Measure ULA Suppresses Sales and Stymies New Housing: Report

The academic reckoning has begun for Measure ULA.

It turns out, the pace of investment sales in Los Angeles slowed by roughly half when the city’s so-called “Mansion Tax” went into effect in 2023, according to an analysis published this week of some 338,000 transactions across the county over the past five years by University of California, Los Angeles researchers Michael Manville and Mott Smith.

It’s perhaps the most ambitious attempt yet to quantify the market impact of the ballot measure since it passed three years ago, imposing a 4 percent tax on real estate sales above $5 million and 5.5 percent on sales over $10 million.

About 60 percent of deals that meet the threshold are for single-family homes — mansions, as the law’s nickname implies. The rest are multifamily, office or industrial buildings, according to the study.

And a slump in those markets will have dire consequences for the city’s budget and housing supply, Manville and Smith argue.

Already, the drop in sales volume has translated to a $25 million initial annual loss in city property tax revenue, they estimate. That shortfall will compound over time and offset the revenue L.A. raises from the tax.

But to anyone involved in commercial real estate in L.A., this is not news.

“That 5.5 percent is very material to capital providers,” said Moses Kagan, founder of Adaptive Realty, which buys, renovates and manages multifamily properties in L.A. “And it’s a very large portion of the total profit for the developer.”

Kagan added the tax makes underwriting more difficult since passive lenders now risk “taking a haircut” in case of foreclosure.

Manville and Smith say the data proves what many in the industry have observed since the tax has been on the books.

“Measure ULA might be our single most important policy change in the past 10 years,” Smith told The Real Deal. “It’s going to impact our regional economy and our ability to build enough housing. It was not adequately analyzed before it passed.”

But that’s beginning to change. Los Angeles Mayor Karen Bass hinted at the possibility of reforming the two-year-old tax last month, and now lawmakers in Sacramento are also tuning in.

Assemblymember Buffy Wicks is among those calling for a reappraisal. On Monday, Wicks introduced a bill restricting cities from enacting new transfer taxes before studying the impact on housing production.

It’s a halting first step toward reform. An earlier version of the bill would have created an exemption for commercial and multifamily properties completed in the last 15 years, according to a copy of the draft bill obtained by TRD.

A spokesperson for Wicks described the bill’s current version as “just the start of a conversation.”

The fact is, progressive transfer taxes are de rigeur in California housing policy circles.

With Measure ULA, Angelenos followed in the footsteps of voters in San Jose, San Francisco, Culver City and Santa Monica, where various versions of a “mansion” tax have gone into effect over the past five years.

A spokesperson for United to House LA, which ran the campaign to pass the ballot measure in 2022, cast doubt on Manville and Smith’s findings, citing the numerous confounding variables.

“It’s hard to draw conclusions given the number of factors,” the spokesperson wrote in an email to TRD. “Its initial dip owes more to developers and the real estate lobby hoping to overturn it in court or at the ballot box — and losing.”

Measure ULA prevailed over legal challenges in its first year, and also survived a ballot measure attempting to strike it down, which was defeated last June. But Manville and Smith’s analysis extends six months beyond that and the challenges to ULA were not sufficient for prospective sellers to keep their properties off the market.

What’s clear is that the tax has fallen far short of the $900 million proponents predicted it would raise in annual tax revenue. In its first 20 months, it brought in $288 million in annual revenue, which is earmarked for developing affordable housing and preventing homelessness.

That’s enough evidence for some former proponents to change their tune. In fact, one of them is right down the hall from Manville and Smith at UCLA’s Luskin School for Public Affairs.

“We’re seeing some pretty stark negative effects of Measure ULA, but they’re not inevitable,” researcher Shane Phillips said in an email.

Phillips studies housing at UCLA and co-authored a report endorsing the ULA ballot measure in 2022. Back then, the trio did not see eye to eye.

Three years later, Phillips still believes local transfer taxes can be a good source of revenue for affordable housing, but it’s not so clear cut, he said.

Measure ULA would work better if it were graduated to avoid arbitrary thresholds and, he added, recently developed multifamily projects should be exempt.

Manville and Smith agree.

“What’s actually most noticeable is you’re reducing the turnover of commercial, multifamily and industrial sites,” Manville said. “Many voters probably didn’t understand what was going on, that these transactions are actually important, particularly for housing production.”