Fiscal Chief Tells Los Angeles Not to Spend Transfer Tax Funds

Since the Measure ULA property transfer tax in Los Angeles went into effect on April 1—after a slew of last-minute deals were rushed through at the end of March to avoid it—the city’s top financial advisor has had a lot to say about its implementation: all of it disappointing to proponents of the measure, which was approved by a lopsided margin of city voters in November.

Last month, the city’s fiscal overseer reported that the yields for a new housing fund that will be paid for from proceeds of the new property transfer tax will be much less than advertised by proponents of Measure ULA.

This week, City Administrative Officer Matt Szabo warned the city not to spend the tax windfall until legal challenges to the property transfer tax are resolved in court.

Szabo warned Mayor Karen Bass and the City Council they need to understand the risk they are taking if they start allocating the tax proceeds to new affordable housing project. If the city ends up losing either of two legal challenges to Measure ULA that are moving through the courts, he said, Los Angeles will be liable to refund the tax money to property sellers.

Last month, Szabo made public an analysis by his office which showed that Measure ULA, the new property transfer tax on commercial and residential transactions over $5M in Los Angeles—an initiative that was approved 58% to 42% margin in a state referendum in November—is not delivering the kind of tax revenue, earmarked to support a new housing fund, proponents of the measure told voters to expect if they passed it.

The analysis from the City Administrative Office estimated that Measure ULA will generate up to $672M in the fiscal year that begins on July 1 and end on June 30 next year.

Supporters of Measure ULA told voters on the city’s voter information pamphlet—the official ballot information provided to voters that explains what an initiative aims to accomplish—said the property transfer tax would generate $900M per year, based on real estate sales volume in the fiscal year that ended in June 30 2022.

This claim was amplified by a UCLA analysis published in September that estimated that the transfer tax would generate $923M. The new property transfer tax adds a 4% tax on all residential and commercial sales over $5M and a 5.5% tax on sales over 10%.

Neither of the earlier estimates included an important caveat: they assumed all the sales they based their estimates upon would actually close. Opponents of Measure ULA warned last fall that rising interest rates and the approval of the transfer tax would have a chilling effect on sales transactions.

A $672M yield for Measure ULA will generate an estimated $433M for affordable housing programs in Los Angeles and $185M for homelessness prevention programs in a new fund known as House LA.

Voters will get another chance to decide if that return is sufficient to keep Measure ULA in effect:

A petition calling for a new referendum on local special tax increases, spearheaded by Kilroy Realty, was certified by California’s Secretary of State last month to have been signed by more than 1M registered voters, the threshold needed to place the referendum on the state’s 2024 ballot.

The real estate interests who sponsored what they’re calling the “Taxpayer Protection Act”—Kilroy and the California Business Roundtable sponsored the measure—have worded their ballot proposition in a way they hope negates the popular advantage of Measure ULA: in fact, the 2024 referendum doesn’t even mention Measure ULA.

Instead, a “yes” vote on the 2024 referendum will create a new requirement for two-thirds approval of state referendums that impose any new local special tax increases—and it will grandfather the rule in so that it can be used to invalidate Measure ULA.

The 2024 referendum will specify that any local special tax imposed “after January 2022 but before November 2024” that was approved by less than two-thirds of voters (a 66.7% “yes” vote) “was not adopted in compliance” will be voided.

In December, a group of landlords known as the Apartment Association of Greater Los Angeles and a group calling itself the Howard Jarvis Taxpayers Association filed a lawsuit challenging Measure ULA, claiming that the state constitution prohibits cities or counties from designating real estate transfer taxes for special purposes.