The LA April Fool’s Day Tax: Not a Laughing Matter

It seems appropriate that Measure ULA (United to House LA), otherwise known as the “mansion tax,” went into effect on April Fool’s Day of this year. For those not familiar with this measure, a 4% ULA transfer tax is now levied on the sale or transfer of real property when properties are valued above $5 million and is increased to a 5.5% tax for real property valued at over $10 million. The money raised by this measure is designated for the production and acquisition of affordable housing, as well as homelessness prevention measures in the form of rent relief, income support for rent-burdened seniors, and legal counsel for tenants facing eviction.

So, who will be affected by this transfer tax?

The ULA transfer tax will be imposed on all real estate property—both residential and commercial— sold or transferred within the City of Los Angeles beginning on April 1, 2023. This applies to properties in all LA neighborhoods including Century City, North Hollywood, Van Nuys, and Westlake. This ordinance, however, will not apply to a number of incorporated cities within LA County such as Beverly Hills, Santa Monica, Culver City, West Hollywood, Pasadena, and Long Beach. Other California cities including San Francisco, Culver City, and Santa Monica have recently passed similar measures imposing new transfer taxes or increasing existing transfer tax rates for real estate transactions.

While we can all agree that Los Angeles has a homeless problem and solutions are much needed, this measure could actually cause more harm than good. Indeed, according to The UCLA Lewis Center for Regional Policy Studies’ analysis on the initiative “Measure ULA may depress new housing production by serving as a tax on apartment development. Specifically, increasing taxes on new multifamily housing could generate very little additional revenue but reduce the production of market-rate and below-market housing. This could result in higher rents and displacement relative to a tax that exempted sales of new multifamily.”

Director of Finance

Early estimates indicated the ULA tax would generate upwards of $1.1 billion for affordable housing. However, City Administrative Officer Matt Szabo shared an analysis by his office with significantly lower figures of up to $672 million. A recent LA Times article indicated that commercial real estate sales in Los Angeles have cooled off due to the new transfer tax. The ULA tax may be leading to only those that need to sell due to death, divorce, retirement, etc. to list their property. Also mentioned was the “Nine Ideas to Avoid the Effect of Measure ULA – The New Mansion Tax,” in the JD Supra legal news blog. A few workarounds to selling without incurring the transfer tax are selling the building and doing a ground lease on the land and selling the property with a seller carry-back, lowering the sales price while carrying a very high interest loan. Choosing not to sell or to adjust the transaction to avoid the transfer tax may bring the ULA tax revenue below the revised $672 million estimate.

Measure ULA also amended the City of Los Angeles Municipal Code and authorizes the Director of Finance to redefine the term “realty sold.” This allows the Director to expand the scope of transactions that trigger the ULA tax, perhaps as some fear on business entities and equipment sales. As with most policies and taxes, the ULA tax will remain in effect until the Los Angeles voters choose to repeal it. This may be the case as both a legal challenge and a ballot initiative are in progress.

Challenges in the Courts and on the Ballot

Back in December of 2022, the Howard Jarvis Taxpayers Association and the Apartment Association of Greater Los Angeles filed a joint lawsuit against the City of Los Angeles seeking to overturn Measure ULA, calling the measure “invalid.” Proposition 218 amended the California Constitution in 1996 and requires local special taxes to be approved by a two-thirds vote. As Measure ULA’s revenue is only going into a special fund for the purpose of funding homelessness initiative and not the general fund and passed with only 57% of the vote, the ULA tax may be considered unconstitutional. The lawsuit states: “If the Measure ULA tax increase is imposed as scheduled on April 1, 2023, great and irreparable harm will result to plaintiffs, and to all Los Angeles property owners in being required to pay unconstitutionally imposed taxes.”

In addition, a new state ballot initiative, which was approved by the California Secretary of State with more than 1 million signatures—392,000 of those coming from Los Angeles County—will be on the 2024 ballot. Under the proposed Taxpayer Protection Act initiative, all new taxes passed by the California State Legislature would have to be approved by voters. And for any local special tax increases, voters would have to approve the measure by a two-thirds vote, rather than a simple majority as at present. Although the ballot initiative, which was sponsored by Kilroy Realty, does not mention Measure ULA, it states that any local tax imposed after January 2022 but before November 2024 that “was not adopted in compliance” with the two-thirds requirement will be voided. Measure ULA with only 57% of the vote would therefore be cancelled.

If indeed the legal challenge or the ballot initiative is successful, the taxes collected would need to be refunded to property sellers. Los Angeles’s top financial advisor has said the tax money would be refunded to property sellers if the city ends up losing the two legal challenges. City Administrative Officer Matt Szabo has also recommended a pause in spending the money collected until the courts announce their decisions. Daniel Yukelson, executive director of the Apartment Association of Greater Los Angeles, which represents landlords, stated: “If this unlawful tax is allowed to stand, it will be the last straw that will cause property owners to invest elsewhere and never to come back to Los Angeles, following nearly three years of challenging rent collections and no allowable rent increases due to so-called ‘temporary’ moratoriums. The punitive tax increase imposed by Measure ULA would ultimately trickle down to consumers in the form of higher prices for consumer goods and services, including higher rents.”