Jerusalem, Tel Aviv at odds over who pays for future benefits of urban renewal

Israeli homeowners in areas undergoing urban renewal are closely watching recent rulings in Tel Aviv and Jerusalem that leave open the question of the municipality’s right to put a price on the value oof potential extra building rights.

A few weeks ago, Tel Aviv ruled that homeowners in areas zoned for urban renewal should pay an “improvement levy” for the extra value in the possibility of their property being extended and improved (to be paid when the home sells). This improvement would be under the law known as TAMA 38 which allows developers to add floors and units to existing buildings (for which building permits were issued before 1981) while also upgrading the structure.

This week, a Jerusalem appeals committee took the opposite view, ruling that there should be no additional fees for homeowners merely for the possibility of improvement and that the municipality could not impose the levy.

Under TAMA 38, existing homeowners in a given building agree to allow developers to add stories and apartments that they sell for a tidy profit and, in return, deliver an improved building (with a strengthened framework to make it earthquake resistent, and often also with an elevator and/or storage rooms) to existing residents. There are also direct improvements to the existing individual apartments like the addition of a reinforced secure room and balconies.

Although the system was set up to encourage developers to make existing buildings earthquake-resistant, TAMA 38 has become synonymous with adding new apartments to conservation areas with high property values. Once TAMA 38 projects are complete, tax revenues to the municipality increase because there are new apartments to pay local property taxes (arnona), and existing owners whose apartments have been extended through the scheme, pay for the added footprint.

The current uproar is over the theoretical increase in property value in areas where TAMA 38 projects are part of the development framework. The question is over whether a municipality is entitled to place a value on the possibility of future urban renewal, and to request an improvement levy that can amount to hundreds of thousands of shekels if the property changes hands.

A construction site showing a newly renovated section of an apartment building, under the TAMA 38 plan, in the northern Israeli town of Kiryat Bialik, October 24, 2018. (Meir Vaaknin/Flash90)

In other situations, when a homeowner has permission to add space to an existing home, just the value of that extra building right would attract tax as part of the overall sale even if there was no additional building.

The controversy here is that both the Jerusalem and Tel Aviv municipalities have argued that whether or not specific plans exist, an apartment is inherently more valuable if it is zoned in an area designated for urban renewal. Owners, unsurprisingly, feel that in the absence of specific plans for their homes, they are being asked unfairly to pay extra costs (or to pass them on to buyers) if they wish to sell.

In Jerusalem, the focus is on central Rehavia, as well as parts of Kiryat Shmuel, Talbyia, and Shaarei Hesed. TAMA 38 plans were originally agreed in 2015. A group of owners including the former president of the Supreme Court, Aharon Barak, challenged a decision that they should pay an improvement levy, and the court supported them, ruling that it is unreasonable to expect owners to pay the levy, just because of the potential theoretical possibility of future development. The Jerusalem Municipality was ordered by the chairman of the committee to pay the homeowners’ legal costs in bringing the case.

But in Tel Aviv, the other major center for this form of urban renewal, an equivalent appeals body said the improvement tax should be levied. The decision relates specifically to the neighborhood known as the Old North, formally called District 3, running between Ibn Gvirol Street and the sea, north of Bograshov Street and south of  the Yarkon River.

Eclectic architecture on Yehushua Ben Nun street in Tel Aviv’s Old North. (Shmuel Bar-Am)

The committee decided that the urban renewal plans for the area gave certainty to apartment owners that their property could be extended and improved, and therefore increase in value. As a result, it said, it is fair for the municipality to impose improvement levies, reflecting the extra value of the future possibility of being part of a TAMA 38 project.

TAMA 38 is particularly widespread in Jerusalem and Tel Aviv as these cities have few empty plots for new buildings, large areas with historic character and buildings that need to be conserved, along with high values per square meter. Alternatives such as demolition and rebuilding (Pinui Binui) are not always an option.

With soaring property values, TAMA 38 is attractive both to homeowners, who may be able to sell at several times the value of the original property, and to developers, who will sell the additional units at top value.

The Jerusalem decision will deprive the municipality of the extra revenues from the sales of homes in designated TAMA 38 urban renewal areas. The Tel Aviv ruling provides an extra stream of income to the municipality when homes in the Old North change hands.

The uncertainty is likely to lead to further legal action.