Thursday, July 25, 2024

High-end realtors of Los Angeles on why the mansion tax is fundamentally misguided

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Josh Altman has been appearing regularly on Bravo’s Million Dollar Listing for several years now, where the Los Angeles-based realtor shows exactly that: multimillion-dollar homes for sale in the city of angels. But the Douglas Elliman realtor has a message about the so-called mansion tax on every property sale above $5 million in Los Angeles County: “We’re not talking about these crazy mansions that you see on MTV Cribs.” 

A $5 million house “may be a mansion in Minnesota,” he added, “that’s not a mansion in L.A.” For those unfamiliar with Los Angeles’ extremely stratified housing market, Altman explained that what you get for $5 million in most of Los Angeles “could be a four-bedroom, 4,000-square-foot regular house that you would find anywhere in America, but it just happens to be more expensive because it’s in L.A.”

Altman and others of his ilk talked to Fortune about Measure ULA, which is essentially an additional 4% tax on Los Angeles property sales over $5 million and 5.5% on those above $10 million—with the tax being paid by the seller. It passed with nearly 58% of the vote in November but went into effect beginning on April 1, and adds more pain to a pandemic home price correction that has been sharper out west than anywhere else, as the region is  hypersensitive to interest rate hikes and has home prices unusually detached from average local incomes. On the high end, the L.A. luxury segment has declined 55.5% in terms of home sales in the three months ending January 31, per Redfin. And the mega-realtors and brokers of L.A. are apocalyptic about what the new tax will do. “I think that it is the worst thing [to] happen to the real estate market in Los Angeles since 2007, 2008,” Altman told Fortune.    

The city says the tax will generate a new revenue stream to combat its homelessness crisis through affordable housing projects and prevention efforts. As of last year, 41,980 people experienced homelessness in the City of Los Angeles. And this tax, the city says, can generate up to $672 million this year

Altman described the mad dash of many upper-income home sellers to beat the deadline, adding that it’s been a bit “silly” to watch what’s gone down before the April 1 deadline, with everything from cars to vacation homes being thrown into deals just to close before the mansion tax takes effect. At the time of our call, Altman said he was negotiating two G-Wagons (the Mercedes-Benz G-Class) as a throw-in for a house being sold days before the deadline. He calculated that he was closing 25 deals in the 72 hours before April 1. In a separate case, he and Jade Mills, a Coldwell Banker Global Luxury Ambassador, offered any real-estate agent a $1 million bonus on top of commission to close a nearly $28 million home in Bel Air before the first of the month. Altman knows it’s absurd, but he said “this has been completely forced on us.” 

Some in the industry also say this tax isn’t the ideal way to solve the city’s homelessness problem. Altman told Fortune to think about it like this: let’s say you bought your home for $5.2 million a few years ago, but with interest rates going up and a market that’s down, your house is worth just slightly over $5 million now. If you were to sell, with this new tax in place, you’d be taking a loss on your property while paying an additional tax of around $200,000. This is exactly the point, proponents of the measure say, claiming it would “reduce homelessness, make housing more affordable, and protect low-income seniors from losing their homes.” 

An analysis of Measure ULA, published in September of last year and authored by UCLA researchers, among others, found that the tax would only affect approximately 4% of real-estate transactions in a given year, and 72% of its revenue would come from properties sold over $10 million. (The average home value in Los Angeles is $891,820, according to Zillow.) The researchers argued that the measure “represents a holistic approach to the city’s housing affordability and homelessness crises.” In other words, these luxury real-estate professionals are playing quite a tiny violin. 

Altman said that misses the point: This is likely to affect everyone and trickle down to owners of $2 million and $3 million homes, “because everyone’s values are going to be lowered.” 

Juliette Hohnen, a Beverly Hills-based realtor with Douglas Elliman, told Fortune that voters likely looked at this measure and thought “the rich should pay for it,” but this will also affect developers on the commercial side, too, and she’s worried about them leaving the state permanently. This could backfire: “We need more homes here. We don’t need people holding onto their homes and making them high-level rental opportunities.” 

Hohnen said when she bought her own home, it wasn’t worth $5 million, but now it is and she won’t ever sell because of this tax. “My house is my biggest asset,” she said.

Jason Oppenheim, founder and president of The Oppenheim Group—the setting of Netflix’s “Selling Sunset,” has been an opponent of the measure from the start, calling it “ill-conceived.” Before diving into the measure on our call, he paused a few times, seemingly giving orders to his team while on the line. He told Fortune that before it went into effect, Measure ULA had already “drastically restricted development” in Los Angeles. 

“Developers create microeconomies when they develop properties,” Oppenheim said, which ​​injects millions of dollars into the economy. He said he sees development is now almost completely shut down because of Measure ULA, as it’s just not as profitable for developers. 

Oppenheim said that makes it “no longer feasible for people to make enough money to want to develop.” That being said, it also reduces sales volume, lowers transactions, and reduces property tax revenue. These developers are going to develop in Beverly Hills, Newport Beach, or other cities where there isn’t a tax like this, Oppenheim said: “We’re losing all of that money that is injected into these microeconomies.”

“It’s very easy to avoid the tax, and guess who benefits? Beverly Hills does, L.A. loses,” Oppenheim said, adding that he wouldn’t consider selling any of his properties right now because of the tax. With the real-estate sector already headed in a “very difficult direction” with transaction volume slowing, “now the mansion tax will drastically slow sales in the luxury market, and almost crush any demand from developers, and you’ve got prices going down.” 

Emil Hartoonian, managing partner at The Agency, agreed that once people understand the tax, buyers and sellers who don’t want to pay it will gravitate toward nearby, untaxed areas like Calabasas and Beverly Hills because “it’s a big pill to swallow,” he told Fortune.  

Altman’s alternative, or at least what he considers to be a “fair tax?” A 1% tax across the board, from a $500,000 condo to a $50 million house, on profits. Oppenheim shared a similar sentiment, that he wouldn’t be “against, potentially, a 1% tax on all property,” to go towards reducing homelessness. But at this point, Altman thinks “there’s going to be a lot of inventory and that’s going to affect the market,” a mansion glut, if you will.

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