Measure ULA Update: Reported Revenue, Applicability to Foreclosures and Legal Challenges

In a February Legal Update, we analyzed the Taxpayer Protection and Government Accountability Act (the “Taxpayer Protection Act” or the “Act”), a statewide California ballot initiative that could potentially repeal the “mansion tax:” Measure ULA’s tax levied on City of Los Angeles real estate transactions (the “ULA Tax”). Although the Taxpayer Protection Act qualified for the ballot, the initiative will not be left to the voters this year following a recent California Supreme Court ruling. In this Legal Update, we discuss the reported revenue the ULA Tax has generated, its applicability to foreclosures, and the current state of legal challenges.

Reported Revenue

The city controller reports that, since it took effect in April 2023, the ULA Tax generated $15.6 million in fiscal year 2022-23 and $156.9 million (as of January 2024) in fiscal year 2023-24. The City is uncertain of future ULA Tax revenues, given ongoing litigation, proposing a modest year-end total estimate of $270.3 million for fiscal year 2023-24, compared with the campaign’s original expected annual revenue of $600 million to $1.1 billion. Yet some of these funds remain unspent—the city controller’s office has advised the City to “responsibly allocate” revenue in case Measure ULA is invalidated, and the revenue must be refunded to taxpayers.

Applicability to Foreclosures

Most relevant for many lenders in the current financing environment is whether the ULA Tax would apply to foreclosure or deed-in-lieu conveyances. Under certain conditions, current law exempts existing non-ULA Tax real property transfer taxes from transfers in connection with a foreclosure or deed-in-lieu of foreclosure. While Measure ULA provides no such exemption by its express provisions, the City of Los Angeles’s Office of Finance has provided guidance stating that “all other transactions which are exempt from the base Real Property Transfer Tax per local, state, or federal laws and regulations” are exempt from the ULA Tax. While this guidance from the City of Los Angeles is not clear—for reasons which go beyond the scope of this Legal Update—and does not necessarily have the force of law, some market participants are utilizing this guidance to take the position that a purchase of real property at a foreclosure sale, or the completion of a deed-in-lieu of foreclosure transaction, is exempt from the ULA Tax.

Legal Challenges to Measure ULA

Litigation to Invalidate the Taxpayer Protection Act

The Taxpayer Protection Act presented a comprehensive constitutional amendment limiting tax increases, with retroactive effect, by requiring additional voter approval thresholds. Measure ULA would not have satisfied its requirements and, accordingly, would have been invalidated unless passed again in a new vote compliant with the Taxpayer Protection Act. The Taxpayer Protection Act quickly drew attention from state legislators and Governor Gavin Newsom, who petitioned the California Supreme Court to review the constitutionality of the Taxpayer Protection Act before placing it on the ballot. After hearing oral arguments in early May, the court rendered an opinion on June 20, 2024, pulling the Taxpayer Protection Act from the ballot. The unanimous opinion, authored by Justice Goodwin Liu, reasoned the Act’s amendments would significantly shift government power such that the Act “would substantially alter our framework of government,” and thus would qualify as a revision of the Constitution exceeding the scope of citizen initiative power. 

Litigation to Invalidate Measure ULA

Despite the failure of the Taxpayer Protection Act, the ULA Tax remains exposed to direct invalidation in federal and state appellate courts. In federal court, the US Court of Appeals for the Ninth Circuit expects to hear arguments in October from appellant, Newcastle Courtyards, and respondent, the City of Los Angeles. Newcastle’s appeal claims that Measure ULA misled voters into believing the “mansion tax” would only affect “millionaires and billionaires.”¹ 

In separate state court proceedings, Howard Jarvis Taxpayers Association and the Apartment Association of Greater Los Angeles have appealed a lower court’s decision to dismiss its claim that Measure ULA is unlawful under the California state constitution. Here, the appellant argues that the tax violates Article XIII A of the California Constitution, which requires (1) special taxes to be adopted by a two-thirds vote; and (2) that cities may not impose “a transaction or sales tax on the sale of real property.” The Los Angeles County Superior Court held this restriction does not apply to citizen initiatives, like Measure ULA. The appeal was filed in November 2023, and oral arguments will be scheduled following the completion of briefing.

Violet Flocks contributed to this Legal Update.

¹ 23-2665, Newcastle Courtyards, LLC, et al. v. City of Los Angeles, et al.