[co-author: Samara Harris]

In response to the homelessness crisis, voters in the city of Los Angeles approved Measure ULA, aka the "mansion tax," on Nov. 8, 2022. Measure ULA seeks to raise funding for affordable housing and tenant assistance programs by imposition of a massively increased transfer tax to be charged on certain transfers of real property. Both sellers and buyers of commercial and residential real estate need to be aware of this new tax and its impact on the net purchase price in a purchase and sale transaction. It is anticipated that this new tax will have a ripple effect in the market as the extra cost is significant and likely changes underwriting assumptions.

How Does Measure ULA Work?

At present, both the city of Los Angeles and the county of Los Angeles levy a documentary transfer tax on every instrument that conveys land sold within the city. When the value of the property exceeds $100, the city tax is collected at a rate of $4.50 per $1,000 of consideration, while the county tax is levied at a rate of $1.10 per $1,000 of consideration, for a total of $5.60 per $1,000 of consideration.

Effective April 1, 2023, Measure ULA drastically increases the transfer tax by imposing an additional tax on the sale or transfer of "high-value" real properties within the boundaries of the city. A tax of 4 percent of the property's value will be imposed on the sale of properties valued between $5 million and $10 million. If the property is valued at $10 million or more, the sale will be subject to a 5.5 percent tax. The value of the property for the purposes of the measure will include the value of any lien or encumbrance remaining on the property when it is sold. By way of example, starting on April 1, 2023, a seller of real property valued at $100 million will pay $5.5 million more in transfer taxes to the city.

Certain qualified affordable housing organizations are exempt from the tax. To qualify for an exemption, the transferee must show a history of affordable housing development and/or housing property management experience, as determined by the Los Angeles Housing Department. Additionally, the measure will not apply to certain housing, nonprofit and public entities.

The measure is expected to raise between $600 million to $1.1 billion annually, fluctuating based on the amount of property transferred. A minimum of 92 percent of the revenue will be used by the Affordable Housing Program and the Homeless Prevention Program to fund affordable housing and tenant assistance initiatives.

Potential Effects

The impact of the measure will likely be widespread. In addition to owners of high-value residential real estate, commercial tenants and occupants city-wide will bear the brunt of the new tax. Rents could rise, businesses may close and others may choose not to invest or buy property in the city, absent some correction in the sale price of assets that accommodates the new transfer tax. Additionally, even though the tax affects property with a value at or more than $5 million, there will be a trickle down impact on small- and medium-size commercial and residential sale transactions.