Measure ULA: new and updated FAQs addressing the LA Mansion Tax

On March 21, 2023, shortly after we released our client alert on LA’s Mansion Tax, the City of Los Angeles released updated FAQs that replace the original FAQs discussed in our prior alert.

The new FAQs go into more detail on the implementation of Measure ULA, but many issues remain unaddressed. 

Below are highlights of the new guidance.

1.  Document recording

Most notably, the City of Los Angeles revised its previous FAQ addressing the City’s procedure for applying the Mansion Tax to documents received for recording.  In the original FAQs, the City stated, “Transfer Tax is due at the time the document is recorded unless there is a valid exemption claimed.  All Title-ensured transactions are recorded the same day received.  If a deed is received in the mail, the County looks at the date the document was received in their building.” 

Under the updated FAQs, the City states, “The City’s procedure for applying the ULA Tax is modeled on the ownership change rules under California Board of Equalization property tax rule 462.260 for all documents subject to the City’s real property transfer tax.  If a change of ownership occurred before April 1 but is received by the county for recording on or after April 1, 2023, the taxpayer will need to provide evidence of the actual transaction date to show that it actually occurred before the April 1, 2023 effective date of the ULA Tax.”

Key takeaway

This is a helpful update for parties closing in the days leading up to the effective date of the ULA Tax (ie, the “Mansion Tax”), but it is unclear what will be considered adequate evidence of the actual transaction date.  For this purpose, we recommend that the parties be prepared to show transaction documents such as purchase and sale agreements, escrow instructions, title reports, and loan documents.

2.  Properties partially located within city limits

For properties that are situated partially within the City of Los Angeles, the City states, “The real property transfer tax will be applied in proportion to the value of the real property interest that was transferred within the boundaries of the City.  If a valuation of the real property interest isn't available, the real property transfer tax should be applied based on the square footage of the property within the boundaries of the City, as a proportion of the total consideration or value of the real property interest conveyed.”

Key takeaway

For these uniquely situated properties, parties should be prepared to present support for their determination of the portion of the property located within the City and thereby subject to its real property transfer tax (ie, the current city documentary transfer tax and the Mansion Tax, if applicable).  It is unclear how the County Recorder intends to verify such allocation at the recording desk, but including a simple explanation with a calculation may be helpful in that process.  Please note, however, that the county tax of $1.10/$1,000 will still apply to the entire property.

3.  Overpayments and underpayments

With respect to amounts paid, the City states, “If the City, through its compliance process, identifies a potential over payment or under payment, the City will notify the parties to the transaction of the potential overpayment or underpayment.  In cases of overpayment, taxpayers will need to file a request for refund from the Office of Finance.” 

The City further states, “In case of underpayment, the taxpayer will receive an invoice for the unpaid balance.”  

Key takeaway

While helpful, it is unclear which party will be treated as the “taxpayer” for purposes of requesting a refund for overpayment or the recipient of an invoice for underpayment.  We encourage parties to address this point in their transaction documents.  We also note that there is no indication at this time whether an unpaid amount will be subject to penalties or interest.

4.  Administration of exemptions

Most interesting to us is that exemptions only applicable to the Mansion Tax (see discussion below) must be claimed through a refund process. 

The City states, “All ULA Tax exemptions will be processed through the City’s refund process following the payment of the ULA Tax and the Base Tax.  [T]ransferees will need to provide the necessary documents, records, or writings to demonstrate that they are qualifying transferees under sections 21.9.14 or 21.9.15 of the [Los Angeles Municipal Code].  Once submitted, the Los Angeles Housing Department or the Office of Finance, respectively, will make a determination and issue a certification of eligibility with respect to the relevant documents that conveyed real property.  Once that certification is received, a refund request may be submitted to the Office of Finance for the ULA Tax that was paid.”

Further, the City states, “The certification of eligibility issued by the Los Angeles Housing Department or the Office of Finance will be limited and only applicable to the particular transaction for which a ULA Tax exemption is being requested.”

Key takeaway

Because of the anticipated complexity of determining whether a transferee is qualified (see discussion below), our view is that the City will need time to process these claims.  Rather than providing a pre-approval process, the City is requiring parties to make payment and claim a refund, which can be a lengthy process.  This may be a deterrent for certain sellers to engage in these transactions since their sales proceeds will be tied up for an unknown period of time and will not accrue an economic benefit (eg, interest, capital use). 

Also, once a transferee has been certified as eligible, it appears that such certification does not apply to subsequent transactions with the same transferee, meaning that the parties must engage in the same refund process for each transaction between them. 

5.  Claiming certain exemptions

There are stated exemptions in Measure ULA applicable to the Mansion Tax.  These exemptions include conveyances to certain qualified affordable housing organizations as described under section 21.9.14 of the Los Angeles Municipal Code (LAMC) having “a history of affordable housing development and/or affordable housing property management experience” and certain other tax-exempt transferees as described under section 21.9.15 of the LAMC.

Qualified affordable housing organizations

With respect to determining whether a transferee is qualified, the City states, “The Los Angeles Housing Department will be promulgating regulations to further define “history of affordable housing development” and “affordable housing property management experience” and will be publishing information on the type of documents, records, or other writings that will need to be submitted by a transferee to satisfy those definitions and be deemed a qualifying transferee under section 21.9.14 of the LAMC.”

Key takeaway

At this time, there is no indication of when these regulations will be released, thereby potentially halting conveyances to these types of affordable housing organizations, as parties wishing to fall under this exemption will not have the comfort they need to proceed given the requirement to pay the Mansion Tax up front with no guaranty on timing or success of a refund. 

Other tax-exempt transferees

With respect to determining whether a transferee is qualified, the City states, “The Office of Finance will be publishing information on the type of documents, records, or other writings that will need to be submitted by a transferee to be deemed a qualifying transferee under section 21.9.15 of the LAMC.”

Key takeaway

As of the date of this alert, no such information has been published.  However, we believe such information may include the following:

• For 501(c)(3) transferees:
  
  
  • The organization’s IRS determination letter (note that the organization must have received the initial IRS determination letter at least ten years prior to the transaction date to satisfy the qualification requirements under Measure ULA)
    
    
  • The most recent IRS Form 990 filing for the organization (although the City may require more than one tax year)
    
    
  • Financial statements for the organization showing assets of less than $1 billion (it is not yet clear whether assets must be below this threshold at the time of the transfer, or at such time and a number of years prior)


• For government agencies and other entities or agencies exempt from the City's taxation power under the California or US Constitutions:
  
  
  • Charter documentation
    
    
  • Statutory support

Our view is that these transferees would be easier to verify through a pre-approval process.  We hope the City will establish such process in the near term so that conveyances to these organizations may take place without needing to engage in the refund process. 

Going forward

With the pressure of pending lawsuits in state and federal courts, the ballot measure seeking to overturn special taxes including the Mansion Tax, the need to release regulations and guidance in a timely manner, the pushback the City likely received on its original FAQs (eg, the change in recording procedure), and the likely pushback it is now facing on is current FAQs (eg, the refund process for exemptions), the City has its hands full.

Accordingly, as the effective date approaches, we encourage all interested parties to check for new guidance daily as the City works through its implementation procedures.

For more information, please contact the authors of this alert or your DLA Piper relationship attorney.