Real Estate Transfer Tax Aims to Help Homeless, But Similar Los Angeles Tax Struggles to Deliver 

By Brian Rogal, Chicago Tribune| November 19, 2023

Earlier this year, Los Angeles hiked a transfer tax imposed on pricey real estate purchases, a move designed to generate revenue to fund homeless services.

The measure, which hits both commercial and residential properties, bears a striking resemblance to the “Bring Chicago Home” proposal up for a citywide vote next March, and has so far failed to fill Los Angeles coffers.

Luxury home sales, the mainstay of a market home to Hollywood stars, popular recording artists and entertainment executives, plunged in the first few months after the new law took effect in April, leaving the city far short of its fundraising goals, at least for the first six months.

“With not a lot of digging, you’ll find it’s been a disaster for LA real estate,” said Matthew Hargrove, president and CEO of the California Business Properties Association. “This is a market, and markets react to taxes. They’re not coming anywhere near the promised numbers. That’s the problem with doing policy at the ballot box.”

If Chicago voters approve Mayor Brandon Johnson’s request to hike the tax that he hopes will pour more funds into homelessness prevention, it would help fulfill campaign pledges to tackle the affordable housing crisis, ensure the wealthy pay more for city services, and grant more power to grassroots organizations.

“We are committed to finding a dedicated funding stream to combat homelessness,” said S. Mayumi “Umi” Grigsby, Johnson’s chief of policy. “And we’re trying to do it in the most equitable way possible.” Grigsby acknowledges that so far, the Los Angeles initiative hasn’t raised the hoped for amount, but said the Johnson administration reached out to city officials there to learn more about its policy and made important adjustments to Chicago’s proposal, including a tax cut for many property buyers.

But critics worry Bring Chicago Home might encounter the same pitfalls Los Angeles has struggled with. They also fear raising any tax will sabotage recovery in the real estate market, which has been beset by high interest rates and an office market stunted by the pandemic.

“Some people say, ‘it’s just high-value properties,’ and therefore, it’s OK to increase taxes on them,” said Illinois Realtors CEO Jeffrey Baker. “But it will slow the entire real estate market, and the entire real estate market is in a precarious position.”

The debate comes as a growing number of local governments are using ballot referendums to raise real estate or other business taxes, often to fund progressive goals such as building supportive housing for homeless people. Voters in San Francisco, Santa Fe, New Mexico, and Silicon Valley’s Mountain View recently backed various tax hikes to fund homeless services, or to develop affordable housing. And Evanston recently decided to use its transfer taxes to fund a reparations program for Black residents.

“This has become a bit of a fad or trend, especially in California,” said Christopher Berry, faculty director of the University of Chicago’s Mansueto Institute for Urban Innovation. “Partly it’s that with the election of more progressive mayors, cities are looking for options to implement progressive taxes.”

A coalition of activists, labor unions and community organizations, including the Chicago Coalition for the Homeless, Jewish Council on Urban Affairs, the Chicago Teachers Union and ONE Northside, led the Bring Chicago Home effort and say they were directly inspired by Los Angeles activists.

“We did go to LA, and we modeled our campaign on them,” said Julie Dworkin, former director of policy for the Chicago Coalition for the Homeless.

Funding for homelessness

Tens of thousands of people are living on Los Angeles streets on a given day, far more than in Chicago, and in 2016 voters in LA approved Proposition HHH, a $1.2 billion, 10-year bond program to build thousands of units for people who are homeless. A countywide referendum later authorized a slight bump in sales taxes to fund homeless services, and in 2022, LA voters approved a transfer tax increase.

Called Measure ULA, it taxes buyers at much higher rates than what Bring Chicago Home proposes. The California measure increases transfer taxes to 4.45% for all properties costing between $5 million and $10 million, and to 5.95% for properties worth more than $10 million.

Backers say calling it a “mansion tax” was key to building support, even though it also covers commercial properties.

“It was marketed as a mansion tax, and that’s what made it easy for voters to get behind,” said Los Angeles City Councilmember Nithya Raman.

In November 2024 California voters will choose whether to make it easier to raise taxes if the proceeds fund affordable housing.

Proposition HHH made a big difference, said Stephanie Klasky-Gamer, president and CEO of LA Family Housing, a homeless services provider and real estate developer, and she expects luxury home sales covered by Measure ULA to eventually pick up and spark even more development.

“We used to build one building every three years, we’re now doing three buildings each year,” she said. “The production (of units) across Los Angeles has been incredible. That’s what we expect to see once (transfer tax) coffers are full, and why we fought so hard to get it passed.”

