On Tuesday night, the Santa Monica City Council considered two measures regarding an increase in the transfer tax on documents of the sale of real property.
Mayor Himmelrich’s Measure
The first tax considered, which has been sponsored by Mayor Sue Himmelrich, would add a third tier to taxes already charged to the transfer of sales of property in Santa Monica.
The existing tiers — $3 Dollars per $1,000 of value on properties under $5 Million, and $6 Dollars per $1,000 per $5 Million – $7,999,999 Million – would be joined by a new third tier, $56 Dollars per $1,000 at $8 Million and above.
As written, the ballot initiative would then allocate the first 20 percent of proceeds to an education fund, and the following 40 percent of proceeds to a fund to prevent homelessness and seed affordable housing development. If the revenue generated exceeds $50 Million, 80 percent would go into the homelessness and housing fund, with 20 percent going into the education fund. The measure does not contain a sunset provision to end the new tax rate at some future date. An 11-member citizen’s oversight committee would aid the city in watchdogging the use of the funds.
Apparently, several cities in the state are looking to boost their graduated rate of real estate transfer tax, including nearby Culver City and Los Angeles, which are both considering proposals. Los Angeles will be offering a ballot measure, in fact, to add $55 dollars on every $1,000 over $10 Million or more.
Based on revenue estimates of commercial sales between 2012-2021, commercial sales represent 82 percent of transactions and 92 percent of sales value. According to the presented study, “Sales of office, retail and multi-family housing buildings represent 85 percent of the commercial transactions,” suggesting this would largely affect wealthy, commercial properties. Single family and condo sales were most concentrated north of Montana Avenue and along Palisades Beach Road.
Paul Silvern, a representative of HR&A Advisors, provided the council with his objective, third-party view of the proposal. He was not entirely complimentary of the measure, expressing caution about a number of tenets. However, he conceded it would make “significant progress” toward more affordable housing production and combating homelessness.
Councilwoman Gleam Davis asked Mr. Silvern, “If we have someone who’s a developer, or a housing provider – as they may choose to characterize themselves – and they’re doing a project, and their typical rate of return would be 15 percent, and due to this tax, it came down to 13 percent, how do you think the market responds?” She then expressed concern that the developer would then just pass on the increased costs to a higher sales number and higher rents.
Councilmember Phil Brock, who has his own competing transfer tax measure before the council, made no secret of calling into question the increase in the transfer tax called for here. He did his best to add a little theatrics to his questions. “[This] would increase expenditures devoted to homelessness prevention and affordable housing programs and administration by 293 percent?” asked Brock, feigning surprise at something he already knew.
Brock also expressed concern over mechanisms that could be used to avoid the tax, like partnerships that split the cost of sale. Silvern admitted, “There are certain entity transfer mechanisms, including partnerships and limited liability corporations that can be used to try and avoid paying a documentary or real estate transfer tax.”
Continuing on with a series of blow-by-blow questions against the tax, Brock asked, “You mentioned in your report that that transfer tax could be the final straw that causes investors to pursue their business elsewhere,” he said. “Do you believe that’s the potential, or do you believe that’s just bluster?”
“For some categories of transactions, particularly the most expensive, yes, that is a possibility. Because as you know, capital is mobile, and the very sophisticated investors and developers who have worked in Santa Monica have the ability to take their marbles elsewhere if they choose,” said Silvern.
Mayor Himmelrich was quick to remind Silvern and her colleagues that a proposed measure for the City of Los Angeles ($55 per 1,000 square feet for properties selling above $10 Million) has additional baggage in the form of other underlying taxes and fees that technically make L.A.’s proposal a larger increase than that which she is sponsoring for Santa Monica.
Despite Davis’ and Brock’s concerns, the council voted to move the measure to appear on the ballot by a unanimous vote, 7-0.
Councilmember Brock’s Measure
Later in the meeting, the city council discussed a competing measure by councilmember Phil Brock. This measure would also add a third tier to the transfer tax charged on real property sold in Santa Monica, and also set it for properties over $8 Million. However, Brock’s much more modest proposed third tier would charge just $20 per 1,000 square feet sold. The rate would be incremental, so the tier two rate of $6 per 1,000 square feet would apply to the first $5 Million of the sale, with the $20 rate kicking in above $8 Million.
This measure would be an Advisory Measure, as it would also ask the public which community priorities should be addressed with the proceeds received from the tax.
Other provisions include:
- The removal of an exemption for the first time transfer of newly constructed properties with more than four units and owner-occupied properties of three units or fewer
- A 10-year sunset clause for the measure
- An amendment to an advisory measure to include housing displacement services for senior and low-income residents
The measure also includes a number of exemptions, among them the transfer of property to a nonprofit that would be used for affordable housing and transfers to or from a tax-exempt charitable organization.
“So all the responsibility falls on the city council?” asked Councilmember Oscar de la Torre, when asking about oversight of the proceeds raised by the measure, and learning that Brock’s proposal would not include a citizen’s oversight committee. He followed up, “Would this, as written, prevent the city council from setting up an advisory committee if it wanted to later down the road?” The city attorney affirmed the council could indeed do so.
Councilmember Davis had concerns about the sunset clause, citing previous financial challenges that befell the school district when past parcel taxes benefiting education included sunsets. “I’m concerned about the financial cliff we might face in 10 years, especially since both Mr. Silvern’s presentation and yours [presenter] talked about volatility.” She later added, “We don’t know if in 10 years we’ll be past our financial challenges. And though no one’s crystal ball is perfect, it sounds as if, at a minimum, we might want to think about extending the period of the sunset to give us more time.”
Brock defended his intentions with the sunset clause. “In my mind, this was meant to be a bridge measure,” arguing that projections are for city revenue to be back to full strength or better even before his measure sunsets.
Councilmember Lana Negrete, making sure her colleagues and the public were aware she doesn’t want to get personal about either of the measures, moved that this tax be raised to $30 per 1,000 square feet sold and that the money be directed to 100 percent affordable housing development.
After what seemed like endless debate over other specifics, the council ultimately agreed to a $25 per 1,000 square foot fee whose proceeds would guarantee at least 30 percent toward housing assistance. And, at the eight-year mark, the council could decide to extend the sunset clause by five years if agreed to by a supermajority of the council. The lone no vote was by Mayor Himmelrich, who felt this measure was a real missed opportunity to make a defined impact on specific problems, which she feels her measure does.