Court Ruling Reverses Tax Exemption for Shelters in Urban Renewal Projects

A new ruling by the Central District Court has altered the calculation of betterment levies (Hitl Hashbacha) in urban renewal projects, specifically concerning the tax exemption for protected spaces (Mamadim). Previously, Mamadim were generally considered exempt from these levies, as the state encouraged their construction. However, the court clarified that this exemption depends on how development rights are realized.

In a case originating from Rishon LeZion, property owners engaged in a "combination deal" (Iskat Kombinatzia) for a Tama 38/2 project. In such deals, landowners transfer some rights to a developer in exchange for apartments or spaces in the new building. The project involved adding 70 new apartments, reinforcing the existing building, expanding current units, and constructing Mamadim. The local planning committee's appraiser initially assessed a betterment levy of approximately NIS 2.2 million for the project.

The landowners appealed to the Appeals Committee, which sided with them, extending the exemption to Mamad areas related to rights transferred to the developer. This decision aligned with a trend in the Appeals Committees during the summer, which suggested that even developer apartments in combination deals could benefit from the Mamad exemption. This interpretation reduced the taxable base for betterment levies, making some deals more financially viable.

However, the District Court, presided over by Judge Moti Furer, overturned this decision. The court distinguished between the actual construction of a Mamad and the sale of building rights to a developer. It ruled that Mamad building rights possess economic value, and their transfer in a combination deal constitutes a sale. The legal exemption, the court stated, is intended for the construction of protected spaces under a building permit, not for the transfer of rights to a developer, which can incur a betterment levy. Therefore, the mere presence of Mamadim in the final building does not guarantee exemption for all associated rights.

This ruling reinforces the position of local authorities, potentially allowing them to collect broader levies on such deals. For developers and landowners, a Mamad, once seemingly an exempt component, now requires careful pricing within the transaction. The decision currently applies to specific transaction structures, and property owners building their own Mamad under a permit continue to benefit from the existing exemption. The case may proceed to the Supreme Court, leaving the final outcome uncertain.