Brokers Take Proposed LA Luxury Tax as Slap in Face

What a difference four percent makes–especially when it’s a tax on high-end home sales.

Supporters argue that the tax they want on deals of $5 million or more is a necessary measure to address one of Los Angeles’s most urgent crises.

Brokers see a discriminatory overreach that would wreak havoc on the housing market.

“I think it would be really bad,” said broker Michael Nourmand. “It’ll chill the market.”

The line between the two camps can be readily quantified: the 4% tax would claim $200,000 on a $5 million sale; the rate would go up to 5.5 percent starting at the $10 million mark, a $550,000 chunk of a deal at that price.

It also is subject to some qualitative analysis.

Brokers object to a perceived tendency by municipalities of singling out real estate for revenue — and to the massive amounts of money local governments have already poured into homelessness spending. In 2016, City of Los Angeles voters approved Proposition HHH, authorizing $1.2 billion in bonds intended to go toward homeless housing; the following year L.A. County voters also passed Measure H, which implemented a new one-quarter of a cent sales tax project to raise some $350 million in annual funding over a 10-year period.

Homelessness has grown steadily in the years since each of the measures passed, a trend confirmed by official surveys and anecdotal indicators.

“It was a lot of money,” said the broker Dannie Cavanaugh, “and what have we seen for it, really? Like, not much. So I think people kind of feel like this is going to be more money down a rabbit hole.”

“I’d rather have what’s already been decided be fully effectuated,” added broker Michael Edlen, “rather than thinking of alternative ways of redistribution of wealth in the state.”

Crash course

The proposal for the new tax crashed into the public debate on Thursday, when a coalition of housing advocates and progressive groups filed paperwork with the City of Los Angeles to set up a campaign to gather the 60,000 or so signatures from registered voters in order to qualify the measure for next November’s ballot.

The revenue raised would be drawn from an estimated three percent of all homes sales in the city. The money would go towards building housing and providing other support for the homeless, and organizers have pledged vigorous oversight of such programs–a standard, often-unrealized promise in similar campaigns in the past.

Another familiar theme is an early bid to frame the proposed tax in terms of upping the bills of so-called One Percenters for social programs.

“This is really about millionaires and billionaires paying their fair share to have a transformative approach to solving our housing crisis,” Laura Raymond, director of the Alliance for Community Transit-Los Angeles and a coalition leader, told the Los Angeles Times.

Raymond, who did not respond to an interview request from The Real Deal, added that the measure “affects folks who are very privileged who have made money off increases in property values” and was also about “protecting our neighbors.”

Staggering problem

There’s no doubt Greater L.A.’s homelessness crisis has reached staggering proportions. An estimated 66,000 people in the county are sleeping in tents, cars or in the open, with more than 41,000 of those within the City of Los Angeles. Homeless individuals and encampments are common in parks and sidewalks in many neighborhoods of the city, including a good number that have been previously untouched by the problem.

In recent months, amid various political and civic battles over encampment sweeps and housing projects — and a mayoral campaign that’s still taking shape ahead of a June primary election — the crisis has also reached a boiling point among the general public: In one widely cited poll, more than 900 likely L.A. County voters identified homelessness as the region’s most pressing issue. Respondents also expressed wide dissatisfaction with political leadership on the issue, and many cited growing personal safety concerns.

“I didn’t feel safe over there, especially raising my children,” said 35-year-old Amber Morino, who moved to the San Fernando Valley from Mar Vista after a nearby camper caught fire. “I am also considering moving out of the state because it’s so bad.”

Campaign themes

And while advocates are framing the proposal as a tax that affects only the wealthy — an argument that could eventually help sell the plan to the general public — brokers also argue it could end up backfiring by driving wealthy potential taxpayers out of the L.A. market altogether.

“We’ve already lost people to other states,” said Nourmand, in part because of California’s high taxes. The proposed increase, he added, would be conspicuous enough to have a tangible impact on the industry.

“I don’t think this is a ‘sneak it in there’ amount,” he said. “This is a ‘hit you in the face’ amount.”

“It’s going to boomerang,” added the broker Ron Wynn, “and end up coming out of the buyers’ pocket.”

Wynn and others also predicted more consequences should the measure eventually pass, including a stifling effect on developers dealing with tight margins, a short-term rush to close deals ahead of the measure’s looming implementation and even creative workarounds.

“Imagine a house that probably is worth exactly $5,050,000,” Wynn said. “People are going to kind of play with that: ‘Gee, maybe I’ll insist that the buyer not pay me more than $4,999,999.’ People will be jockeying with that number when it’s right there.”

Precedents

The proposed hike does have some precedent. In 2018, voters in Berkeley increased that city’s documentary transfer from 1.5 percent to 2.5 percent on real estate transactions over $1.5 million, and voters in Oakland approved a graduated tax that rises to a 2 percent rate on transactions over $5 million.

In April, a similar voter-approved initiative, called Measure RE, also came into effect in Culver City, creating new tax rates of 1.5 percent on transactions between $1.5 million and $3 million; 3 percent on real estate transactions between $3 million and $10 million; and 4 percent on those above $10 million.

So far, said Cavanaugh, whose brokerage is based in Culver City, many residential buyers he’s spoken to aren’t aware of the tax change for the municipality of 40,000 or so that’s surrounded by the City of Los Angeles.

But others have been left fuming, he said.

Cavanaugh closed one deal on March 31, he said, the day before the tax hikes came into effect, effectively saving the seller some $40,000.

“Everyone was busting their butt to try to close it,” he said — including the buyer, who gained no financial benefit from closing early.