Los Angeles Voters Could Approve ‘Mansion Tax’ Affecting High-Value Real Estate | Knowledge
In response to the homelessness crisis, voters in the City of Los Angeles were asked to vote on Measure ULA, aka the “Mansion Tax,” on November 8, 2022. Measure ULA seeks to raise funds for affordable housing and tenant assistance programs by imposing a massively increased transfer tax to be levied on certain transfers of real estate. Sellers and buyers of commercial and residential real estate should be aware of this new tax and its impact on the net purchase price during a purchase and sale transaction. It is expected that this new tax will have a ripple effect on the market as the additional cost is significant and probably changes underwriting assumptions.
How does the ULA measurement work?
Currently, the City of Los Angeles and Los Angeles County levy a Documentary Transfer Tax on every instrument that carries land sold in the city. When the value of the property exceeds $100, municipal tax is levied at a rate of $4.50 per $1,000 of consideration, while county tax is levied at a rate of $1.10 per portion $1,000 of consideration, for a total of $5.60 per $1,000 of consideration.
If the ULA measure is passed, effective April 1, 2023, there will be a drastic increase in transfer tax amounts by imposing an additional tax on the sale or transfer of “high value” real estate within the city limits. A tax of 4% of the property value will be imposed on the sale of properties valued between $5 and $10 million. If the property is valued at $10 million or more, the sale will be subject to a 5.5% tax. The value of the property for measurement purposes will include the value of any lien or encumbrance remaining on the property at the time of its sale. For example, as of April 1, 2023, a seller of a building valued at $100 million will pay an additional $5.5 million in transfer duties to the City. Note that if passed, the ULA measure will become law on January 1, 2023, but it will not impact transactions until April 1, 2023.
Some qualified affordable housing organizations are exempt from the tax. To qualify for an exemption, the transferee must have a history of affordable housing development and/or real estate management experience, as determined by the Los Angeles Department of Housing. Additionally, the measure will not apply to certain housing, non-profit and public entities.
The measure is expected to bring in between $600 million and $1.1 billion a year, fluctuating depending on the amount of assets transferred. At least 92% of revenues will be used by the Affordable Housing Program and the Homelessness Prevention Program to fund affordable housing and tenant assistance initiatives.
The impact of the measure will likely be widespread. In addition to owners of high-value residential real estate, commercial tenants and occupiers across the city will bear the brunt of the new tax. Rents could rise, businesses could close and others could choose not to invest or buy property in the city, absent some correction in the sale price of assets that takes into account the new transfer tax. Additionally, even though the tax affects properties worth $5 million or more, there will be a ripple effect on small and medium-sized commercial and residential sales transactions.
Also check back as additional votes are counted and constituencies report back. As of this writing, not all of the City of Los Angeles’ votes have been counted.
For more information or questions about Measure ULA and its potential impact on buy and sell transactions, contact the authors.
Upcoming Related Webinars
The California Housing Laws of 2023, Part I: Housing Law Heavyweights
Wednesday, November 16, 2022
11:00 a.m. – 12:00 p.m. PT
Speakers: Dan Golub, Chelsea Maclean and Emily Warfield
California Housing Laws of 2023, Part II: A Deeper Dive and a Bigger Picture
Wednesday, December 7, 2022
12:00 p.m. – 1:00 p.m. PT
Speakers: Dan Golub, Chelsea Maclean, Kevin Ashe and William Sterling
The information in this alert is intended for the general education and knowledge of our readers. It is not intended to be, and should not be used as, the sole source of information when analyzing and resolving a legal issue, and it should not substitute for legal advice, which is based on a specific factual analysis. In addition, the laws of each jurisdiction are different and constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular factual situation, you are encouraged to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.