Chicago homeless services providers say they also need more funding. Conditions here are not as bad as Los Angeles, but the city still has a long-standing shortage of affordable housing, mental health care and other services, and a homeless population that was growing even before thousands of migrants, mostly from Latin America, began arriving by bus in late 2022.

“During the pandemic, the eviction moratorium helped, and the city did a good job of keeping shelters open,” said Mary Tornabene, a nurse practitioner and project manager for Heartland Alliance Health. “It was a phenomenal effort, but after the pandemic ended, the numbers of people homeless pretty rapidly increased.”

The state’s eviction moratorium ended in October 2021. In 2022, city officials conducted their annual survey of the homeless population and said 3,875 people were in shelters or on the street on a given day. The 2023 survey found more than 6,000 people were homeless, and Tornabene said about 68,000 Chicagoans did not have a home at some point during the year.

“The resources don’t increase at the rate homelessness increases, so there needs to be another way to fund this, absolutely,” she said. “We talk to our shelter providers all the time, and ask, ‘How many beds do you have open?’ No one has had a bed available in a long time.”

Interfaith Housing Development Corp. is developing the Conservatory Apartments, a 43-unit building at 414 N. Central Park Ave. in the Humboldt Park community. But Katharine Booton-Wilson, CEO of Deborah’s Place, a homeless services provider that will operate many of the units starting in January, said the needs of the population they serve, unaccompanied adult women, will still be far greater than available resources.

“It’s an often-forgotten population,” she said. “There are thousands of women living on the streets or in shelters who don’t have a place to live. Our city should have the resources to provide a roof over the head of every single person.”

Dworkin said when she started with the Chicago coalition nearly 30 years ago, the city kicked in less than $10 million per year toward homeless services, mostly for shelters. Funding now stands at about $56 million, and that’s not enough to create the needed permanent housing units.

“We agreed with the LA coalition that the best way to tackle this problem is with dedicated funds, so when people say, ‘how are you going to fund it,’ you have an answer,” she said.

Although Chicago activists liked the strategy of going directly to voters, they thought higher sales or property taxes would be an impossible sell. Instead, they advocated more than tripling the city’s transfer tax for buyers, currently a flat rate of 0.75%, on properties sold for more than $1 million.

“We couldn’t find anything else that would be politically viable, and which generated the funds needed to tackle the problem of homelessness,” said Dworkin, who estimated the move would raise on average about $160 million per year.

Evanston activists also found transfer taxes come in handy. The north suburb in 2019 raised its transfer tax on properties valued at more than $1.5 million, and last year decided to use it to partly fund a historic reparations program for Black residents harmed by housing discrimination after a cannabis tax did not raise enough money.

“It’s a way to finally begin addressing some of the harm that was done to our community,” said Robin Rue Simmons, executive director of the nonprofit FirstRepair. “I think policymakers should use us as an example.”

Evanston’s transfer tax did raise far less than expected in its first year, but in 2022, after city officials forecaste raising $3.75 million through the tax, it brought in nearly $5.5 million.

“There may have been an impact/reduction around the time the tax took effect as properties greater than $1.5 million rushed to close before the new rate took effect,” Jessica Mayo, communications manager for the Evanston city manager’s office, said in a statement. “However, there has been no noticeable long-term impact.”

Real estate impact

Luxury home sales in Los Angeles soared before the transfer tax increased in April. Actor Brad Pitt sold his Hollywood Hills estate in March for $39 million, avoiding more than $2 million in transfer taxes. Many other wealthy owners did likewise.

In March, 126 Los Angeles homes or condos worth more than $5 million were sold, according to the multiple listing service. But in April, just two were sold.

“It definitely slowed down transactions,” said Loretta Thompson, a Los Angeles-based real estate attorney with Withers. “But for homes under $5 million, the market is vigorous and has not been affected.”

Some potential sellers could be hanging onto their houses to see if several ongoing lawsuits overturn the tax hike, while others simply sell their homes for less than the $5 million cutoff, according to Sally Forster Jones, CEO of the Beverly Hills-based Sally Forster Jones Group.

“At $4.999 million there is not any additional transfer tax, but once it hits $5 million, there is, and it’s for the total amount,” she said. “It was not well thought through.”

Activists don’t regret pushing the measure through.

“(Legislators) could have solved this five, 10, 20 years ago but didn’t, and voters wanted to see the problem dealt with,” said Jerry Jones, coordinator of the Greater LA Coalition on Homelessness. “It’s not the perfect public policy, but it ain’t bad.”

In Chicago, Johnson endorsed the plan to raise the transfer tax and made it a centerpiece of his mayoral campaign. But local business groups have denounced the proposal and are critical of the term “mansion tax,” as the tax could also hit buyers of apartment buildings, offices and stores.

