In November, City of Los Angeles voters overwhelmingly passed Measure ULA, an increased transfer tax on high-end real estate properties that is estimated to generate $900 million annually to support homeless individuals. The tax rate will increase to 4% for properties conveyed at over $5 million and 5.5% for assets conveyed at $10 million or more. Despite court challenges, the so-called “mansion tax” is set to go into effect April 1. Connect CRE recently spoke with Chris McKenzie, Lee & Associates Principal — LA North/Ventura, about how Measure ULA will affect the Los Angeles Commercial Real Estate industry.

Q. How are you seeing Measure ULA impact the CRE sector?

McKenzie: The biggest push I’ve seen recently is from those who were on the fence and were trying to close deals in time (ahead of Measure ULA) to avoid having to pay the tax. We recently closed a $7.1 million dollar sale for an industrial building located on Strathern Street in Van Nuys. It worked favorably for the seller who had wanted to move the property out of its portfolio ahead of the ULA tax. Looking ahead, we’ll be seeing a lot of creativity with this tax implication, in particular, with those who have loans on buildings. For example, say you have $3 or $4 million in debt and you’re selling an asset for $5 million which subjects you to pay the tax – you really have to think about your selling price. A lot of property owners with loans are having to get creative and asking these big questions to avoid the tax where they can. Owners might be looking at property credits on the threshold which ultimately impacts the sale too.

Q: What advice do you have for those in the CRE industry regarding the implementation of Measure ULA? What can they do to ensure their business transactions are taking this measure into account in their processes?

McKenzie: Real estate professionals are going to need to be creative to get the deals done. You have to think about your negotiation power. For example, if a new roof needs to be built, it’s going to take more creativity to now get it done. For more substantial deals, I don’t see the tax implication being as big of an issue with a lot of money being made. It’s those deals on the fence where you’re going to have to get creative. Some owners have begun selling below the ULA property tax number, and there are other instances where the buyer needs to still do their due diligence with inspection and credits. It’s going to be an awkward time in the near future, I think.

Q: What short and long-term impacts do you think we can expect to see from Measure ULA with CRE properties?

McKenzie: The short-term impacts I see are that the people who on the fence for selling are looking at the new numbers after ULA takes effect in the sales price. Some may decide not to sell at all. However, no matter what, we need product availability. Long-term, with inflation really high on top of the cost of doing business in California, it is not advantageous for some companies to operate in the state. We’re going to feel these effects for a while.