The residential real estate market in Israel has been subject to drastic changes for some months. After years of a steady sharp uptrend in apartment prices, the number of real estate transactions has diminished, and apartment prices in most regions in Israel have either stabilized or dipped slightly.
There are many reasons for this trend reversal, including: the high purchase tax imposed on purchases of a second apartment (third apartment, etc.) and on apartments purchased by foreign residents; the stringent regulations imposed on banks in Israel when receiving funds related to real estate transactions (as part of the global war against money laundering); insufficient land allocations for residential construction by the Israel Land Authority; restrictions and delays in issuing building permits for residential projects, and so forth.
Nevertheless, residential apartments in the high-demand regions of this small and attractive country will likely continue to remain highly coveted. This is certainly true as long as the alternative of rental apartments stays rather limited, public transportation remains spotty and inefficient, and the economy’s interest rate holds at its current level.
In order to supply the aforesaid demand, real estate developers have been pouncing on the urban renewal alternative, and for good reason. Considering the lack of any extensive supply of land in general, and land that is economically feasible for construction in particular, developers are targeting another player who can supply them with the goods—current apartment owners.
Superficially, the idea of urban renewal looks promising. Developers construct new buildings or renovate existing ones, execute seismic retrofitting, and build new apartments for apartment owners or expand their existing ones—all in exchange for apartments the developers can sell on the open market and against the receipt of various types of tax benefits from the State.
But in Israel, as the local axiom goes, “nothing is easy,” to put it mildly. For years, developers have been encountering numerous difficulties and obstacles when attempting to carry out urban renewal projects. The main obstacles are contending with the apartment owners, on the one hand, and with the authorities, on the other.
Just before the Knesset’s most recent recess, it approved the Evacuation and Construction (Compensation) Law (Amendment No. 6), 5778 – 2018. The main objectives of this law are to protect apartment owners’ rights and to resolve the issue of “recalcitrant tenants”—all for the purpose of encouraging urban renewal projects.
The majority rules:
In order to promote and implement a plan for an urban renewal project, a developer must obtain the apartment owners’ consent to carry out the project by the majority required by law. However, even after this task has been accomplished, it often becomes necessary to contend with a “recalcitrant tenant”— an apartment owner who refuses to cooperate with the urban renewal project for various reasons.
Inter alia, the amendment to the law prescribes that if the court finds that the recalcitrant tenant’s refusal to cooperate with the project is unreasonable, the court can take number of steps. It may approve the transaction for the execution of the project, appoint an external attorney or accountant to engage in the transaction on behalf of the recalcitrant tenant, or even rule that the recalcitrant tenant is liable for damages caused to the rest of the apartment owners who consented to the project as a result of his or her refusal.
In many instances, the recalcitrant tenant is an elderly person who is naturally concerned about participating in an urban renewal process at this stage of his or her life. The amendment to the Law attempts to resolve this obstacle while also ensuring that the elderly tenant’s rights are protected, inter alia, by imposing an obligation on the developer to offer the elderly tenant the following alternatives (and the elderly tenant will receive tax benefits in respect of these alternatives): moving to protected housing, buying an alternative apartment outside of the project (either by the elderly person or for him or her), providing two small apartments within the project instead of one large apartment, or providing a small apartment with differential payments. These alternatives are designed to ensure that the total consideration is equivalent to the value of the apartment that the elderly tenant would have received in the project had he or she consented. If a developer does not offer the aforesaid alternatives to the recalcitrant elderly tenant, his refusal to the project will be considered reasonable.
Although the legislative amendment addresses the issue of recalcitrant tenants, and provides protection to apartment owners as stated above, the amendment to the law completely disregards the “elephant in the room”—shortening and streamlining the planning proceedings so that urban renewal projects can be efficiently and speedily executed.
In terms of both “the authorities’ route” and “the developers’ route”, the approval proceedings for an “evacuate and build” plan take several years. The proceedings to obtain approval of a building permit application, whether for an “evacuate and build” project or for an NOP 38 project, take another year or two.
At issue is a timeframe that is too long and not known in advance, particularly when it comes to “evacuate and build” projects, since there is no certainty the project will eventually be carried out. The many years devoted to the planning proceedings expose the intended project to the risk of various unforeseen problems arising. These problems may delay the project for several years, in the best-case scenario, or may result in absolute failure, in the worst-case scenario.
For example, the “evacuate and build” project at the Andreas site in Netanya was finally launched by Africa-Israel Residences only this year, after about 16 years of deliberations in the planning and building committees. Undoubtedly, delays such as these are the main reason why very few “evacuate and build” projects have been completed to date in Israel.
The process of obtaining a building permit by virtue of NOP 38 is also no quick or simple task. Due to the frequent policy changes by the local authorities regarding the exercise and mode of exercise of building rights, uncertainty often arises with regard to the building permit that will eventually be issued. This uncertainty sometimes causes developers to rethink the economic feasibility of a project and drop it.
In summary, the amendment to the law is commendable, since it is warranted and can be expected to provide much needed assistance to both developers and apartment owners. It will also provide some impetus to urban renewal projects, while still protecting apartment owners’ rights and interests, including the elderly among them.
However, if the legislative authority or the government, through the government’s Urban Renewal Authority, were to raise the gauntlet, by significantly streamlining planning proceedings and issuing clear guidelines to the authorities with regard to the mode of calculation of the additional building rights and the additional housing units for the developer, then they would pave the way for urban renewal in Israel at the needed and correct volume.