Local real estate groups are mounting a drive to stop a city of Los Angeles proposal to double the transaction tax on home and building sales.
The proposal planned for the March ballot would double the documentary transfer tax on real estate transactions within the city from the current $4.50 per $1,000 in sale value to $9. That would make the tax more than 16 times higher than most other cities in Los Angeles County.
On a $500,000 home sale, the tax would go from $2,250 to $4,500, while on a $100 million commercial building sale, the tax would jump from $450,000 to $900,000.
City officials estimate doubling the tax would generate an additional $100 million a year; money that would be used toward closing the annual city budget deficit of more than $200 million.
But a coalition of residential real estate agents and commercial building owners say raising the tax would hurt the local residential real estate market just as it’s beginning to pull out of the recession and could push lease renewal rates so high that commercial building tenants would leave the city. All this could drive down overall real estate transactions, resulting in less tax revenue for the city.
More than a dozen residential broker groups have signaled their opposition to the proposal, including the Beverly Hills/Greater Los Angeles Association of Realtors. On the commercial side, the L.A. chapters of the Building Owners and Managers Association and the National Association of Industrial and Office Properties have joined in the opposition. The Los Angeles County Business Federation, or BizFed, is also opposed.
James V. Camp, chairman of legislative affairs at the NAIOP’s Southern California chapter, said the cost increase would be significant and building owners and their tenants will react.
“There will definitely be an impact from this type of huge tax increase,” Camps said. “Investors will be motivated to purchase property outside of the Los Angeles city limits. To flee the trickle-down impact of this tax, the tenant’s alternative is to move their businesses outside of the Los Angeles city limits to surrounding municipalities that offer a more attractive tax structure. Ultimately, this actually leads to less total tax revenue being collected by the city, not more.”
City Administrative Officer Miguel Santana proposed the measure in an April report on city finances. He also suggested a 50 percent increase in the parking lot tax that would bring in $40 million a year.
The City Council has until late November to place the measures on the March city primary ballot.
Slowdown in home sales?
One local residential real estate agent said doubling the tax would put more of a burden on both sellers – who must pay the tax directly to the city – and potential buyers who would likely have to pay higher prices.
“This could cost me the ability to close sales and will almost certainly slow down the overall residential market,” said Crystal DaCosta, president of DaCosta Livin’ Enterprises, an independent residential real estate brokerage in Leimert Park. “Sometimes, all it takes is another $2,000 or so to prompt the buyer to pass on the deal, so this could have devastating effects.”
Buyers on the cusp of qualifying for loans could even be priced out of the market.
“For somebody in the price range of $300,000 or so, if they had to pay $1,000 more, it could disqualify them,” said Rosanne Howard, a Realtor and broker associate with Sotheby’s International Realty, a New York residential brokerage. “With the market starting to recover, doing something like this would be a big mistake.”
DaCosta added that the proposed tax increase could increase the number of short sales by pushing property owners’ debt above the value of the home. Short sales require approval from the bank or mortgage holder because they would take the loss. Failure to find a buyer for a short sale could lead to foreclosure.
“Doubling the tax could definitely push you into a short sale, and that’s not good for the seller or the overall community,” she said. “We should be pushing to increase the value of homes, not force them to fall.”
On the commercial side, building owners and operators say doubling the documentary transfer tax could ultimately prompt some tenants to flee to cities where the tax is much lower. That’s because most new building owners ultimately pass on the tax to tenants as leases come up for renewal under new owners who have to pay the higher tax.
“Doubling the rate to $9 is an enormous jump that will be added to all other city taxes and fees paid by commercial tenants that discourage them from doing business here,” said Michele St. Denis, president of the L.A.-area chapter of the Building Owners and Managers Association.
But the additional pass-through cost might not be borne equally. Larger tenants, with their greater negotiating power, might be able to negotiate a better deal. That would leave smaller tenants with the choice of staying and paying higher rates or finding cheaper locations in other cities.
“Bigger tenants are so coveted that they can often negotiate taxes and fees like this out before they sign,” said Jonathan Larsen, Southern California regional managing principal with Cassidy Turley in St. Louis. “It’s the smaller tenants who can’t negotiate this out who may decide to bolt for buildings in cities where this tax isn’t so high.”
The documentary transfer tax in most cities in the county is 55 cents per $1,000 in sale value; the proposed $9 rate in Los Angeles would be more than 16 times as high. Only a handful of cities charge more than $1, including Culver City ($4.50), Santa Monica ($3), and Pomona and Redondo Beach (both $2.20).
City Administrative Officer Santana said that while the increase would make the L.A. rate be the highest in the county, it would be less than several Bay Area cities. For example, Oakland and Berkeley charge $15 per $1,000 in sale value.
He said last week that the city recently engaged Beacon Economics principal Christopher Thornberg to analyze the economic impacts of the tax increase. Thornberg is expected to report back in coming weeks.
“He will be looking at the impact on residential real estate sales, on possible tenant flight to other cities,” Santana said. “If his report shows that increasing the tax would decimate property sales in the city, that’s something the council should know. On the other hand, if the report shows only a minimal impact, the council should know that, too.”
Santana said that when real estate groups emphasize the proposal’s negative impacts, they forget to include the other side of the equation: a continual drop in services as the city grapples with a long-term structural budget deficit.
“Without additional revenue, there will be less money to spend on reducing police and fire response times, fixing our streets and sidewalks, and other services crucial to the quality of life,” he said. “Over time, our lack of ability to address these basic concerns could also lower property values.”
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