Join us for a discussion with Steven Sorell of Sorell Law Group in Pasadena, CA and Kiran Dhillon, Broker-Associate at KW Commercial on the impact of Measure ULA (aka “The Mansion Tax”), which will go into effect in the City of Los Angeles on April 1, 2023.

Topics covered include: (1) a summary of Measure ULA, including how Measure ULA’s proponents plan to spend the funds collected; (2) legal challenges being brought against Measure ULA and the likelihood of success; and (3) the impact of Measure ULA on commercial property owners.

Kiran Dhillon, SIG Commercial:

Welcome to our series, Simply Multifamily. My name is Kiran Dhillon, I am a Broker-Associate

at Keller Williams Commercial, specializing in multifamily sales. The purpose of this series is to highlight issues that affect owners of multifamily properties via market updates, investment highlights, and interviews with trusted professionals.

Today we are going to be talking about Measure ULA, commonly referred to as the "Mansion Tax." To walk us through the effects of Measure ULA on owners of multifamily properties in Los Angeles, we have with us today attorney Steve Sorell of Sorell Law Group. Welcome Steve, it's great to have you again.

Steve Sorell, Sorell Law Group:

Thank you very much for having me again on this interesting, very timely topic that has a lot of emotions attached to it and some of the issues are not clearly understood. And I hope I can shed a little bit more light on some of these questions today.

Kiran Dhillon, SIG Commercial:

Absolutely. So to start off, can you tell us briefly what Measure ULA is?

Steve Sorell, Sorell Law Group:

Measure ULA, which is commonly referred to as the "Mansion Tax," and I think inappropriately so, increases the transfer tax on real estate transactions above $5 million. Transfer tax is a tax that is imposed by the local government on real estate sales, which includes a change in ownership of an LLC or some entity that owns real estate.

Right now, prior to Measure ULA, there was about a 1/2 percent transfer tax in the City of Los

Angeles. There is a county and a city tax, so the rate actually varies depending on the city and location. Voters of Los Angeles passed Measure ULA, which imposes two levels of transfer tax increases. For transactions that are below $5 million, there's no change. Above $5 million, it imposes a 4% transfer tax on all transaction between $5 million and $10 million. Above $10 million, the rate increases to 5.5%. That's in addition to the 1/2 percent that already exists.

Although it's called a "Mansion Tax," in terms of where the revenue is really anticipated to come from, it's from commercial transactions. Yes, Los Angeles is a city known for a lot of $5 million mansions and above, but in terms of the real dollar value of transactions, it's office buildings, it's larger apartment buildings, industrial buildings, warehouses, and the like. That's really where the source of the revenue is going to be from. So it is portrayed as a Robin Hood kind of tax, to take from the rich, but it's really not entirely fair, because of so much of the source of the revenue.

The other thing that some of the opponents have pointed out is that it's based on the gross selling price of the property, not on the profits. So if somebody purchased a building for $5.5 million and is now trying to sell it for $5.2 million (at a loss), they're still going to be hit with the transfer tax. So it is a gross revenue tax.

I would also note that Los Angeles is not the first city to impose this. The City of San Francisco started with this with Measure C, that was approved in 2011 and again 2016. The City of Santa Monica has one and Culver City has one. But the LA measure is different than the other measures, at least San Francisco's and Culver City's, in that Los Angeles has two levels, two bands, whereas San Francisco has like six different thresholds, increasing gradually. Culver City has four different thresholds. So Los Angeles is a little bit cruder, a little bit blunter instrument, if you will.

Kiran Dhillon, SIG Commercial:

Got it.

[Proposed Uses of Measure ULA Funding]:

Steve Sorell, Sorell Law Group:

The proponents of this are looking to fund various kinds of homeless programs. Everyone agrees that there is a housing crisis in Los Angeles. There is in the rest of the country, but particularly acute here in Los Angeles. The uses of the ULA funds, which are expected to generate somewhere between $600 million and a billion dollars a year, a very large amount of money, dwarfs the amount of money that's been raised by Proposition HH, which is a bond measure passed a number of years ago, and really any other funding source that's been considered. The state is looking at spending sums in that amount. This is just for the City of LA.

