Right now, the best real estate deal in the city of Los Angeles may be not be doing one at all.
That’s what some real estate analysts are saying as the city’s property owners and investors are digesting a new mansion tax on most commercial and residential real estate selling above $5 million. The tax, which took effect on April 1, faces two lawsuits that call into question its legality, and the city may have to return the tax money should it lose in court, two city officials said in a report.
Meanwhile, the mansion tax and other similar taxes statewide may get the boot if a statewide ballot initiative passes in November 2024. The act, called The Taxpayer Protection and Government Accountability Act, would end the mansion tax in Los Angeles and others like it if passed.
Much is riding on the tax: Property values and sales may be depressed in the city of Los Angeles should the tax remain, according to one study by Jerry Nickelsburg, an adjunct professor of economics at UCLA. Meanwhile, the tax may generate hundreds of millions of dollars a year to build housing and fund initiatives to combat homelessness in America’s second-biggest city.
“If you’re not forced to buy or sell, hold firm,” said Bob Weiss, a Los Angeles real estate attorney at Valensi Rose PLC. “Things are going to be happening every day down the road. There’s going to be some legal maneuvering.”
Real estate investors are taking note. Since April 1, no property in the city of Los Angeles has sold for more than $5 million, according to CoStar data. Between April 1 and April 13 last year, roughly 25 properties sold for more than $5 million in the city of Los Angeles.
That contrasts with $1.3 billion in sales that were completed between March 26-31 as buyers and sellers attempted to close deals before the new tax set in.
But there’s no guarantee lawsuits challenging the tax will prevail, and it’s not known when these suits will get resolved.
Daniel Yukelson — executive director of the Apartment Association of Greater Los Angeles whose organization is suing to challenge the mansion tax’s legality — said there have been limited proceedings to date with the next court hearing scheduled in May. That hearing may consolidate the two lawsuits currently challenging Measure ULA.
Yukelson said he’s optimistic about the lawsuit’s chances of upending the tax.
“We are certain, and in fact, we are up in the 99.9 percentile, that we will prevail,” Yukelson said.
In the meantime, real estate analysts say that parties involved in sales above $5 million in the city of Los Angeles should file a claim for a refund within a year of sale. That’s according to Susan Shelley, vice president of communications for the Howard Jarvis Taxpayers Association, which is also suing to challenge the mansion tax’s legality. Shelley said that her organization’s website has a “how to” explaining the refund claim process.
“Once filed, [claims] are valid regardless of how long it takes for a legal resolution to be finalized,” Shelley said. “If the tax is ruled illegal, taxpayers who filed claims within one year will receive refunds.”
Refunds probably won’t be available if the Taxpayer Protection and Government Accountability Act passes in November 2024. The proposed ballot measure derails the mansion tax and other similar transfer taxes after it passes and doesn’t include language for refunding taxes.
A report released March 17 notes that the city of Los Angeles may have to refund the mansion tax if it loses to pending litigation. The report was written by L.A. City Administrative Officer Matthew Szabo and L.A. Housing Department General Manager Ann Sewill.
“Until there is a court order to stay implementation or a decision that invalidates the measure, the city is mandated to implement Measure ULA in accordance with its provisions,” according to the report. “The Mayor and City Council, however, would need to decide if they are willing to risk expending an amount of the tax collected on priority projects before the court cases are resolved.”
City of Los Angeles Mayor Karen Bass along with the city’s councilmembers didn’t respond to a request to comment from CoStar News about whether the city should spend any mansion tax money it collects.
Meanwhile, the report questioned the city’s preparedness to simply handle the influx of mansion tax monies. The report notes that, for example, the law mandates that the Los Angeles Housing Department approve some funding for and organize expenditure plans for funds collected by the mansion tax.
LAHD needs to hire six positions to oversee some of these functions, according to the report.
However, the report notes that LAHD “lacks meaningful capacity or infrastructure” for much of what is required to perform its mansion tax duties, including stakeholder engagement, government and external affairs and data-informed performance analysis.
“These significant core capabilities are very limited at LAHD compared to housing departments in other major cities or other large city departments,” according to the report. “Absent immediate approval and action to address these gaps, LAHD and the City will not be able to effectively launch and start Measure ULA.”
The report also notes that the city has no way to currently ensure the tax is even being paid. Los Angeles County, where sales deeds are recorded and where transfer taxes are collected, does not ensure the tax is correctly paid. However, other cities that have similar transfer taxes, including Santa Monica and Culver City, have contracts with outside entities to ensure compliance. The city of L.A’s Office of Finance is looking at its options for enforcing and auditing tax payments.
The first funds are expected to arrive in late May 2023 from the county, according to the report.