By Jorge Casuso

July 25, 2022 -- Mayor Sue Himmelrich's proposed tax measure could lead to "significant progress" addressing homelessness and affordable housing, but it provides an unpredictable revenue stream and adds a layer of bureaucracy, a report to the City Council found.

The Mayor's transfer tax measure -- which received the necessary voter signatures to qualify -- must be placed on the November ballot by the Council Tuesday.

The measure would charge a real estate transfer tax of $53 per $1,000 on properties valued at $8 million, generating an annual average of $49 million, based on qualifying sales over the past decade, according to the report by HR&A Advisors, Inc.

Of that amount, $10 million would go the the local School District, while the other $39 million would fund "homelessness prevention programs and services and affordable housing unit production," according to the report.

That represents a "dramatic increase in potential funding" from the current $13.3 million a year spent by the City, the report found.

"This dramatic increase in potential funding dedicated to homelessness prevention and affordable housing would increase the scale at which the City can support related program expenditures," the report states.

"The new tax revenues could make significant progress in addressing the needs of homeless persons, rent-burdened existing low-income households, and a need for additional dwelling units affordable to
low- and moderate-income households."

Using $19.5 million of the new revenues a year to fund affordable housing could result in about 74 additional units built on land acquired from a private owner and about 182 units on City owned land, the report found.

But the revenues would vary substantially from year to year, based on qualifying sales over the past decade -- from $16 million in 2014, when there was one transaction totaling more than $100 million, to $123 million in 2016, when there were four.

"There are reasons to be cautious about whether the scale of estimated new tax revenue predicated on previous sales over the past 10 years would materialize to the same degree year over year in the future," the report found.

That presents a problem because administering the programs will require hiring additional staff (paid for by the measure) on an ongoing basis with an "uneven flow of new annual revenues."

It also would add a new layer of bureaucracy that includes an 11-member advisory board composed of residents who "must fit within specific income brackets, housing circumstances, life experiences, and professional backgrounds" that could prove difficult to fill, the report warned.

"Caution is warranted about the City’s ability and speed to deliver effective programs and new affordable units, to the degree that the Residents Oversight Committee and City Council may recommend."

In addition, the Mayor's measure "incentivizes property sellers to pursue any available tax avoidance tactic," the report found, based on interviews with industry professionals familiar with Santa Monica's market.

"The higher the sale price, and hence the higher the potential tax liability, the more incentive there will be for sellers to pursue tax avoidance tactics."

Industry professionals also are concerned the measure would provide "yet one more requirement on new development and real estate investment transactions in a city with notoriously high barriers to entry."

The transfer tax "could be the 'final straw' that causes developers and investors to pursue their business elsewhere, at a moment when the City needs active participation by the private sector to meet its elevated housing production requirements."

Another concern is that the measure doesn't account for general price inflation or contain a sunset clause, leading to an increasing number of properties qualifying for the tax.

This could chill the sale to developers of private properties "owned by families with a low property tax basis and high sensitivity to generational wealth transfer," the report found.