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According to a new report released Friday, Los Angeles’ “mansion tax,” which funds affordable housing, is likely to fall across the entire apartment building, and worsen the housing situation in the city.
Research from researchers at UCLA and RAND focuses on Measurement ULA, a voter-approved law that took effect in the spring of 2023. Called the mansion tax, the measure applies 4% collection to almost all asset sales in cities that cost around $5 million or more, including apartments, minimalls and warehouses, and $5 million, including 5.5% charging.
In doing so, the real estate industry claims that the additional costs of buying and selling of land are making it difficult to make profits from many new housing developments, thus killing potential deals.
The released study supported that view on Friday, with the authors based on the findings based on a decline in sales of properties where multifamily homes are commonly built.
Overall, researchers estimated that ULA is causing a reduction of at least 1,910 units per year. City apartments are often built using density bonuses that require private developers to include income-limited housing, which cuts at least 168 affordable units a year, the report says.
“If we build fewer homes, the city will be even more out of hand,” said co-author Shane Phillips, Housing Initiative Project Manager at UCLA’s Center for Regional Policy Research.
Los Angeles is not the only city that has fallen to construction. New housing permits have been declining nationwide as higher interest rates and material costs make it more difficult for developers to make profits.
ULA supporters point to rising costs as they argue that the measure has not had the negative impact that real estate industry critics argue.
The authors of the report attempted to dynamically adjust the city of LA’s land sales by comparing it with other parts of the county where transfer taxes do not increase. They found that land sales had dropped much further in the city and used the differences to come up with an estimate of lost units resulting from ULAs alone.
In a statement, United manager behind the tax, Joe Donlin said the report was based on “a highly questionable assumption” and promoted the benefits of “real estate billionaires and billionaires.”
In addition to interest rates, ULA supporters say the decline in real estate sales is attributed to some investors so far waiting for it while the real estate industry fights to overturn ULA in court. They tout the positive impact this measure has had.
Overall, city data shows that taxes have raised nearly $633 million within two years. And the ULA coalition said it funded 11,000 Angeleno rental assistance, paid for eviction defenses, and donated money to the construction of 795 affordable homes.
ULA “survived court agenda and referendum attempts from the real estate industry, but now it is the biggest source of affordable housing funding that Los Angeles has ever seen,” Donlin said.
However, land economist Jason Ward, who wrote the report, said the measure was injuring the overall home construction in several ways by expanding beyond luxury home sales.
The first is to reduce the number of landowners you want to sell in the first place, and therefore limit the opportunities to build. And many multi-family developers sell their projects to other investors after they have finished construction, and doing so will result in tax impacts again.
Even if the developers plan to keep their new apartments, they still have mortgages on their property, and Ward said that if the developer falls into foreclosure, lenders must consider the costs of the sale.
“They either give you less money or give you money at a higher interest rate,” said Ward, co-director of the Rand’s Centre on Housing and Homelessness.
Ward and Phillips called for changes to the measure to limit potential negative effects.
Not only did economists say that reducing market rate housing will lead to higher rents, but researchers argued that in the long run, ULA will lead to net losses for affordable units as private developers of density bonus projects are not enough to fill the hole.
For example, the 795 affordable units cited by the Coalition receives only a small number of funds from ULA. Some projects had already begun construction before receiving ULA funds, and after experiencing a cost overrun, they needed more cash.
Phillips and Ward said it was likely that ULA would expand its construction of 795 units, but said these homes would have been eventually built as other sources would be caught in the cobblestones together and more affordable units would be built without the ULA.
To ensure more homes are built, the report recommended exemptions from ULA multi-family projects built within the past 15 years. The authors say it will only reduce annual ULA revenue by up to 8%.
“Negative consequences are inevitable,” the report reads when seeking change.
The UCLA-RAND analysis follows a survey released last week that saw a decline in sales caused by ULA, resulting in a loss of $25 million per year in property tax revenue, worsening over the next few years.
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