This year, only one hotel sold in the city of Los Angeles after the "Mansion Tax" went into effect last April. The new transfer tax on residential and commercial real property, officially the "Homelessness and Housing Solutions Tax," means that if the sale amount exceeds $10 million, it will be subject to an additional tax rate of 5.5%.
In August, the one hotel that traded was purchased by the City of Los Angeles, which is exempt from paying the Mansion Tax. The city plans to convert the hotel as part of the Inside Safe initiative. Inside Safe Initiative is a housing-focused solution to combating homelessness. ICO Investment Group sold the 294-room Mayfair Hotel for $60.3 million, or $204,923 per key.
The previous owner purchased the hotel in 2012 for an undisclosed price. The city plans to complete renovations for approximately $19 million and spend roughly $4 million toward project oversight, resulting in an estimated total spend of $83 million. The city hopes to reopen the Mayfair in February.
Prior to that, only five hotels sold this year as the city is experiencing the investment slowdown seen nationally and among other commercial real estate asset types.
Still, hotel investment in Los Angeles has other challenges to contend with besides the "Mansion Tax."
Labor expenses have increased after the Los Angeles Hotel Worker Protection Act took effect in August 2022. Wages could continue to grow as other legislation was introduced to increase minimum wages and due to the ongoing Unite Here Local 11 hotel union strike.
Union contracts expired June 30, resulting in 15,000 Los Angeles and Orange County hotel workers going on strike, representing the largest hotel strike in U.S. history. Unite Here Local 11 is asking for an immediate $5 increase in hourly wages and a $3 increase each year for the next three years. Other requests include affordable family health care, pension contribution increases, and increased staffing to have hours back to pre-pandemic levels.
Lastly, investors could hesitate to move on hotel purchases until the "Responsible Hotel Ordinance" is determined on the March 2024 ballot. The measure would require hotel operators to report room vacancies to the city of Los Angeles daily. The city's homeless agencies could then send individuals or families to the vacant hotel rooms with a "market rate" voucher for payment. The hotels would not be allowed to decline these guests or their vouchers.
These factors have also impacted hotel development in Los Angeles, as no hotels have started construction in 2023. However, there has been a construction slowdown nationally as funding construction loans has become more difficult.
More transactions could occur after the March 2024 election, which includes a measure to end the Mansion Tax and the Responsible Hotel Ordinance. Additionally, many investors believe the uncertainty surrounding the federal reserve rate hikes has waned. The duration of the ongoing strikes remains a question mark, as only two hotels in Los Angeles have reached an agreement with the union.