"Metro tax" will upend central Israel real estate market

Metro  / Photo: NTA

The state intends that owners of properties near the new mass transit system will bear much of its enormous cost.

Do you own an apartment or a shop located near one of the planned subway lines that will serve the country’s central region? You’d best keep an eye out. The Metro is only expected to commence operations sometime in the next decade, but properties located within its so-called "impact radius" are already expected to be significantly affected.

On the one hand, their construction rights may be expanded, but on the other hand, expropriations, taxes and levies are expected.

What's behind the change? The Metro project, the largest infrastructure project ever planned in Israel. It will have three lines, covering 145 kilometers, and will traverse 24 local authorities, with 109 stations planned. The project is currently budgeted at NIS 150 billion, and the state is demanding that its "beneficiaries" - i.e., owners of properties adjacent to the train lines - should bear the bulk of the cost.

To this end, the state has endorsed a "Metro tax", currently included in the Economic Arrangements Bill. The principle underlying the tax is a considerable increase in construction rights for property owners. Today, standing along most of the train lines, are residential buildings, office buildings and mixed-use buildings, mostly low-rise and very old. The state’s inclination is to approve construction plans that will be several times larger than existing ones. At present, there is no information about the scope of the rights, as no plans yet exist, but it’s safe to say that the intention is to carry out very large amounts of construction that will create avenues of high-rise towers bordering the metro lines.

The State also wants some rights to itself

That was the carrot. Now, the stick: high taxation, whose whole purpose, as mentioned, is funding the ambitious project.

This is where the questions start to arise. When planning laws change in a way that enhances building rights, property owners are charged a 50% levy on the increase in value attributable to the enhanced rights, known as the betterment levy, when they sell or develop a property. In the Metro’s case, taxes will be much, much higher: a 40% betterment levy to the local authorities, plus another 35% Metro tax payment to the state.

"The Metro Tax is being added to the existing betterment levy. The amendment to the law assumes benefits will rain down on the landowners, and therefore it adds an extra betterment levy - a Metro betterment levy," explains Adv. David Basson, partner at law firm Hartavi Bornstein Basson & Co. "For this measure to succeed, the ‘rain of benefits’ justifying this heavy tax payment must, accordingly, include a ‘flood of construction rights’, otherwise things won’t work out.

"The construction rights have got to be very large, but it’s also unclear what capital gains tax will be levied when owners want to sell their properties," says Adv. Meir Mizrahi, who specializes in tax law. "It’s clear that the owner of a small office space or small apartment can’t initiate anything, and will sell their assets to major developers. Suddenly, they’ll be liable for 75% in tax and levies, plus another 10% capital gains tax. So, I don't foresee any big bonanza for them here."

A "Globes" investigation reveals even more confusion surrounding the new law. Under the proposed law, the state wishes to receive a portion of new construction rights. Therefore, if an increase in construction rights exceeds 80,000 square meters, the state will receive up to four-sevenths of the excess, which it can later sell to private developers.

Another question that currently remains unanswered is, which assets are considered to be along the Metro route? Only those in direct proximity? The law states that, for this purpose, the Israel Planning Administration (IPA) will determine something called an "impact radius" - physically drawing boundaries to a certain distance, so that anyone within them will be included in the Metro real estate project.

The tax could halt deals

Right now, a lot of people are wondering what will happen, in the near-term, to those Metro-adjacent areas, should this section of the Economic Arrangements Bill pass. Industry insiders tell "Globes" they believe that thousands of property owners will have trouble understanding whether they will make a profit or a loss as a result.

Adv. Basson warns against blindly following those congratulating property-owners, in the belief that land nearby the metro can only increase in value.

"Such ‘betterment’ must be scrutinized carefully as, in our beloved country, they are generally subject to compulsory purchases of land, or of buildings that are then demolished, after which citizens receive compensation only after many years."

Attorney Mizrahi expects that in the near future, real estate deals along the Metro routes will be frozen, as property owners and potential buyers enter into a waiting period in an attempt to understand what the construction rights are, and what taxes will be due on them.

Another possibility is that a speculative real estate industry will develop around the metro lines - similar to the agricultural lands scenario - wherein players bet on potential building rights, their payout schedules, and what amount of profit they may hold.

Published by Globes, Israel business news - en.globes.co.il - on July 13, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Metro  / Photo: NTA
Metro / Photo: NTA
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