In the last two decades, the state of Israel has been fighting a shortage in available lands for construction, when one of the most significant reserves is located in cities, in neighborhoods and in suburbs. A solution to this problem can be found in the field of urban renewal, which enables the destruction of old buildings and old neighborhoods for the purpose of constructing new, larger buildings (“Pinuy Binuy”), thus enabling to improve the appearance of the city and its infrastructure and create more residences.
Alongside the prominent advantages of urban renewal, there are more than a few difficulties and obstacles for the creation of these projects, which result both from the complexity of an urban renewal project, and from the conflict of interests which exists between the three parties relating to the project: the entrepreneur, the tenants and the local authorities.
Thus, from one side, there is the entrepreneur’s need to obtain as many building rights as possible in order to create economic feasibility (sometimes while harming third parties), from the tenants’ side there is the interest for development, increasing the value of their properties and receiving protection against harmful scenarios, and from the local authorities’ side there is the interest of supervision, of controlling the urban planning and of the taxation of the projects at high values. Due to the many obstacles and difficulties in the field of urban renewal, the Government Authority for Urban Renewal was established in 2016, and is responsible for leading the field of urban renewal, to assist in financing plans, in the establishment of municipal administrations, in providing professional training for the tenants and in removing constructional and legislation barriers (hereinafter: “the Authority”).
In this short article, we shall focus on the existing offers for removing materials obstacles in urban renewal proceedings in the perspective of an opinion which was published by the Authority in March 2020 (hereinafter: “the Opinion”).
Economic Uncertainty in the Question of an Exemption from Betterment Levy
A betterment levy could determine the feasibility of a project, however currently there are two central and material problems in this matter. The first lies with a problematic provision of the law on the question of the appropriate timing for charging a sale transaction for betterment levy and the second is the uncertainty of entrepreneurs with regards to the scope of the levy.
- The uncertainty with regards to the scope of the betterment levy:
Urban renewal projects are saturated with significant uncertainty, while this certainty is vital and crucial for the existence of any urban renewal project. Article 2(a) of the Third Addition to the Planning and Construction Act 5725-1965, provides the duty to pay betterment levy when the land was bettered due to the expansion of building rights or for any other reason. Article 19(b)(2) of the Act allows the Minister of Construction and Housing and the Minister of internal affairs, with the consent of the relevant local authority, to provide a partial or full exemption from this levy.
The proceeding of the application to receive the exemption is performed only after the approval of the plan and prior to receiving the building permit. In the framework of the application, the entrepreneur is required to prove that the project meets certain criteria, including lack of viability for the project and include an assessor’s opinion to the application. The approval for the application must be received from the municipal council which performs viability examinations on its part, from the Authority for Urban Renewal and from government offices (the Ministry of Construction and Housing and the Ministry of Internal Affairs).
In this regard, it is important to note that in most projects, there is a charge of betterment levy in any case, since construction rights are utilized pursuant to the zoning plan (in addition to construction right pursuant to the NOP), and this fact as well, creates great uncertainty with regards to the sum of the levy.
The meaning of the complexity of the proceeding and the uncertainty is that the entrepreneur is required to go through an exhausting proceeding after he has spent great funds for the approval of the construction plans, while the viability of the project is doubtful. The proceeding as it operates today is cumbersome, and greatly damages the promotion of new plans for urban renewal.
In its Opinion, the Authority offers that a fixed betterment levy shall be set at a rate of 25% in the entire country, while the municipalities shall have the option to declare certain areas as areas of full or partial exemption (as a default), or to exercise discretion with regards to those areas. This way, the entrepreneurs will know prior to submitting construction plans, the viability of the desired project (in light of its location), and in as much as a certain area shall require an application proceeding to receive an exemption, it shall be done only vis-à-vis the local authority.
Our opinion is as the Opinion of the Authority, the offer for changing the legislation is welcomed; such a change will cut down on cumbersome bureaucracy by canceling a redundant chain of approving factors, in a way which is expected to save precious time for the promotion of urban renewal projects, thus moving additional projects to execution stages.
- The problem with the timing of imposing the betterment levy
In the current state of affairs, once a project for urban renewal is approved, the law sees this as performing a transaction, despite the fact it may be many years until the project will be executed (receiving the permit and the order for beginning construction). As a result, the tenants have difficulty in selling an apartment after the approval of the plan, since after the approval of the plan the sale of the property requires a betterment levy.
In the opinion of the committee, it is recommended to examine the option for deferring the event of the betterment to the next realization time (namely, upon the actual realization of the construction rights).
Our opinion on this matter is divided, whereas even though the current situation damages a tenant who wishes to sell his apartment after the approval of a plan due to betterment levy expenses, the very approval of the plan raises the value of the property and partly justifies the demand for the levy.
In light of the foregoing, it seems that the opinion of the committee is not sufficient and does not provide a solution to the current state, and it seems that the legislator must create a legislative mechanism which will provide the appropriate time for charging the levy, which shall refer both to the increase in value of the property after the approval of the plan, and to the fact that it is still possible that the plan may not be executed.
The Problem of the Insubordinate Tenant:
In order to understand the power that lies in the hands of the insubordinate tenant, the Urban Renewal Act provides that a decision to construct an urban renewal project, requires a majority of the apartment owners who own at least four fifths of all apartments in the cluster (namely 80%), and who own at least 75% of the joint property. Namely, where more than 20% refuse to execute the project, it will not be executed.
The tenants of a condominium have the option to approach the court against the insubordinate tenant and argue that his refusal is unreasonable, and in this case, the court is entitled to charge him with monetary payment due to the damage he has caused to the other tenants, or to instruct that a professional shall sign in the name of the subordinate tenant, thus ratifying the project.
It seems that the law prevents tenants from objecting to urban renewal projects, however the reality is different. There are many cases of insubordinate tenants who delay the advancement of urban renewal, while legal proceedings against those tenants could last many years.
In the framework of the Opinion, the Authority suggests enabling both the state and the entrepreneur the option to file a claim against an insubordinate tenant, as well as to amend Article 2(a) of the Act, so that there will be a mechanism which will enable filing a claim against the owner of an apartment whose refusal is unreasonable, even when there is a majority of 66% of the tenants alone. The filing of such a claim with the aforementioned majority shall be enabled only if it includes the opinion of an assessor who was appointed by the Authority.
In our opinion, in light of the many defenses which the tenants of condominiums receive and in light of the importance of urban renewal projects, the suggestion to reduce the percentage of consent in order to approve projects, and the change which enables both the state and the entrepreneur to file a claim against a subordinate tenant, shall enable the promotion of projects which provide a solution to the low residence problem as stated and enable healthy growth of life surrounding us.
Urban renewal has many advantages, mostly the need to locate a solution for the residential problem. The current legislation, which regulates the complex relationship between the players in the field of urban renewal, is still accompanied by many problems and creates obstacles for the promotion of new projects. The Opinion of the committee, where some of its suggestions have been brought in this article, is important by its very existence – raising the awareness for the many existing problems in this field, thus providing the legislator with various opportunities to solve these problems and promote the removal of the barriers. In addition, our Firm sees the publication of the opinion of the Authority positively and even tends to agree with most of its stances, with the exclusion of individual suggestions.