Here’s the skinny

In a bid to address the escalating homelessness crisis and fund affordable housing projects, Los Angeles recently implemented a new Mansion Tax - also known as - Measure ULA. The tax is designed to target high-value properties and generate additional revenue for housing initiatives. Sure, the intention behind this tax is commendable, but it has sparked debates regarding its impact on property owners, developers, and the homeless population it claims to serve.

Let’s break it down

The Los Angeles Mansion Tax is a progressive tax levied on residential properties valued at $5 million or more. Introduced as part of broader housing policies, this tax aims to generate funds to support the construction of affordable housing units, and expand tenant protection programs. 

The tax rates are tiered and increase as the property value rises – a property valued between $5 million and $10 million is subject to a 4% tax, while properties valued above $10 million could face a tax rate of 5.5%. The revenue generated from this tax is allocated to specific housing programs and initiatives aimed at addressing the housing affordability crisis in Los Angeles. 

The base tax for these property transactions sat at 0.45%. Needless to say, it’s quite a significant jump for anyone looking to offload a property. To put it simply, a commercial property which sold for $10 million in March 2023 was subject to a property transfer tax of $45,000 – but now a property that sells for the same price will be taxed a whopping $595,000.  

The Mansion Tax primarily affects owners of high-value residential properties. The (not so hidden) intention here is to generate funds from those who are seemingly better equipped to contribute towards addressing the housing crisis. By targeting homes valued at $5 million or more, the tax focuses on the upper echelon of the property market. 

The city is aiming to cash in over $900 million each year to put towards these humanitarian initiatives – only the new legislation may already be backfiring. There were 126 homes sold in March of 2023 over $5 million prior to Measure ULA going into effect. The following month – just two homes total! 

Before Measure ULA was evening out of ‘draft’ mode, it was having a negative impact on housing construction in the city. Lenders had begun pulling back from making construction loans on ground-up multifamily projects in L.A. after the tax was approved in November. The city has already estimated that the anticipated total from the program will be significantly less than the estimated $900 million. 

So what’s the outlook?

Here’s what many aren’t talking about – this tax structure stands to impact far more commercial developers than it does home owners. Individuals selling luxurious single family homes will either push the sale until circumstances change, or they’ll simply adjust their selling price to offset the expense onto the buyer.  

Yes – this bill is trying to increase money directed towards homeless housing solutions, but when you add this tax to the growth value of a property without taking into account other property expenses, the cost for developers to build properties affordable for the average American increases dramatically. As such, so will the associated rent charged to tenants. With increased rents, we have less affordable housing, so could this imposed solution ultimately drive more momentum into homelessness trends?  

The denoted name "Mansion Tax" might be misleading. Since it's not exclusively taxing mansions but rather all of the building developments in L.A., so a large majority of people impacted are local renters, inflating the cost of thousands of apartments that would have been built to provide housing for the average working resident. 

The Trickle Down effect

From where we stand, it’s possible that this well-intended policy may result in more backlash than anyone intended. The tax will likely continue to dampen the demand for high-end residential properties, which may lead to a slowdown in that sector of the real estate market. And outside of the impact felt by the homeowners, developers who specialize in luxury housing might take a heavy hit, reducing their profitability and impeding the creation of jobs and growth associated with these developments. 

What’s that we’re taught in relationships? It’s a matter of intention versus impact. This new Los Angeles Mansion Tax represents a bold step towards addressing the housing affordability crisis in the city, but has so far failed to fully evaluate its impact on the greater L.A. economy. Balancing the needs of housing affordability with the concerns of developers, homeowners, and tenants will require careful evaluation and ongoing dialogue to ensure a sustainable and equitable future for this beautiful city.