WINE, MISHEIKER & ERNSTOFF
LAW OFFICES משרד עורכי דין
The essentials of this system are based on joint purchase of land, administration of the building project through a professional project manager and contracting with experienced contractors while establishing building costs and schedules from the outset. Usually, a developer or a group organizer locates the land, plans the building with an architect and organizes many aspects that are set below, which the group will then have to ratify.
The following is a brief summary of the major elements of this system.
Purchase of the Land
Joint purchase of the land with payment from the participants’ own funds (not a mortgage on the property), such that the land is free of encumbrances. Before the actual purchase takes place, the architect selected for the project will prepare preliminary plans which will allow each participant to pre-select his apartment. This is necessary as the relative values of the apartments (depending on size, location, attachments such as gardens, parking spaces, storage rooms) will be reflected in the relative portion of the land purchased by each participant. If this is not done, the tax authorities may assess taxes on the basis of the difference between the proportion of each participant in the original land purchase and the proportion of the value of the finished apartment of such participant vis a vis the total value of the finished building.
Joint Ownership Agreement
The participants will sign a joint ownership agreement (heskem shituf) before the purchase of the land which will include:
- A procedure for selection of a steering committee of three persons out of the group, which with the project manager, architect, and attorneys will direct the project.
- A procedure for selection of the architect
- A procedure for selection the project manager and contractor
- A procedure for selection of the financing bank
- Principles for managing the relationship among the ultimate owners, including for example managing the building once completed to be registered as the rules (takanon) of the building
The selection of the architect must be done very early in the project. In consultation with the steering committee, he will develop the program for the project and the initial preliminary plans as stated above. A written contract setting out the rights and obligations of the parties will be signed between the participants, by their representatives, and the architect, which will include the process from preparation of the application for zoning changes, through the building permit stage, construction and final occupancy.
Of utmost importance is a connection with a financing bank which will provide to the participants construction financing for the project and will obtain a mortgage on the property. The basic principle is that each participant must show at the outset his ability to pay for the land and construction. This can be done either by each participant putting into the project account his portion of such amounts or pre-qualifying with the financing bank for a loan to cover such amounts so that the funds are guaranteed to be available as needed. Bank usually finance up to 50% of the projected costs of the project and the other 50% are the participant’s own funds.
This interim construction financing can then be converted into a long term mortgage loan at the completion of the construction and registration of the condominium (bayit meshutaf).
The key element is that all the participants are guaranteed sufficient financing for the project and will not be subject to a particular participant’s defaulting on his payments.
The attorneys with whom the participants contract for services are also key to the success of the project. They act in a trust capacity for the participants throughout the project, deal with the payments required, register the land in the names of the participants, deal with the contracts with project manager, architect, contractors, etc., deal with the financing bank, deal with the legal issues involved in the change of zoning, handle the legal problems that develop in the course of the project, and ultimate registration of the bayit meshutaf. The fee paid to the attorneys for the project does not include appearing in court if there is any legal dispute arising in the process.
Each participant will have to sign a power of attorney in favor of the attorneys allowing them to sign legal documents on behalf of the participant. This power of attorney must be signed (1) before the attorneys while the participant is in Israel, or (2) at the nearest Israeli Consulate abroad, or (3) in countries which are parties to the Hague Convention, before a notary with Apostille attached.
If the participants are foreign residents, it is important they each has a representative in Israel to deal with those aspects of the project relating specifically to the non-common portion of the project, including selection of finishes and handle the different financial transactions for the participant, such as the construction of the apartment interior, payments to the different vendors for selections etc.
A professional project manager or company is required to assist the participants from the planning process up to the delivery of completed apartments to the owners. The project manager works with the architect in developing the plan for the project, cost analysis, the tender and bid process, selection of contractors and suppliers, zoning plan changes, dealing with the planning and other governmental and municipal authorities, construction supervision, approval of bills from contractors and suppliers, bookkeeping for the project, allocation of costs among the participants, coordination among contractors and suppliers, completion of the project as planned and within budget, and supervision of repairs during the warranty periods.
The building contractor is selected in a formal tender and bid process supervised by the project manager, and in which the architect and steering committee participate. There are different methods of putting forth a tender, including request for an overall bid, use of bill of quantities, use of general contractor while reserving the right to use subcontractors for specified areas and others. The contractor will provide guarantees of performance backed by financial guarantees, and payment is made by certification by the project manager of completion of stages of construction.
Acquisition Tax which is a graduate tax averaging 4%-7% of the apartment price, depending on several factors. Acquisition Tax is on the purchase of projected value of the finished apartment.
Very truly yours,
WINE, MISHEIKER & ERNSTOFF
Barry D. Ernstoff, Adv.