No One Will Sell Because of Measure GS 5% Tax on Property Sales Above $8M. So Why Not Let the Courts Reverse it.
"Measure GS will also be a major flop and actually embarrassingly backfire on you and city taxpayers...."
January 25, 2023
Dear Esteemed members of the Santa Monica City Council & Honorable City Manager,
I am aware that tonight, you will be discussing how the City, which represents taxpaying citizens of Santa Monica, will respond to at least one legal challenge to the recently-passed but highly flawed Measure GS. I kindly ask you to read my entire email, as long as it is, because it is based on fact, apolitical, and intended to help both your reputations and our beloved city. Note that while I am a homeowner in Santa Monica, my home is not worth remotely close to $8 million and therefore will not be subject to Measure GS tax. Moreover, we plan never to sell our property as it's a real treasure, and we'll live in it and keep it within our family long after we are gone. Therefore, this email is not about me -- it's about our city and you.
As someone who is frankly fed up at watching our city waste tens or hundreds of millions of dollars we do not have on pricey lawyers, legal filings, and judgment/settlement payments, rather than putting our very limited financial resources to use keeping us safe and keeping libraries and parks and other essential public facilities clean and open, I am writing to urge, in fact demand, that you not engage in a lengthy and expensive legal challenge to Measure GS. I offer my rationale below and encourage you to read it:
1. You have a fiduciary duty to existing residents of Santa Monica. This includes being responsible stewards of our taxpayer money. The city's lengthy track record of failed and expensive litigation is proof that throwing many millions of dollars at litigation in what is likely a futile (see below) attempt to rescue Measure GS would betray your fiduciary duty to us. You'll hire outside lawyers who, like all outside lawyers have done in the past, view the city's treasury as a bottomless ATM that can print millions of dollars without any accountability. You never set maximum litigation budgets and law firms and their wealthy partners take advantage of that to milk our city treasury dry. For this reason, alone, you must back off. No one is asking the city for a financial settlement in this lawsuit, so the city's cost to ending the litigation today would be zero. It doesn't get better than that.
2 Legally, as you have likely heard already and read in the complaint challenging Measure GS, the ballot measure as passed is illegal. It doesn't follow the law in allocating funds and as such is unenforceable. Thus, any legal challenge will be futile and a fool's errand. The only beneficiaries will be the lawyers at whichever expensive law firm you choose to represent Santa Monica. If you do go ahead with this, kindly use existing staff in the City Attorney's office, supplemented with support from the santa monica high school Mock Trial Team. This would allow these high school students to get real-world experience in a legal case that we are going to lose anyway, something that no mock court case could duplicate.
3. A percentage of Measure GS funds are allegedly earmarked for public schools. However, as you know, unless something immediately changes, we are NOT the Santa Monica Unified School District. Rather, we are the Santa Monica MALIBU unified school district. As such, we would be putting that money into a school district that we share with another city that does not have a transfer tax. So, we either share the money with Malibu schools (which we are obliged to), effectively forcing SM taxpayers to subsidize much wealthier residents of Malibu OR we inequitably keep that money within Santa Monica schools while giving Malibu the proverbial finger. This one issue alone will inevitably cause another legal challenge. It therefore would be awfully embarrassing to all of us, both Santa Monica City and all of you as elected city leaders, to justify either aforementioned option.
4. Measure GS will also be a major flop and actually embarrassingly backfire on you and city taxpayers. Someone (likely Himmelrich & Soloff) came up with an annual GS revenue estimate of $40-50 million as part of an effort to encourage citizens to vote for the tax in the 2022 election. However, this estimate is actually a fantasy, as it assumes measure GS will have zero negative impact on real estate sales in Santa Monica. Having extensively discussed with residential and commercial property owners, as well as real estate brokers/agents in Santa Monica (something which I encourage you all to do), it's abundantly clear that this is false. ANY unusual tax measure, particularly one that applies selectively to high net worth individuals or corporations, is immediately accompanied by a change of behaviors to legally avoid that tax. I am listing below what you should expect to see happen here once Measure GS takes effect.
Individuals and corporations will opt not to sell >$8 million properties because GS would take away $400,000+ of money from them (and erasing potentially all of their post-selling-costs profit), opting instead to hold onto the property as a vacant property or turn it into a rental.
Individuals and corporations will avoid buying any properties in Santa Monica valued at $3 million or higher (which applies to most properties here) because eventually, all of them will become subject to Measure GS tax. If you look at recent real estate advertisements, agents are advising buyers to avoid buying in Santa Monica and Los Angeles cities, which are subject to Measure GS or ULA taxes, respectively. Why would anyone in their right mind buy something in either of these cities, knowing that they can simply buy in Malibu or Beverly Hills and save 5.6% now and (at the very least) at time of sale? Measure GS makes our properties far less attractive.
What will the impacts of these be? I'll tell you:
Fewer residential sales will mean fewer homeowners and more renters in SM.
Fewer sales will also drive up sales prices and make housing even MORE unaffordable than it already is, going against your attempts to make housing more affordable here.
Fewer developers will want to build apartments and condos in SM that they intend to later sell, opting instead to build elsewhere. This will also drive up housing prices here with less available rental stock.
We will over time erode the number of young families in SM (unless they're super wealthy), destroying communities and local schools.
Fewer sales also will translate into fewer opportunities to step up our property tax cost basis. Imagine an elderly couple living in a $9 million North of Montana house they bought 45 years ago, which pays just $5000 a year in property tax (thanks to Prop 13) rather than the $100,000 a year (20x more) it would pay after being sold to a new owner. We will lose out on a TON of money with even a few of these properties (let alone many) failing to change hands.
Individuals and companies that do hope to sell properties will find legal ways to sell without triggering Measure GS transfer tax, such as putting the property into a single asset LLC and selling shares of that LLC over a couple years or more. Many other legal ways to avoid triggering Measure GS tax. With so much money at stake, wealthy sellers will be happy to pay a little to lawyers and accountants to make this happen.
Finally, fewer sales will mean much much less Measure GS money than anticipated. instead of $40-50 million a year we'll get probably $10 million at most. That will be more than offset by the reduction in higher property tax revenues that we would have gotten ON AN ANNUAL RECURRING BASIS had those properties simply sold, as they do today. It will also be offset by the many millions you will pay (from our money) for futile litigation.
So I kindly urge you to settle with whoever is suing us over Measure GS and ask for something to be recorded "with prejudice" so this is settled and over. I just outlined for you how you'll message this to the people -- that while Measure GS sounded nice, it's illegal and unfeasible, and therefore cannot be enforced.
Very best regards,
Houman David Hemmati, MD, PhD