City Council
Report
City Council Meeting: July 12, 2022
Agenda Item: 11.A
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To: Mayor and City Council
From: Gigi Decavalles-Hughes, Director, Finance Department Subject: Adoption of a Resolution to place a Real Property (Documentary) Transfer Tax revenue measure on the November 2022 Ballot.
Recommended Action
Staff recommends that the City Council:
1. Adopt a resolution to place a transfer tax measure and advisory measure on the November 8, 2022 ballot (Attachment A), which would:
a) Amend Chapter 6.96 of the Santa Monica Municipal Code to establish an additional third tier transfer tax rate of $15 per thousand dollars of consideration or property value transferred, which would apply solely to the amount of consideration or value transferred in excess of $8 million, subject to certain exemptions, and be collected in addition to existing transfer tax rates that apply to the entire transfer amount; and b) Allow voters to express their preference that if the Comprehensive Real Property Transfer Tax Measure is adopted, funds should be used to fund:
(a) services to address homelessness and mental health, (b) public safety and emergency response teams to address safety issues on City streets and in parks, (c) the reopening and staffing of all public libraries, (d) afterschool and post-COVID recovery programs for public school children, (e) traffic safety improvements around schools, including crossing guards, and (f) transitional housing and shelters; and
c) Identify Council Members, if any, who wish to prepare arguments for or against each measure; and
d) Direct the City Attorney to prepare an impartial analysis of each measure.
Summary
At the May 24, 2022 Budget Study session, Council directed staff to study a revenue measure to place on the November 8, 2022 ballot that would increase the City’s Real Property Transfer Tax, which is contained in Chapter 6.96 of the Santa Monica Municipal Code. The proposed measure (“Transfer Tax Measure”) would create an 2 of 10
additional third tier real property transfer tax rate of $15 per thousand dollars of consideration or property value transferred, which would apply solely to the amount of consideration or value in excess of $8 million, subject to certain exemptions. The existing second tier tax rate of $6 per thousand dollars of consideration or property value transferred would continue to be collected on all transfers over $5 million.
Applying the proposed third tier tax rate to transfers from the last four calendar years and through May 2022 would have generated additional revenue ranging from $6 million to $15 million per year (including the estimated impact from the new proposed exemptions). As the wide range indicates, this tax source can be very volatile based on market conditions and can be skewed by occasional extraordinarily high value transfers.
The proposal includes an Advisory Measure that, if the Transfer Tax Measure passes, would direct the additional funds raised to services to address homelessness and mental health, public safety and emergency response teams to address safety on City streets and in parks, the reopening and staffing of all public libraries, after-school and post-COVID recovery programs for public school children, traffic safety improvements around schools, including crossing guards, and transitional housing and shelters.
The proposed resolution, including the text of the Transfer Tax Measure and the text of the Transfer Tax Advisory Measure, is attached (Attachment A).
In November 2020, Santa Monica voters approved Measure SM which established the second tier rate, effective March 1, 2021. Measure SM has contributed approximately $6.6 million to City revenues since its implementation. The City’s Real Property Transfer Tax is currently structured as follows:
Tier Rate Applies to
1 $3/ $1,000 of consideration or property
value
Sales < $5 million
2 $6/ $1,000 of consideration or property
value
Sales ≥ $5 million
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This is in addition to the County’s rate of $1.10/ $1,000 of consideration or property value.
The City’s Real Property Documentary Transfer Tax currently has two categories of exemptions:
• Exemptions that align with state law exemptions found in Revenue & Taxation Code, Division 2, Part 6.7, Chapter 3, including §§ 11921-11925 therein. See S.M.M.C. §§
6.96.040 (deeds to secure debts), 6.96.050 (transfers to governmental agencies),
6.96.060 (corporate reorganizations), 6.96.070 (transfers pursuant to SEC orders),-
6.96.080 (transfers of certain partnership interest)
• A partial exemption for Affordable Housing Transfers. This partial exemption applies if the property transfer is to: (1) a nonprofit corporation; (2) a limited partnership or limited liability company in which a nonprofit corporation is the managing general partner or managing member; or (3) a community land trust. A taxpayer making an Affordable Housing Transfer who receives prior approval from the City is not required to pay the second tier tax to the City, but must pay the first tier tax rate on the entire transfer amount. Alternatively, a taxpayer making an Affordable Housing Transfer subject to the second tier tax may seek a refund of the tax paid that exceeds the first tier tax rate.
There is a voter initiative entitled “Funding for Homelessness Prevention, Affordable Housing, and Schools” that also includes a proposed real property transfer tax measure and has received sufficient signatures to be placed on the November 8 ballot. If both measures appear on the ballot and are approved by 50% + 1 of the voters, the measure with the greatest number of votes would be enacted.