The ballot measure is really quite intricate. It's 26 pages long. In terms of the detail of how it's going to be used, they really try and go into great detail. There's something for everyone in it. About 70% of the funding is meant to be used for the construction of low-income housing, specifically projects 40 units or more. So it does not do much for smaller developments. It's really designed for the larger ones. Of that 70%, roughly 45% of that is for

the actual construction of new projects. Another 10% will be available for rehabbing of existing buildings, and another 10% to facilitate purchases of low-income housing, single family units. So there's a little something in there for the single family side, but the great majority of it is to fund new construction of large projects.

The measure had the support of a lot of trade unions because, coincidentally, among the requirements is that those projects have to be staffed by unions. Not just prevailing wage, but actual unionization for almost every aspect of it.

The remaining 30% of the fund is to help the rental side. There is about 15% of it will be spent on rental assistance, emergency housing, rental payments for people who were laid off, and then a continuing fund for people who are chronically low income and need continuing support. It'll be a slice of it.

Another 10% of it, interestingly, will be to aid tenants in eviction defense. Which is a fairly broad category, of course, and it doesn't really distinguish what the grounds are for it. But it

will certainly provide a lot of funding, $60 million a year or more, to housing defense funds, tenants' rights foundations and the like. So there's a lot of non-profit groups that will be receiving significant funding.

Kiran Dhillon, SIG Commercial:

Steve, are there any concerns being raised about whether the funds that are earmarked for these different groups will actually ever get there?

Steve Sorell, Sorell Law Group:

Well, that's kind of loaded question and it does get into various policy issues. As you may be aware, Proposition HH was passed about 10 years ago to fund development of a lot of housing, a little bit larger units, and most of that money is still unspent. And the projects that did get built came in at about half a million dollars a unit. About twice the cost of what the developers, the proponents expected.

There's no reason to expect that housing will be built any less expensively under this. In fact, since there'll be so much money sloshing around, there will be pressure to spend it, I believe, and we will likely see low-income housing that costs a great deal of money. Because once you start getting into that venue, people say, "Well gee, if we're going to make low-income housing, we also want to be able to include this provision. And it should be green, and so it should be solar powered." And everybody will come out with the special enhancements that they want to the projects and I suspect that it will be expensive.

You may have heard there was quite a scandal in the papers about a month or so ago about the portable temporary housing that LA put up, that cost several hundred thousand dollars per unit, and these were just little kind of porta-sheds, because of all the other ancillary support services that went with it. So I don't know.

The fund also specifically earmarks 8% of the money that's collected for administration. That's a lot of money. Eighty million a year for the administration of this, tends to be self-perpetuating of course, and remains to be seen how wisely the money will be spent. It is such a huge increase in the money that's available, in a very short period of time, that I think there will be, even under the best circumstances, there'll be some growing pains that will have to be dealt with for a while. Certainly, if it goes as proponents plan, it should make a huge dent in the homeless shelters here.

You think about a hundred million dollars a year. Say it's not all going to be on housing, but if they can get housing done for $250,000 a unit, or for a million, we're talking 400 units a year or more, it's a start. But it is still not that much money if you consider how many people are classified as not having housing. So it's a huge intractable problem that we have, and this is a big step, but it's certainly not without its problems. Not sure how well thought out it was.

It will certainly have, I think, a temporary effect on sales because people will initially be shocked by it, and what do we do? Maybe we won't put our house on the market now, our property. But I think, like most other kinds of conditions, people get used to it and will start, as long as the tax is in effect, they will continue to sell. Just as the interest rate increases had an effect, and it'd be a permanent effect, but people bounce back and they still have to make transactions. People who have to sell properties, will still need to sell it. Developers will still want to build office buildings and other properties. By the way, resales of housing that's built with this fund would be exempt from the tax on any subsequent resale.

Kiran Dhillon, SIG Commercial:

I didn't know that. That's very interesting.

Steve Sorell, Sorell Law Group:

There's an exemption for sales of any kind of properties that are held by qualified nonprofit entities. So that includes existing developments that are so funded.

Kiran Dhillon, SIG Commercial:

Steve, you're mentioning in terms of the effect this might have on residential and commercial owners who fall in that price range or close to it, that there might be a chilling effect, but eventually people will get used to it and get back to it. Do you have any advice for people who have to sell and who will be facing the tax this year and will probably be quite surprised by it?

