Last month, Los Angeles voters approved Measure ULA, imposing a new tax on all sales or transfers of real property over $5 million. This will affect all parties involved in a real estate transaction, and it is important to understand the implications of the measure before negotiating a new project. My colleague David Tabibian, a partner in JMBM’s Global Hospitality Group® and Real Estate Department, explains the initiative and its potential impact below.
In an effort to combat the homelessness crisis, Measure ULA (also known as the “Homeless Tax and Housing Solutions”) was recently approved by the voters of the City of Los Angeles on November 8, 2022. The measure imposes a very significant increase in transfer taxes on certain sales of real property within the City of Los Angeles, which will have a Powerful impact on the entire real world. real-estate market. The new tax is anticipated to generate approximately $600 million to $1.1 billion annually to fund affordable housing and renter assistance programs administered by the Los Angeles Department of Housing. Given the high cost of this new tax, it is important that buyers, sellers, and developers fully understand its implications.
What does the ULA Measure do?
Although commonly known as the “mansion tax” it is actually much broader in scope, as it applies to all real estate asset classes, including residential and commercial property, as well as vacant land. In fact, many industry experts anticipate that much of the revenue generated by Measure ULA will come from sales of apartment buildings and commercial properties rather than sales of mansions.
Currently, unless a specific tax exemption applies, all transfers of real property, regardless of value, are subject to a documentary transfer tax from both the City of Los Angeles and the County of Los Angeles at a combined rate of $5.60. for every $1,000 of consideration. Simply put, it is a 0.56% tax on the consideration received and is collected at closing.
However, under the new measure, sales of residential and commercial real estate valued at more than $5 million but less than $10 million would be subject to a additional transfer tax at a rate of 4%, and sales of real estate valued at $10 million or more would be subject to tax additional tax at the rate of 5.5%. In contrast to the existing documentary transfer tax, the value of the property for purposes of the measure will include the value of any liens or encumbrances remaining on the property when it is sold, so that the tax is based on gross value, not only in consideration. He received. Also, the tax would be paid regardless of whether it is sold at a profit or a loss. The thresholds under the measure will be adjusted each year for inflation. Although Measure ULA will become law on January 1, 2023, it applies to property sales that occur on or after April 1, 2023.
Any transfer valued at $5 million or less is not subject to the new tax. In addition, transfers of ownership with “qualified affordable housing organization” assignees, certain non-profit assignees, and government assignees will be exempt from this tax. It appears that the same general exemptions currently applicable to existing document transfer taxes would also apply to the new tax, but it is not yet clear what other exemptions, if any, may apply and how they might be interpreted and applied.
For example, the sale of a property valued at $50 million would currently be subject to a documentary transfer tax of $280,000 under the existing rules, but will now be subject to an additional transfer tax of $2,750,000 under the new measure, totaling more $3 million due at closing in transfer taxes alone.
What are the potential impacts?
The ULA Measure is expected to cause a ripple effect throughout the Los Angeles real estate market. It could end up causing rents to rise by increasing development costs, which would go directly against the main objective of the measure. Market-rate construction is necessary both to relieve pressure on the housing market and to provide the sales that generate the revenue for these subsidies. It may further discourage both developers from building new construction and buyers from investing in the City of Los Angeles and instead lead them to transact outside of the city limits where this tax will not apply.
Additionally, critics have argued that this new measure may have little impact on the homelessness crisis, similar to Measure HHH, the $1.2 billion ten-year bond measure that was approved by Los Angeles voters in 2016. to address homelessness by constructing 10,000 new affordable, permanent buildings. supportive housing units. In the six years since Measure HHH was passed, homelessness in Los Angeles has increased dramatically.
How to deal with the new tax?
Only time will tell how this new tax will change the way real estate transactions are typically negotiated between parties. Sellers can use this opportunity for buyers to split the new transfer tax equally among themselves (currently, California custom is for sellers to normally pay all documentary transfer tax). Broker commissions may also be reduced, especially when you consider that closing costs (for example, transfer taxes, broker commissions, escrow and title fees, and other transaction costs) on transactions High-value real estate can now consume more than 10% of the sale price of the property.
On multi-parcel properties, sellers may try to break them up into separate sales transactions to try to get below the thresholds and avoid the new tax, but it’s too early to tell if the taxing authority will allow it. However, the acquisition of the legal entity owning the property on title is unlikely to avoid tax since a change in ownership of an entity owning real property is currently considered a taxable event.
Regardless of the structure of the agreement, clients are encouraged to incorporate this new transfer tax into the underwriting of existing and future projects.
Contact us if you have any questions about the ULA Measure and how it might affect your next real estate transaction.
See how JMBM’s Global Hospitality Group® can help you.
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jim butler
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