Transfer Taxes and Eviction Bans Cripple Housing Growth
By Kenneth Schrupp
January 20, 2023
While the rest of the nation experiences slowing rent growth and even rent declines, rents are projected to increase in California at the maximum legal level as the state’s enduring housing shortage more than offset the state’s last threestraight years of population decline.
California’s 4.6 million unit housing shortage has led to myriad challenges – skyrocketing costs of living, homelessness, delayed family formation, outmigration of workers towards more affordable states, and the resulting growing dependent-to-worker ratios crippling state finances. In response, cities including San Francisco and Los Angeles have issued massive new property transfer taxes under the guise of “mansion taxes” to fund subsidized housing units.
But this approach is counterproductive. Combined with continued rent moratoriums, these taxes – in the case of Los Angeles, more than developers’ entire profits in some projects – will cripple the housing development the state needs to reverse the exodus that is causing a continued decline in population.
The worst of these new transfer taxes is Los Angeles’ Measure ULA. Passed by voters last November, the measure imposes a tax of 4 percent on properties valued between $5 million and $10 million, and 5.5 percent on those valued over $10 million. That’s on top of the existing 0.56-percent tax across the city and county levels. Groups such as the measure’s authors are naturally exempt from the tax, which will fund “qualified affordable housing organizations” that build subsidized housing.
These transfer taxes are so high that they outsize developers’ entire historical share of building profits, forcing developers to limit future development in Los Angeles. Consider, for example, that a typical small multifamily development built for $7 million and sold for $10 million with a 6.6-percent transfer tax ($660,000) and 4 percent ($400,000) in broker fees leaves $1.94 million in profit.
Because developers mostly use others’ money to fund their projects, let us assume the developer keeps only 20 percent of this remaining profit, sharing the rest with investors. Post-ULA, the developer, who takes on almost all of the risk in the project, nets $388,000, or a bit more than half of what the city receives in transfer taxes. With transfer taxes completely obliterating developer profits, why would any developer choose to build in Los Angeles over municipalities that don’t have these taxes? This will worsen the city’s housing shortage.
California’s 4.6 million unit housing shortage has led to myriad challenges – skyrocketing costs of living, homelessness, delayed family formation, outmigration of workers towards more affordable states, and the resulting growing dependent-to-worker ratios crippling state finances.
UCLA housing expert Shane Phillips’ October 2022 report on ULA authoritatively declared the measure would have “minimal” impact on development “compared to the revenues raised.” Supporters of the measure prominently featured his research in the last weeks before the election. Even he has changed his tune. Though he still supports the measure, Phillips now believes it will significantly reduce housing development, and that funding 3,000 units of subsidized housing per year does not outweigh the impact on limiting the private construction of an additional 50,000 units of housing per year.
Given Phillips’ estimates that ULA will bring in $923 million per year, the 3,000-housing-unit construction estimate yields a cost of $307,000 per unit, assuming money from Measure ULA goes only to government-supported housing development and none of the other policies outlined in the bill.
If that number sounds familiar, that’s because it’s close to the promised initial estimates from Los Angeles’ Measure HHH, a $1.2 billion bond that was meant to spur the construction of new subsidized housing for the homeless – backed by these same nonprofit developers and with union labor for projects with 65 or more units – at $400,000 per new unit.
Since the start of Measure HHH construction, per-unit costs have risen to an average of $600,000 per unit and up to $837,000 per unit (or more than the median price of a house in California). Assuming a similar cost of construction due to the continued use of the same developers and union labor (for projects with 45 or more units), ULA will fund a mere 1,500 units per year in return for risking the cessation of billions of dollars of private development in the city.
But even if developers are able to pencil out profitable enough numbers for development in Los Angeles, continuing eviction moratoriums mean there is significant risk for property buyers and managers. Outside of owner-users, anyone purchasing property for rental in Los Angeles must consider that they could very well see their rental income drop to zero at any time under at-will government zero-eviction policies.
Amid a bump in COVID, flu and respiratory syncytial virus cases, the Los Angeles County Board of Supervisors voted to extend the county’s eviction moratorium to “at least” the end of January 2023. If the enduring threat of eviction moratoriums scares off potential buyers, the few developers who still believe they can turn a profit in this environment will nonetheless have no choice but to build elsewhere, as they wouldn’t want to be left operating zero-income properties with non-evictable tenants when the next crisis comes.
Though Los Angeles is the worst example, this trend of crushing developer profits through taxation is hampering development across the West Coast. In Washington, for example, a 3-percent transfer tax on property over $3 million has helped create an 847,000-unit housing deficit across the state, while San Francisco’s new transfer taxes that rise up to 6 percent have left it with one of the nation’s largest housing deficits by percentage, coming in at 45 percent. San Francisco even has a housing vacancy crisis, as property owners are reluctant to rent out their properties because of the city’s strict tenant laws.
As fashionable as it is to get back at “mansion” owners or “greedy developers,” the reality is these new taxes hurt working families the hardest. With massive pre-existing housing shortages and new taxes significantly limiting new development, scarcity-driven rent increases squeeze out working and middle-class renters the hardest, forcing more families either into government assistance, homelessness or out of the region. Oregon has thus far avoided these transfer taxes, but its development shortage has nonetheless driven out tens of thousands of residents, resulting in population decline.
Fewer workers means less demand and supply of goods and services, thus inducing regional recession, pessimism and a culture of zero-sum grievance politics that leaves everyone poorer and less free. If the West Coast is to exit its malaise and grow again, smothering new taxes and the seizure of property owner rights that have characterized the COVID-19 era must end.
Kenneth Schrupp is a Young Voices contributor writing on the intersection of business, politic, and media, and serves as editor in chief of the California Review, an independent political journal.
