BY BRYNN SHAFFER | OCTOBER 16, 2023

It’s been six months since Measure ULA went into effect, and one thing is already certain: sales volume is dramatically down, and many local developers are looking to do more work outside of Los Angeles because of the measure. 

Enacted on April 1, Measure ULA, which stands for United to House L.A., is a tax on all real estate sold at or above $5 million in the city of Los Angeles. The tax received 58% of voter support to pay for new homeless support, requiring sellers of properties valued at $5 million to $10 million to pay a 4% tax to the city and sellers of properties at or above $10 million to pay 5.5%.

“I think ULA was a real mistake and is materially impacting the ability of people to build new housing,” said Sean Burton, chief executive of Cityview, a multifamily investment management and development firm based in Century City.

Proponents of ULA dubbed it the “mansion tax,” arguing that it would essentially take from the rich and give to the poor, but the tax is much more complex than that and affects all types of real estate. It has impacted sales across all asset types, and commercial properties such as multifamily, industrial, office and retail have been hit hard.

“I don’t think voters understood what they were voting on,” Burton said. “Voters were told they were going to tax millionaires and billionaires on expensive mansions and take that money and use it to build more housing for thehomeless. And in fact, that’s not at all what it does. That’s one aspect of it. But it’s a tax on any sort of real estate, including any sort of new housing, which has led to the redlining of Los Angeles with investors and developers.”

Some builders and developers are shunning Los Angeles altogether, because it’s no longer seen as an economically viable city to invest in, leading to staggering drops in sales. In the first quarter of this year, commercial real estate sales on properties valued over $5 million hit $2.4 billion. In quarter two, from when ULA went into effect, sales plunged to $260 million. And in quarter three, sales increased ever so slightly, reaching $300 million, according to data from Colliers.

“The transaction volume has fallen off,”  said Sean Fulp, vice chair and head of office capital markets at Colliers. “We’re operating at a transaction volume that’s roughly 15% to 20%, optimistically speaking, to where it was a year ago.”

And while it’s hard to pinpoint exactly how much of this dramatic drop can be traced back to ULA due to multiple factors affecting the current market climate – such as higher interest rates plus the work-from-home trend, which is hurting the office market – experts agree that the tax has played a pivotal role in the decrease in sales volumes. 

Asset breakdown

Sales are down across all asset types. In quarters two and three of this year, multifamily properties priced above $5 million sold for a total of $320 million. That’s far below the combined $2 billion sold in those same quarters last year, according to data from Colliers.

In the office market, in quarters two and three of last year, the combined total transaction volume was $199 million. In quarters two and three of this year, the combined total was $82 million, according to Colliers.

Industrial properties sold for a combined $594 million in quarters two and three of last year. This year, sales were $37 million. And retail properties, too suffered. generating only $49 million this year compared to $496 million across the two quarters last year, according to the same Colliers data.

“It’s lost revenue,” Shlomi Ronen, founder and managing principal of Dekel Capital, a Century City-based investment real estate firm, said. “You’ve got billions of dollars of transactions that are not happening as a result of this tax. There’s a multiplier effect.”

Another asset type impacted by Measure ULA is hotels. During the third quarter of last year, Los Angeles County saw 13 hotel sales priced above $5 million. In that same period this year, only two hotel sales above $5 million took place – one in Glendale and one in Lennox. No hotel sales subject to ULA were recorded during the third quarter, according to Atlas Hospitality Group. 

Likewise, in the second quarter of last year, Los Angeles County had 20 hotel sales priced above $5 million. In quarter two of this year, the only hotel sale the city of L.A. had above $5 million was the $760 million foreclosure sale of the Fairmont Century Plaza, a 394-room luxury hotel located in Century City and acquired by the Reuben Brothers.

“If you foreclose on a loan, and that loan is over $5 million, you pay the ULA tax,” said Alan Reay, president of Atlas Hospitality Group, who’s been tracking California hotel sales for more than 20 years. “No one’s really bringing this up, but that’s a big issue for lenders making loans in Los Angeles right now.”

Reay said lenders are rethinking the choice to make loans as a result. In the case of the Fairmont Century Plaza, 5.5% of $760 million is $41.8 million.

“ULA is a tax that you pay even if you lose money on a project,” said Burton. “Usually, you pay taxes on your profits.”

Measure ULA is nonrestrictive, imposed even on the sales of properties part of a 1031 exchange,a tax break that allows sellers of properties to reinvest their proceeds into a replacement property with no immediate tax consequences.

According to Reay, many hotel owners will likely delay selling, or decide against selling altogether and switch to leasing because of it.

“It’s basically really shut down the market,” Reay said.

