Court Fight Looms Over Property Transfer Tax in Los Angeles

A court fight is looming between landlords and housing advocates over a new property transfer tax aimed at CRE transactions in Los Angeles.

The property transfer tax, known as Measure ULA, approved by city voters in November and scheduled to take effect in April, will add a 4% tax on real estate deals above $5M, with the rate increasing to 5.5% on deals above $10M. The new transfer tax would be added to LA’s existing transfer tax of 0.45%

The Measure ULA ballot initiative—which was approved by a 58% to 42% margin of city voters—specifies that revenue generated by the new transfer tax will go directly into a new House LA Fund that will “allocate revenue to projects that address housing availability at certain income thresholds and homelessness prevention.”

The new tax applies to all commercial and residential property deals—properties that are sold or transferred—in Los Angeles. City officials estimated the tax will generate more than $1B annually for the special housing fund.

At the end of last month, 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.

“If the Measure ULA tax increase is imposed as scheduled on April 1, 2023, great and irreparable harm will result to all Los Angeles property owners in being required to pay unconstitutionally imposed taxes,” the opponents’ lawsuit stated.

Housing advocates supporting Measure ULA fired back, saying the legal challenge to the new transfer tax is groundless.

“The California Supreme Court has made it clear that our power as citizens to place the measure on the ballot is broad, and at least four recent decisions of the Court of Appeals have made it clear that City Charters cannot limit the initiative power to propose special taxes,” said Laura Raymond, a Measure ULA campaign co-chair, in a statement.

The battle lines are already forming in the fight over Measure ULA, which supporters say is the largest housing ballot initiative ever adopted in the US. Proponents estimate the new tax could fund 26,000 new housing units over the next decade.

Shortly after the lawsuit was filed, Southern California News Group, which owns 11 area newspapers including the Los Angeles Daily News and the Orange County Register, published an editorial in all of its papers branding the transfer tax “a massive money grab” that will discourage new housing development rather than support it.

The city’s largest newspaper, the LA Times, published an editorial this week backing Measure ULA and urging the courts to quickly resolve the constitutional issue raised by opponents.

The Times suggested the new tax would affect “only a tiny percentage of property sellers” while providing a big boost to what the city’s new mayor, Karen Bass, has called her top priority: combatting the homelessness crisis in Los Angeles.

“Clearly, voters wanted to see something big and swift done to create more affordable housing in a city that has fallen behind year after year in producing it,” the Times’ editorial said.

However, in expressing its hope that the Measure ULA survives the court challenge, the city’s largest newspaper conceded that the courts might have to carve out an exemption to Proposition 13, an amendment to the state constitution adopted in 1978 which prohibits a city or county from designating a real estate transfer tax for a special purpose—like building affordable housing.

Courts have upheld the city’s right to collect transfer taxes as general revenue, so the sticking point will be the legality of the House LA Fund.

The Howard Jarvis Taxpayers Association is named after Howard Jarvis, a businessman who ran unsuccessfully for mayor of Los Angeles several times and then spearheaded a petition drive that put the Proposition 13 initiative on the state ballet in 1978.

The Prop 13 initiative—passed during the double-digit inflation of the late 1970s—adjusted property taxes to peg them at 1% of the purchase price of the property.