BAE report on Measure ULA
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BAE Report
Scholarly research on Measure ULA has attempted to show correlations between the time that Measure ULA has been in effect and a relative dip in real estate activity in the city of Los Angeles. But this period has seen many serious challenges to development, such as high interest rates, high insurance costs, immigration raids, tariffs and other political factors.
The methodology behind these comparisons has been heavily criticized–and until now,, no one has attempted to isolate how Measure ULA causes a decline, beyond elementary economic truisms like “taxing something gets you less of it.”
This paper is the first to analyze how the ULA assessment might affect developers’ and investors’ calculations.
Top takeaways
- Right now, development is very difficult in Los Angeles for many different types of buildings
- The reasons for that have very little to do with Measure ULA
- The proposal before the Los Angeles City Council to waive ULA for construction newer than 15 years would make very few projects feasible, and unnecessarily subsidize projects that are already feasible—high-rent buildings for wealthy residents.
- Merchant builders who build in order to sell quickly might gain from a ULA waiver—but could also reach profitability by simply holding buildings for eight years or more.
Key Findings
In most scenarios, the value of waiving the ULA tax does not affect whether or not a project is financially feasible.
To be profitable, multifamily housing in LA must charge high rents, in the 75th percentile of the market. Projects charging lower rents are rarely feasible in any circumstance. A ULA waiver is irrelevant.
Los Angeles currently has very high capitalization rates (the ratio of rental income to property value). When cap rates rise (which is not directly governed by policy), new investment becomes riskier and slows down. The return of cap rates to historic norms would have a much greater effect on real estate activity than waiving ULA.
Holding periods are also significant. For projects charging rents in the 75th percentile, simply holding onto a project for 8 years or more made it feasible.
There is a narrow band of projects that could be pushed over the edge into financial feasibility by a Measure ULA exemption: multifamily housing charging rents in the 67th to 80th percentiles with short holding periods (built to be flipped).
There were no examples of commercial projects that would become feasible from a Measure ULA exemption, and an exemption for substantial rehabilitation would apply to the vast majority of multifamily units that would otherwise pay the tax.