In a combination deal, a landowner sells part of the land to a developer, and in exchange the developer builds apartments or space for the landowner on the rest of the land. The landowner receives no money on signing, only a promise that will be fulfilled years later, while the tax is already calculated. Most of the legal work is therefore about making sure that promise is kept: security, timetables, specifications, compensation for delay, and tax that is calculated correctly from the day of signing.
You can get an initial estimate of betterment tax with the betterment tax calculator, and tax planning in real estate transactions is covered on the tax planning page. Other complex transactions are gathered on the complex real estate transactions page.
The Real Estate Taxation Law describes it as the sale of part of a right in land, where the consideration is construction on the rest of the land (section 19(4) and section 67(b) of the Real Estate Taxation (Betterment and Acquisition) Law, 5723-1963). Put simply, the landowner gives the developer the land for construction, the developer takes most of the apartments to be built and sells them, and the landowner receives some of the apartments without paying for the construction.
There are several common structures, and the structure affects both the risk and the tax:
Before signing anything, including a letter of intent or a memorandum of understanding. Developers usually arrive with a ready-made contract drafted in their favour, and what is signed at the first stage sets the framework for the entire negotiation. The risks of a memorandum are explained in the article on the memorandum before the contract.
Proper representation begins before a developer is chosen: what the land is worth, how many apartments can be built on it under its approved rights, how offers from different developers compare on the same basis, and which of them include real security.
"Three apartments" is not enough. The contract must specify which apartments: floor, orientation, area under a clear definition of how it is measured, balconies, parking spaces and storage rooms. It also needs a mechanism for changes in the plan, so that if the number of apartments in the project grows, the landowner's share grows too.
A specification attached to the contract as a binding annex, not a "sale specification to be provided later". The landowner's apartments should be built to the same standard as the apartments the developer sells, and the landowner should be able to choose finishes like any buyer.
Deadlines for applying for a building permit, obtaining it, starting construction and handing over the apartments. If the permit is not obtained on time, the landowner needs a right to cancel and to get the land back free of any obligation, charge or registered note in the developer's favour.
The landowner hands over a real asset and receives a promise for the future. The contract must therefore set out what security is given and when. Common forms of security:
When the developer receives possession of the land, and when it is given an irrevocable power of attorney. Both dates also affect when the landowner's tax is payable (see below), so they are set in the contract deliberately.
Agreed compensation for each month of delay in handing over the landowner's apartments, at least equal to the rent the landowner loses. Without such a clause, a delay of a year or two costs the developer almost nothing.
The contract must allocate payments expressly: betterment levy, development fees and levies, the developer's purchase tax, VAT, registration costs and legal fees. Any payment not allocated may end up falling on the landowner.
An undertaking by the developer to register the building as a condominium and to register the landowner's apartments in the landowner's name, by a set date. The contract should also state expressly that the developer is liable for construction defects in the landowner's apartments, as it is towards anyone who buys an apartment from it.
For betterment tax, the "sale date" is the day on which the sale was made (section 19). In the past, a seller in a combination deal could elect to defer the sale date to the end of construction, but that option applied only to transactions made between 7 November 2001 and 31 December 2006 (section 19(4); see Tax Authority instruction 13/2002). Today the tax is calculated as of the signing date, even though the apartments will be handed over only years later.
The sale value is the consideration received (section 17(c)), and in a combination deal the consideration is mainly the construction services the landowner receives. How that value is determined is a common point of dispute with the Tax Authority, so it is prepared in advance, including a valuation where needed, rather than left to the assessment.
The transaction is reported to the Tax Authority within 30 days of the sale (section 73(a)). The payment date is set by section 51: the tax is payable when one of the following occurs: possession of the land has passed to the developer, more than 40% of the price has been paid (for betterment tax), or the developer has been given an irrevocable power of attorney for registration. In a combination deal, where there is almost no cash payment, the timing of possession and of the power of attorney effectively determines when the landowner pays tax on apartments not yet built.
A seller who sells part of their rights in a qualifying residential apartment, and receives in exchange construction services in a building to be built on the same land, is entitled on request to an exemption on the part sold, subject to the exemption conditions (section 49A(b) and section 49B). This is relevant, for example, to an old private house replaced by a building. The exemption request is filed together with the report, so the conditions are checked before signing.
When owners of adjoining or contiguous plots combine them into one project, the law treats certain situations as "land consolidation", including the sale of part of a right where the consideration is construction on the rest of the land in such plots. Such a consolidation may be exempt from tax where no balancing payment was made (section 67; see Tax Authority instruction 12/2002). Whether it applies depends on the structure of the transaction, so the transaction is drafted in advance to meet the conditions.
A combination deal also has VAT aspects relating to the construction services and the land, which depend on the landowner's status (individual, business or company) and on the structure of the consideration. The developer is liable for purchase tax on the part of the land it acquired (section 9). And remember the future: the acquisition value and acquisition date of the apartments you receive will affect the tax when you sell them, so it is worth documenting now the value determined in the assessment.
A review of the rights registered in the land (land registry extract), the owners, charges and registered notes. A review of the developer: experience, previous projects, financial strength, and claims or proceedings against it.
Comparing offers on a uniform basis, drafting the contract and annexes (specification, plan, security, timetable), and negotiating with the developer's lawyer.
Reviewing the tax before signing, preparing the valuation, filing the declaration with the Tax Authority, requesting an exemption where available, and handling the assessment.
Monitoring compliance with the timetables and security conditions, checking the handover, and registering the landowner's apartments in the landowner's name.
A combination deal lasts years: negotiation usually takes weeks to months, and construction itself several years. Legal representation continues throughout, until the apartments are registered.
The fee is agreed in advance in a written agreement, according to the scope of the transaction. In some transactions it is agreed that the developer will bear the landowner's legal fees, which is a matter for negotiation already at the offer stage.
The choice depends on age, the need for liquidity, the state of the land and the quality of the developer. There is no single right answer, but the decision should be made with numbers, not feelings.
The tax is calculated as of the date the contract is signed. The payment date is set by section 51 of the Real Estate Taxation Law and depends mainly on when possession passes to the developer or it is given an irrevocable power of attorney. The option to defer the sale date to the end of construction applied only to transactions from 2001 to 2006.
By the value of the consideration the landowner receives, which is mainly the construction services for the landowner's apartments. This is a common point of dispute with the Tax Authority, so the value is prepared in advance.
Where a qualifying residential apartment stands on the land, an exemption may be requested on the part sold under section 49A(b), subject to the conditions. Where adjoining plots are consolidated, an exemption under section 67 may be available. In any other case the transaction is reviewed on its own facts.
That is exactly the scenario the security in the contract is for: guarantees, bank project support and transferring the land in stages. Without such security, the landowner may be left with neither land nor apartments.
The landowner, unless agreed otherwise. In some transactions the developer agrees to bear the fee, which is a matter for negotiation already at the offer stage.
Only if the contract says so. That is why the contract should include a deadline for obtaining a permit and a right to cancel and get the land back free and clear.
In one meeting we go over the offer, the security and the tax, and decide what to ask for in the negotiation.
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