The threshold for Measure ULA, a controversial real estate transfer tax also known as the “mansion tax” will increase slightly this summer, but some are hoping the tax is suspended or ended altogether.
“It affected sales considerably,” Jeff Bramson, a senior managing director at Jones Lang LaSalle Inc., said. “That’s not a surprise to anybody. Sales have basically come to a screeching halt. It’s been particularly tough on multifamily which trades much more frequently than office buildings. It’s had a devastating effect on landlords.”
The measure was approved by voters in 2022 and went into effect in April 2023, at which point sales fell. But some experts note that it wasn’t the only factor at play.
“It was perfectly timed with the downturn that was occurring with commercial real estate,” said Kevin Shannon, co-head of U.S Capital Markets at Newmark. “When it went into effect, (interest) rates increased at an all-time record pace… and that caused turmoil in the real estate market, not just in L.A. but everywhere, and then you get this new tax…it impacts not only the sellers but the buyers now have to underwrite (the) tax on their exit.
Shannon said office product was hit the hardest while industrial, which is the least leveraged and boomed during the pandemic, was the least impacted.
Bramson said the tax amounted to a huge part of a property’s equity. He added that Measure ULA, coupled with the other regulations in place in the city, have led some investors to “decide not to invest any further in California.”
“There’s a lot of political risk with owning real estate in L.A. in particular and the transfer tax is just a component of that,” he said, calling investors “leery” of the area.
A UCLA report released last week estimates that Measure ULA has resulted in a loss of property tax revenue of $25 million annually, which will compound, and a 30-50% decrease in the number of commercial, industrial and multifamily transactions.
Bass and threshold increase
One minor change is ahead for Measure ULA: an adjustment to the threshold where the tax will apply due to inflation. There is currently a 4% tax on properties that sell for above $5.15 million and a 5.5% tax for those selling for more than $10.3 million. Those numbers will rise to $5.3 million and $10.6 million, respectively.
“It’s so minimal,” Shannon said, adding that the change would have “no impact” on the types of larger deals he works on.
And a few weeks ago, news broke that Mayor Karen Bass was considering suspending Measure ULA in wake of the fires that hit L.A. earlier this year. She has since backtracked, according to a report by Bisnow Media. Her office did not respond to a request for comment by press time.
Still, Shannon said he has since noticed more interest in properties that are still in L.A. County but not in the City of L.A., which is where the tax applies. He said for buildings that have large loans adding a large tax to the mix “wipes out your equity.”
Still, Shannon said he is starting to see more interest in the L.A. market and saw sales velocity increase the second half of last year, a trend he expects to continue to see this year.
“Lenders have conviction that we are past the bottom,” he said. “L.A. finished with around $3 billion in sales last year – well below average – but I think we’re going to pass that figure in 2025 and again pass the 2025 figure in 2026. Capital has conviction that 2025 is going to be a good finish.”
