Governmental Incentives for Developing the Hotel Industry

Introduction

Following the Corona pandemic, a number of entrepreneurs and businessmen have recently contacted our firm, interested in examining the option of converting office buildings in their ownership for hotel purposes. Apart from the proprietary aspects and the licensing and planning processes which must be considered, at the first stage our recommendation is to examine whether the project is entitled to government grants for converting buildings with the designation of residence, employment and commerce to hotels, or assistance grants for the establishment and expansion of existing hotels.

First of all, it is important to realize that prior to the outbreak of the pandemic, over the past decade, there was significant growth in the scope of activity of the hotel industry in Israel in general, and significant growth in the quantity of incoming tourism to Israel in particular. Thus, 2019 alone was characterized by a record of 4.9 million tourists, and no less than 24 million hotel lodgings across the country, constituting an increase of approximately 35% from the average tourists in the past decade.[1]

In light of the increasing demand of lodging places and the lack of hotel rooms, the state of Israel has chosen to incentivize and encourage entrepreneurs in the hotel industry via tax benefits or grants. Thus, back in 2009, the Knesset assembly has approved the bill for the Law for the Encouragement of Capital Investments (Amendment no. 66), 5769-2009 (hereinafter: the “Law“), in order to promote and develop the production capacity of the market, to improve competitiveness in the market, and to create infrastructure for new and sustainable workplaces.

The provisions of the Law provide two main routes for the encouragement of tourism in areas of national preference[2]: (1) route of tax benefits, and (2) a route of investment and development grants. Pursuant to the route of investment and development grants, the administration of investment in tourism which is responsible for obtaining the purposes of the Law, provides procedures from time to time, whose purpose is the development and expansion of hotels and tourism enterprises by providing incentives and grants.

In this paper, we will focus on the route of grants, with an emphasis on the procedure for the year 2020, which provides a grant for projects of converting buildings for hotel use and returning hotel activity which was stopped.

Grants for converting office and residential buildings to hotels and guest houses

In the framework of procedure 2/2020 which was published on 26/10/2020[3], terms were provided for entitlements for receiving a grant, both for hotels which have suspended their hotel activity for a period of two years and which ask to return to this activity, and both for projects of converting buildings with the designation (or use) which is not hotel, to hotel use. In both cases, the grant is given for investments in planning, infrastructure, construction works, and purchasing equipment and furniture.

It is important to note, that all requests will be prioritized by the administration in accordance with the classification files set in the procedure, such as the requested action, the location of the intended hotel, the ranking of the hotel and such.

As of the year 2020, the state budget for this grant is a total of 5,000,000 ILS alone, compared with a budget of 30,000,000 ILS set in the procedure of 2019 (and naturally, this is the result, inter alia, of the fact that the procedure was only received towards the end of the year).

The scope of the grant which shall be given in the framework of a project which shall be approved, will be a total of up to 20% of the sum of the “recognized” investment in the project. What is the recognized investment? The procedure provide that the sum of the recognized investment is defined and limited in two manners: a sum equaling 60% of the total actual costs of the project as they were approved by an engineer on behalf of the Ministry of Tourism, and alternatively a sum equaling 60% of the budget ranking set in Appendix A of the procedure. For example, the cap which shall be recognized as a recognized investment for converting a site for hotel use at a ranking of 3 stars, shall be less than the cap for investment in conversion for hotel use at a ranking of 5 stars (in accordance with the ranking of the order).

The prerequisites for submitting a request for a grant are, inter alia, that the applicant has ownership of the land (or alternatively a long lease), and that in the framework of the project, areas in a designation which is not hotel will be converted to hotel guest rooms which shall amount to more than 11 hotel rooms. From a planning aspect, the applicant of the grant must present to the administration an approval for deviating use of the property, valid for 5 years at least, and simultaneously submit a request for changing the zoning plan to the designation of the site for hotel purposes, and in as much as the project requires the demolition of a structure – a valid building permit as well.

In order to guarantee the undertakings of the applicant for meeting the provisions of the procedure, the applicant must register a caveat with the Land Registry Bureau in favor of the Ministry of Tourism, prove that he has equity of at least 20% of the scope of the total investment in the project, and deposit an autonomous bank guarantee. In terms of the schedules, the applicant must operate the hotel for a period of 15 years at least (and “low-cost” hotels up to 10 years), and to end the construction of the project no later than 36 months from the time of receiving a principle approval for the grant.

Additional route for grants for the expansion and erection of hotels (and guest houses)

Apart from the route described above, it is important to recognize that there is an additional grant route suitable for a project of erection and expansion of hotels (and guest houses). We shall state briefly that the procedure set on the matter for the year 2020 extends the procedure set in the year 2019 but provides, for the first time, that a material condition for submitting a request for a grant is a valid building permit. Apart from this, there are additional important aspects which must be examined upon checking for entitlement to this grant.

Addition to the grant for low-cost hotels (3 stars)

Finally, we shall state that under government rule number 1556, apart from the aforementioned grants, entitlement conditions were determined for an additional grant at a rate which will not exceed 13% of the scope of the recognized investment for “low cost” projects[4]. However, in the framework of the new procedure for the year 2020, it was decided not to extend this provision, probably due to budget problems, and therefore, all that is left is wait to the new procedure which shall be set in the year 2021.

Conclusion

The importance of the route of grants for the encouragement of entrepreneurship in the hotel industry is crucial for the expansion of the scope of activity in the hotel industry, inter alia (and perhaps mostly), in light of the Corona pandemic which has erupted and created many fluctuations in the new employment world, and is crucial damages to incoming tourism, less use of offices, as well as increased demand for local tourism. Therefore, the government should determine as soon as possible a procedure for the year 2021, in the framework of which large grants shall be given to entrepreneurs wishing to promote the industry of hotel and tourism for the benefit of the Israeli market.

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*          This article was written in collaboration with the economic advisor Mr. Ofer Pops, who owns an economic consulting firm that specializes in the hotel industry, including advising on receiving grants under Encouragement of Capital Investments law and other administrative grants.

[1] The Central Bureau of Statistics, notice to the media, “Entry of tourists to Israel, December 2019”, (published on the website of the Bureau, 06/01/2019).

[2] The areas of preference were determined in the Order for the Encouragement of Capital Investments (Determining the Borders of Special Areas for the purpose of Tourism Enterprises), 5767-2007.

[3] Procedure 02/2020: assistance for returning buildings for hotel use and for converting buildings to hotels for the year 2020 in accordance with the Law for the Encouragement of Capital Investments, 5719-1959.

[4] See “procedure 02/2019 – chapter B: administrative grant, low-cost hotels” set forth in the procedure: assistance in returning structure for hotel use and for converting structures to hotels for the year 2019 in accordance with the Law for Encouraging Capital Investment, 5719-1959.