say that they’re no longer interested in buying in LA.”

Some sellers may have been biding their time, hoping the tax would be quashed by the multiple state and federal lawsuits that emerged to challenge it. While judges have repeatedly ruled in Measure ULA’s favor, appeals are planned. Or they may still be holding out hope that it will be nullified by a proposed 2024 ballot measure that would raise the threshold for voters to pass local taxes.

The transaction trend line is starting to go up and Somers says permitting is continuing apace. “Life does go on; building does continue in our city, because of such high demand, and the potential for high values,” he said.

Already, 19 affordable housing projects with a total of 1,500 units have applied for a piece of the $56.8 million in Measure ULA funding available. Short-term rental assistance has started going out to tenants and landlords. “Despite all of the attempts to slow it down, to undermine ULA, to challenge it — we’ve made a lot of progress,” said Donlin.

Measure ULA supporters say that even generating half of the projected revenue would be a “game-changer,” says Good. “We’ve never had a consistent revenue stream to generate affordable housing, and certainly not of that girth,” he said.

LA has passed several other measures to fund housing and homelessness in the last several years. Meanwhile, Los Angeles city and county had 71,320 people living on the streets on one night in 2023, according to the Department of Housing and Urban Development’s latest count.

“The market has not addressed and has not ensured that Angelenos don’t sleep on the street,” says Good. “And it has not ensured adequate housing stock in this region or in this city. The city right now is shaking the snow globe and trying to figure out how to address this.”

Sarah Holder writes for Bloomberg CityLab.