At the beginning of April, a new real estate transfer tax went into effect in the city of Los Angeles on all sales priced above $5 million. Under the new ULA Tax, properties priced over $5 million incur a 4 percent transfer tax, and those properties priced over $10 million are taxed 5.5 percent, which in both cases, the seller must cover.
The tax has led to wild swings in L.A.’s luxury real estate market, with transactions surging in the months before the tax was imposed as sellers tried to get ahead of the new policy, then plunging in the months since the tax went into effect. Similar volatility has not been observed in nearby cities such as Beverly Hills and Malibu.
Meanwhile, agents have been caught in the middle, working to support clients as best they can while also trying to move property and keep their income streams stable.
“There are no easy answers,” Nourmand & Associates President Michael Nourmand, who was born and raised in L.A., told Intel of finding the balance between solving the city’s homelessness crisis with an effective solution that the public was willing to swallow.
Nourmand recently spoke with Intel to provide an inside account of how Measure ULA has impacted the real estate community thus far, and how it might impact the city on a greater scale in the future. What follows is his take on the situation, edited for length and clarity.
Intel: What kind of response have you seen to Measure ULA?
Nourmand: The first thing is, anytime you have something which makes selling a property more expensive, somebody has less financial reasons to do it. So if I come to you and say, “Hey, you’re going to sell your house for $10 million, and you’re going to net $5 million,” and then I come back and say, “Actually, just kidding, you’re gonna sell your house for $10 million and you’re gonna get $4.5 million dollars.”
The concept that people don’t care or that they have so much money that it doesn’t matter is the most flawed thing because often people who care the most about money are the people who have it.
A lot of these people didn’t get rich because they weren’t paying attention to money; they got rich because they had a good idea, they worked hard, they were motivated by money or something like that.
I think what [ULA] did was it made all of the people that didn’t have an absolute need to sell postpone [their sale]. Then obviously some people just figured, “OK, I’ll push through it before the tax comes in so I won’t have to deal with it.” So you have the people who expedited their sale before it went into effect, the people who decided to postpone it because they didn’t want to pay for it, and some people that are kind of wait-and-see.
We know in terms of the courts, it doesn’t look like it’s going to get changed. The judges have not reacted favorably to it.
The original thing was, it was a mansion tax — tax the rich. Who cares about them? It doesn’t affect you, they can pay for it. But I don’t think what people realize is, when there’s less transactions, that’s one of the things that funds public schools: property tax. It’s not the only thing, but it’s one of the coffers. So now when you have less properties trading, there’s less property tax because each time a property sells, nine out of 10 times, it sells for more money. So now you’re getting a higher amount.
Somebody buys a house for $2 million, they sell it for $6 million and now the property tax is based off of $6 million instead of $2 million. So you have that.
Then what happens is, you say, “You know what? Who cares about the millionaires?” and then you realize, “Wait, every time a house sells, real estate agents get paid, title companies get paid, escrow companies get paid, inspectors get paid, contractors get paid,” all these people that that money exchanged hands with. People don’t see that part of it.
The other part of that is, it’s all real estate — residential, houses, condos, apartments, office buildings, industrial buildings, it’s everything. So now when you look at commercial, commercial is purely a financial transaction. And I think the residential community maybe could have done more, myself included. But I don’t recall — and maybe I’m mistaken — the commercial community really doing or saying anything [to oppose ULA]. There were some emails from residential agents going out and talking about it, trying to educate people about it …
People will try to play the other side, will say there were sales done beforehand, the economy changed, interest rates went up. Yes, all of that is a factor. But I have to negotiate a fee when I sell a house, and I can tell you, that if you think that somebody doesn’t care about 4 percent or 5.5 percent, they care. It’s one of the key discussions when you sell a property, what they’re going to pay you. If that whole amount is, let’s say on a $7 million house, [the commission] is 5 percent, then you’re going to almost double it by charging a 4 percent [tax].
As you just suggested, there are other factors impacting the market right now, but from the data I’ve seen, it does seem like Measure ULA in particular has had a palpable impact on sales volume.
Compare it to other cities. The cities that are winners would be Malibu, Beverly Hills. And if you look at the sales, when I checked last, a few months ago, the sales were much, much lower in L.A. on properties $5 million and up than they were in Beverly Hills and Malibu.
I have a client and we sold a place for him and he paid a large price for tax, for the ULA, and he wants to buy a place in [greater] L.A., and he refuses to look at anything in the city of Los Angeles. So he will look in Beverly Hills, he will look in West Hollywood. Anything in the city of L.A., he 100 percent does not want to discuss it.
I used to view L.A. as being kind of a moderate city, meaning, when you looked at rent control, West Hollywood and Santa Monica were the extremes, and then L.A. was in the middle, and Beverly Hills was the most landlord-friendly. Then all of a sudden, L.A. started to be more difficult and extreme on rent control rules. It hasn’t been a very pro-business place since I’ve been doing my job for 20-plus years, but it’s gotten worse. At some point, I think you just drive more and more people out and more and more companies out, and the companies that can move outside of this have. I think it’s not just ULA, I think ULA is just one of many things that are happening.
But the number of sales has definitely suffered and I think prices have also softened because of it — not solely because of it — but it’s definitely one of the main factors.
So when you think about there being a possibility that ULA could change or be repealed one or more years from now, do you think buyers and sellers will hold out until that possibility comes to fruition, if ever? What will it take for these holdouts to transact?
I think you can see it in the sense that there are a lot of places on the market for lease. There are, generally speaking, more high-end leases than before and that market is softened, too. Look, if you have a place that’s worth $10 million, for $550,000, would you wait a year? I would.
It is a lot of money.
It is a lot of money — and it’s kind of interesting timing with the NAR [commission] lawsuit and all that stuff, with the talk of “should buyers be paying their agents or not?” But I think you are starting to see some situations where maybe a house is $5.2 million and the deal sells for $4.95 million and the buyer pays commissions to the listing agent and to the buyer’s agent.
Do you think we’ll see people and businesses move out of Los Angeles?
I think there’s already been a move away from Los Angeles. I think a lot of people who have invested here now, people who have bought office buildings are getting completely hosed on their investment. Then you add other things, like [ULA] … It’s a very, very frustrating time to be in business in L.A.