Federal Judge Dismisses Challenge to Measure ULA

A federal judge this week ruled that federal court is not the proper venue to mount a legal challenge against Measure ULA, the property transfer tax that went into effect in Los Angeles this year. 

Judge John Kronstadt dismissed a federal lawsuit Newcastle Courtyards filed against the City of Los Angeles claiming that the new transfer tax violates the equal protection clause of the US Constitution.

“Federal Courts are courts of limited jurisdiction. Accordingly, when a federal court finds that it lacks subject matter jurisdiction, it must dismiss the case in its entirety,” Kronstadt wrote, in his ruling.

In dismissing the case, Kronstadt also rejected the plaintiff’s argument that Measure ULA can’t be defined as a tax, but rather is a charge on a specific group of people.  The judge noted that Measure ULA was approved by city voters in a citizen-sponsored initiative.

“[When] the electorate exercises its initiative power, it is acting in a legislative capacity,” the judge ruled.

Newcastle Courtyards also is a plaintiff in a lawsuit challenging Measure ULA that is underway in Los Angeles Superior Court. In April, that case was combined with legal challenges to the tax filed by Howard Jarvis Taxpayer Association and Apartment Association of Greater Los Angeles.

Measure ULA, nicknamed the “mansion tax,” imposes a 4% tax on all residential and commercial sales over $5M and a 5.5% tax on sales over $10M. The new taxes were added to an existing transfer tax of 0.45% in Los Angeles.

Los Angeles votes approved the new tax by a lopsided 58% to 42% in a statewide referendum in November after proponents of the transfer tax projected that it would generate up to $900M for a new housing fund.

In March, the Los Angeles City Administrative Officer projected that Measure ULA would generate $672M in its first fiscal year.

However, since the law went into effect in April, Measure ULA, has had a significant dampening effect on real estate transactions. In April, Los Angeles collected a paltry $3.6M from only five transactions that were subject to the new tax. As of July 1, that total only crept up to $38M.

Voters will get another chance to weigh in on Measure ULA next year. In February, a petition calling for a new referendum on local special tax increases, spearheaded by Kilroy Realty, was certified by California’s Secretary of State to have been signed by more than 1M registered voters, the threshold needed to place the referendum on the state’s 2024 ballot.

The sponsors of what they’re calling the “Taxpayer Protection Act”—Kilroy and the California Business Roundtable sponsored the measure—have worded their ballot proposition without mentioning 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.