No free meals: If the price of an apartment in Tel Aviv sounds too low, this is probably a warehouse

It is estimated that there are at least 10,000 warehouses used in apartments in Tel Aviv. Investors are happy to buy an apartment at a lower price than the market and get a high return, but on the way there are bumps to know. bargain? Not at all sure

What looks "too good to be true" - it is (Photo: ShutterStock)

Tel Aviv Municipality Building and City Garden Tower Against Skyscrapers (Photo: ShutterStock)

Are you looking for an investment apartment, and have come across an ad for a tiny apartment, in a good location, that even looks great, and yet a lower price than usual? It's probably not because you fell for your lucky day, but for a much more prosaic reason: it's not actually an apartment, it's a warehouse. While it looks like an apartment for everything, with all the necessary facilities in a residential apartment, sometimes even at a high level, the records are a warehouse. If you were wondering why the charming apartment in the hottest area of ​​Tel Aviv is selling at 20% less than its market value, this is probably why.

The phenomenon is very common in Tel Aviv (but not only in it): quite a few of the ads that offer apartments are actually ads for renting apartments that function as apartments. "I estimate," says a realtor advertising several apartments listed as warehouses, "that there are maybe 10,000 such properties in the city."

The warehouses used as apartments are also marketed at a higher price than the same size warehouse price, but since they are not listed as apartments, an apartment price tag cannot be set for them, so the price is somewhere in the middle, between a warehouse and an apartment, but closer to an apartment price.

Here are some examples from ads about one-and-a-half-room apartments in Tel Aviv, advertised on the Yad 2 website, and all of them are actually warehouses: a 26 sqm apartment in the old north, at a cost of NIS 1.1 million - "a great investment with a 6.5% yield"; a 17 sqm apartment R. in the old north, the same amount; A room in the stage area, not specified in size, for NIS 590,000; 18 sq.m. in Dizengoff, "renovated, completely new", at a cost of NIS 890,000; a 20 sq.m. apartment in central Tel Aviv, at a cost of NIS 780,000.

There are those who advertise such properties, and even note that the property is suitable for rent as an Airbnb accommodation, and then of course the return it receives is even higher.

At first, it sounds tempting: to buy a low-priced property whose rent does not fall from that obtained from an apartment. But what seems "too good to be true" is, and there are reservations to know about.

Challenge 1: Financing and Value

"The problems start at the financing stage already. When the bank arrives to take out a mortgage to buy the property," explains Eitan Singer, CEO of real estate website Madeleine, "the bank will evaluate it as a warehouse, not a real estate. So if the price tag is NIS million, for the purpose of the mortgage For example, it would be valued at only NIS 400,000, as if it were a warehouse, because it is so registered. So that should be taken into account in terms of the equity that must be prepared. "

Oren Glazer, a partner at Anglo Saxon Tel Aviv and the manager of the commercial department, recalls that among the assets handled by the agency was a warehouse on the 1st floor, at Ness Ziona Street in Tel Aviv. "It's a 75-square-foot warehouse that has been used as an apartment for over 60 years. They tried to sell it at a price close to the price of NIS 2.4 million, and slowly they fell in price. They have already reached NIS 1.85 million, and the property has been on sale for a long time. "

Why?

"Many times an investor will come to buy it, in order to get a high return. But when he comes to a lawyer, he will realize that there is some situation here: The bank does not recognize such an asset as an apartment, so it will not give it its mortgage as if it were an apartment.

Can the buyer not demand that the price be the price of a warehouse?

"In principle there is a case, but in practice the prices of these properties are closer to apartment prices and most likely the property owner will not sell it at warehouse prices, and wait for the appropriate buyer, who will think primarily about the return."
A real estate broker from Tel Aviv points out that it is possible to legalize such a property for registration as a dwelling, but it is not always possible to do so. For example, the apartment has a minimum size of 30 square meters. As long as the property is smaller, the warehouse will never remain a warehouse.
Singer points out that it's not always worthwhile either. He said, "The process is complex, lengthy, and once the warehouse becomes an apartment, the property has a hefty surcharge, so the whole deal becomes much less worthwhile."
Challenge 2: The use is contrary to the permit

An attempt to talk about the issue with real estate brokers in Tel Aviv encountered suspicion and reservations. Those who agreed to speak asked not to be named, and also asked not to mention the properties they were advertising. You can understand why: There are also realtors who hide the fact that these are warehouses.

Is it difficult to market these assets?

"Yes, because it is illegal. For me, I sell a warehouse, and I also state it in the ad, and whoever buys, will do what he wants with it.

"Beyond that, although the property tax is paid as a property tax, the municipality's engineering department can come at any moment to argue that the use of the property is contrary to its permit, and demand to return the situation to its predecessor. Although the deal is at a lower price, if the buyer is required to repay The property to its original state, the deal already looks quite different: instead of a deal at an opportunity price, it is a high-priced deal that the buyer actually paid for the property as if it were an apartment, or approaching it, rather than as a warehouse. "

Where's the town in this whole story? On the one hand, using a warehouse as an apartment is illegal, but industry officials say the municipality is comfortable closing its eyes, and that it charges a property tax as an apartment property listed as a warehouse. "It may be appropriate for a municipality to enter certain areas of a new blood city, and around that, nightlife and living will develop," they say. "There is a very clear tendency to go to a mix of uses, to allow developers to turn warehouses and shops, into apartments. There are also warehouses and apartments that become AirBNB apartments, which may also fit in with the municipality's trend, due to a lack of hotel properties in Tel Aviv. It is hard for me to believe that the municipality does not know what is going on. In those assets. "

The Tel Aviv Municipality said in response that "Use of a residential warehouse is a criminal offense on the Planning and Building Law. We do not have data on the extent of the phenomenon and on special areas in the city where it is located. In each case we find out about such an offense, we initiate an enforcement process against the property owners which leads to registration. Criminal or administrative fine against him where the purpose is to return the use of the property to his designation as a warehouse under the building permit, which entails the demolition of all the residential properties added to the warehouse (kitchen, toilet and shower, etc.).

