Measure ULA – the latest increase to transfer taxes in California

What is Measure ULA?

Measure ULA, also referenced as the "Homelessness and Housing Solutions Tax," is a new city property transfer tax approved by voters in the City of Los Angeles, California, in November 2022. Despite being dubbed the “mansion tax” by many politicians, media and industry commentators, this term mischaracterizes the tax. Unlike other “mansion taxes” applied to high-priced residential real estate, Measure ULA has a much broader scope and applies to residential and commercial real estate transactions valued at more than $5 million.

The tax rate will be 4% of the purchase price for transactions between $5 million and $10 million and 5.5% for transactions over $10 million, in addition to the existing 0.56% combined documentary transfer taxes in Los Angeles. Although multiple industry associations are currently challenging it, Measure ULA is set to go into effect on April 1, 2023.

Los Angeles is facing a well-documented housing crisis, with a shortfall of nearly 500,000 units. According to Measure ULA text, the City of Los Angeles had a higher percentage of cost-burdened renter households (59%) than any other major American city in 2019. Nearly a third (32%) of Angeleno renters are severely cost-burdened, spending over half of their income on rent. Additionally, more than 40,000 city inhabitants are currently homeless. The stated goal of Measure ULA is to establish and authorize programs to increase affordable housing and provide resources to tenants at risk of homelessness. California law limits the ability of municipalities to raise property taxes. As a result, many of these municipalities have turned to measures such as transfer taxes to raise necessary funds and placing a more significant portion of the tax burden on both tax-paying commercial and residential property owners.

Measure ULA is just one of the many recent initiatives in California to raise funding to address homelessness and alleviate household cost burdens across the Golden State. In the same month that Angelenos passed Measure ULA, Santa Monica voters passed Measure GS (referred to as the “Funding for Homelessness Prevention, Affordable Housing, and Schools” ballot measure). Measure GS will increase transfer tax in the city to 6% for sales over $8 million, up from the current rate of approximately 1%. San Francisco, Culver City and San Jose passed similar measures in 2020, which took effect in 2021.

Measure ULA and other transfer tax measures implemented in California since 2020

California transfer tax and real property tax under Proposition 13

Since Proposition 13 was passed in 1978, California property taxes have been based on “acquisition value.” The assessment is updated to reflect the purchase price when a property is sold. Following a sale, the assessed value (the sale price) becomes the “base value,” which is increased by the inflation rate each year until the property is sold again.

If a property has not been sold for several years, a sale can significantly increase the property’s assessed value. Since there is no requirement that taxes be equitable with similar properties, properties that transact are often at a competitive disadvantage, paying a higher tax burden than neighboring properties that have not sold. The new transfer tax under Measure ULA will magnify those inequities.

Criticisms of Measure ULA

Despite getting through the polls, Measure ULA has its critics. The measure is being legally challenged in Superior Court by the Howard Jarvis Taxpayers Association and the Apartment Association of Greater Los Angeles, who maintain that the measure is unconstitutional. Although state law provides exemptions to charter cities to allow levying transfer taxes, it requires that the taxes be directed to general revenues and not to special projects. Other criticisms of the transfer tax increases include the following:

• The tax should not be levied on gross transaction value but rather on the proceeds from the sale

• The tax does not take into account a loss in value that may have occurred since the property was purchased

• The measures compound the hardships of landlords and property owners recovering from the COVID-19 pandemic

• The high cost of transactions will discourage investment within the Los Angeles city boundaries

• The increase in costs will be passed on to consumers, likely resulting in increased rents, which is contrary to the intended goal of the measure

Many Measure ULA critics point to previous attempts to raise taxes to address the housing crisis. Prior attempts have had mixed effectiveness, generally creating a limited number of new units. Rather than penalizing market participants by increasing tax rates, many Measure ULA critics and industry advocates suggest that increased developer incentives to create more affordable housing would lead to better outcomes.

What to consider if Measure ULA is implemented

Under California law, taxes (both property tax and transfer tax) are levied against the “actual value,” defined as the fee simple interest in the land and buildings. The purchase price is presumed to reflect the “actual value.” In many cases, however, the purchase price may be higher than the “actual value.” It may include machinery and equipment, which in the case of properties like data centers may be a significant portion of the value and must be extracted from the purchase price to determine “actual value.” The purchase price may include leasehold value, goodwill and brand value, and other values connected to the business, not the real estate.

While the outcome of that challenge is still unknown, the impact of Measure ULA should be factored into the valuation, increasing the reversionary value’s cost of sale. Application of the measure as it currently stands at the time of writing would increase the cost of sale by 4% for assets priced between $5 million and $10 million at reversion and by 5.5% for assets selling for more than $10 million at reversion.

Before incorporating consideration of the higher transfer tax, valuers must ensure the property falls under the jurisdiction of the City of Los Angeles, as not all assets in this greater Los Angeles market will be affected. As shown earlier, Culver City and Santa Monica may appear to be part of Los Angeles geographically, but they are their own jurisdictions subject to different tax laws. Due diligence is critical when determining which taxes needs to be considered and applied at reversion.