By Mercedes Shaffer l Published in AOA Magazine
The votes are in! Now apartment owners get to pay a special tax that funds a tenant advocacy group that supports tenant access to legal representation to help defend them against evictions. For housing providers that have to evict a tenant, they must hire an attorney and pay out of pocket to have the attorney defend their rights, while the non-property-tax-paying (and likely non-rent-paying) tenants get free legal representation that is funded by the property owners. Yes, this is just one more new tax that Los Angeles residential and commercial real estate owners get to look forward to.
Measure ULA, also knows as the “mansion tax,” is a ballot measure that passed in the 2022 November elections. It imposes a one-time transfer tax on commercial and residential real estate sales valued at over $5 million. The transfer tax rate jumps from .45% for all properties to 4% for properties valued at $5 million to $10 million and increases to 5.5% for properties valued at $10 million and above. Apartment owner’s selling a $10 million property, for example, would face about $522,000 in additional taxes on the sale (after commission fees). It’s as though the city of Los Angeles wants to penalize property owners looking to escape LA’s punitive and one-side property ownership environment.
ULA is a special tax, meaning revenues don’t go into the city’s general fund but rather a dedicated purse. There’s a set-aside of 8% of revenues for an inspector general and oversight staff, and according to the voter information pamphlet, the rest goes towards funding affordable housing under the Affordable Housing Program, that includes tenant assistance and protection programs under the Homeless Prevention Program. This is yet another new taxpayer funded bureaucracy.
This is the biggest investment in tenant protections in the history of LA, and further drives a wedge between property owners and tenants. It gives even more free resources and rights to tenants and takes away from property owners. I can’t help but wonder if this is part of a larger plan to de-privatize real estate and put housing in the hands of government.
Other than that, it seems the tax will continue to chase away businesses and private investment in LA, widening the disparity with neighboring cities, and harming the citizens it’s supposed to be helping. The tax impacts all real estate sectors including grocery stores, retail, automotive shops, hospitals, etc. This additional fee will likely get passed down to residents by driving up the cost of goods and services.
The tax will go into effect on April 1st, 2023, and without a sunset clause, it would be permanent. To avoid incurring these taxes, homeowners and apartment building owners of multimillion dollar properties should look to sell before the spring. As an example, the additional tax bite for selling a $7M property after April 1st is about $260,000 -- and there’s still commission, escrow and title fees!
The group that backed the ballot measure, United to House L.A., estimates that the tax hike could generate between $600 million and $1.1 billion per year in additional aid to help Los Angeles address its homelessness problem and aid tenants facing eviction. The group states that these funds would go directly to innovative solutions to the housing crisis, including creating affordable housing and purchasing hotels for the purpose of converting them to housing. According to the proposal, nonprofits, qualified affordable housing organizations and government agencies would be exempt from the tax. Another tax by government, for government and to fund yet another bureaucracy.
Laura Raymond, organizer and spokesperson for the Yes on ULA campaign and director of the Alliance for Community Transit-Los Angeles (ACT-LA), a coalition of 42 organizations working toward transit and housing justice, said, “the cost-benefit tradeoff is a huge win, and one that will make our city not only more just but also a better place to live for everyone.” The underlying idea is that taxing the people who have worked hard, saved, and invested (i.e. those that earn money) and giving to those that did not, brings about justice and equality. This is a dramatic shift from the principles our founding fathers built this country on and seems to be a new wave of popular thought.
The Los Angeles County Registrar-Recorder/County Clerk showed that nearly 56% of voters approved the city ordinance, and a majority vote is all that was needed for it to pass. It’s not a surprise that this ordinance was approved by voters. In the city of Los Angeles, the majority of voters do not own real estate valued at $5M or more, and more importantly, tenant rights groups are very vocal about their beliefs and encourage and embolden tenants to believe that they are entitled to free housing. These groups band together and fund ‘protesters’ to wear bright shirts, hold picket signs, and make noise at city council meetings. They make their voices heard, while property owners are missing from these meetings because they are likely at work so that they can earn the money needed to pay their mortgage bills, taxes, retrofits, etc.. Property owners have become a target for lawsuits and have increasing amounts of responsibility and liability.
It’s time for apartment owners to become a political force and stand together for our rights to build a business. By being silent, we are losing our income, our real estate, and our rights. Participate in AOA’s take action Tuesdays, organize and collaborate with other apartment owners, and don’t allow your hard-earned investments to be taken from you.
If you would like help with buying, selling or doing a 1031 Exchange, I can be reached by phone at 714.330.9999, by email at InvestingInTheOC@gmail.com or visit my website at www.InvestingInTheOC.com . Mercedes Shaffer is a real estate agent with Coldwell Banker and specializes in residential and commercial real estate, helping clients buy and sell apartment buildings and homes and perform 1031 Exchanges. DRE 02114448