What to know before signing an evacuation and reconstruction transaction

What is evacuation and reconstruction?

Evacuation and reconstruction is the name given to urban-renewal processes in which new buildings replace ageing buildings that have outlived their usefulness. Residents of the building scheduled for demolition move into alternative accommodation until the new building is completed.

The programme aims to create strengthened residential buildings that meet strict, demanding and up-to-date construction standards, and to add housing units to accommodate population growth while preserving Israel’s open spaces. The state’s authority to declare an evacuation and reconstruction project is established in the “Evacuation and Reconstruction of Rehabilitation Areas Law, 5766–2006”.

Carrying out an evacuation and reconstruction project requires the consent of all rights holders in the building. What should you know before signing such a transaction? The following article provides the answers.

Under what conditions is evacuation and reconstruction possible?

An evacuation and reconstruction process is possible under the following conditions:

• The site has been officially designated by the State of Israel as a “rehabilitation area” intended for evacuation and reconstruction.
• The proposed site includes at least approximately 24 existing apartments.
• All rights holders must give their consent in writing.
• A decision to proceed, adopted by a special majority of approximately 66% of apartment owners in the building, enables the majority to sue those who refuse or ask the court to compel implementation where the refusal is unjustified and comes from a resident making extortionate demands without legally recognised grounds. A 60% majority decision permits submission of plans to the planning authorities.
• The consideration provided to residents must be uniform and equitable, based on existing rights.

What does the law say about compensation for residents?

Under the “Evacuation (Compensation) Law” of 2006, evacuated residents are compensated by being moved into another residential building until construction is complete. At the end of the process, they will receive an apartment in the new building or financial compensation.

Why sign an evacuation and reconstruction transaction?

The advantages are that residents receive a new apartment in an entirely new building, usually larger than their existing apartment, and worth considerably more than their former home. The new apartments will include a protected room, will generally be larger than the old apartments, and will have a storage room and parking space.

Remember that this is a transaction in which apartment owners sell development rights to a developer in exchange for construction services to build the project. The consideration residents receive is therefore influenced by land value and the extent of the rights approved by the planning authorities. The higher the land value and the greater the rights, the greater the consideration to residents, and vice versa.

The surroundings will also be developed, including infrastructure renewal and the creation of green public spaces, shopping centres, public-transport hubs, roads, educational institutions and more. Conversely, the project adds housing units, increases density and places a burden on existing infrastructure unless it is upgraded accordingly.

In addition, residents in evacuation and reconstruction projects are not required to pay land appreciation tax, purchase tax or betterment levy up to a certain apartment size.

It is important to remember that one should not always rush to sign an evacuation and reconstruction agreement. It is a particularly complex and risky transaction that may take many years and may never be implemented. Various parties participate in the process, including local authorities that do not necessarily support the project. The consideration offered is therefore important when assessing the risk and inconvenience arising from increased density.

What should you check before signing an evacuation and reconstruction agreement?

Here is everything to do before signing an evacuation and reconstruction transaction:

• First, apartment owners should organise and choose a representative body from among themselves.
• Second, they should select and engage their own lawyer specialising in property and planning and building law before selecting a developer, or choose one who was not recommended by and/or has no working relationship with the developer. The lawyer’s fee should preferably be agreed without the developer’s involvement, although in practice the developer will pay it as reimbursement to residents, under the agreement between residents and their lawyer.
• It is advisable to ascertain the municipality’s position on the project in advance, while recognising that owners’ interests do not always coincide with the municipality’s. Residents’ counsel should therefore also understand planning and building matters, or work alongside a specialist adviser in that field.
• A pre-agreement document may be signed solely to enable the developer to assess the project’s feasibility, while recording residents’ agreement in principle, subject to the promised consideration and a limited timetable of 6 to 12 months. Ensure that it does not constitute a binding agreement to implement the project or impose restrictions on residents beyond authorisation to assess feasibility and an undertaking not to negotiate simultaneously with another developer. It is preferable to sign only with a developer who will carry out the project, or with a professional project-management body acting for residents to organise a tender among developers or contractors, rather than with a signature collector, even though the law permits this.
• It is important to conduct a thorough background check on the developer before selection, including financial, legal and professional history. Obtain recommendations from previous residents. Ensure construction will be carried out by a qualified contractor entered in the Contractors Register and holding the appropriate classification.
• An opinion must be obtained from an appraiser on the statutory list to assess the consideration and economic viability under the binding appraisal standard, Standard 21. Other professionals, including engineers and architects, must also be consulted.
• Before signing, ensure that the transaction agreement contains all relevant details, including timetables for submitting and approving plans, obtaining a building permit, construction and apartment delivery. It should provide for consideration that varies according to the rights approved; security and guarantees; insurance; cancellation conditions; apartment locations; a mechanism for selecting new apartments; limits on building committee charges and management fees; rent for alternative accommodation; specifications for apartments, the building and public areas; funding for professional supervision on behalf of residents at every stage, including an architect’s assessment of design quality both in the statutory plan and building permit, and engineering oversight by a specialist engineer and construction supervisor acting for residents; special arrangements for older residents; a maintenance fund; a mechanism for resolving disputes between residents and the developer and among residents themselves; and compensation for late delivery or breach of other obligations.