After 'Mansion Tax' Begins, LA Real Estate Quivers - Law360

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After 'Mansion Tax' Begins, LA Real Estate Quivers - Law360

In the aftermath of a major new tax on high-dollar real estate transactions taking effect in Los Angeles, buyers and sellers are working anew to understand property valuations and what deals can be done.

A flurry of transactions closed in the days before Measure ULA took effect April 1, adding 4% to 5.5% to the cost of Los Angeles real estate deals valued at more than $5 million.

Construction workers finish the exterior of an apartment building in downtown Los Angeles. While the city's Measure ULA, a property transfer tax, went into effect April 1 as a way to provide revenue tofight homelessness, it faces a battle from two lawsuits and a potential statewide measure that would have it overturned or nullified. (AP Photo/Damian Dovarganes)

But many sales failed to get in under the wire, leaving buyers and sellers struggling to structure deals, and some sellers questioning whether it's savvier to wait to see if the tax is overturned.

"We've been dealing with a lot of the aftermath from the failed transactions," said David Tabibian, a Los Angeles-based partner in Jeffer Mangels Butler & Mitchell LLP's real estate group. "Some of them, the parties are back to the negotiating table to save the deal, and in some cases the deal has already died and the seller has taken the deal off the table."

Tabibian said he closed a deal for residential land for "almost nine figures" ahead of the deadline. But not every deal came together.

"A lot of deals just failed to close in time," he said.

Real estate attorneys have joined a chorus of business opposition to Measure ULA, which some fear will dramatically slow transaction volume in Los Angeles.

"When you add ULA on top of the way the capital markets have been lately, it's really taken a significant chunk out of what the net sales proceeds are," Tabibian said.

Measure ULA passed in November with 57.7% of the vote and is intended to provide a steady revenue stream to fight homelessness. ULA stands for United to House LA, the umbrella organization of community groups that pushed for the ballot measure.

While it was sold as a "mansion tax," the transfer tax applies to any property valued at more than $5 million, including commercial property, multifamily and land.

Measure ULA faces two separate lawsuits from real estate interests seeking to overturn it. In addition, a statewide measure has qualified for the November 2024 ballot that would nullify ULA.

For now, however, the tax adds a 4% levy to properties valued at more than $5 million and less than $10 million, and a 5.5% surcharge on properties valued at more than $10 million.

That's enough to cause buyers and sellers to pull back in an already challenging economic environment, real estate experts said.

"Nobody wants to transact because it's hard to find debt right now, and properties as a result of that are being valued in a way that sellers don't find acceptable," said Alexander Davis, a partner at Mayer Brown LLP's real estate group in LA. "So you have that issue, and you also have the Measure ULA issue. The way I'm thinking about it is it's another factor in an incredibly hard-to-price market."

Some observers expect developers to look to do deals in cities that lack high property transfer taxes.

"Developers we're talking to, they're not looking at doing many deals within the city boundaries," Tabibian said. "I think there's no question surrounding cities might benefit from this unintentionally because developers that want to stay in California are going to look outside the boundaries of Los Angeles where you don't have to deal with this."

LA, however, isn't alone in charging significant property transfer taxes. Culver City and Santa Monica are among the municipalities that levy such taxes.

For apartment building owners, Measure ULA comes on the heels of three years of inconsistent rent collections backed by eviction moratoriums, said Daniel Yukelson, executive director of the Apartment Association of Greater Los Angeles, or AAGLA.

"The rental property owners have basically had the hell beaten out of them. I don't know any other way to put it," he said.

The AAGLA is a plaintiff in a suit brought in December in Los Angeles County Superior Court seeking to overturn the transfer tax.

Some multifamily property owners are looking to get out of their LA assets, Yukelson said.

"A lot of them, after not collecting rent for the last three years, they're in the position of having to sell their properties," he said. "Some of them are going to wait around until November 2024. Some people are going to hold out and see what happens."

The tax is dinging real estate values in LA, Yukelson said. That is causing managers of large public pension funds, which invest in real estate investment trusts that own LA real estate, to divest of some holdings.

"Some of the larger owners, particularly some of these real estate investment trusts, are taking a hit now because their values are dropping," Yukelson said. "What happens when a portfolio in real estate drops that quickly, fund managers start rebalancing and pulling money out of real estate and putting it in other things, like stocks and bonds."

As the April 1 tax date loomed, buyers and sellers completed deals in a hurry. Waterbridge Capital purchased the Union Bank Plaza, a 40-story, 701,888-square-foot office tower in downtown LA. The purchase price was not disclosed, but Waterbridge used a $75 million acquisition loan from BH Properties to finance the deal.

Real estate services company Colliers, which arranged the loan, said Measure ULA put "increased pressure on the sale to close before the end of March."

"Union Bank Plaza is just the most recent example of private capital filling the void where institutions have pulled back," Colliers Vice Chair Sean Fulp said in a statement.

Celebrities also got in on the selling spree. Actor Brad Pitt reportedly sold his Hollywood Hills mansion for $39 million just before the deadline.

"There's no question there was a rush to get deals completed before Measure ULA went into effect," said Tabibian.

Since April 1, buyers and sellers are adjusting to the post-ULA landscape. In some cases, they're sharing closing costs that were traditionally borne by the seller. There's also renewed discussion of trying to cut brokers' commissions, Tabibian said.

"As you can imagine, brokers are not happy at all, and I cannot blame them," he said.

The lasting impact of Measure ULA may be that property owners decline to sell in an already challenging landscape, real estate experts said. The tax poses particular obstacles for transactions such as 1031 exchanges, which involve moving between comparable real estate assets.

"It's definitely making people think twice and run the numbers again, because it's going to be expensive [to transact]," Tabibian said. "You're having people take a hard look if it's worth the sale."

--Additional reporting by Quinn Wilson. Editing by Jill Coffey.


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