According to a new report released Friday, Los Angeles’ “luxury house tax” could lead to a decline in overall apartment construction, which could worsen housing conditions in the city.
The study, from researchers at UCLA and Rand, focuses on the measure ULA, a voter-approved law that went into effect in spring 2023. Despite being called the luxury home tax, the measure imposes a 4% levy on nearly all real estate sales in the city, including about $5 million in all real estate sales, including apartment buildings, mini malls and 5.5% sales, and about $10 million above.
In doing so, the real estate industry believes that the additional cost of land buying and selling makes it difficult to profit from many new housing developments, killing potential transactions.
The study released Friday supports this view, with the authors citing their findings as sales of properties that typically build multifamily homes.
All in all, researchers estimate that the ULA will reduce at least 1,910 vehicles per year. The report said that since apartments in the city are usually built using density bonuses, which require private developers to include some income-limited housing, reducing at least 168 affordable units each year.
“If we were to build less housing, the city would become more affordable,” said Shane Phillips, housing planning manager at UCLA’s Lewis Center for Regional Policy Research.
Los Angeles is not the only city with declining construction. New housing permits nationwide are lowered nationwide as higher interest rates and material costs make it harder for developers to make profits.
ULA supporters noted that those rising costs believe the measure has not negatively impacted the claims of its real estate industry critics.
The report authors attempted to adjust this dynamic by comparing the city of Los Angeles with other areas where there was no increase in transfer tax. They found that land sales fell much more in the city and used the differences to propose their estimates of lost units that were limited to ULA.
In a statement, Joe Donlin, director of the United Nations United Tax Alliance, said the report was based on “highly questionable assumptions” and further promoted the interests of “real estate millionaires and billionaires.”
ULA supporters also said that in addition to interest rates, the decline in real estate sales may be attributed to some investors waiting for it, while the real estate industry has fought, failing to successfully overturn the ULA in court so far. They touted the positive impact of the measure.
Overall, city data shows that tax revenue raised nearly $633 million in two years. The ULA coalition said it has provided rental assistance to 11,000 Angelenos, paid for the eviction defense, and contributed money to the construction of 795 affordable homes.
Ula “survived the challenges and referendums of the real estate industry, and now, it is the largest source of affordable housing funding in Los Angeles ever.”
But Rand economist Jason Ward also wrote the report, saying the measure harms overall housing construction by going beyond luxury home sales.
First, it reduces the number of land owners who want to sell first, thus limiting construction opportunities. Many multifamily developers sell their projects to other investors after they have completed construction and are again affected by taxation during this period.
Even if developers plan to stick to the new apartment building, they have a mortgage on the property, Ward said lenders must consider the cost of sales if the developer falls into foreclosure.
“They either give you less money or give you money at higher interest rates,” said Ward, co-director of the Rand Center for Housing and Homelessness.
Ward and Phillips called for changes to measures to limit their potential negative impact.
Not only do economists say that lower market prices lead to higher rents, but researchers believe that ULA will lead to affordable unit net losses in the long run, as private developers of private reward projects are backing off, and ULA currency is not enough to support the filling of the loophole.
For example, the 795 affordable units cited by the Alliance received only a small number of funds from the ULA, while other resources constituted most of the project costs. Some projects have also started construction before they get ULA funds and need more cash to complete after a cost overrun.
Phillips and Ward said that while Ula may speed up the construction of 795 units, the homes may end up pieced together with other sources and build more affordable units without ULA.
To ensure more housing is built, the report recommends exemption from ULA multifamily projects established over the past 15 years, which the authors say will only reduce annual income by 8%.
“Negative results are not inevitable,” the report said in a call for change.
The UCLA-RAND analysis follows a study released last week that found that its sales attributable to ULA resulted in an annual loss of $25 million in property tax revenue, which will intensify in the coming years.