If the Advisory Measure associated with the Transfer Tax Measure passes, it provides an indication of general voter opinion on the proposed uses outlined in the Advisory Measure, but it is not controlling. If the Advisory Measure passes and the Transfer Tax Measure does not, there will be no change to existing policy. 4 of 10
Discussion
At the May 24, 2022 Council meeting, Council directed staff to study the viability of placing a measure on the November 8, 2022 ballot that would add a third tier to the City’s Real Property (Documentary) Transfer Tax on the portion of transfers valued over $8 million and return to Council with the results of the study. The Council noted that the tax would provide a way to increase the City resources available to address critical issues identified during budget discussions. The proposed measure would be a general tax, requiring a simple majority to pass (50% + 1 vote).
Proposal Details
The proposal would add a third tier tax rate to Santa Monica’s Real Property Transfer Tax as detailed below:
Tier Rate Applies to
3 $15/ $1,000 of consideration or property
value
Sales > $8 million on the
amount of the sale over $8
million, with the threshold
adjusted every five years by CPI
The third tier tax rate of $15/$1,000 on the increment over $8 million would be charged in addition to the current Tier 2 rate of $6/$1,000, which is generally applicable to the entire transaction amount for transfers of $5 million or more. The proposed measure further notes that the threshold amount for the third tier would be adjusted every five years by the consumer price index (CPI) for the Los Angeles-Long Beach-Anaheim area. This would essentially increase the threshold amount. Depending on the escalation rate of property sale values during each five year period, which are subject to a number of factors other than inflation, such as interest rates and the overall real estate market, the adjustment could have the effect of decreasing the number of property transfers subject to the third tier, and could negatively impact the ultimate revenue generated by the tax.
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Charter cities in California have the right to assess a tax on the transfer of real property that deviates from the tax rates that general law cities cannot exceed. Santa Monica is one of five cities in Los Angeles County to levy a documentary transfer tax in addition to the County tax of $1.10/$1,000. However, a number of charter cities in Northern California levy the transfer tax at rates significantly higher than the current Santa Monica rate. The proposal in the Transfer Tax Measure is still below those of other cities, as shown in the table below. Except for Culver City, these cities assess the higher rates on the full sale price.
City Rates ($/ $1,000)
Santa Monica
(current)
• $3 on sales < $5 million
• $6 on sales ≥ $5 million (with exceptions)
Santa Monica
(proposed)
• $3 on sales < $5 million
• $6 on sales ≥ between $5-$8 million (with exceptions) • $21 on the amount > $8 million (with exceptions)
Berkeley • $15 on sales up to $1.5 million
• $25 on sales >$1.5 million
Oakland • $10 on sales up to $0.3 million
• $15 on sales between $0.3-$2 million
• $17.50 on sales between $2-$5 million
• $25 on sales > $5 million
San Jose • Exempt <$2 million
• $7.50 on sales between $2-$5 million
• $10 on sales between $5-$10 million
• $18 on sales >$10 million
San Francisco • $5 on sales up to $0.25 million
• $6.80 on sales between $0.25-$1 million
• $7.50 on sales between $1-$5 million
• $22.50 on sales between $5-$10 million
• $55 on sales between $10-$25 million
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• $60 on sales >$25 million
Culver City • $4.50 on sales up to $1.5 million
• $15 on the amount between $1.5-$3 million
• $30 on the amount between $3-$10 million
• $40 on the amount >$10 million
City of Los Angeles • $4.50
The Transfer Tax Measure includes other general exemptions per State law, and additional partial exemptions to the proposed third tier tax (listed below), which would be in addition to existing exemptions. Staff reviewed exemptions in comparison cities’ codes related to transfer tax. Of the cities shown here, only San Francisco, Culver City, and Santa Monica have policy-related exemptions (beyond those consistent with State law or to ensure the tax does not apply to transactions that are procedural or corrective). Based on a review of four and a half calendar years of transfers, staff estimates that the exemptions shown below could reduce potential revenues from the new tax by $0.2 million to $2.0 million in any given year. # Proposed Santa Monica Third Tier
Exemptions
Cities with Similar Language
1 Exemptions in State law All except Culver City list these exemptions in various forms
2 Transfers to a non-profit for affordable
housing
Santa Monica has similar language in its
Municipal Code related to Tier 2.
San Francisco has a partial exemption for
rent-restricted affordable housing
3 A deed to correct a previously recorded
defective deed
City of Oakland
4 Transfers that relate only to a change in
the way in which the title is held
City of Oakland, City of San Francisco
5 Transfers to or from a tax-exempt
charitable organization
None
6 First transfer of a newly constructed
residential property having at least four
Culver City has an exemption for transfer
of real property that contains four or more
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units dwelling units designed for permanent
residential occupancy, including
accessory dwelling units, and meets the
following conditions:
a) At least one (1) or more of the
dwelling units was newly
constructed within the last five (5)
years prior to the transfer of the
real property, based on the date of
the issuance of the certificate of
occupancy for such newly
constructed dwelling units (“newly
constructed” shall not include the
remodel or renovation of an
existing unit);
b) The newly constructed dwelling
units must have resulted in a net
increase in the total number of
dwelling units on the real property;
and
c) The transfer of real property is the
first transfer following the issuance
of the certificate of occupancy for
such newly constructed dwelling
units.
