Right to an Apartment in Israel

What does purchasing land that grants the right to an apartment in Israel mean, what does it entail, and who is it suitable for? You will soon understand what checks are important to perform and what to watch out for.

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In recent decades, real estate prices in Israel have been constantly rising, and many find it difficult to see how they can bridge the gap and reach the capital required to purchase an apartment, whether for residential living or investment purposes.

This situation leads many to seek creative and unconventional solutions that will allow them to reach the coveted apartment. One such solution gaining momentum is purchasing a "right to an apartment." What is the meaning of purchasing land that grants the right to an apartment, what does it entail, and who is it suitable for? In this guide, we will delve into the complexity of this concept and examine the important checks to perform and what you need to watch out for.

What is a Right to an Apartment in Israel?

The term 'right to an apartment' essentially refers to purchasing land that grants building rights for an apartment as part of a building. This is land located in an area zoned for residential construction, and the building rights it grants are derived from the Town Planning Scheme (TPS) applicable to the land.

Within the relevant TPS, the permitted building rights per dunam are defined, meaning what percentage of the area can be built upon. This means that if you purchase 200 square meters of land, and the approved building rights in the TPS define that these 200 square meters of land allow the building of an apartment of 125 square meters including a safe room (Mamad), then the land purchaser has a right to a standard five-room apartment in this specific case.

When purchasing agricultural land in the process of rezoning (thawing), it is important to understand that the building rights granted by the land are determined during the process as part of the formation and approval of the town planning schemes. In other words, the rights on the land will only be approved after the land successfully passes the rezoning process (change of zoning).

The Differences: Purchasing an Apartment, Purchasing on Paper, and Purchasing Land in Rezoning

It is important to understand that there are fundamental differences between buying an existing apartment from a contractor, buying a right to an apartment on rezoned land, and buying land that is still in the process of rezoning.

• Buying an apartment from a contractor: On the one hand, you receive the final product, without waiting and with a tangible final specification. On the other hand, you pay the maximum price for the apartment at that time, and the entrepreneurial and betterment profits are minimal to non-existent.

• Purchasing a right to an apartment on rezoned land: This means buying rezoned land that grants defined and approved building rights on the plot and in the specific location where the building will be erected. In this way, you add the required construction costs to build the apartment (as part of all the apartment owners in the building) along with the required taxes, and thus you can save hundreds of thousands of shekels on the price of the apartment.

• Buying land in the rezoning process (prior to final approval): This option divides into several sub-options, such as purchasing agricultural land at earlier stages, purchasing land that has already undergone part of the process, or purchasing land in very advanced stages that has not yet received official final approval.

Purchasing land at earlier or more advanced stages is a subjective choice that depends on the investor's purchasing goals.

The earlier in the process the land is purchased, the longer the timeline for rezoning and construction usually is. However, the land's price is cheaper, and the profit potential increases significantly, sometimes by hundreds and even thousands of percent. Conversely, the more advanced the stages at which the land is purchased, the clearer the scope of building rights and the shorter the timelines, but the prices become more expensive.

Nowadays, the price differences between buying an apartment from a contractor and buying a right to an apartment or land do not amount to just tens of thousands of shekels, but hundreds of thousands and even millions of shekels. These huge differences in investment amounts and investor profits have made the purchase of land and rights to apartments a trend and one of the most prominent and profitable investment channels existing in the Israeli real estate market today.

Is it Worthwhile to Buy a Right to an Apartment in Israel?

As mentioned, purchasing a right to an apartment on rezoned land is different from purchasing an apartment from a contractor. Purchasing a right to an apartment will give the buyer the option to build an apartment with the addition of construction costs and legally required taxes. It is necessary to examine the entirety of the expected costs and compare them to the cost of buying a ready-made apartment.

Therefore, before purchasing the right, during the transaction examination, we will want to check the following things:

• Betterment Levy (Heitel Hashbacha): A tax collected by the municipality as part of its role in betterment, planning, and preparing the Town Planning Scheme (TPS) for which the existing building rights are granted.

• Purchase Tax (Mas Rechisha): A tax paid to the state for purchasing the land.

• Construction, Development, and Planning Costs: The price quote received from the execution contractors for building the project must be examined. Usually, at the same opportunity, the expected development and planning costs will also be presented to us.

In many cases, especially in high-demand areas, it will be very worthwhile to purchase the land prior to the start of construction due to the significant and substantial savings in the apartment's price.

Those who are wise enough to purchase the land in advance and before this stage—meaning, before the final approvals—will also enjoy the appreciation of the land's value, which in most cases is reflected in profits of hundreds and even thousands of percent (and this is even without the need to build the apartment).

The risk in purchasing land lies in the fact that it is a time-consuming process. Additionally, not all land actually has the potential for rezoning. Real estate investment must follow a clear method and characteristics, the first of which is the existence of a construction plan for the land. Therefore, in most cases, it is advisable to consult a professional who will know how to provide the required information and present the business plan according to the existing data.

How to Know if Land Grants a Right to an Apartment (and When to Buy)

The building rights granted by the land can be checked at the municipality with the professionals in the planning department. At this stage, where the land is already rezoned along with all the final approved permits and tables, there are "balancing and allocation tables" that define the permitted building rights on the plot and the building rights applying to the land. These tables can also be easily accessed online or through specialized companies operating in the field.

The classic cases in which it pays off to purchase a right to an apartment are when there is a significant gap between the final price of the apartment and the cost of the land plus construction costs and taxes. Such cases can be encountered in many areas across the country, especially in high-demand areas where apartment prices are high. In these areas, the highest profits can be reaped (relative to this stage) in a relatively short time with high securities.

When purchasing land in the process of rezoning, unlike purchasing an approved right to an apartment, balancing and allocation tables do not always exist yet. At this stage, it must be taken into account that this is a longer-term investment and that there are more question marks. At the same time, the price of the land is significantly lower, and when the rezoning process is known and clear, the risks are reduced while exceptionally high profits can be preserved.

Important Checks for Unrezoned Land

There are a number of checks that should be performed when purchasing unrezoned land in order to minimize the risks for buyers:

• Check that it is "yellow land": This means the land is zoned for residential use, and the possibility of changing the zoning and building is only a matter of time and bureaucracy.

• Check the rezoning progress: Ensure the land is already in the rezoning process and has successfully passed some of the stages. This will save you precious time, and additionally, the further along the land is in the process, the higher the certainty for you as buyers.

• Request a Standard 22 Appraisal Opinion: The opinion will give you vital information as buyers, such as: assessing the land's value in its current state, assessing the likelihood of rezoning, anticipated obstacles in the process, expected value appreciation, expected uses after rezoning, and more.

• Prefer privately owned land: Opt for purchasing land registered privately in the Tabu (Land Registry), as this eases the process and removes some of the hurdles along the way.

• Conduct a background check on the developers: Purchase land only from experienced developers in the field who have successfully accompanied rezoning processes in the past on lands similar to the one you are interested in purchasing, and who can present projects where residential buildings have already been built.