The Los Angeles “tax on the mansion” which finances affordable housing probably led to a drop in the overall construction of apartments, potentially aggravating the city’s housing situation, according to a new report published on Friday.
The study, researchers from the UCLA and Rand, focuses on the measurement of the ULA – a law approved by voters who entered into force in spring 2023. Although nicknamed the mansion tax, the measure applies a levy of 4% to almost all sales of city properties on approximately 5 million dollars, including apartments, mini -centuries, From 5.5% to around $ 10 million.
In doing so, the real estate sector argued that the additional costs for the purchase and sale of land have made too difficult to make a profit on many new housing developments, thus killing potential offers.
The study published on Friday supports this view, the authors based on their results on a reduction in sales of goods where multifamily houses are generally built.
In total, the researchers estimated that the ULA leads to a reduction of at least 1,910 units per year. Since the city’s apartments are often built using density bonuses which require that private promoters include certain limited homes, there has also been a reduction in at least 168 affordable units per year, according to the report.
“If we build fewer housing, the city will become even more unaffordable,” said co-author Shane Phillips, project manager of the housing initiative with the Lewis Center for Regional Policy Studies of the UCLA.
Los Angeles is not the only city where construction has fallen. The permits for new dwellings are decreasing across the country, because higher interest rates and material costs make developers more difficult to achieve a profit.
ULA supporters underlined the cost increase to assert that the measure does not have the negative impact that its criticisms of the real estate industry claim.
The authors of the report tried to adapt to this dynamic by comparing land sales in the city of Los Angeles to other areas of the county where the transfer taxes have not been increased. They found that land sales have dropped much more in the city and used the difference to find their estimate of the lost units attributable to ULA only.
In a statement, Joe Donlin, director of the United States to shelter the coalition behind the tax, said that the report was based on “very questionable assumptions” and has strengthened the interests of “real estate and billionaires”.
ULA donors said that in addition to interest rates, the drop in sales of goods could be awarded to certain investors waiting for it while the real estate industry has so far been fighting ULA in the courts. They praise positive impacts that the measure has brought.
In total, the city data shows that the tax has collected nearly $ 633 million in two years. And the ULA coalition said that rental assistance financed 11,000 Angelenos, paid for expulsion defense and contributed to the construction of 795 affordable houses.
The ULA “has survived judicial challenges and attempted referendum of the real estate industry, and now, it is the greatest affordable source of accommodation for housing that Los Angeles has ever seen,” said Donlin.
However, Rand economist, Jason Ward, who also wrote the report, said the measure injured the overall construction of housing in several ways, extending beyond sales of luxury houses.
First, it reduces the number of landowners who wish to sell in the first place, thus limiting construction opportunities. And many multifamilial developers sell their projects to other investors after completing the construction, and would still have had an impact by the tax by doing so.
Even if the developers plan to keep their new apartment buildings, they have mortgages on the property, and Ward said that lenders should take into account the cost of a sale if the developer falls in foreclosure.
“They will give you less money or give you money at a higher interest rate,” Ward, co -director of Rand’s Center on Housing and Homelessness.
Ward and Phillips have called for measurement to limit its potential negative effects.
Not only do economists say that a reduction in housing at the market rate leads to higher rents, but researchers have argued in the long term, the ULA will lead to net loss in affordable units, because private developers of density bonus projects are looking for money and ULA money is not enough to fill the hole.
The 795 affordable units cited by the coalition, for example, only received a minority part of the ULA funds, other sources composing most of the project costs. Some projects had also started construction before receiving ULA funds and needed more money to finish after having experienced cost overruns.
Phillips and Ward said that even if Ula probably accelerated the construction of 795 units, these houses would probably have been built in the end because other sources were paved and that more affordable units would be built without Ula.
To ensure that more housing is built, the report has recommended to exempt ULA multifamilial projects built in the past 15 years, which, according to the authors, would only reduce ULA annual income by 8% to the maximum.
“The negative results are not inevitable,” said the report by calling for change.
The UCLA-MAND analysis follows a study published last week which revealed that the drop in sales it awarded to the ULA led to an annual loss of $ 25 million in land tax revenue, which will be done in the years to come.
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