Much More than 66% – Must-Know Changes in the Urban Renewal Field
After years of expectations, the government has approved the legislative amendments needed to promote “Urban Renewal” projects in Israel. While everyone is talking about the amendment lowering the threshold of consent for apartment owners to 66%, a lot more has also changed. All of the amendments, both major and minor, are important.
No fewer than eight laws have been amended in Israel, all with the goal of promoting urban renewal and creating planning, legal, and economic certainty for developers and apartment owners. These laws include the Planning and Building Law, the Vacate and Build Law (Encouragement of Vacate and Build Initiatives), the Real Estate Law (Earthquake Retrofitting of Condominium Buildings), the Urban Renewal Law (Transaction Organization Agreements), the Israel Land Authority Law, the Government Urban Renewal Authority Law, the Real Estate Taxation Law, and the Public Housing Law (Purchasing Rights).
Below are some highlights of the amendments and their importance:
Land Betterment Tax
Without a doubt, this is one of the most important amendments. It attempts to create economic certainty for developers when planning urban renewal projects.
As of the prescribed date, May 1, 2022, the land betterment tax rate that will apply to residential real estate (note this tax applies solely to residential real estate and not to commerce, industry, or offices) because of the approval of a pinui-binui program is one quarter of the betterment.
However, the amendment determines that until the prescribed date, every local authority may divide the area within its jurisdiction into regions. (A region must be a minimum size of 30,000 m2.) It will then decide that tax in each region will be imposed at half or a quarter of the betterment, or that no tax will be imposed in that region at all.
The local authority will perform the calculation, while taking into account, inter alia, the land values and the congestion of the existing housing units and the planned congestion according to the urban renewal program.
The authority’s defined betterment tax rates will apply for a period of five years after the prescribed date. At the end of every five years, the authority may revise the tax rate.
The tax will also apply to an urban renewal program filed with the planning committee prior to the prescribed date. Insofar as the authority defines the tax at a rate that differs from that prescribed in the law, the rate set by the committee will apply. If the committee does not define regions with different tax rates, the rate prescribed in the law will apply.
The Requisite Majority
For urban renewal projects, the requisite majority of consenting apartment owners was reduced from 80% to 66%. The requirement of ownership of 75% of the common property was rescinded.
The requirement of obtaining consent from every building in a cluster was reduced from 66% to 60%.
The rights or part of the rights of an apartment owner who refuses to sign an urban renewal transaction will not be taken into account, if it is found his opposition derives from unlawful construction or unlawful use of space in the common property or in the area bordering the building, or if the apartment owner’s opposition derives from his having unlawfully split his apartment into at least one additional apartment.
In order to calculate the majority excluding the recalcitrant apartment owners, evidence of unlawful construction must be presented and at least 50.1% of the apartment owners owning 50.1% of the common property must agree to the urban renewal transaction.
As for the calculation of the 50.1%, all of the apartment owners will be taken into account, including the recalcitrant apartment owners.
An important clarification: the reduction of the requisite majority does not apply to an NOP 38 or an NOP 38/2 transaction.
The Elderly
The Vacate and Build Law (Encouragement of Vacate and Build Initiatives) prescribes various solutions for the elderly aged 75 and 80. (These include moving to an old-age home, purchasing an alternative apartment, receipt of a sum of money at the capitalized value of the compensated apartment in order to purchase an alternative apartment, two apartments at the cumulative value of the compensated apartment, or a smaller apartment plus payments capitalized to the value of the compensated apartment.)
The legislative amendment lowers the ages from 75 to 70 and from 80 to 75.
However, please note that the definition prescribes that an “elderly person” is “anyone who, on the date the urban renewal transaction was initially signed, was aged 70 and had resided in the building for at least two years on said date.”
There is still no solution for what happens in projects when the tenants begin as “youngsters” and become “elderly” when the time comes for them to vacate their apartments. However, considering our familiarity with the vast majority of leading major companies and developers in Israel, they clearly understand the plight of the elderly and they operate in an orderly manner to provide a solution for this population.
Power to Cancel Agreements
Due to the volume of developers obtaining signatures on urban renewal agreements and of companies that fail to advance such projects, another important section was added to the amendment. This section prescribes that the Minister of Justice will set provisions regarding the content and format of an urban renewal agreement, including mandatory provisions whereby noncompliance will cause the agreement to be deemed null and void. The ombudsman (as defined in the Government Urban Renewal Authority Law) will be empowered to deliberate an apartment owner’s complaint against a developer/the person who obtained signatures on an agreement and to issue a ruling to an apartment owner that the urban renewal agreement is null and void.
It is still unclear if such a ruling will enable action to be taken to strike caveats on apartment owners’ apartments that were registered in favor of the developer, or if apartment owners will still need to go to court against the developer and petition for a mandatory injunction ordering the striking of the caveat as a result of the ombudsman’s ruling.
Validity of an Urban Renewal Agreement
New time frames were defined in relation to the ability to nullify urban renewal agreements.
The amendment prescribes that the majority of apartment owners in a condominium building, including anyone who did not sign an urban renewal agreement, are entitled to decide to cancel a signed urban renewal agreement, provided that:
1. Urban renewal agreements were not signed by 50% of the apartment owners within two years of the date the first agreement was signed, or if the developer failed to engage with 60% of the apartment owners within four years of the date the first agreement was signed. If a complex contains public housing at the ratio of 40%, the calculation will be performed without the public housing.
2. A detailed program (pursuant to section 83(a)(1) of the Planning and Building Law) was not submitted to the planning committee within 4.5 years of the date the first agreement was signed. (This condition includes an urban renewal complex as declared in section 14(a)(1) of the Government Urban Renewal Authority Law.)
Insofar as an urban renewal agreement was signed for a condominium building located in an urban renewal complex, or if the complex received preliminary approval pursuant to section 14 of the Government Urban Renewal Authority Law and the complex contains at least 120 housing units, said time frames will be extended by one year.
If apartment owners issue a notice of cancellation of an agreement due to the fulfillment of the aforesaid conditions, they will not be deemed in breach of contract. However, a section was added prescribing that the Minister of Justice will set provisions regarding payment to the developer subsequent to a cancellation pursuant to the provisions of this section.
It is unclear why the Minister of Justice has been given the discretion to obligate apartment owners to compensate the developer if they issued a notice of cancellation of the agreement in conformity with the provisions of the law.
Minimum New Apartments in Urban renewal Transactions
In order to approve a complex as an urban renewal complex, the state’s tax provisions prescribe that at least 24 housing units must be vacated. The amendment adds the condition whereby a minimum of 70 new housing units must be constructed in their place.
Additionally, the director-general of the Urban Renewal Authority may declare that a plot containing at least 12 housing units is an urban renewal complex, provided such urban renewal program includes the construction of at least 24 housing units. In such instance, all areas so declared will be deemed a single urban renewal complex.
Taxation
Numerous amendments were also made to the Real Estate Taxation Law regarding urban renewal, including the following three major amendments:
1. The section prescribing that “a seller and his spouse, apart from a spouse that permanently resides elsewhere, and their children under the age of 18, shall be deemed a single seller” has been rescinded.
2. The tax exemption applying solely to a single residential apartment in a complex has been amended and there is no longer any restriction on the number of apartments owned by an individual in order to obtain the tax exemption.
3. The loss of entitlement to a tax exemption due to the transfer of an apartment to a relative less than 24 months after the signing of an urban renewal agreement has been rescinded.