Urban renewal projects under NBP 38/2 are of the utmost urban and planning importance. These projects answer needs constantly publicly debated in Israel, of increasing the supply of apartments in demand areas while improving urban infrastructures and environmental development.
It is important to understand that these projects – though they are not “ordinary”, large scale renewal projects encompassing many dozens and sometimes even hundreds of tenants – are complex projects, combining legal, possessive and financing mechanisms, and requiring thorough, well thought out negotiations.
This article will briefly survey a number of mechanisms and considerations regarding NBP 38/2 projects. Of course, this is not an exhaustive script, but rather a concise discussion aimed at emphasizing the need for comprehensive examinations prior to the formation of a transaction.
Background
Recent years’ soaring real estate prices have underscored the need to answer the large housing demands in the form of increasing the supply of lands available for construction. At the same time, most Israeli urban centers considerably lack lands available for construction.
One of the most meaningful solutions to the problem is promoting urban renewal processes in old urban neighborhoods, under renewal projects.
These projects have clear advantages in adding a significant amount of residential units, sometimes fivefold and even more new residential units than the original number. Other advantages in these projects relate to improving urban infrastructures, environmental development, and the most important may be the huge advantage for original apartment owners receiving a new property worth much more than the original.
One of the main difficulties with urban renewal projects stems from the projects’ large scope and the difficulty in organizing and forming many dozens, sometimes even hundreds of property owners into one transaction. Often, the large number of property owners is cause for delay and even cancelation of projects that would have greatly benefited all of the tenants.
In recent years, amendment number 2 was approved for NBP 38, under which a small scale renewal projects was formulated, sometimes even for a specific building. Such a renewal project under NBP 38/2 is easier to formulate, compared with “ordinary” urban renewal projects, due to its mere scope. However, the transaction remains very complex in terms of the legal mechanisms that are meant to regulate the relationships between the entrepreneur, original apartment owners, new apartment owners, and financing bank.
Discussing select issues and mechanisms
Transaction nature – under an “ordinary” urban renewal project, the original tenants receive a new apartment, usually larger than their original apartment, including an apartment protected space (“APS”), parking, a balcony etc. Under a NBP 38 reinforcement project too, the original tenants receive construction works in their original apartment, which usually increase its size by several square meters, that is added with an APS, a balcony etc. (in addition to actions bettering the entire building).
In most cases, an NBP 38/2 transaction is analyzed similarly to a combination transaction, which enables the derivation of consideration for the original tenants. In many of the transactions, the original tenants reach a combination rate with the entrepreneur and according to it the resulting properties are divided between the entrepreneur and the original tenants. In that context, it is important to note the following: first, most of the tenants’ consideration is taxable. Second, obviously, the smaller the ratio between original number of apartments and the new apartments, the larger the odds of the tenants’ consideration not being derived as in a combination transaction, but rather similarly to an ordinary urban renewal transaction (a new apartment with its various attachments).
Planning aspects: using rights under the NBP alongside rights from an UBP – most executed NBP 38/2 transactions rely, amongst other, on construction rights under Urban Building Plans (UPB), in addition to rights under the NBP. Thus, the project uses rights from two planning sources: a local urban building plan permitting additional rights that were not realized, alongside national building plan 38/2 awarding additional rights in the form of additional floors. It is important to realize that a preliminary analysis of most transactions shows that the rights under NBP 38/2 alone are not enough to make the project worthwhile for the entrepreneur (except in very high demand areas).
Payments and expenses distribution – under urban renewal projects, as well as NBP 38 structure reinforcement projects, it has become common practice that the entrepreneur pays on behalf of the original tenants all of their project expenses. This way, in many cases the entrepreneur pays taxes on behalf of the tenants (insofar as there is no exemption), bears the urban tax payments (again, insofar as no exemption or reduction were given), the tenants’ legal fees, rent for the tenants’ evacuation period from the original apartment, moving expenses etc. On the other hand, under an NBP 38/2 in which considerations for the original tenants are derived from combination percentiles, loading said costs on the entrepreneur will necessarily result in lower combination rates for the original tenants. Often, the original tenants are better off receiving the high combination rate, and getting loans for the above payments, despite the decrease in percentiles in the main transaction.
Guaranties – under an urban renewal project (an “ordinary” project or under NBP 38/2), there is a significant guaranties array. The most significant guaranty is a bank guaranty for the new apartment due to be received under the project. That is, the original tenant, as well as any new tenant purchasing an apartment in the project, receives a bank guaranty from the entrepreneur to secure their new apartment.
Also, within negotiations with the entrepreneur, additional guaranties required are for rent payment during the construction period, a guaranty for the performance of other payments due to the tenants (taxation, betterment levies etc.), as well as a guaranty for the overhaul period and construction quality liability.
Summation
An urban renewal project under NBP 38/2 is a complex project, giving rise to many issues. First, it is important to note that the points discussed above, of course, do not form an exhaustive list, and there are many significant issues to be discussed between the parties.
It is important to understand that the mere fact that the project is relatively small compared with “ordinary” urban renewal projects does not make the transaction less complex, or negate the need for examinations and comprehensive, serious negotiations.
Thus, it is important to perform preliminary, comprehensive examinations prior to negotiations, let alone hold thorough negotiations taking into account both the tenants’ considerations and those of the entrepreneur in entering the transaction.