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Thursday, Jun 13, 2024

LA ‘Mansion Tax’ May Provide Boost for OC

Proposition ULA Expected To Pause Dealmaking in City

Orange County’s luxury market received a boost to its buyer pool during the pandemic as residents of nearby cities—specifically Los Angeles—flocked to the county, in search of a less-dense and safer haven.

The prospective buyer pool from LA may get another boost this year, as that city implements a “mansion tax” that has some residents reconsidering their zip code.

Late last year, LA voters approved Proposition ULA, which raises the one-time transfer tax from about 0.5% to 4% for property deals between $5 million and $10 million, and 5.5% for transactions of $10 million and above.

“It’s pretty unprecedented to hit homeowners with that type of tax,” John Stanaland of Douglas Elliman told the Business Journal. “It will likely result in people shying away from making deals in the city or thinking twice before buying there.”

The increase takes effect on April 1; city officials estimate the tax will raise between $600 million and $1.1 billion per year, with funding going to affordable housing projects and homelessness prevention.

Institutional investors are also taking notice, with the measure expected to push various buyers further into a wait-and-see mode.

“Everyone will wait to see the impact,” Bill Shopoff, CEO of Shopoff Realty Investments, said, adding “my friends in Los Angeles feel like they just lost a lot of their equity.”

Affordable Efforts

Neither new Los Angeles Mayor Karen Bass—nor opponent Rick Caruso—supported Proposition ULA, despite her move last month to implement an emergency declaration over homelessness.

Bass is instead focusing on her Inside Safe Initiative, which aims to create more shelter for homeless individuals in LA. Earlier this month, the city council voted to transfer $50 million toward those efforts.

The tax increase will affect about 4% of real estate deals annually in LA, with 72% of the proposition’s revenue coming from properties that sell for more than $10 million, according to an analysis by the UCLA Lewis Center for Regional Policy Studies.

Supporters, such as United to House LA, argued the measure will improve the city’s efforts to increase the stock of affordable housing and help mitigate homelessness. Critics argue the measure may push investment out of LA, as well as make housing less affordable due to higher costs for landlords, and for potential multifamily investors.

Orange County could see an increase in demand from former LA residents or investors looking for a higher-return on their purchase, whether commercial or residential.

Pandemic Trends

Such a push would continue a demand set in place here a few years ago, as residents of larger cities such as LA, San Francisco and New York flocked to Orange County, coveting the region’s space, privacy and lifestyle, brokers note.

“Orange County has been put on the map as a major destination,” Stanaland said.

Prospective buyers are also coming from China, Stanaland notes, with international interest ramping back up in recent years.

Last year brought about a slowdown in OC’s luxury market after the prior two record-breaking years, and this year will continue that slowdown, brokers predict.

“Still, I don’t foresee a giant devaluation,” Stanaland said. “This will run its course.”

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