‘Completely misguided’

“The concept of taking care of homelessness is near and dear to me,” said David Prior, senior managing principal at The Klabin Co., a Torrance-based commercial real estate firm specializing in industrial assets.

Prior’s brother died in November after being homeless for 30 years on the streets of Venice.

“(Homelessness is) a pervasive issue,” Prior said. “(However) I think the intent is completely misguided.”

Intentions aside, with transactions pretty much at a standstill, the city has not been generating nearly the revenue it sought to achieve. 

In the first four months since the tax was enacted, Measure ULA raised more than $55 million, according to city officials. That’s only 25% of that period’s projected revenue needed to reach the $672 million goal within the tax’s first year.

In August, the City Council approved a plan for spending the first $150 million in Measure ULA funds, but since the tax had only raised $55 million, the city pulled from other pools of income in order to meet its promised deliverables.

However, regardless of where the money came from, only a third of that budget will actually go toward the production of more affordable housing, and none will help subsidize the cost to encourage more production.

The remaining two thirds will go toward programs including an eviction defense and prevention program, a short-term emergency assistance program for low-income tenants, a tenant outreach and education program, a tenant harassment protection program and rent subsidiary programs for low-income seniors and people with disabilities.

“What we need to do is to spend every dollar we have on building more housing for people so we can bring costs down,” Burton said.

Burton is currently teaming up with leaders in the business, real estate, labor and housing advocacy communities to come up with a “fix ULA” proposal to amend the tax so that it doesn’t continue to chill the production of affordable housing.

“The government policy with homelessness is mercurial,” Prior said. “It’s very difficult. Believe me, I lived with it for a long time. But the solution isn’t to tax people and spend more money. I don’t know what the answer is. But this is not it.”

And due to the basics of supply and demand, when transaction volume falls, values fall as well. And values will continue to fall until investors feel that there is an asset appropriately priced. This is a form of capitulation – when values fall, the property tax base is reduced in return, which means less money for the city and county, which impacts services and jobs.

“While the city’s raising money in one place, they’re losing it in another,” Fulp said.

Since April, multiple lawsuits have been filed challenging Measure ULA, including a combined dispute from the Howard Jarvis Taxpayers Association and the Apartment Association of Greater Los Angeles.

“If this unlawful tax is allowed to stand, it will be the last straw, that will cause property owners to invest elsewhere and never come back to Los Angeles,” Dan Yukelson, executive director of the apartment association, said in a statement at the time of the suit.

Looking ahead

While it’s only been two quarters since ULA took effect, many real estate experts agree that sales aren’t going to pick up anytime soon.

“Activity will stay muted as long as ULA remains in effect,” Fulp predicts.

And that seems to be the case, as many top-level investors and property managers now say they are looking to invest in markets outside of Los Angeles.

“Any time you change policy, that brings uncertainty,” Fulp said. “And investment markets do not like uncertainty.”

Cityview, for example, is finishing up developments on properties it purchased prior to April 1, but is not underwriting any new deals within the city of Los Angeles.

Instead, the firm is looking to invest in new areas, such as Santa Monica, Gardena, Culver City, Pasadena and Burbank. Although all located in Los Angeles County, those cities fall outside of the city of Los Angeles and therefore are not subject to the tax. He said Cityview is also looking to expand in San Diego, Orange County and Denver.

“That’s not by choice,” Burton said. “We don’t want to not be doing L.A. We’re believers in L.A. We started our business here, raised our families here. We want to be here, but ULA has made it impossible to build new market-rate housing in the city.”

Paul Daneshrad, founder and chief executive of Beverly Hills-based real estate investment company StarPoint Properties LLC, said his firm is transitioning to dramatically expand out of Los Angeles. StarPoint’s current portfolio is about 40% Los Angeles and 60% elsewhere, but Daneshrad said the company just changed its investment parameters with a new goal to bring those numbers down to only 10% to 15% due to L.A.’s tight regulations, such as Measure ULA.

“Nothing vis-a-vis ULA is going to change until one of several things happens first,” Michael Wiener, tax partner at Century City-based law firm Greenberg Glusker LLP, who specializes in real estate tax issues, said. “First, if the lawsuits challenging it are successful and obviously eliminate it, or also if the city issues regulations, which they’re supposed to do and have not yet.” 

If ULA remains, more local developers and real estate owners may do the same, rethinking doing business in Los Angeles and looking elsewhere.

“I think you’re going to find, in the future, there’s going to be a lot of reconsideration of doing any sort of development of new buildings for sale,” Prior said. “And that’s kind of the lifeblood of our market. It’s a time a lot of people have never been through.”