The Change Brought About by the Law of Arrangements With Regard to Land Betterment Levy in Evacuation-Construction Projects

Introduction:

The recent Law of Arrangements, adopted and published in November of 2021[1], contains many legislation changes, some of which are very relevant to urban renewal, such as significant amendments made to the Planning and Construction Law[2] with regard to evacuation-construction projects.

One of the new amendments adopted through the Law of Arrangements pertains to the tax obligation involved in evacuation-construction projects, particularly the land betterment levy paid to the municipality. As will be explained in detail below, the amendment introduces greater certainty as to the financial viability of the project, since it sets in advance the rate of land betterment levy to be applied in each municipality and in every specific area within the municipality’s jurisdiction.

In this article we will briefly review the old arrangements applied to evacuation-construction projects before the recent Law of Arrangements (and specifically in connection with the land betterment levy obligation), as well as the new scheme set in the Law of Arrangements and its advantages.

Background:

An evacuation-construction project is a specific type of urban renewal project, where a residential complex or an industrial and commercial complex, which includes at least 24 units in its present state, is fully evacuated, demolished, and replaced with new buildings, which often include mixed uses – residence, employment, and commerce.

The general obligation to pay a land betterment levy is set forth in Article 2(a) of the Third Addendum to the Planning and Construction law, stating that a land betterment levy would apply if an enlargement of building rights increased the value of a given property. At the same time, many evacuation-construction projects were able to obtain an exemption from paying a land betterment levy from a specific municipality, if certain conditions set by the municipality were met.

The process for obtaining the exemption was lengthy, complex, and expensive, meaning that it did not offer the developer or contractor promoting the project any certainty. This also prevented the land owners from obtaining sufficient certainty as to the viability of the project, its eventual materialization, and their compensatin to be received from the developer/contractor.

Changes Brought About by the Law of Arrangements Regarding Evacuation-Construction Projects

Given the situation described above, a decision was made to introduce, as part of the Law of Arrangements, a new arrangement regarding the rate of land betterment levy to be paid in evacuation-construction projects, as well as the time at which developers would know the final land betterment levy rate to be paid to the municipality on each project.

Specifically, the Law of Arrangements has established a mechanism whereby the default land betterment levy payable in an evacuation-construction project would be 25% of the betterment value. However, each municipality may set its own land betterment levy rate applied to projects within its jurisdiction, either uniformly across the entire city or by dividing it into specific areas. Therefore, each municipality may decide for each specific area whether it would be subjected to a land betterment levy in the rate of 50%, 25%, or 0%.

Municipalities had to advise on their decision regarding the rate of land betterment levy applied to evacuation-construction projects in their jurisdiction until 1.5.22, and if they haven’t – the default rate applies, namely 25% of the betterment value. The Law of Arrangements also provided that the decision made by the municipality would apply for a five-year period, and only at the end of said period would the municipality be allowed to change the rate of land betterment levy to be collected, if it wishes to do so.

Given the new mechanism described above, greater certainty is offered to the developer as to the rate of land betterment levy they would have to pay, and, accordingly, whether that particular project is financially viable and what compensation the developer can realistically give land owners. In addition, the new scheme in the Law of Arrangements does away with petitions made to deciding assessors, as part of the discussions with the municipality, making the process significantly cheaper and shorter for all those involved.

Below are several examples for the decisions made by some municipalities in Israel with regard to the land betterment levy rate to be collected by them – Tel Aviv – a rate of 50% is applied to the entire city, except for 18 specific areas where another rate would apply; Ashdod – the first city to announce its decision that the entire city would be subjected to the maximum rate of 50% (a similar decision was made, for example, in Holon, Bat Yam, Givataim, Ramat Gan, and others); Kiryat Ono – one of the few cities which have decided on a full land betterment levy exemption throughout the city.

Nonetheless, we point out that aside from the new mechanism set in the Law of Arrangements for the rate of land betterment levy applied to evacuation-construction projects, the recent Law of Arrangements has introduced additional noteworthy improvements to evacuation-construction projects, such as a dramatic reduction in the majority needed to take legal steps against homeowners who refuse to consent to the project, excluding homeowners who have committed illegal construction from the minimum count needed for taking legal steps against such reluctant homeowners, benefits to elderly and/or disabled homeowners, and more.

Conclusion:

Naturally, evacuation-construction projects cover a sizeable land, are highly complex, and involve great costs, and they may affect large communities. It is also important to remember that urban renewal projects in general (and evacuation-construction projects in particular) are very important and are strongly supported by the government, given the housing shortage which has been everybody’s concern in recent years.

Therefore, the legislature has set its sights on trying to put in place greater incentive for carrying out such projects, including by the recent amendments to the Planning and Building Law as part of the Law of Arrangements. Naturally, this is a welcome trend that should be supported by all those concerned – government officials, municipalities, developers, and of course us, the home owners.

[1] The Economic Efficiency Law (Legislation Amendment for Meeting Budget Targets for Budget Years 2021 and 2022), 5782-2021

[2] Planning and Construction Law, 5725-1965

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