All posts by singlemalt

Native Angeleno and Industrial real estate agent since 1994.
Governmental

New 4-5.5% ULA Transfer Tax for Properties Sold in the City of Los Angeles

Leave a comment

Measure ULA, commonly known as the “mansion tax,” would impose a new “Homelessness and Housing Solutions Tax” on transfers of residential and commercial real property in the city of Los Angeles valued in excess of $5 million.

Under the measure, sales of residential and commercial real property valued at over $5 million but less than $10 million would be subject to an additional tax at the rate of 4%, while sales of properties valued at $10 million or more would be subject to an additional tax at the rate of 5.5%. The new tax would apply to the entirety of the sale value, not solely the amount in excess of the $5 million and $10 million thresholds, and regardless of whether the property is sold at a gain or a loss. The thresholds would be adjusted each year based on inflation. The tax would apply to property sales occurring on or after April 1, 2023.
The new tax would be in addition to the existing documentary transfer tax imposed on property sales in the city of Los Angeles, which is imposed at a combined city and county rate of 0.56%.

This tax will have a negative impact on property sales, especially industrial real estate sales given they are generally sold at a higher value than many other types of properties. The tax could possibly make properties in the City of L.A. less attractive to buy.

Who will end up paying the new real estate transfer tax? Below are the percentage of sales based on recent data for each property type.

  • Single-Family Residences and Condos: 2.6%.
  • Multi-Family Apartment Buildings: 6%
  • Commercial (office buildings, retail, etc.): 11%
  • Industrial: 19%
  • Other (vacant land, utilities, etc): 1.9%

    The ordinance exempts certain transfers from the ULA Tax. Transfers to non-profit entities, Community Land Trusts, and Limited-Equity Housing Cooperatives are exempt, as these are the types of transactions the City is intending to encourage.

    On December 21, 2022, the Howard Jarvis Taxpayers Association and the Apartment Association of Greater Los Angeles brought suit in state court challenging the validity of the ULA Tax. Plaintiffs argue that the ULA Tax is a “specific tax” prohibited by the California Constitution on the grounds that ULA Tax revenue must be used for specific purposes. The litigation is currently pending.

    Above data from An Analysis of Measure ULA, by UCLA Lewis Center.

    Note

    4 Ways a Rental Property Can Benefit You

    Leave a comment

    The benefit of real estate investing boils down to the following four ways investors typically plan to make money on their real estate investment.

    1. Cash flow
    The primary purpose of those who purchase rental income-producing property is to rent out space in their asset in order to collect rental income. And cash flow is generated after the property’s operating expenses and debt service (i.e., mortgage payment) are deducted from that rental income. Thus, when more cash comes in than goes out, the result is a “positive cash flow” that becomes periodically available to the investor on a regular basis.

    2. Tax Shelter
    One of the primary benefits of owning rental income property is being able to legally reduce your annual or ultimate Federal income taxes with the following four tax deductions:

    1. Acquisition costs – Most costs incurred at the time of purchase are deductible in the year of purchase.
    2. Property expenses – All expenses incurred in the operation of the property are deductible.
    3. Mortgage interest – The interest paid on the mortgage is deductible.
    4. Depreciation – The IRS also assumes that your buildings are wearing out and becoming less valuable over time and therefore allows you take a deduction for that presumed decline in what the tax code calls cost recovery (i.e., depreciation).

    Of course there are nuances and exceptions in all tax matters that every investor should always discuss with a tax expert. But you get the idea.

    3. Loan Amortization
    Loan amortization signifies a periodic reduction of the loan over time. In other words, with a fully-amortized loan (i.e., not interest-only), each payment made reduces some amount of principal. As stated, home buyers enjoy loan amortization, too. But here’s the difference: with a rental income property, the tenants are virtually paying down the debt—and therefore helping the investor to buy the property—each time they pay their rent.

    4. Appreciation
    Appreciation is also not exclusive to rental income property because any real estate sold for more than its original purchase price would benefit from appreciation, whether it be a personal residence or office complex. With investment real estate, however, the owner doesn’t necessarily have to leave appreciation to chance the way a typical home owner would. The truth about real estate investing is that investors buy the income stream of a rental property. And as a result, the more income stream a landlord can generate (perhaps by lowering vacancies or reducing wasteful expenditures) the more they can expect their property to be worth; and the sooner they can impose these changes, the sooner their rental property is likely to appreciate.

    Contact us with questions.

    Governmental

    Initiative Ordinance ULA: A 4-5.5% tax on real estate sales in L.A.

    Leave a comment

    This freshly approved City of Los Angeles ordinance will impose a one-time 4% tax on property sale transactions above $5 million that would rise to 5.5% on transactions above $10 million. A $5-million sale would generate a $200,000 tax bill.

    This will negatively impact the sellers of all property types including residential and commercial such as retail, office, apartments, and industrial.

    Market Trends & Indicators

    High Land Value As a Percentage of Total Property Value in Los Angeles

    Leave a comment

    In the WSJ article, The U.S. Is Running Out of Land, a professor of finance who studies land values cites that “Land now accounts for 47% of U.S. home values…That is up from 38% in 2012 and less than 20% in the early 1960s.”

    So that intrigued me and I pulled a sample of 1,315 industrial zoned parcels from Downtown Los Angeles to the City of Vernon. See below graphic. Dividing the Los Angeles County Assessor Land Value amount by the Total Assessment results in 71% of these industrial properties’ value is the land component. The Total Assessment includes improvements such as warehouse and manufacturing buildings constructed on the land.

    That is a strikingly high percentage for land value but should not be surprising given the rapid increase in prices per square foot for land sales in the last decade. In the top section of the graphic, which is the DTLA Arts District, land values have ranged from $300-450/SF in recent years. In the bottom section, City of Vernon land was not long ago $50-100/SF and is now approaching $200/SF.

    The Central Los Angeles Industrial Market has been an Infill Market for many years which has resulted in rapid increases in land values. If you own land in this area feel free to contact us.

    Propound

    Sale-Leaseback Explained

    Leave a comment

    Sale Leaseback graphic

    Sale-Leaseback transactions occur when a property owner sells their real estate and becomes a tenant of the property. It’s a great way for a property owner to obtain a cash infusion for capital spending for their business or to retire debt.

    Sale-Leasebacks are particularly well suited to peak periods of the real estate cycle, when prices are at their peak. And prices have never risen faster or been higher in the Los Angeles industrial real estate market than now.

    Feel free to contact us with any questions.