The implementation of Proposition ULA will have wide-reaching consequences for commercial and multifamily properties in the city of Los Angeles priced above $5 million. The 4 percent or 5.5 percent tax implemented on all transactions will alter owners’ hold strategies, citywide sales activity, and the viability of proposed developments.
Measure ULA imposes new tax on real estate transactions. The city of Los Angeles’ new Homelessness and Housing Solutions Tax establishes a 4 percent to 5.5 percent fee on all real property sales priced over $5 million, starting April 1, 2023. Dubbed a mansion tax, this voter-approved measure will significantly impact not only the single-family housing market, but also commercial and multifamily properties. Property owners will need to adjust near-term hold strategies, and investor demand for citywide listings could decrease or shift to other options in the metro area. Recent sales activity solidifies the significance of the measure’s reach. Spanning the past 12 months ending June, nearly 760 apartment, retail, office and industrial listings each sold for more than $5 million, representing 44 percent of the metro’s trade volume. Furthermore, based on current property assessments, roughly 18,100 citywide buildings could be potentially impacted. The threshold for taxation will be adjusted annually based on a chained Consumer Price Index, suggesting properties in the $5 million to $10 million tranche won’t eventually be subject to the 5.5 percent tax rate because of inflation alone.
Owners face short interval to sidestep local taxation. Investors mulling a potential property sale as the year closes out have a roughly five-month window in which to execute a trade without being subject to the new tax. A boost in citywide listings volume may occur during this interval as a result, providing additional opportunities for active investors seeking longer-term holds in the city of Los Angeles. Still, buyers will weigh the taxation that awaits at the end of a potential hold when contemplating a near-term purchase. This may further alter buyer and seller pricing expectations during a span of rising interest rates and more stringent lending practices.
Projects may not pencil. Tax implementation will represent another hurdle for developers with proposed projects, specifically merchant builders that sell following stabilization. A 5.5 percent tax at the back end of a development’s timeline — combined with volatile building costs and a more stringent lending environment — will tighten developers’ margins, likely translating to some proposals being nixed in the near term and potentially exacerbating the city’s housing shortage. Multifamily projects with a mix of market rate and affordable units may carry forward. As of mid-November, more than 40 percent of the apartments underway citywide were part of projects with some income restrictions. That share could rise in the future, as tax revenue will go toward the funding of income-restricted housing owned by non-profits, government agencies, and certain partnered organizations. Exemptions yet to be defined by the LA Housing Department could ultimately apply to other projects with a mix of market and non-market rate units.
Property performance remains an attractant. Adoption of the new tax will alter sales activity in the city of Los Angeles; however, most property types remain in heavy demand by residents and tenants, performance that should attract active investors. Class C apartment vacancy is extremely tight throughout most Los Angeles proper neighborhoods. Meanwhile, industrial vacancy in the county is anticipated to rank third-lowest among major U.S. markets at the end of this year, with warehouses in the city of Los Angeles expected to remain in high demand among users amid a lack of developable land and proximity to both ports. Elsewhere, forecasts call for the metro’s retail sector to record a third consecutive year of vacancy compression during 2023, aided by an improvement in CBD midweek foot traffic. While availability in the office segment will enter next year at an all-time high, tenants absorbed nearly 1.5 million square feet of space during the 18-month stretch ending in September.