Over the last decade, agricultural communities in Israel have become increasingly attractive. They are attractive for investors looking to invest in existing industries, as well as for entrepreneurs seeking to establish business real estate projects on communities’ lands. What’s more, agricultural land is becoming a highly attractive location for establishing renewable energy ventures for electricity generation. This is due to the Israeli government’s target of reaching 30% renewable energy by 2030. As a result, energy companies frequently approach many agricultural communities, as well as entrepreneurs engaging in other industries. It is a well-known fact that business real estate in these communities has, for quite some time already, not just helped support the agricultural branches. It has also served the opposite purpose: to reduce the dependence of these communities (and their residents) on agricultural output.
Many agricultural communities have thus been investing not only in business real estate within their communities but also in ventures outside their communities. For example:
- Private sector projects.
- Overseas operations, against the backdrop of the globalization process and the preference for production in proximity to overseas markets.
- Business real estate in other agricultural communities, out of a deep understanding of the needs, costs, and returns in this sector.
All of this, as stated above, is in addition to private investors investing in business real estate in these communities. Nevertheless, agricultural communities in Israel are a far cry from realizing their potential. This is due to the regulatory restrictions that force them to be selective in choosing the transactions proposed to them and to maintain informed and long-term thinking about their priorities and alternatives.
Alongside these issues, this sector also faces “in-house” challenges. These derive from the fact that such communities are deemed special corporations according to personal law, because their shareholders reside in them, and from the fact that a cooperative society is designed for the welfare of its members and not necessarily for the purpose of maximizing their profits.
The Trend – Weakening of Agricultural Communities’ Bundle of Rights
Out of all OECD member states, Israel is an exception in terms of its land regime. Most socio-economic activity in Israel takes place on nationally-owned land, with the ratio of national ownership in the agricultural sector higher than in the urban sector. National ownership means contending with a key player, the Israel Land Authority (ILA).
Leasehold contracts and ILA decisions stipulate that agricultural communities are obligated to cultivate the land. At the same time, there are situations when business activities are allowed in these communities under particular restrictions. However, the ILA’s decisions in this regard change frequently, usually as part of the trend of weakening the agricultural communities’ bundle of rights (as opposed to privatization that applies to the urban sector). The prevailing approach in Israel is that residential construction and the establishment of non-agricultural businesses in agricultural communities pose a threat to the robustness of cities. This is as opposed to the prevailing approach in many countries around the world. These countries believe that development in rural areas contributes to narrowing socio-economic disparities between the center and outlying regions.
Interactions with the Israel Land Authority
In light of the above, agricultural communities are in constant friction with the ILA, especially considering the following points:
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Making service contingent upon service.
Even prior to deliberating an application to approve a project on its merits, the ILA makes service contingent upon service. Until all uses the ILA considers to be nonconforming in that agricultural community are regulated, the transaction cannot proceed. Considering ILA’s pace of work, this stipulation could delay or completely derail a transaction. In any case, the price of the transaction with the entrepreneur should include this delay.
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The community’s share of the project.
According to the ILA’s rules, the community must hold a minimum of 26% of the share capital, the right to appoint directors, and the right to profits in every project on its land. This restriction requires communities without a penny in their pockets but who are still interested in a business project to be very creative in devising formats of engagement with entrepreneurs that will not force them to relinquish too much.
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The quota of dunams (dunam = 1,000 m2) under employment zoning.
According to the ILA’s rules, every agricultural community receives a limited number of dunams zoned for employment. About a year ago, the ILA decided that even communities holding a historic contract that allows them to engage in transactions to create jobs without the dunam restriction (but under other restrictions) are now also subject to the dunam quota. The benefits awarded in renewable energy transactions are also diminishing. For example, for renewable energy storage projects, the ILA has decided that all of the land in the transaction will be calculated against the zoning quota and not just 10%, as is the case for solar energy projects. According to the ILA’s decisions, solar energy transactions and transactions for the expansion of a solar energy enterprise may exceed the quota (at the ILA’s discretion).
However, ILA’s policy is that this is only possible if the community has exhausted its employment zone quota. Otherwise, the ILA will calculate these transactions at the expense of the quota. This situation is causing communities to sometimes prioritize a transaction that is entirely counted against the quota over a solar energy transaction (which generates a higher return). This happens even though there is no certainty the ILA will approve a transaction that exceeds the zoning quota.
Therefore, this frequently changing reality is forcing agricultural communities to prioritize long-range business opportunities while perched on unstable regulatory ground.
Interactions with the Planning Authorities
Furthermore, agricultural communities must also overcome Planning authorities’ restrictions in order to realize a business real estate project.
In terms of planning, in order to establish a real estate project, the planning designation must be compatible. If it isn’t, this requires the initiation of an extensive planning proceeding, either a specific urban building scheme or rezoning. This naturally takes a long time and must be prepared in advance. Furthermore, until recently, planning authorities maintained an enforcement policy of turning a blind eye out of “good neighborly relations.”
However, Amendment 116 to the Planning and Building Law changed the rules of the game. It increased enforcement at the planning level. It changed the center of gravity from local committees to enforcement, and It hardened the enforcement policy. Officials in agricultural communities now also face exposure to criminal charges due to the abolition of the presumption of innocence. Therefore, we recommend that each community conduct an internal examination. Even the working assumption that a building built before 1965 does not require a building permit was recently overturned by a Haifa District Court ruling. The ruling held that no such presumption exists at all and that every building has been under an obligation to obtain a building permit since the Town Planning Ordinance 1936.
Due to the considerable economic and regulatory complexities, business real estate ventures in agricultural communities require thorough analyses. The analyses must take into account the investment, its duration, the choice of project, and the selection of the developer. Agricultural communities must prepare comparative pricing so they can make informed decisions. Such communities should consider, inter alia, the commercial proposal, the seriousness of the entrepreneur, their communities’ data, and all of the alternatives available to them.
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Hagit Ben Moshe is a partner at Barnea Jaffa Lande Law Offices in our firm’s Kibbutz sector department.