Urban renewal construction projects, known in Israel either as an NOP 38/1 project (retrofit and renovate), or as an NOP 38/2 project (demolish and reconstruct) began in Israel as a result of the realization that residential buildings whose building permits predate 1.1.1980 must undergo earthquake retrofitting.
The mechanism that was devised provides various incentives, both to interested apartment-owners in relevant buildings and to various developers, to engage in an agreement for an NOP project.
However, ever since these national outline plans were approved, apartment-owners and developers have been encountering numerous internal and external obstacles that are preventing these projects from being carried out. There are numerous reasons why many projects are not even reaching the performance stage, despite the investment of considerable time and resources and despite the fact that the relevant agreements were signed.
Many times, apartment-owners find themselves unable to extricate themselves from the agreements they signed with the developer, and end up wasting years trying to make some progress on the project, without success.
Therefore, we’ve selected five important tips when engaging in an NOP 38 project:
Exclusivity agreement with the developer
As a rule, you should avoid giving exclusivity to any particular developer and should negotiate with a number of prospective developers, although there are circumstances where a developer will insist on exclusivity before it expends substantial amounts of money and time in carrying out certain pre-project operations.
If you sign an exclusivity agreement, it is very important to limit it to a defined date, after which, the exclusivity agreement will be nullified.
To learn more, read the important provisions in the Urban Renewal Law, which came into effect recently.
The question of whether an NOP project will reach the performance stages depends, to a great extent, on the suspensive conditions in the agreement. The most prevalent suspensive conditions are: obtaining the signatures of the requisite majority of the apartment-owners on the NOP agreement, and obtaining a building permit at the volume of building rights that are needed for the project.
It is extremely important to set detailed timetables for the fulfillment of the suspensive conditions. The objective is to avoid unreasonable delays or a total freeze on the project without any ability to terminate the NOP agreement.
The consideration to the apartment-owners
Due to the nature of this type of transaction, and in order to avoid future disputes, you should be especially careful during the stage of your commercial negotiations with the developer in relation to the precise consideration that the developer and each of the apartment-owners in the building expect to receive, and you should explicitly specify the consideration to each of the parties, to the extent possible, in the agreement between the parties. You should specify the floor and the directions of the new apartments to be built for the apartment-owners, carefully prepare the apartment specifications, define the order of selecting the new parking spaces and storage rooms, and stipulate the precise distribution of the existing and future building rights between the developer and any or all of the apartment-owners.
Another important, fundamental rule in an NOP project is the absence of discrimination between one apartment-owner and another; therefore, if the consideration is not being equally divided, the division should be balanced, and it is possible and recommended to hire a real-estate appraiser for this purpose.
The guarantees are the main securities to apartment-owners in NOP 38 projects:
- Sale Law guarantees (for a demolish and reconstruct project) – make sure that you receive guarantees pursuant to the Sale Law, according to the value of the apartments as finished, with the value being determined according to the project’s zero report (financial feasibility report), while enabling the tenants to appoint an appraiser on their behalf, at the developer’s expense, to determine the value, and whose determination will be final and binding.
- Performance guarantee (for a retrofit and renovate project) – which is an autonomous bank guarantee. If at issue is a project with bank financing, the guarantee should cover the entire value of all works, with the sum to be determined according to the inspector, which is usually issued shortly before receiving a building permit for the project. It is important to note that the apartment-owners can use this guarantee for any purpose, without limitation and at their sole discretion, due to the very wide variety of payments that will be required in the event of a need to exercise the performance guarantee.
It is also important to demand a guarantee from the developer to cover repairs during the warranty period, a guarantee to ensure the registration or amended registration of the condominium building, as well as a guarantee for tax payments and a guarantee for rent payments (mainly in a demolish and reconstruct project).
For an NOP demolish and reconstruct project, the rent payments are a compulsory, integral part of the consideration being paid to the apartment-owners, since they are vacating their apartments for the purpose of carrying out the project. It is important to obligate the developer to give sufficient notice about vacating of the apartments, after a lien has been registered in favor of the project’s lending bank. You should demand to receive a guarantee for the payment of rent, at the full extent of the rent for each of the apartment-owners for the entire duration of the construction period and, parallel to this, to demand that the moving costs from the existing apartment and the costs for moving back in to the new apartment once construction has been completed (moving and packing expenses, etc.) will apply to the developer.
For the most part, apartment-owners who continue to reside in their apartments during the performance of an NOP retrofit and renovate project suffer considerably during the construction, inter alia, from noise and dirt nuisances, from the blocking of sunlight, from the blocking of access paths to the building and to their apartments, etc. It is important to take this into account, and to retain your option to vacate your apartment at any time should you decide to do so, by obligating the developer to pay your rent and issue you a guarantee to cover these rent payments.
In closing, it is important to add that you should make sure that you select suitable consultants on your behalf for the project – architect, inspector, real-estate appraiser and an attorney, who are tasked with pushing the project forward, each within his purview, while representing you, protecting your interests, ensuring your rights and avoiding any undesirable complications.
One last thing – demand that the developer pay the aforesaid consultants’ fees.