The state earns billions from land tenders and puts developers in a tailspin (Photo: ShutterStock)
Fluctuations in the value of land expose landowners and developers to high betterment levies;
Thus, for example, the land tenders marketed by the Israel Land Authority in Sde Dov brought billions of shekels into the state coffers, but the heavy financing costs and a high interest rate environment sent some of the developers in the complex into a tailspin and realized assets, with the aim of reaching a positive cash flow that would enable them to repay the loans they took to purchase the land in Sde Dov.
Another area affected by the rapid increase in land values is combination transactions, which take a long time compared to standard sales transactions. In these cases, the landowners signed attractive deals, but did not imagine that after a few years (sometimes even a year or two) the value of the land would increase by tens of percent, and with it the betterment levies demanded by the local authority.
Why do fluctuations in land values make combination transactions difficult and expose developers to particularly high betterment levies? We checked with Adv. Yael Nathan, partner in the Real Estate, Infrastructure and Project Finance Department at Firon Law Office.
What is the danger of a combination deal?
A combination transaction is a partial sale transaction, in which the landowner sells part of the land in his possession to the contractor, where, instead of receiving cash consideration for the part sold, the contractor builds units (residential/commercial/offices) for the landowner on the remaining part of the land in his possession.
Usually, in terms of the consideration that the landowner receives, a combination transaction will be preferable to a landowner over the sale of the land for cash, since in a combination transaction the landowner receives a real estate asset whose value may increase over the years and which can yield a return in the future.
At the same time, a combination deal is a long-term deal. In a significant number of cases, the transaction includes a process of approving a plan (for changing the designation / increasing building rights) and after approval of the plan, there is a process of issuing a building permit, which also takes several years.
In fact, quite a few years, and sometimes more than 5 years, will pass from the date of signing the agreement until a building permit is issued and the units are divided between the landowner and the contractor.
So what, then, is the exposure of the parties to such a transaction?
One built-in exposure is in determining combination rates, and that is exposure of both the landowner and the contractor. Changes in the value of land affect the combination rates in such a way that as the value of the land increases, the ratio of the combination in favor of the landowner should increase, and vice versa.
In order to overcome this exposure and in fact protect the consideration stipulated in the agreement, it is customary to establish in the agreement a mechanism according to which the combination rates will be determined or adjusted only close to the issuance of a building permit for the land, or to set a mechanism that will create a correlation between the consideration received by the landowner and the change in the value of the land.
This way will ensure that if there is a dramatic change in the value of the land, in the period of time between the date of signing the agreement and the date of issuance of a building permit and the division of units between the contractor and the landowner, this change will be reflected in the consideration that the landowner will receive.
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Increase in the value of land – leads to a dramatic increase in the betterment levy
In the increase in the value of the land lies another exposure, this time from the landowner alone, which is often not considered. This exposure lies in the dramatic increase in the amount of the betterment levy that the landowner is required to pay, an increase that occurred following the sharp increase in the value of the land.
A betterment levy is a payment for the betterment of land, in respect of a plan, at a very high rate of 50% of the improvement as of the date of approval of the plan. According to the Planning and Building Law, the betterment levy is collected by the local authority when the betterment is realized: when the land is sold or when a building permit is issued for the land.
In a standard combination transaction, part of the levy will be paid after the date of signing the agreement and part of it will be paid when the building permit is issued for the land. The landowner bears the betterment levy applicable to the entire land.
Attorney Yael Nathan (Photo: PR)
Usually, in combination transactions, the contractor is required to promote a plan that increases building rights or changes zoning, and in fact, the combination agreement is conditional on approval of such a plan.
The time period for approval of a plan can and will be several years. As we noted, during this period the value of the land can jump and in most cases this is the case and if the parties did not take into account the increase in the betterment levy, which is a direct result of the increase in the value of the land, the landowner is harmed.
Therefore, it is important to hedge the exposure of the betterment levy applicable to the landowner and to reach an agreement with the contractor regarding the risk of an increase in the amount of the betterment levy beyond the amount taken into account by the landowner in determining the consideration.
Here it is important to emphasize another point - from the date of signing the agreement until the actual payment of the betterment levy, the amount of the betterment levy accumulates linkage differences and interest.
Therefore, if there is a plan in the process of approval and the landowner is in negotiations to sign the agreement, it is important that he sign the agreement before the plan is approved, so that there will be no betterment levy charge at the time of signing the agreement, but only at the time of issuance of the building permit.
Usually, tax payments in a combination transaction are paid out of a loan that the contractor makes available through the lending bank to the landowner. This loan is a candidate for issuance of a building permit, when the project's bank accompaniment is closed.
If the parties sign the transaction after approval of the plan, they usually postpone the payment of the betterment levy, but interest accrues on this payment from the date of approval of the plan until the actual payment date, which is a period of several good years.
If the parties sign the agreement prior to approval of the plan, then at the time the building permit is issued, the landowner will pay the betterment levy plus linkage differences only. In this way, the landowner saves the interest payments for the period from the date of realization until the actual betterment levy is paid.
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