Los Angeles High-Value Property Sales Plummet by Up to 70% Amidst Apartment Owners' Shift to Condo Conversions

Los Angeles apartment owners are increasingly considering converting their existing buildings into condominiums as a strategic move to circumvent the substantial Measure ULA tax, rather than selling them as completed apartment complexes. This trend, highlighted by commentator @mottsmith on social media, reflects a growing effort by property owners to mitigate the financial impact of the city's controversial real estate transfer tax. The shift comes as high-value property transactions in Los Angeles have seen a dramatic decline since the tax's implementation.

Measure ULA, officially known as the Homelessness and Housing Solutions Tax, took effect on April 1, 2023. It imposes a 4% tax on real estate sales between $5.15 million and $10.3 million, and a 5.5% tax on transactions exceeding $10.3 million, with thresholds adjusted annually. While colloquially termed the "mansion tax," Measure ULA applies broadly to all property types, including multi-family residential buildings, commercial properties, and industrial sites, and is paid by the seller on the gross sales price. The revenue generated is earmarked for affordable housing initiatives and homelessness prevention programs.

Since its enactment, Measure ULA has significantly impacted the Los Angeles real estate market. Reports indicate a substantial reduction in high-value property sales, with some analyses showing residential sales over $5 million dropping by nearly 70% and commercial transactions experiencing similar downturns. The overall decline in high-value property sales in the city has been estimated at around 50%. Consequently, the tax has generated far less revenue than initially projected, with collections averaging approximately $288 million annually, falling short of the anticipated $600 million to $1.1 billion.

The strategy of converting apartment buildings to condominiums aims to bypass the "crushing Measure ULA tax," as stated by @mottsmith, by allowing owners to sell individual condo units, which typically fall below the tax's high-value thresholds. This approach avoids the single, large transfer tax that would be levied on the sale of an entire apartment building exceeding the ULA thresholds. However, such conversions involve complex regulatory processes and market considerations.

Critics argue that Measure ULA has led to unintended consequences, including hindering the production of new market-rate and affordable housing units and impeding property tax revenue growth due to reduced transaction volume. Legal challenges to the tax, led by groups such as the Howard Jarvis Taxpayers Association, are ongoing, asserting that the measure violates constitutional provisions. The ongoing debate underscores the tension between the city's need for affordable housing funds and the broader economic impacts on its real estate sector.