"The municipal property tax levies, according to the municipal property law, for the actual use of the property and in contravention of the alleged, does not constitute this fact to legalize or" shut the eye "of the offense being committed. A property owner who wishes to convert a warehouse into a residential apartment must apply for a permit to use it (a zoning change) "As far as property taxes are concerned, an application for a property tax bill must be filed and after a property inspection is considered, the classification application is considered. Only if the property is actually used as a residence will the property be classified as a residential property."
Challenge 3: Not easy to sell

Oren Glazer of Anglo Saxon notes that warehouses used as apartments usually spend more time on the shelf than regular apartments.

If so, this means that the market is aware of the problems inherent in the property, hence the lower price.
"True, but in the end what reflects the return? The risk. The higher the risk the higher the return, and probably the investors who saw the property, estimated that the risk involved in buying it was higher, so they expected the price of the property to fall.

"An apartment that is listed as a warehouse will be worth less than a normal apartment, and obviously there is a reduction factor here, and there will be no lawyer who will agree to sign a warehouse as a normal apartment. If there is a buyer who does not make the necessary checks and only looks at the return, he may be tempted, but people do Tests, and the evidence, that apartments listed as a warehouse are not priced as apartments, but are lower than that. "

Oren Alt, senior real estate consultant at Remax Ocean Tel Aviv, says that there are only a few interested in these types of assets. "Over the years I have had only three clients interested in such properties. They did not fear, and did not care about what would happen in the future. They wanted to stick a stake - maybe there would be an urban renewal building and they would benefit anyway. "
Challenge 4: Urban regeneration

Asaf Nir, director of urban renewal in Demri-Galim, says: "In almost every second or third project of TAMA 38, we encounter this.

"The problem is that the owner of a warehouse wants to get a residential apartment in exchange for the project, and at the end of the question is money. The project is a business unit that should make a profit - if you give more to one, there will be less after.

"We have a tenant in the Tel Aviv borough area in our project, which has a warehouse of about 15 square meters currently rented as a residential apartment that he bought at the time for half a million shekels. We are in the process of facing it and trying to find a solution within the framework of threatening balancing mechanisms.

"This is very common. Today, there are sophisticated investors who purchase warehouses under strategic locations, considering that at least some of them will be part of a renewal project and will" become "apartments."

"The problem is particularly evident in urban regeneration projects," says Attorney Neria Cohen, director of urban renewal at the firm of Pless-Moser-Cohen, "and therefore the issue is emerging more and more recently, due to the multiplicity of municipal renewal deals. In-depth examinations are more likely to carry out inspections, and in cases where the original permit is a warehouse or office permit, and the unit has been used as a residence, the tax authority does not grant the automatic exemption from existing homeownership tax payments and removes high appreciation tax assessments, as does the local commission, Who joins the celebration and pulls out high praise levies due to the misuse.

"These condominiums tend to oppose an urban renewal project because the developer cannot grant them an apartment, as it will not be recognized in the project's zero report. In fact, developers succumb to pressure from these property owners and allow them to receive permits that they do not deserve according to the agreement Apartment owners in the building and at the expense of the developer's compensation. "

Alt says that "I have a friend who bought such a 40-square-foot property, 80 percent of which is a warehouse. There is an urban renewal project in the building, so it is going to get an 80 sq.m. apartment. Whether the developer gives extra space or gives compensation, whoever has such an asset, does not lose. "
The ruling: Two reversed judgments within a few months

How do the tax authorities and courts address the issue of warehouses used as residential apartments? Recently, says Meir Mizrahi, a real estate tax expert, said the Tax Authority has adopted a new interpretation that even if the property is used for housing and has the necessary facilities for living (kitchen, bathroom, bathroom), if there is a planning problem regarding property classification , The seller will not benefit from a tax exemption for the apartment.

For example, in a Guy ruling, the owner converted a warehouse into a residential apartment, and did not change the situation despite the municipality's demand, which even filed a lawsuit against him. The judges found that there was a gross violation of the law by the owner and therefore deprived him of the relief from the praise tax provided in the sale of a dwelling.

In contrast, Mizrahi notes, in a recent Stein judgment, that if the planning problem is not significant, the status of the apartment for tax purposes will not be impaired and it will continue to enjoy the tax benefits. The ruling deals with the case of spouses who bought an apartment in Tel Aviv in 1992 and paid a purchase tax on them according to the relevant steps for residential apartments. The apartment contained all the necessary residential facilities, and the couple made use of the apartment for over 20 years for the family residence and then rented the apartment.

When they wanted to sell the apartment, the buyer discovered that the apartment's historic building permit from 1945 was for a warehouse and a heating room. Not only was this unknown to the spouses who owned it, but the apartment was also listed in the taboo as a residential apartment and the municipality has been collecting property taxes from the owners for years. Despite this, the tax authority sought to deny the couple the benefit of the estate tax granted for a residential apartment, but the district court rejected the position by a majority, allowing relief, as this is a case of bad faith.

Mizrahi believes that there is a place for the tax authority to adopt a lenient interpretation, and resolve these cases of warehouses that are regularly used as housing, as housing.

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