Court Ruling May Increase Costs for Urban Renewal Projects

A recent ruling by the Tel Aviv District Court concerning "Pinui-Binui" (evacuation-construction) urban renewal projects could significantly impact their economic viability by potentially increasing the "betterment levy" (Hitl Hashbacha). This levy is calculated based on the increase in property value resulting from urban planning approvals.

The "Pinui-Binui" model relies on a delicate financial balance, factoring in developer profits from selling new apartments, construction and financing costs, local authority payments, and compensation to existing homeowners. A June 2025 ruling in the case of Noa Lev may alter a key variable in this calculation: the betterment levy. Typically, this levy is 25% of the increased property value, but can be 50% or waived depending on local arrangements.

The court determined that when comparable sales data is unavailable or when a building permit is issued for the entire project, a "discount factor" (used to account for the time lag between planning approval and project completion) should only be applied to the *increase* in value created by the new plan, not the entire property value. The court's logic is that the pre-existing rights in the property are already available and should not be discounted due to future realization. However, this method could lead to a higher betterment levy compared to previous calculations.

While the original case involved the sale of a single apartment, the ruling's implications extend to entire projects at the building permit stage, placing the financial burden primarily on developers. The Contractors Association's request for leave to appeal was dismissed as they lacked standing. The Supreme Court has not ruled on the calculation method's validity, leaving the door open for developers involved in future cases to challenge it.

This issue extends beyond a dispute between developers and local authorities. Developers often agree to cover the betterment levy on behalf of homeowners. An increase in this levy after agreements are finalized and planning is advanced can destabilize a project's financial model. For new projects, this could mean reduced compensation for homeowners, stricter conditions, or longer completion times. Existing projects might require redesigns or renegotiations. Projects with marginal profitability could be halted or abandoned.

While the levy funds public needs arising from increased population density, a substantial change after agreements are signed creates uncertainty. Delays in these projects leave residents in older, potentially unsafe buildings for longer periods. Clear, predictable rules are essential for urban renewal, allowing developers and homeowners to make long-term commitments with confidence.