Los Angeles Mansion Tax Sees Apartment Permits Fall 46 Percent

A 2022 ‘mansion tax’ aimed at funding affordable housing has instead seen multifamily development grind to a halt, with permits dropping to the lowest level in a decade.

A Los Angeles tax on luxury property sales, intended to fund affordable housing, has been followed by a 46 percent collapse in new multifamily building permits, raising questions about the policy’s unintended consequences. The levy, known as Measure ULA, has chilled development activity since taking effect in 2023, with sales of large, development-ready parcels falling by nearly two-thirds.

“There have been some unintended consequences,” Miguel Santana, chief executive of the California Community Foundation, a nonprofit that initially supported the tax, said. Developers say the tax on gross sales value, which applies regardless of a project's profitability, has made building in the city unviable.

The city issued permits for just 7,363 multifamily units last year, down from over 13,600 in 2022 and the lowest annual figure since 2013. The tax imposes a 4 percent charge on sales above $5.3 million and 5.5 percent on those above $10.6 million, hitting not just mansions but also the apartment buildings and vacant land needed to ease the city’s housing shortage.

The fallout has placed a repeal measure on the November ballot, backed by $14 million from real-estate investors and tech billionaires. The debate pits the urgent need for housing construction against the progressive goal of taxing high-value property to address a spiraling homelessness crisis, with the city’s development future hanging in the balance.

The tax makes no distinction between a Bel-Air mansion and a market-rate apartment building. While proponents sold it as a “tiny tax on megamansions,” city data shows 39 percent of the revenue has come from commercial, multifamily, and vacant land sales — the very properties crucial for expanding housing supply.

“We have not started any multifamily housing in the city of L.A. since the passage” of the tax, said Chris Tourtellotte, managing director at LaTerra Development. His firm, which previously built 500 to 1,000 units a year in the city, is now focusing on other California cities and states like Texas.

Revenue Shortfall and Spending Woes

Proponents of Measure ULA projected it would generate between $600 million and $1.1 billion annually. However, collections have fallen dramatically short. While the source article's total collection figures are unclear, it is clear that only $119.4 million of collected funds had been paid out as of April 30, mostly for rental assistance and eviction defense.

Hundreds of millions more are committed to building or rehabilitating affordable units, but the process is slow and costly. The 1,790 new apartments currently slated to receive funding from the tax are expected to cost an average of $779,955 each, a figure that highlights the inefficiencies of the program.

“It’s a classic cautionary tale about this sort of ballot-box legislation,” said Michael Manville, a professor of urban planning at the University of California, Los Angeles. A study from Harvard Business School estimated that the drop in sales volume will reduce traditional property-tax revenue by an amount equal to 80 percent of the money the mansion tax raises.

A Statewide Battle Looms

The local Los Angeles dispute is set to go statewide. An initiative led by the Howard Jarvis Taxpayers Association qualified for the November ballot that would not only repeal Measure ULA but also similar property transfer taxes in other California cities like San Francisco and Oakland.

Backers have raised $14 million, with significant contributions from tech billionaires Peter Thiel, Eric Schmidt, and Chris Larsen. Meanwhile, an ad hoc City Council committee is studying potential modifications to the tax, though any changes would require another public vote.

“It was a bold move that was a people’s initiative, and they really said what they wanted with it,” said Los Angeles council member Ysabel Jurado, who chairs the committee. Proponents argue that high interest rates are the primary cause of the construction slowdown, a nationwide phenomenon, and that developers are using the tax as a scapegoat.

“What’s been proposed are drastic changes based off of faulty research and big narratives strung together by the real-estate industry,” said Joe Donlin, executive director of United to House LA, the coalition that campaigned for the measure. He called the tax “an essential asset to the city.”

This article is for informational purposes only and does not constitute investment advice.