Israeli Authorities Taking Action to Lower Barriers in Urban Renewal Projects

In light of the complexity of urban renewal projects, and in order to promote further urban renewal, Israeli authorities have begun taking action to create mechanisms and implement changes to convince apartment owners and entrepreneurs that urban renewal projects are feasible and worthwhile.

Shelf agreement

Recently, the Israeli government’s Urban Renewal Authority announced plans to publish a “shelf agreement” between entrepreneurs and apartment owners for the execution of “vacate and build” projects. Due to the fact that, in most cases, apartment owners are the weaker players and lack experience in this area, the shelf agreement serves to help protect their rights.

The proposed agreement provides solutions for issues important to apartment owners, such as:

• Restricting entrepreneurs’ ability to assign their rights and obligations pursuant to the agreement;
• Obligating entrepreneurs to set up a maintenance fund to pay current maintenance expenses;
• Defining how appraisers are to rank the owners’ apartments and divide the consideration among the apartment owners; and
• Defining the timing for apartment owners to sign lien registration documents with the lending bank so that signing will only be after a building permit under conditions is received.

It is important to note that the shelf agreement will only constitute a recommended version, and parties are under no obligation to use it. Consequently, it is reasonable to assume that entrepreneurs’ legal advisors will opt to amend or change the proposed version in their favor or, alternatively, will opt not to use it, and this issue will also be subject to negotiation between the parties.

Tax benefits

A new procedure prescribes that the Encouragement of Capital Investments Law, which grants significant tax benefits to entrepreneurs in both “vacate and build” and NOP 38/2 projects, will also apply prospectively to NOP 38/1 projects. Some of the benefits granted under this law include a reduced tax rate in respect of the sale of new apartments, a VAT exemption in respect of letting out apartments, a VAT exemption when selling apartments, and accelerated depreciation.

These benefits are contingent upon the construction of at least six new apartments, in addition to the existing apartments, half of which the entrepreneur will be required to let out for a period of at least five years. This stipulation is inconsistent with entrepreneurs’ usual strategy, since most prefer to quickly sell all the apartments and proceed to their next projects.

Reform of real estate appraisers’ standard 21

Another step being taken to encourage entrepreneurs is the planned reform of the Real Estate Appraisers’ Standard 21, which is used to calculate the economic profitability of a “vacate and build” project. The reform, subject to approval by the Israeli Council of Real Estate Appraisers, will apparently include several material amendments:

(1) eliminating the limit on entrepreneurs’ maximum profit from “vacate and build” projects, which is currently limited to 20%–30%;

(2) creating certainty when calculating the land betterment levy; and

(3) examining the possibility of eliminating the restrictions that currently apply to entrepreneurs in relation to the consideration they can offer to apartment owners.

To sum up, there is a clear trend among government decision-makers toward improving conditions for urban renewal project initiations, with the aim of incentivizing apartment owners and entrepreneurs to promote these projects. Consequently, it appears additional amendments and incentives will be introduced in the near future, with the hope these will eliminate barriers and lead to the launch and completion of urban renewal projects.