Projects which include apartments allocated for long term rent (including subsidized rent) are not a new phenomenon in the Israeli housing market. “Apartment for Rent” - The Government Company for Housing and Rental Ltd. is currently promoting serval tenders for the execution of such projects. In such tenders, bidders are required to propose the amount which the agree to pay in consideration for the land, after having taken into account the obligation to allocate some of the apartments for long term rent, in accordance with the terms of the tender. Once awarded the tender, the entrepreneur is required to enter into an agreement with “Apartment for Rent”, which includes inter alia, its obligation to complete the construction of the project within a defined timeframe and to rent out the apartments for long term rent for a period of 20 years.
It seems that the Bill aims to create a parallel path to the one already in place. However, a closer look at the Bill reveals some uncertainties which can have an adverse effect on the execution of long term rental projects via this new path.
First, it is unclear whether granting the entrepreneur a building addition of up to 15% is a reasonable compensation for the additional costs incurred by the entrepreneur and arising from its obligation to construct apartments for long term rent. Not only is the entrepreneur obligated to rent the apartments for an amount which is 20% below the market price, it also bears the costs of maintaining the project for a period of 20 years. These costs may include operation and maintenance costs, management costs, overhead expenses, insurance costs and long term entrepreneurial risks. At this stage, it is difficult to assess if a building addition of up to 15% can serve as a worthy compensation for the hefty construction, operation and maintenance costs, costs which might deter entrepreneurs and financiers from investing in such projects.
The economic viability of the projects could be improved if the Bill would allow entrepreneurs to obtain financing against the creation of a security interest with respect to the rent receivables. However, the Bill fails to address the status of financiers in this new path. It is well known that banks and other financial institutions expect that by entering into a financing transaction of this nature they will be entitled to registration of mortgages in their favor as collateral. So that in the event that the entrepreneur fails to meet its obligations under the financing agreements, the financiers will be entitled to realize the mortgage by selling the apartments. However, when dealing with apartments for rent, the adverse effect of realizing a mortgage is early termination of the long term rent, contrary to the Bill’s intention. It should be noted, that in contrast to the new path, in the projects promoted by “Apartment for Rent”, the status of financiers is regulated under the agreement signed between the entrepreneur and “Apartment for Rent”. Those agreements include provisions which allow the financiers (although not a party to the agreement) to appoint a substituting entity, which, in the event that the entrepreneur fails to meet its obligations under the financing agreement, will receive ownership of the project and replace the entrepreneur vis-à-vis “Apartment for Rent”, the tenants and the financiers. This mechanism allows on the one hand for the registration of the collateral necessary for obtaining project financing and on the other hand ensures that the realization of the financier’s collateral will not result in early termination of the long term rent.
An additional point which should be considered with respect to the Bill is the level of supervision over the entrepreneur. In the tenders published by “Apartment for Rent”, “Apartment for Rent” is granted a supervisory role over the entrepreneur’s obligations, particularly with respect to its obligation to ensure that the apartments designated for long term rent will indeed be used for that purpose. As security for its obligations, the entrepreneur is required to provide “Apartment for Rent” with bank guarantees for the construction phase as well as for the rent phase. In the new path proposed in the Bill, the Ministry of Construction and Housing is granted certain supervisory powers pursuant the Planning and Building Law. However, it is still unclear what would be a scope of supervision which will actually be performed to ensure that the entrepreneur fulfills its obligations regarding the long term rent and, in any event, the entrepreneur is not required to provide any collateral, such as bank guarantees, for securing its said obligations.
The Bill is a welcomed initiative which can greatly assist the promotion of affordable housing projects. However, as the Bill is still to undergo further enactment stages, one can hope that the legislator will address some of the issues listed above in order to keep true to the Bill’s intention and to reach the best possible outcome.
The author is a partner in the Project Finance Department, Levy, Meidan & Co., Attorneys at Law