L.A. 'mansion tax' would raise money for affordable housing

A homeless encampment near Los Angeles City Hall in January.

Sept. 30, 2022 5 AM PT

Rep. Karen Bass and Rick Caruso have each put forward expensive plans for expanding interim and permanent housing for homeless people, but the Los Angeles mayoral candidates have offered few specifics about how they would pay for them.

One possible way to fund these plans is a ballot measure going before city voters in November. Known as Measure ULA, or “United to House L.A.,” the “mansion tax” would impose an additional tax on commercial and residential property sales that exceed $5 million.

The ballot measure would generate an estimated $600 million to $1.1 billion a year, according to a city analysis.

Caruso’s proposed plan costs roughly $900 million, Bass’ about $300 million. But neither candidate has supported the measure, even as city officials expect funds available for affordable housing construction to plummet in the coming years.

Both appear to think that backing the tax is bad politics when Angelenos are frustrated with how past money has been spent to address homelessness, even as many feel the crisis has worsened.

“While I would support the idea of a dedicated revenue stream for homeless housing and services, I believe we must first demonstrate to the public they can trust the government to utilize these funds effectively and efficiently,” Caruso said in a statement. “Once we make that happen, if the need for more funding is proven, I would gladly push forward a measure to make it happen.”

Bass hasn’t decided whether to support or oppose the measure, her spokesperson said, adding that the congresswoman’s priority is “making sure the $1 billion the city is already spending on homelessness every year is spent as effectively and efficiently as possible.”

The measure, known as a documentary transfer tax, would impose a one-time 4% tax on property sales above $5 million that would rise to 5.5% on transactions above $10 million. A $5-million sale would generate a $200,000 tax bill.

A simple majority of votes cast in the Nov. 8 election is required for passage.

Many of those involved in creating affordable or homeless housing see it as essential to continuing their work.

“I truly believe it would be a game changer for us,” said Stephanie Klasky-Gamer, president and chief executive of L.A. Family Housing, a homeless services and housing nonprofit. “Having dedicated ongoing revenue stream — not a bond measure, not something that happens once but a dedicated revenue stream that could produce this amount of funds — would really allow us to do the growth in building that we’ve experienced these last five years.”

Initiative Ordinance ULA has also won backing from labor unions, which say it would help their members find decent places to live, as well as secure jobs on the projects that receive funds from it.

A Rand Corp. study showed the labor provisions in an earlier affordable housing bond added 14.5% to construction costs. But supporters of the new tax proposal say this is the consequence of paying people well, and that it could lead to as many as 43,000 new construction jobs and 26,000 new affordable housing units being constructed in the next decade.

Social justice groups are heartened that about 30% of the proceeds go to funding emergency rent subsidies, direct payments to seniors and disabled people who are at risk of becoming homeless and tenants’ right to counsel. They say these sorts of programs prevent people from becoming homeless.

“Any amount that we can get in the hands of the senior is typically just that tipping point so they can pay rent without having to then choose between the medication or addressing food insecurity issues,” said Diego Cartagena, chief executive of the legal aid group Bet Tzedek.

The group overseeing the measure, United to House L.A., has raised about $3.9 million, mostly from unions, while opponents have collected about $1.5 million, so far including $775,000 from the California Business Roundtable and $500,000 from Westfield Property Management.

Opponents say the tax could drive up rents and make Los Angeles a harder place to do business, causing firms to flee the city.

They invoke Proposition HHH, the city’s much-criticized $1.2-billion homeless housing bond program approved by voters in 2016, which has been beset by cost overruns and delays. As of August, about 6,300 units of housing funded by the bond were under construction.

A controller’s report about the work in 2021 found that 14% of the HHH units in construction at that time would cost more than $700,000 each to build. The city is paying about $130,000 per unit, with the rest of the money coming from government and philanthropic sources.

The opponents say that much of the ULA money would go toward building housing that’s too expensive and takes too long to complete. Nearly 25% of the money generated under the proposed tax would go to permanent affordable housing that would be funded in a manner similar to Proposition HHH.

“Why would we raise more money and tax people on the sale of their property ... when we have failed to address homelessness with the billions that have come before,” said the Rev. Andy Bales, who runs the Union Rescue Mission, one of the city’s largest homeless shelters on skid row.

That money has “been wrongly spent. It takes too long to develop these units. Once we develop them, they’re too expensive. They’re not sustainable and then the alcohol and drugs just freely flows,” Bales said.

The city already has a similar tax that sends revenue into the general fund, though at a much lower rate than what is proposed for the ballot measure. (The current tax — $4.50 per $1,000 — amounts to $22,500 on a $5-million transaction.)

Klasky-Gamer and other supporters say this measure has been written to reflect the lessons of Proposition HHH, including providing more flexibility around the cap on how much city money can flow into an affordable housing project. Developers say this limit slowed construction as they pieced together financing from several sources, including tax credits.

Klasky-Gamer said Proposition HHH allowed her nonprofit organization to create housing faster, moving from one new development about every three years to breaking ground on three new buildings every year.

“Is it later than people thought it would be? Maybe,” she said. “But that’s pretty damn huge and that’s because of revenue in our system.”

New funding that would come from the ballot measure is needed to continue that momentum, she said.

Roughly a quarter of the tax’s proceeds would go toward alternate modes of construction and the purchase of existing buildings. About 30% of the revenue would provide short-term emergency assistance for tenants, subsidies for rent-burdened seniors or disabled people; and funding to provide legal aid for tenants.

Unlike past housing bond measures, there will be a paid inspector general with a staff who will audit the progress of how the money is spent. About 8% of the revenue would be set aside for this purpose.

The city faces a funding crunch for affordable housing in the next few years. L.A. has committed to spending about $350 million this fiscal year on housing construction, mostly funds coming from Proposition HHH, but only about $75 million in the next fiscal year, $49 million the year after that, according to Housing Department estimates.

Proponents say this new tax is needed to keep the city from lagging behind in the construction of new affordable housing. Opponents, meanwhile, say the “mansion tax” label is misleading.

In 2019, if this tax had been applied, nearly half the proceeds would’ve come from the sale of commercial properties and 27% would have come from the sale of multi-family residences, such as apartments, according to analysis conducted by consultant Mike Kahoe, who authored a paper on the measure for the Center for Jobs & the Economy and the California Business Roundtable.

If the upcoming ballot measure were already in force, sales of these two types of real estate would have raised about $690 million, while sales of expensive single-family homes would have raised just over $200 million.

“You increase costs on business — whether it’s a rental business or an office or industrial property — those costs get passed on,” Kahoe said. “Particularly in the current economic environment, where those types of businesses that are being hammered by cost increases all the way around, the likelihood of those costs being passed on more quickly are much more likely.”

Billy Lehman Goodyear, a residential real estate developer, said he recently pulled out of the purchase of a piece of land in Brentwood when he heard about the tax. He planned to build two homes there but then calculated the impact on his business if the measure were to pass.

“This new tax ... coupled with the downward shift of home prices that the tax will likely cause, will render the work of many home developers unprofitable and will force many to cease developing in the city of Los Angeles,” he wrote in an email, noting that the measure taxes the entire value of a sale and eats up much of the profit he makes on a development.

“For many, this tax will be the knockout blow.”