Most of us will never have a legitimate occasion to explore the multimillion-dollar regions of Redfin--with its screening rooms, pool houses, Viking ranges, fallout shelters, etc.--but the other day I took a stroll anyway.
I found 73 listings in the $4.5 million - $4.99 million range, and 48 in the $5.5 million - $6.0 million range. In the $5.0 million - $5.49 range: 32 listings.
Hmm.
We're obviously not dealing with a huge sample set here. But, even with only 150 data points, we'd expect the number of listings to decrease as prices increase. What's up with that 32, then?
I haven't polled the sellers, but the relative shortage is likely a distinct consequence of Measure ULA. And it is by far the least significant consequence. Everything else about Measure ULA threatens to bring development in Los Angeles nearly to a halt.
Approved by Los Angeles voters in November, and implemented April 1, Measure ULA imposes a 4% transfer tax on property transactions of $5 million-$9.9 million, and a 5% tax on transactions of $10 million and above, and dedicates the funds to the development of affordable housing.
What's worse is that ULA is not a marginal tax. It's a gross tax, meaning that it assesses not just the increment over $5 million but rather the entire value of the transaction.
A sale for $4.999 million? No ULA tax. A sale for $5.001 million? Two-hundred, twenty-two thousand in ULA tax. (This city webpage has a ULA calculator in case you're feeling incredulous.)
I suspect that many voters and supporters assumed that ULA was a marginal tax because, well, anything else would have been insane. Be that as it may, if you're a multimillionaire homeowner and aren't willing to drop your price south of $5 million, you'll figure out a way to cope. In the worst case, you'll eat the 4% and wash it down with Dom Perignon.
The emotional appeal of Measure ULA centered on this sort of decision calculus. Supporters of Measure ULA, which include nonprofit housing developers, social justice advocates, and trade unions, promoted it as a "mansion tax." That's a solid way to get 512,000 votes, for a 57%-43% win, in a city with 16% poverty rate and a rent-burden rate of 35%.
A great many people voted for ULA for this very reason---including seasoned real estate folks, who voiced little, if any, opposition to it. A developer friend of mine voted for ULA mainly because the Howard Jarvis Taxpayers Association opposed it. That's usually a good heuristic if you're pro-development. But the housing crisis has created some strange bedfellows
I'm all for soaking the rich, as far as it goes. But ULA taxes much more than mansions: it taxes any real estate transaction of $5 million and higher. Here's where Los Angeles's crisis goes into overdrive.
The economic decisions of the developers and landlords who build and operate multifamily projects bear little resemblance to those of individual homeowners. Landlords don't unload a rental property just because they want a swimming pool or a home theater. Developers don't build just because their renderings look pretty. They sell and build if--and only if--they can at least break even.
Contrary to the stereotype of the "greedy developer," there are probably guys dressed as Spider-Man on Hollywood Boulevard who make more money on a daily basis than many developers do. Their cap rates are thin--in the single-digit percentages--and they often take years to materialize.
And, even if a developer is willing to tolerate lower margins, fat chance finding a lender who will -- especially in what is already a worrying economic climate. (Side-note: If redevelopment was still around, much of this discussion might be moot.)
Kneecapping the development industry may be fine if (like L.A.'s mayor) you're sick of all the "luxury" residential buildings that have gone up lately. But, if "luxury" buildings are the only projects that pencil out now, then what of working class, "missing middle" housing? That's exactly the type of housing Los Angeles needs.
With a 5% tax, it's toast.
And what of developers with cash on hand and the itch to build? They have 88 other jurisdictions in Los Angeles County that won't force them to kiss their profit margins goodbye.
By the time ULA's reign of terror really gets going, Los Angeles will be left with a handful affordable units, developed by nonprofit developers and subsidized by the sale of $5.5 million and up megamansions--and that's it. The city will net several hundred new affordable units when, according to its RHNA, it needs hundreds of thousands. Meanwhile, the vacancy chain by which affluent residents trade up and make lower-cost units available to less affluent residents becomes ever more attenuated.
Economics are only half of the equation. The other half is policy. On that count, Los Angeles--like many other cities in California--finally got the memo, in the form of a 440,000-unit RHNA goal.
The city's new housing element was roundly praised, and the city even got a Prohousing designation from the state. Programs like its Transit Oriented Communities density bonus have done well. And we are subject to new state laws promoting adaptive reuse, reducing parking requirements, streamlining infill development that are tailor-made for a transit-heavy mega-city with tens of thousands of under-built lots and low-density boulevards. It's true that we don't know which of these laws (with more on the way) are going to be truly effective, but the efforts are encouraging.
More so than ever, thinking is aligned at the state, regional, municipal levels, and grassroots levels. A politically significant number of people want Los Angeles to grow, and there are plenty of thoughtful developers who could make it grow well. But, unless Sacramento passes a law requiring developers to light money on fire, these new incentives, plans, and regulations will hardly matter. Measure ULA stands to topple all of these successes.
Now, as ever, Los Angeles cannot get out of its own way.
If they could go back in time, the city's developers probably would have spent every last dime fighting ULA--or, at least, negotiating with its sponsors to make it marginal and omit multifamily transactions. But, it's too late for that. Measure ULA has no sunset clause (which it, like every other major land use law, ought to), and it has broad public support.
Beyond my sympathies for the unhoused and housing-insecure people in my city, all of this makes me personally sad. I support development. As my friends observe about me, "you like a good building." They're right. Urban planning excites me in part because I believe in the promise of the new--new housing, new streetscapes, new people. I'd like to think that, in my lifetime, the place where I live can become better--for me and everyone else who lives in it. Planning is about the prospect of building on past successes and correcting for past mistakes.
We've just made a huge mistake--one that, potentially, negates its own solutions. I don't want to think about how long it's going to take to correct it. At least with SB 9, we can start subdividing some of those mansions. I call dibs on a pool house.
