HOUSING CRISIS - By almost any measure, Los Angeles has one of the most serious housing crises of any major American city. Polls repeatedly show that the public ranks housing and homelessness as Los Angeles’ most serious problems.
For years, advocacy groups, elected officials, and candidates for public office have proposed ways to address these problems, such as changing zoning laws, streamlining bureaucratic approvals of new housing construction, implementing tenant protections, and creating new funding programs to subsidize housing production. However, the crisis persists.
The most recent proposal, which will appear on the November 2022 ballot in Los Angeles, is called Measure ULA. It involves an increase in the real estate transfer tax for properties that sell for over $5 million. The measure’s proponents estimate that the program would raise approximately $923 million per year, which would be dedicated to constructing new affordable housing, preserving existing lower-cost housing, providing rent relief for households facing eviction, offering income support to low-income, rent-burdened seniors, providing legal counsel for tenants facing eviction, and educating landlords and tenants about their rights and responsibilities under the law. Proponents also estimate that the tax will only impact four percent of real estate transactions — the most expensive sales — in a given year.
This report provides an overview of Los Angeles’ housing conditions, summarizes the key components of the Measure ULA ballot measure, and evaluates its potential impact.
Measure ULA is a ballot measure which proposes to increase transfer tax rates in the City of Los Angeles on real estate sales valued $5 million or more. The new fees will be levied at the time of sale at a rate of 4% for properties between $5 million and $10 million, and 5.5% for those $10 million or above. The money raised by this measure would be set aside for the production and acquisition of affordable housing, as well as homelessness prevention measures in the form of rent relief, income support for rent-burdened seniors, and legal counsel for tenants facing eviction. The tax will affect approximately 4% of Los Angeles’ real estate transactions in a given year.
If the tax was in place in fiscal year 2021-22, it would have raised roughly $923 million. The coalition of affordable housing developers, homeless service providers, labor unions, hospitality workers, and community-based organizations pushing the measure estimate that over the next ten years this money could create 26,000 affordable housing units and 43,000 new construction jobs. Annually, the measure is also expected to provide emergency rental assistance to 5,100 households, income support to 13,000 households with seniors or disable people, and legal counsel for 23,000 households facing eviction. The measure would also create an oversight committee made up of 15 seats, each with their own experience requirements, including: expertise in affordable housing development, housing finance, labor, or community land trusts, as well as seats set aside for those with experience in tenant organizing, or experience with living in low-income housing or homelessness.
By providing funding for new housing and homelessness prevention, Measure ULA represents a holistic approach to the city’s housing affordability and homelessness crises. We find that the magnitude of Measure ULA’s potential revenue, coupled with the program’s design and oversight, make this proposal likely to have a strong positive impact on homelessness reduction and housing affordability in Los Angeles.
According to County Assessor data from fiscal year 2021-2022, Measure ULA could raise over $900 million annually. Currently, the City of Los Angeles raises an average of only $207 million per year from transfer taxes (based on pre-COVID-19 fiscal years 2016-2019), and the revenues are added to the General Fund, not earmarked for housing.
Measure ULA’s tax would affect approximately 4% of real estate transactions in a given year and 72% of its revenue would come from properties sold for over $10 million. Under 3% of single-family homes or condos sold in a given year would be affected.
There is no evidence that the tax would impact rents for commercial or residential tenants. In most cases, transfer taxes are paid by the seller, who will have no legal avenues to pass on costs to tenants in a building which they no longer own. Additionally, this report cites multiple studies which show that rents are determined by the market, not taxes and fees. Landlords already charge the most they can without losing tenants and facing vacant apartments/retail spaces — this will not change because of new transaction fees.
We found very limited evidence that the tax would impact some for-profit new construction projects, but developers are able to adjust their business models to minimize the impact of the transfer tax, and revenues from Measure ULA will fund the construction of a much larger number of deed-restricted affordable homes.
Will Measure ULA discourage investment in real estate? Those who invest in real estate for medium- to long-term (7 to 10 years or more) returns will see limited impact from the transfer tax. In Los Angeles’ market, annual income from commercial properties as well as profit made from a property’s sale price will far outstrip the percentage taken by the Measure ULA transfer tax. However, the tax will have a more significant impact on those with a short-term investment horizon who routinely “flip” properties – a practice which inflates housing prices and can cause evictions.44 If a side effect of this tax plan is to discourage flipping and speculation, that is a bonus.
Will Measure ULA discourage new construction? Some worry that increasing the transfer tax on property sales over $5 million may render some housing developments financially infeasible. For single-family construction, this will not be a concern because very few new condos and spec-built single-family units sell for more than $5 million. For multi-family and commercial properties, developers who build and hold their assets will be only minimally impacted, as the property value will appreciate substantially more than the new transfer tax. There is a concern that if developers plan to build new housing, lease the units, and sell the property to another investor within a few years of completing construction, the expectation of a higher transfer tax may require them to bid less for land, and consequently some underutilized properties may go unsold and undeveloped.
To understand if this is valid, we refer to a forthcoming report by Shane Phillips and Maya Ofek of the UCLA Lewis Center for Regional Policy Studies, which analyzes multifamily housing developments completed between 2013 and 2016 in the City of Los Angeles. Because transfer taxes will only impact buildings that sell, they investigate the share of units in buildings with eight or more units that have sold by mid-2022. Among these projects, only those built in “moderate density” zones, such as R3 and CM, are assumed to be at risk due to reduced land bids.45 Projects in higher-density zones such as R4 and C2 have considerably higher land values compared to their existing, pre-development uses, which means a higher transfer tax is unlikely to make such sites less attractive for redevelopment.
(Peter Dreier E.P. Clapp Distinguished Professor of Politics and Professor of Urban & Environmental Policy, Occidental College - Joan Ling Lecturer, Urban Planning Department, UCLA - Shane Phillips Housing Initiative Project Manager, UCLA Lewis Center for Regional Policy Studies - Scott Cummings Robert Henigson Professor, UCLA School of Law - Manuel Pastor Distinguished Professor of Sociology and American Studies & Ethnicity, USC - Seva Rodnyansky Assistant Professor, Urban & Environmental Policy, Occidental College - Jackson Loop Policy Manager, Southern California Association for Non-Profit Housing)