7 Transfers of owner-occupied residential
housing with no more than three units,
whether or not any other portion of the
property is also rented, if the seller has
occupied the property for at least two years
None
8 Ground leases having a remaining term of
less than 35 years
San Francisco has a similar exemption:
for any deed, instrument or writing which
creates, terminates, or transfers a
leasehold interest having a remaining
term (including renewal options) of less
than 35 years.
The Transfer Tax Measure would be effective March 1, 2023 until repealed. The Transfer Tax Measure does not contain a sunset clause.
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The proposed measure also includes a clarification that “realty sold” includes transfers that would trigger a change of ownership under Revenue and Taxation Code § 64. This clarification is revenue neutral and aligns with the County’s existing practice of applying the City’s transfer tax to unrecorded corporate transactions that constitute a change of ownership under Revenue and Taxation Code § 64. Lastly, the measure proposes to delete certain sections and definitions from Measure SM relating to the City’s administration of the second tier tax, if the County of Los Angeles did not agree to administer the City’s second tier tax. The County has entered into a binding agreement to administer the City’s second tier tax and staff expects that the County will administer the proposed third tier tax rate.
Staff Analysis
Staff reviewed the proposed Documentary Transfer Tax measure for reasonableness and to project likely revenue associated with its passage.
Based on averages of the last four calendar years and 2022 year-to-date, approximately 5% of parcels sold in Santa Monica have a value of $8 million or more, generating about 42% of the taxes collected.
Year # Transfers
>$8 million
Additional Revenue
($ in millions)
2018 28 $15.2
2019 42 $13.1
2020 31 $6.3
2021 53 $7.2
2022 (through May) 21 $7.6
Staff estimates that such a measure could generate approximately $6 to $15 million (including the impact of the proposed new exemptions) annually based on historical trends. Transfer receipts can vary widely from year to year based on transactions that occur during any year as well as economic conditions. The projected range demonstrates this volatility.
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If Council approves the recommended actions associated with this report, City staff will proceed with placing this measure on the November 2022 ballot. The recommended ballot language is as follows:
Comprehensive Real Property Transfer Tax Measure
Shall the measure to enhance the City of Santa Monica’s general governmental services by increasing the one-time tax on real property sales over $8 million, and establishing an additional incremental tax of $15.00 per $1000 of the value in excess of $8 million, excepting transfers: per State law, involving tax-exempt charitable organizations, newly constructed residential properties, owneroccupied residential housing, and certain ground leases; providing an estimated $6-15 million annually until repealed, be adopted?
The Council has also proposed an advisory measure to guide spending of additional resources if the measure passes. The text is below and included in Attachment A:
Comprehensive Real Property Transfer Tax Measure-Advisory Measure “MEASURE __: ADVISORY VOTE ONLY: If the “Comprehensive Real Property Transfer Tax Measure” is enacted, should its additional revenue be used to fund:
(a) services to address homelessness and mental health; (b) public safety and emergency response teams to address safety issues on City streets and in parks, (c) the reopening and staffing of all public libraries, (d) after-school and post-COVID recovery programs for public school children, (e) traffic safety improvements around schools, including crossing guards, and (f) transitional housing and shelters?”
The advisory measure would appear on the ballot along with the Transfer Tax Measure.
The advisory measure would pass if it receives the required 50% + 1 vote.
The proposed resolution (Attachment A) includes the text of the Transfer Tax Measure and the text of the Transfer Tax Advisory Measure and authorizes designated City Council members to submit arguments and rebuttals concerning each measure. 10 of 10
Council may designate one to five members to submit arguments and rebuttals for each measure. Finally, the resolution directs the City Clerk to transmit a copy of the measures to the City Attorney and directs the City Attorney to prepare an impartial analysis of the effects of each measure on the existing law as well as on the operation of each measure.
Arguments and rebuttals for each measure shall be submitted in accordance with State Elections Code Sections 9280-9287 and Santa Monica Municipal Code Section
11.04.125. The Elections Official will set the deadline for submitting arguments as 14 days from the date the election is called on each measure and the deadline for submitting rebuttals to arguments as 10 days after the deadline for submitting arguments on each measure.
Financial Impacts & Budget Actions
The cost of placing the measure on the ballot will be covered by the FY 2022-23 election budget. Staff expects that voter approval of the Documentary Transfer Tax measure would increase General Fund revenues by approximately $6-$15 million per year. This estimate does not account for the impact of the inflation adjustments applied to the threshold levels every five years, which could negatively impact revenue generation from this measure, as noted above.
Prepared By: Gigi Decavalles-Hughes, Director
Approved Forwarded to Council
Attachments:
A. Resolution Document Transfer Tax
B. Exhibit 1 Tax Measure Text
C. Exhibit 2 Advisory Measure Text