“Proposals like this act as a disincentive to homeowners who want to freely buy and sell their homes,” Baker of the Illinois Realtors said. “It also sets up an us versus them mentality. We think that’s unhealthy.”

Skeptics also charge such taxes are unreliable, with revenue varying wildly year-to-year. And since downtown is still half-empty, with sky-high interest rates making it expensive for developers to buy and renovate properties, they say it’s a bad time to target the industry.

“I think the transfer tax proposal is very well-intentioned, but poorly timed,” Berry said.

Investors spent about $10.6 billion on U.S. office buildings in the third quarter, down 65% from 2022, according to Colliers, a commercial real estate firm. And just one major downtown Chicago office property, 230 W Monroe St., was sold this year.

“In all product types, the sales volume is significantly down,” said John Homsher, senior vice president of Colliers. “You can increase the transfer tax, but you’re introducing it into a declining market.”

If the proposal gets a thumbs-up from voters, the best long-term scenario would be if buyers and sellers eventually just accept higher transfer taxes as the cost of doing business in Chicago, which is what happened in the past several years after New York City imposed higher transfer taxes, Berry said.

“I don’t think anyone looks at New York and says you can’t sell a $1 million house there anymore.”

Los Angeles officials forecast in March that the first year of the city’s higher transfer tax would raise $672 million for homeless services, rental assistance, mental health care and new supportive housing units. But in October housing officials reported generating about $100 million during the first six months.

“That’s the exact same situation we will have in Chicago,” Baker said. “And then we will have programs that don’t match up with the revenue.”

“We acknowledge that the real estate market is cyclical and impacted by a lot of factors,” Grigsby said, but the city plans to focus on creating permanent supportive housing and launch projects only when enough money is in hand.

To further answer critics, the Johnson administration evaluated the transfer tax hike in Los Angeles and reformed the proposal put forward by the Bring Chicago Home coalition, she added.

The mayor proposed a new three-tier system, including a roughly 20% tax cut for properties priced below $1 million, a move Grigsby said would cover about 95% of sales. Properties between $1 million and $1.5 million would pay a 2% tax, while properties priced higher than $1.5 million would pay 3%.

And if a property is sold for $1.1 million, instead of smacking the buyer will the full tax, they would only pay the higher rate on $100,000, and pay the lower rate on the remaining $1 million.

Properties with agreements to provide affordable housing will be exempt from the increases.

Researchers from the University of Chicago’s Harris School of Public Policy found that if the new rates had been in place during the last decade, the tax would have boosted annual revenue by $160 million on average, mostly from property sales worth more than $10 million — meaning large apartment and commercial buildings.

Annual revenues could be lower than $160 million if a stagnant office market or high interest rates keep prices depressed, according to the study. The new rules could also make land more expensive to buy and develop and halt some transactions, along with other unpredictable effects.

“For properties that face a tax increase, transactions with very small margins may no longer go through,” the study notes. “Likewise, for properties where the tax has decreased, some formerly unprofitable transactions may find a way to happen.”

Grigsby said the city will budget conservatively, and forecasts raising about $100 million per year.

All changes were made after consulting with the Bring Chicago Home coalition, so Johnson is keeping his promise to be a community-oriented mayor, Grigsby said. And even if voters approve the referendum, the City Council will spend months crafting an ordinance, which means further talks with the Realtors and other industry insiders.

“I feel like we’re getting the best of both worlds,” Grigsby said.

The full City Council approved Bring Chicago Home by a 32-17 vote on Nov. 7, setting up a citywide referendum in March. It continues to be a top priority for the administration, and Johnson promised to keep campaigning.

“When I ran, I said that this is what we’re going to do. The people of Chicago had an opportunity to vote for someone else who wasn’t supporting this initiative,” he said at a news conference following passage of the ordinance. “We’re going to knock doors, we’re going to talk to people, we’re going to hold community meetings, and we’re going to tell the story that one in four Black children experience homelessness. That ain’t right. Seventy percent of those that are unhoused are Black. That ain’t right.”

The changes by the mayor’s office are cold comfort to large property owners, said Farzin Parang, executive director of the Building Owners and Managers Association of Chicago. Higher transfer taxes could still slow the sales of office properties, and those sales typically create construction jobs and new amenities for tenants.

“You want the assets to be trading regularly, because when you have a sale, typically the buyer comes in with an investment strategy and puts money into a building,” he said.

Parang does agree the city needs to cure homelessness, and if it’s done right, Chicago could end up even more attractive to investors.

“Chicago can be a leader in getting people off the streets,” he said. “We want to be a part of that conversation. There is an opportunity here.”