Steve Sorell, Sorell Law Group:

They will be surprised. First of all, it's clear that there will be no sales of property between $5 million and $5.2 Million because you're going to want to keep it under the limit. And the same thing for properties over $10 million. Because that extra percent and a half kicks in, you're not likely to see anything in that narrow band above $10 million. So you'll see prices adjusted.

I think people will try workarounds as well. If I've got a property that I think is worth a little more than $5 million, I may sell the property for $4.99 million, and sell the contents, the furniture, which would not be covered by this, for a couple hundred thousand dollars or whatever. So I think there'll be some gamesmanship going on with ways to unbundle the pricing of it, throw in a purchase price for some other unspecified services or something like that. I'll sell you the property, but you'll agree to hire me as your property manager for some amount of time. There's no question about that.

It will also be followed on with sales of entities. As I mentioned, that it should apply to somebody who owns a property in an LLC, and transfers a majority ownership in the LLC. People aren't always aware that under Prop 19/Prop 13 that there is an adjustment for that. It will apply here as well. It's going to clearly encourage a certain amount of that kind of stuff.

[Legal Challenges Being Pursued Against Measure ULA]

As you know, as soon as it was passed, a number of people came out to challenge it. The Apartment Owners Association and Howard Jarvis Taxpayers Association teamed up to file lawsuits. A couple of separate suits were filed that are being consolidated. And I am not a handicapper, I can't really predict what a court will do, but my best guess is that those challenges will not succeed. People were saying, "Well, this wasn't passed by two-thirds majority," since Prop 13 requires new taxes to be passed by that. It requires new local taxes, under Prop 218 and Prop 26, both require a two-thirds majority for special taxes, and a majority for a general fund. And that was the basis of the Howard Jarvis suit, that this is a special purpose tax. It is earmarked for special use, and therefore requires a two-thirds majority. The proposition got about 58% approval. Though a clear majority, it was well short of the two-thirds measurement.

But the reason why I think that the challenges will not succeed is that San Francisco passed their Measure C, which is a similar kind of transfer tax for a similar purpose. And it was a subject of two suits, one by Jarvis and one by interested parties, they called it, back in 2020 and 2021. The appellate court ruled in favor of the Measures in both cases. The reasoning was that the requirements for two-thirds are for taxes that are initiated by the government. If the city proposed it and then put it to a vote, it would require that kind of thing. But this is a tax, like the San Francisco tax, that got on the ballot as the result of a voter initiative -- California's famous propensity for legislation by ballot initiative. And because of that, the courts have held, at least the two courts in San Francisco have held that this is exempt from the two-thirds requirement. It just requires a simple majority, even though it is clearly a special purpose tax.

Now, I have not read the Jarvis brief here, so I don't know what tack they've taken. Since they lost in San Francisco, I'm presuming that they have refined their argument and tried to find some way to differentiate this from the losing battles up in San Francisco. But I think the trend is not in favor of challenges. The trend has been to support this. As I said, we have transfer taxes like this in Culver City, Santa Monica, as well as San Francisco, and I'm sure that there will be more to come.

Kiran Dhillon, SIG Commercial:

Is there any other basis that they're using to challenge Measure ULA, other than the two-thirds majority rule?

Steve Sorell, Sorell Law Group:

Not that I am really familiar with. Yes, there's the whole sense of, the rhetoric around it has been framed in terms of "Gee, this is unfair. It hurts people. It doesn't take account of the fact that there could be a loss involved, so you're taxing people on a loss." And a lot of rhetoric around the general inequities of that.

But that's not the same as a legal argument. I think that is the argument for why this may not have been a fair tax in the first place, and why people of good conscience might have chosen to vote against it, even though they support providing funding to reduce homelessness. There are a lot of good reasons to be against this ballot measure because of these deficiencies and sort of unfairness of the pointedness of the attack on "the rich," which is just totally unfair.

Kiran Dhillon, SIG Commercial:

Do we have a timeline of when any decision will be made on those lawsuits that are being brought by the Howard Jarvis Taxpayer Association?

Steve Sorell, Sorell Law Group:

The law is scheduled to go into effect April 1, so the courts will either decide to grant a preliminary injunction and say, "Let's hold off on this until we hear the case." And if that happens, then implementation would be delayed a year, two years. It would take quite a while to go through it.

