How the Measure ULA Tax Affects Commercial Real Estate in Los Angeles
While framed as a ‘luxury residential tax’ the implications reach far beyond that
Measure ULA, commonly known as the 'mansion tax,' is significantly altering the economics of commercial real estate transactions in Los Angeles. While framed as a luxury residential tax, its implications reach far beyond that, creating new cost structures for institutional investors, REITs, and private capital.
Transactions exceeding $5 million are now subject to additional transfer costs, reshaping acquisition strategies, pricing models, and capital deployment. The commercial sector is already adapting, with deal structures, underwriting approaches, and market liquidity shifting in response to this regulatory overhang.
What Is Measure ULA and How Does the LA Transfer Tax Affect Property Sales?
Passed by Los Angeles voters in late 2022 and taking effect on April 1, 2023, Measure ULA imposes a significant tax burden on high-value real estate deals. Transactions between $5 million and $10 million now carry a 4% surcharge, while those exceeding $10 million face a 5.5% levy—both stacked on top of the existing documentary transfer tax.
Although positioned as a luxury residential tax, its broad language directly affects commercial real estate, prompting reassessments of asset valuations, deal structures, and capital flows. Though the tax is designed to fund affordable housing and homelessness prevention, its immediate effect is a fundamental shift in transaction economics, requiring investors, developers, and property owners to adapt their strategies accordingly.
How Measure ULA Affects Commercial Real Estate Investors in Los Angeles
Measure ULA is altering the dynamics of high-value commercial real estate deals in Los Angeles by imposing new tax burdens, compelling stakeholders to rethink their financial models and adjust their tactics to maintain profitability and competitiveness in a shifting market.
Increased Transaction Costs: Sellers must factor in the additional tax burden when structuring deals, which may lead to lower net proceeds from sales or force sellers to adjust pricing to account for the added cost.
Delayed or Reduced Deal Volume: Many investors are adopting a wait-and-see approach, slowing down commercial property sales. Sellers are hesitant to offload properties at a significant tax loss, contributing to reduced inventory and fewer high-value transactions.
Effects on 1031 Exchanges: Traditional 1031 exchanges, which allow investors to defer capital gains taxes by reinvesting in like-kind properties, are now more complex under Measure ULA. The additional tax burden may make these transactions less financially appealing, particularly for large-scale investors.
How Developers Are Adjusting to Measure ULA in Los Angeles
As the new tax increases costs and affects investment decisions and project timelines, developers in Los Angeles are adjusting their strategies for large-scale commercial projects under Measure ULA.
Potential Slowdown in Large-Scale Developments: The increased cost of transferring property may deter speculative developments, leading to fewer high-profile commercial projects breaking ground.
Shift to Long-Term Holding Strategies: Some developers are opting to hold properties rather than sell, choosing to generate revenue through leasing rather than face the heavy tax on sales.
Price Adjustments to Offset Tax Burden: Sellers may attempt to pass on the cost of the tax to buyers by adjusting property prices, though this strategy is limited by market conditions and demand fluctuations.
How Can Property Owners and Investors Lower Their Measure ULA Tax Burden?
With Measure ULA increasing transaction costs, property owners and investors are adopting strategies to reduce their tax burden and minimize the impact on their investments.
How to Structure Deals to Lower Your Measure ULA Tax
Seller Financing: Structuring transactions with seller financing allows payments to be spread over time, potentially lowering the taxable sale price and reducing the immediate financial burden, especially in high-value deals.
Partial Interest Sales and Joint Ventures: Selling fractional ownership stakes or structuring deals as joint ventures can help keep individual transactions below the $5 million threshold, preventing the tax from being triggered altogether.
Investing in Nearby SoCal Markets to Avoid Measure ULA Tax
With Measure ULA raising costs in Los Angeles, investors are shifting to nearby Southern California markets like Pasadena, Long Beach, and the Inland Empire. These areas have lower transfer taxes, making them more cost-effective for property transactions. Additionally, they offer stable demand for industrial, multifamily, and office spaces, with potential for steady appreciation. By focusing on these markets, investors can avoid the added costs of Measure ULA while still targeting profitable properties.
In addition to nearby markets, cities like Glendale and Torrance are attracting investor interest due to their business-friendly policies and infrastructure investments. These areas provide tax incentives and lower transfer taxes, creating favorable conditions for development and investment. Working with tax strategists can further help identify specific regions with the best tax structures and development incentives, allowing investors to optimize their portfolios while avoiding the added costs of Measure ULA.
Leveraging 1031 Exchanges and Renegotiating Lease Structures
1031 Exchanges: Investors can still use 1031 exchanges to defer capital gains taxes, though the new Measure ULA tax applies to the gross sales price. Careful structuring can help mitigate tax burdens.
Lease Adjustments: Instead of selling, property owners may extend lease terms or adjust rental agreements to offset the financial impact of Measure ULA, maintaining steady income without triggering the tax.
Partner with Nonprofits for Measure ULA Exemptions
Investors can qualify for Measure ULA exemptions by forming strategic partnerships with nonprofit organizations or focusing on qualifying affordable housing projects. To qualify, the property must meet specific criteria outlined in California's Revenue and Taxation Code Section 11911. Additionally, investors must comply with federal regulations, including those under Internal Revenue Code Section 501(c)(3), which governs nonprofit status.
Will Measure ULA Affect LA Commercial Real Estate Long-Term?
Since its implementation, Measure ULA has faced legal challenges and policy debates. Several lawsuits question the measure’s constitutionality. Industry groups and investors argue that the tax discourages economic growth and real estate investment in Los Angeles.
While the measure remains in effect, ongoing legal battles and shifts in city policies could lead to amendments or exemptions, especially if the tax revenue does not meet projected targets or if its economic impact proves more severe than anticipated.
How to Strategically Navigate Southern California’s Commercial and Industrial Real Estate Market
Partnering with industry experts like The Klabin Company can significantly elevate your decision-making process — with over 60 years of experience specializing in the Southern California industrial and commercial markets, we are dedicated to delivering unparalleled service and expertise tailored to your needs. Our deep knowledge of local market dynamics, coupled with our commitment to integrity and innovation, equips our clients with critical insights into emerging trends and opportunities. We prioritize transparency and collaboration, ensuring that your strategy aligns seamlessly with your business’s growth and operational objectives. By leveraging our extensive network and expertise, you can navigate the complexities of the market to position your business for sustained success in this dynamic and competitive environment.
This blog post is provided for informational purposes only and does not constitute legal, financial, or professional advice. Real estate laws and regulations vary by jurisdiction, and the information herein may not be accurate or applicable to your specific situation. Before making any real estate decisions, consult a qualified local real estate attorney, financial advisor, or other relevant professional. The Klabin Company is not liable for any actions taken based on the information in this article.