Sunday, April 3, 2011
Buying castles in the sky
It is perfectly legal to market and sell apartments for which no building permit exists. In fact it's common practice in the Israeli real estate market, where supply is low and homes get bought despite being no more than a plan on paper.In many cases, selling apartments still at an imaginary stage isn't a problem. Yet there is an uncertainty factor and there is the danger that buyers won't get exactly what they've been promised. Amnon Sorek, a lawyer with Hamburger, Evron & Co., says buying on paper can mean a long wait and a lot of uncertainty.
"No building permit is precisely identical to the city master plan, and therefore, until a building permit exists, there's no certainty that the number of apartments the developer is talking about will be approved," he says. "This is especially pertinent in cases where the developer is asking for the rules to be relaxed, to build extra apartments to maximize profit on the lot. It takes about half a year to obtain a permit, on average, but in cases where the master plan doesn't have approval or the developer is seeking extras, a building permit will only be approved after the process of hearing objections. That can hold up the permit by years."
Buyers of apartments that are still on paper are well advised to make sure the contract states a deadline for obtaining a building permit, and that if it's missed, they can void the contract and get their money back, Sorek says. He tells the story of a deal his law office handled, in which a developer spent a year getting a permit to put up two buildings. When a few years later people began moving into the neighborhood, the developer wanted to build two more buildings next door and 92 objections were filed by people who'd already moved in. Getting the permits for the two new buildings took three years, Sorek says.
Obtaining the building permit is one problem. Another is that the final product may not be the same as envisioned, warns Ofra Cohen, a partner in the real estate department at the Amit, Pollak, Matalon & Co. law offices. "As long as there's no building permit, the final plan for the project isn't confirmed," she says. "The master plan defines maximal building rights. The developer can exercise these rights in part or in full, decide whether the building will have two sections or one tall tower. But the structure of the building remains unclear until the building permit is obtained, and therefore, which way the apartment will face will be uncertain until then. The developer may have promised a garden beneath the window but in the end put a parking lot there."
In June 2010, well after marketing began for the Meier on Rothschild project in Tel Aviv, designed by Richard Meier, the Tel Aviv Planning and Building Committee decided to let the Berggruen and Hagag groups build 37 stories instead of 32. That decision is highly material to buyers at the top. Somebody who bought an apartment on the 31st floor, thinking there would only be one story above, now has six neighbors on his head.
Another problem in obtaining a building permit may be that there's no master plan in place for the lot in question. Even if there is one, the contractor may try to get it changed. For instance, Capital Group organized a purchasing group to develop the site of 8 Hadoar Street in Jaffa. The group bought a plot for which the master plan allowed residential construction. All 27 apartments were sold on paper. But the group sought to exercise full building rights in a manner that required a change to the master plan for the site, and submitted a new plan to the city. That variance has held up the building permit to this day; the group is still waiting for construction to start.
Even renowned developers acting in accordance with approved master plans, not applying for any variances, may run into obstacles that hold up the building permit. For instance, buyers who bought future homes being sold by the Levinstein group a year ago, for a project in the town of Kadima-Zoran in the Sharon, were assured by the company that obtaining a building permit was a matter of weeks. The fact that one of the four buildings was already under construction buttressed the company's sense of security. But to this date no permit has been forthcoming. The local planning and building committee claims it's still looking into fire safety and other permits. The buyers received an option to cancel their contracts and get their money back, but in the year that passed, housing prices in Israel rose, so they would mostly prefer to continue waiting for the project to go up rather than look elsewhere. But meanwhile they have to keep paying rent wherever they're living.
In another case, the Boulevard Group put together by developer Ami Federman bought land in 2006 on Markolet Street in Florentin, Tel Aviv, for which there is a city plan allowing 108 apartments to be built. Federman applied for a building permit based on the city plan for the site and didn't seek any extras, to avoid delays. While waiting for the permit, he began marketing the future apartments and suddenly the city demanded the group also buy a 27-square-meter triangle of adjacent land owned by the city as well. He agreed, but the acquisition required the permission of the interior minister, who took a full year to put ink to paper. The delays have continued and all in all the group has been waiting for four years for a building permit.
Yaacov Atrakchi, owner and CEO of Aura Israel, thinks developers shouldn't market homes in places where they aren't likely to get a building permit without delays. He personally only markets when there is a master plan in force, and he hasn't sought any variances, and the planning authorities are in line. Even when he's confident a building permit will be forthcoming soon, he makes sure too commit to a timeline, Atrakchi adds. "The buyer signs an agreement with an appendix regarding the permit, which says that if there's no permit within half a year at most, he can choose to get his money back or extend the agreement by a finite term." Sorek points out that the law limits the amount of money the developer can take in advance until a building permit has been produced: 7.5% of the price of the dwelling. "The developer can take more in advance only if he provides an autonomous bank guarantee securing the buyer," Sorek advises. "When the building permit is produced, the bank guarantee is replaced with a sales law guarantee."
Until the building permit is produced, money should be held in trust, suggests Cohen, and when the permit is forthcoming the buyer should make sure its terms comply with what he was promised. If there are material differences, he should be entitled to get out of the deal, she says. Given the hassle, why buy an apartment on paper at all? Gil Shenhav, an architect with Cnaan Shenhav Architects, says price is the main draw. It's become common practice because the buyer can get a discount of 10% to 15% compared with the price he'd pay if the apartment was already standing, he says. But Sorek isn't so sure it pays. "There is a difference if construction is going to start in year or four years," he notes. "Most people who buy new apartments want to live in them and therefore want to know when they'll be able to move in." You may pay now and get a hefty discount, but then only get the apartment five years down the line - and meanwhile be stuck forking over a fortune in rent.