The court may say, "Gee, preliminarily, we think this is no different than the case in San Francisco, so we're not going to hold it up. You can still go to trial, but we're not going to hold up the implementation." That, of course, sends a pretty clear message. And so, a decision will have to be made pretty soon since we are at the beginning of February.

Kiran Dhillon, SIG Commercial:

Right.

Steve Sorell, Sorell Law Group:

So, I would expect that we would hear something within the next 30 days.

Kiran Dhillon, SIG Commercial:

And that would be interesting if they decided to let it go forward, but then had a trial and somehow decided it wasn't valid and then you had to go back.

Steve Sorell, Sorell Law Group:

Right. And then people would try and get refunds and it would be quite a mess. So that's why I think that the initial view of the court will be really important. If they do not grant an injunction to this, it's a pretty clear signal that they don't think that the challenge will succeed. Yes, something could happen and who knows, but there will be a lot of sharp legal minds looking at it very closely. It's not going to be just sort of randomly assigned to some junior staffer to make that decision. It's taken pretty seriously.

Kiran Dhillon, SIG Commercial:

I'd also read somewhere that the tax percentage rates are meant to be adjusted annually based on inflation. Is that right?

Steve Sorell, Sorell Law Group:

Not the rates, the thresholds. The $5 million, the $10 million will be adjusted periodically.

Kiran Dhillon, SIG Commercial:

Okay. Got it. That makes sense.

Steve Sorell, Sorell Law Group:

I forgot the exact details. Like I said, the ballot measure itself is 26 pages long.

Kiran Dhillon, SIG Commercial:

That's quite extensive.

Steve Sorell, Sorell Law Group:

Quite extensive to be reduced to oh, it's a "Mansion Tax."

Kiran Dhillon, SIG Commercial:

Right, right.

Steve Sorell, Sorell Law Group:

That's all there is to it, folks. Just a "Mansion Tax."

Kiran Dhillon, SIG Commercial:

So essentially, the bullet points of Measure ULA are: it applies to residential and commercial real estate in the city of Los Angeles starting April 1st, 2023. A tax of 4% on properties between $5 and $10 million, and a tax of 5.5% on properties over $10 million. And then that $5 and $10 million amount will be adjusted periodically based on inflation. You're taxed on the entire sale amount, like you said, regardless of whether you have a lot of debt on the property or you're selling at a loss.

Steve Sorell, Sorell Law Group:

Correct.

Kiran Dhillon, SIG Commercial:

And essentially, we probably won't see a lot of sales within that $5 to $5.2 million range.

Steve Sorell, Sorell Law Group:

Right, it wouldn't make any sense because they would end up with less net income than if they sold it for $4.9 million. And also, it is the city of Los Angeles only. It does not extend to the county, unincorporated areas, and the like.

Kiran Dhillon, SIG Commercial:

Is there anything else that you think would be useful for the listeners to know about Measure ULA? I think we've covered everything, but just in case we missed something.

Steve Sorell, Sorell Law Group:

Well, I think that it will be interesting to see, down the road, if there are further challenges. Not to the overall tax because I think that it's likely to succeed, but to the use of the funds.

I think that if somebody now wants to come up with a 40-unit development that will be funded by this, I think it'll face the same issues that any other large project faces. The whole NIMBY kind of thing, and environmental reviews and all of that sort of thing, that will bog it down. And I think that there will be continuing litigation.

But of course, now the fund will be available to support that litigation. It won't be just a small nonprofit trying to promote this thing. The city's revenue fund will be there behind it. So, I think there will be a lot of lawyers making a very good living. I'm not one of those because I don't do that kind of litigation, but I think we'll see a lot.

The 8% that is earmarked for the administration, and these housing councils that are going to be overseeing the use of the funds that are provided in this measure, will be another source of controversy, no doubt. Anytime you have a paid appointed position, there is room for all kinds of issues and challenges and things like that.

Kiran Dhillon, SIG Commercial:

Well, Steve, thank you so much. As always, I really appreciate you being willing to share your knowledge. If anybody has any follow up questions or they want to reach out to you, what's the best way for them to do that?

Steve Sorell, Sorell Law Group:

Email me at steven@sorellgroup.com. Or call the office at (626) 792-8600.

Kiran Dhillon, SIG Commercial:

Excellent. Well, thank you again, Steve. I appreciate it.

Steve Sorell, Sorell Law Group:

Thank you.

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