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Residential brokers dish on Measure ULA

Though Measure ULA has disproportionately affected the commercial industry, agents who sell the top 1 percent of real estate in the city of Los Angeles have also taken a hit.

Some say their clients are now more focused on Beverly Hills or Malibu, neither of which has its own transfer taxes. A handful said buyers are coughing up the cash anyway. Others are hopeful that Measure ULA will be overturned through the November ballot measure.

The Real Deal spoke to a number of top residential agents in the city of Los Angeles to get their thoughts on the transfer taxes and how they think the market has changed over the last year.

“There’s always the three D’s — death, divorce and disparities.”

JOSH FLAGG, COMPASS
Flagg, the star of “Million Dollar Listing L.A.” who recently jumped to Compass from Douglas Elliman, said some people are always going to need to sell.

“But, with that said, adding 5 percent onto the purchase price is never going to be a good situation for anybody,” he said. For the most part, Flagg said his clients understand. “It is what it is.”

Flagg also noted that sellers can’t raise their prices to take ULA into account, given that demand and pricing overall have softened.

“It doesn’t mean houses went up another 5 percent just because of this ULA tax,” he said. “A lot of sellers might be adding it on top of it, but it’s silly to do that because you’re just adding 5 percent over the value of your house.”

“Unless they have to move, people are not keen on taking a large hit.”

STUART VETTERICK, HILTON & HYLAND
It’s hard to blame the huge drop in sales to just Measure ULA, Vetterick said. There’s also the huge rise in interest rates and the fact that presidential election years generally bring a slowdown in sales.

But without a doubt, there are people who are “looking to buy in Los Angeles, but will not buy in the city of Los Angeles,” he said.

People over the age of 70, long-term homeowners who see property as a “nest egg,” are the ones “losing the most,” Vetterick said.

One set of his clients looking to sell have been in their house for 11 years and have taken out loans against the property over time, accumulating significant debt. The home is likely to sell for over $10 million, meaning the client will have to shell out at least $550,000 in cash including the tax.

“That’s their retirement fund,” he said.

“I’ve lost an immeasurable number of clients to other states.”

JASON OPPENHEIM, THE OPPENHEIM GROUP
A number of Oppenheim’s clients are “either hesitant or have decided definitively not to sell because of the tax,” he said.

Oppenheim said more of his wealthy clients have left in California in the last two years than over the last 10, with many critical of increased taxation.

“We’ve dug a 2-foot grave and are continuing to dig,”he said of Measure ULA, noting that the city has not reached its revenue estimates. “I’m not opposed to taxation philosophically. I’m opposed to inefficiency.”

Many of his clients are moving to Florida, Nevada, Arizona and Texas — or even Orange County.

If more continue to leave, the city of L.A. is going to lose a significant chunk of its wealthy tax base, he said.

“I’ve seen developers walk away from projects saying there’s not enough of a profit margin now.”

CARL GAMBINO, COMPASS
Much of Los Angeles’ luxury market is product from spec home developers — investors who build properties from scratch. If more developers walk away, citing Measure ULA, agents and buyers could be left with less product to market and purchase.

In the months leading up to Measure ULA coming into effect, Gambino said, he closed a number of large deals, including Mark Wahlberg’s $55 million sale of a home in Beverly Park.

If Wahlberg, who then moved to Las Vegas, had sold two weeks later, he would have been on the hook for $3.025 million in city transfer taxes.

Since then, “it’s definitely slowed down transactions in some capacity,” Gambino said, echoing other agents interviewed by TRD. “Some sellers have literally just decided they’re just not going to sell because of the tax, and some of them believe that it could be overturned.”

“There was an overabundance of properties for lease.”

SALLY FORSTER JONES, COMPASS
Can’t sell? Lease instead.

Many with $5 million homes in 2023 decided not to sell but rather to try their luck at renting the property they otherwise might have sold.

Rental prices came down in 2023 as the number of properties on the market went up, according to Forster Jones.

“Clearly, the contributing factor was that the sellers did not want to sell or chose not to sell,” she said. “They decided instead they were going to put their homes up for lease.”

Forster Jones also had many conversations with her clients about what listing prices would be at the $5 million mark — the trigger for the initial Measure ULA tax tier of 4 percent.

“The discussion was always, ‘Do we put it up for sale over $5 million?’” she said. “Selling property at $5,000,002, the seller was going to net less than if they had put the property up for sale at $4,999,000.”

“ULA was a horrible measure. It was written terribly. It’s not a mansion tax, it’s a real estate tax. In a city that needs housing, it was the worst thing that anybody could have created.”

AARON KIRMAN, AKG | CHRISTIE’S INTERNATIONAL
Kirman, whose brokerage did $2 billion in sales volume last year, said anything between $20 million and $200 million was “very difficult to sell.”

Sellers of $10 million-plus properties did not want to pay a 5.5 percent transfer tax, plus commissions, generally at another 5 percent, plus closing costs of 2 percent.

“Sellers were looking at a 12 percent closing fee before they even got out of bed.” Kirman said. “And that was very difficult for people to stomach — it still is, by the way.”

Kirman echoed the same sentiment about spec home developers — the transfer taxes are cutting into profit margins, meaning developers will just stop building.

“To be able to buy a piece of dirt anywhere in the city is running between $1.5 million and $3 million, sometimes $4 million to $7 million or more,” he said. “By the time you build and develop, you’re over the $5 million threshold, and developers are not going to run and build houses if it doesn’t make sense.”

However, in 2024, Kirman thinks things have started to settle.

“We’ve seen a lot of high-end luxury buyers back down to the market, we’re seeing a lot of sales,” he said. “I’ve had more billionaires call me in the last three months than I had the whole of last year, an interesting indication of where we are.”

“The margins have become slimmer and slimmer — now with [Measure ULA], in a lot of cases, it just won’t make sense to build a house anymore.”

SANTIAGO ARANA, THE AGENCY
From Arana’s vantage point, Measure ULA is leading to less spec home development, and eventually, less inventory.

Arana, who is hoping ULA will be overturned with the passage of the Taxpayer Protection Act in November, said it’s hard to keep being an advocate for the city of Los Angeles.

“I’m going to think twice if I want to reinvest that money, that I’m gonna put it here in Los Angeles,” he said. “I’m going to invest [in a state] that is more friendly, tax-wise, for entrepreneurs like me, who are trying to diversify as a real estate agent.”

Arana also echoed Vetterick’s concerns about elderly people, noting they are a subset of the market more likely to be affected by a 4 percent or 5.5 percent transfer tax.

“If I want to sell the house to use that equity to go and live comfortably in a retirement home, but I gotta pay four and a half percent on the setbacks of that,” Arana said, “that very well could be a substantial amount of the money that I was planning on using.”

“And by the way, my $5 million house is not going to be a mansion. In Los Angeles, with $5 million, it is not really a mansion,” he added.

— Daria Solovieva contributed reporting

https://therealdeal.com/magazine/april-2024/residential-brokers-dish-on-measure-ula/

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