Combination deal - Best lawyers

A combination transaction is a complex exchange agreement, occurring primarily in the real estate sector, where a landowner sells part of their rights to a developer or contractor and in return receives housing units or built spaces in the future project to be constructed on the land.

In simple terms, instead of receiving full monetary payment for selling the land, the landowner receives "payment in kind" – new apartments to be built by the developer. This transaction has become popular in recent years, allowing landowners to enhance their properties and enjoy significant profits without needing to invest their own capital for construction.

However, due to its complexity, a combination transaction requires deep understanding of all legal, tax, and planning aspects involved. Misunderstanding or improper conduct can lead to serious financial and legal risks. Therefore, guidance from a real estate lawyer specializing in combination transactions is essential.

Combination Transactions: A Broad and Diverse Legal Field

Combination transactions do not stand alone but constitute a meeting point of several major legal branches. Understanding these branches is critical for proper management of the transaction and ensuring the parties' rights.

Real Estate Law

A combination transaction is primarily a real estate transaction. Real estate law, based on the Land Law, 1969, regulates all aspects of ownership, rights, and actions in real estate in Israel. In such a transaction, there is a need to register the transaction at the Land Registry office (Tabu) or other bodies like the Israel Land Authority, check existing registrations, and ensure the transfer of partial ownership of the land to the developer and registration of new apartments in the landowner's name upon project completion.

• Land partnerships: Often, a combination transaction occurs on land jointly owned by multiple owners. In these cases, there is a need to arrange relations between owners in a detailed partnership agreement and ensure the combination agreement receives consent from all partners.
• Condominiums: If dealing with a transaction on land with an existing building (for example, in urban renewal), there is a need to address condominium aspects, including tenant consent and registration of the new condominium.

Contract Law

The combination agreement is a contract in every respect. It is drafted subject to the Contracts Law (General Part), 1973 and Contracts Law (Remedies for Breach of Contract), 1970. This is a complex and long-term contract containing dozens of detailed clauses designed to regulate the relationship between parties, define their rights and obligations, and establish mechanisms for handling breach situations.

• Negotiation stages: Even before signing the agreement, the negotiation stage is critical. It must be ensured that all parties act in good faith and fairness, and that principal agreements are crystallized and clear.
• Securities and guarantees: Since this is a long-term transaction with many risks, the combination agreement must include appropriate security mechanisms and guarantees. For example, a bank guarantee or insurance policy that will ensure project completion in case the developer encounters financial difficulties.

Real Estate Taxation Law

One of the most central and complex aspects in combination transactions is taxation. This involves a significant tax event, and conduct in it directly affects transaction viability. The Land Taxation Law (Appreciation and Acquisition), 1963 is the central law in this matter.

• Appreciation tax: Tax imposed on the landowner for the appreciation (profit) created from selling their share in real estate to the developer. In a combination transaction, the tax is calculated proportionally to the sold portion, and there are certain exemptions and reliefs that can save tens or even hundreds of thousands of shekels.
• Acquisition tax: Tax imposed on the developer for acquiring their share in the land.
• VAT: Unlike regular land sale, in a combination transaction the landowner is considered as providing construction services to the developer, which may obligate them to pay VAT. This aspect requires careful tax planning.
• Betterment levy: Levy imposed on the landowner by the local authority for increased land value resulting from zoning plan changes or building permit receipt.

Sub-areas in Combination Transactions

The field of combination transactions is divided into several main models, each with different advantages, disadvantages, and implications. Choosing the right model depends on transaction circumstances, land value, and landowner objectives.

1. "Classic" Combination Transaction

This is the most familiar model, where the landowner sells a proportional part of the land (for example, 60%) to the developer, and in return receives a certain percentage of apartments to be built (for example, 40%). The ownership portion remaining with the landowner is translated into apartment rights, which they receive after project completion.

2. "Full Sale" Combination Transaction

In this model, the landowner sells all their rights in the real estate to the developer. In return, the developer commits to deliver apartments or built spaces in the future project. Legally and tax-wise, this is a complex transaction that may create double tax events – both on land sale and on "acquisition" of apartments by the owners.

3. "Net" Combination Transaction

In this model, parties agree in advance on a defined "net" consideration to be paid to the landowner, while the developer takes upon themselves all tax and levy payments (appreciation tax, betterment levy, VAT, etc.). This model provides the landowner with high financial certainty, but usually the consideration they receive will be lower than in a regular transaction.

4. "Proceeds" Combination Transaction

In this model, the landowner does not receive apartments in the project, but rather a proportional share of proceeds the developer will receive from apartment sales. For example, the landowner will receive 30% of every payment the developer receives for apartment sales. This model exposes the landowner to greater risk, as the consideration they receive depends on the developer's sales success and final apartment prices.

Advantages and Disadvantages of Combination Transactions

Process Stages in Combination Transactions

To understand the depth and complexity of a combination transaction, one must examine the entire process, from initial stages to project completion, and identify weak points and possible solutions for each.

Initial Stage: Developer Identification and Feasibility Study

The first stage begins with identifying a suitable developer. It's important to check their experience, financial stability, and previous projects executed. Simultaneously, an economic and planning feasibility study should be conducted. This study includes gathering information about the land, existing building rights, the applicable zoning plan, and property enhancement potential. At this stage, involvement of a lawyer and real estate appraiser is critical.

Negotiation Stage and Agreement Drafting

After choosing the developer, the negotiation stage begins. This is a long and complex process where transaction terms are defined: combination percentage, nature of apartments to be delivered to the landowner, timeline, security mechanisms and guarantees, taxation issues, distribution of associated expenses, and more. The combination agreement is the central and most important document in the transaction, and it must be ensured that it is comprehensive, protects landowner rights, and addresses every possible scenario.

Tax Authority Reporting Stage

Upon signing the agreement, the transaction must be reported to tax authorities within 30 days, according to the Land Taxation Law. This report includes appreciation tax and betterment levy assessments. This is a critical stage requiring professional expertise, as proper tax planning can lead to significant savings. The lawyer will work for recognition of the transaction as a combination transaction for tax purposes and exhausting all possible exemptions and reliefs.

Planning and Building Permits Stage

Parallel to legal and tax procedures, the developer begins project planning with architects and planning authorities. They will submit plans to the local planning and building committee and work to obtain a building permit. This is a long and bureaucratic stage where various local authority requirements may arise, potentially delaying the project.

Construction and Supervision Stage

After obtaining the building permit, actual execution begins: demolishing existing structures (if needed), evacuating tenants, and starting construction work. At this stage, the lawyer's role is to ensure the developer meets timelines and agreement terms. Simultaneously, it's recommended for the landowner to use building supervision services on their behalf, ensuring construction quality and compliance with technical specifications.

Apartment Delivery and Tabu Registration Stage

Upon construction completion and receiving Form 4 (occupancy permit), the developer delivers new apartments to the landowner. At this stage, the lawyer will work to register the new condominium and register apartments in the landowner's name at the Land Registry office (Tabu). Only after completing registration does the landowner become the registered owner of the new apartments.

Major Risks and Coping Methods

• Financial risk (developer collapse): This is perhaps the greatest risk in the transaction. To address it, the agreement must include strong securities. The most common security is a bank guarantee, allowing the landowner to complete the project themselves if the developer fails to meet their commitments. Another security is an insurance policy covering damages resulting from developer failure.
• Tax risk (unexpected charges): Tax planning errors can lead to heavy charges in appreciation tax, betterment levy, and VAT. Addressing this risk requires guidance from a lawyer specializing in real estate taxation, who knows how to analyze the transaction, calculate expected tax liability, and take legal steps to reduce it.
• Planning risk (permit delays): The building permit process can take longer than expected and delay the entire project. To minimize risk, the agreement should include a clear compensation mechanism for delays and ensure the developer acts vigorously with authorities to obtain permits.
• Contractual risk (breach of agreement): The developer may breach the agreement in various ways – construction delays, poor quality construction, or substantial planning changes. To address this risk, the agreement should include agreed compensation clauses for breaches and dispute resolution mechanisms.

Key to Success: Choosing a Lawyer Specializing in Combination Transactions

Combination transactions, with all their aspects, do not amount to merely signing an agreement. They require close professional guidance throughout the entire process – from the negotiation stage, through tax planning, permit acquisition, to registering new apartments in Tabu. A lawyer specializing in the field, particularly in real estate law, contract law, and real estate taxation, is a vital professional who knows how to navigate you safely through the legal and bureaucratic maze, prevent costly mistakes, and ensure full realization of your rights.

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