Skip to content
A combination transaction is a real estate deal signed between a developer and one or several landowners. Under the transaction, the landowners sell their land or part thereof and in return, the developer grants them a certain percentage of the rights in the housing units to be constructed on the land. The percentage of the combination to the landowners is subject to negotiation between the parties before signing the deal.
What is a combination transaction?
Every combination transaction is different and there is no standard law relating to how to conduct the deal, which is actually determined by consensus, judgments and market forces. The percentage of the combination to the landowner is also subject to negotiation between the parties before signing the deal. Therefore, the way in which the transaction is represented by the appropriate professionals who specialize in this field is of utmost importance.
Taxation is part of the customary liabilities in a combination transaction. Since combination transactions are considered land transactions, they are subject to appreciation and purchase tax in accordance with the law. The landowners, who in effect sell part of their land rights to the developer, are subject to appreciation tax, which is calculated according to the proportionate value of the rights sold. The developer, who purchases part of the land rights, must pay purchase tax on that part. Together with these taxes, the developer is also required to pay all construction and execution expenses, including the costs of the different permits, fees, planning, execution and marketing of the project. In some transactions, the landowners also pay marketing costs and legal fees.
Clear advantages of combination transactions
There are several advantages to a combination transaction for both the landowner and the developer. For the landowner, the most significant advantage is the potential profit from such a deal, which is much higher than that from an ordinary sale transaction, and includes an increase of the sale value of the property as well as the value of current yield to be generated. Additionally, in such a transaction, the landowners continue holding the land throughout the project, providing a tax benefit and the possibility of involvement in the planning and significant decision making, according to the contract.
For the developer, the clear advantage is the reduced risk undertaken due to not being required to purchase the land, and other than payment of legal expenses, not having to raise or risk a large amount of equity. Also, the taxes imposed in this type of transaction are distinct and lower than those in ordinary land deals, because the consideration is only a proportionate share of the land. In some cases, pre-planning will even lead to additional tax offsets and reductions. The fact that throughout execution of the project, the developer does not own the land rights does not prevent them from applying for bank funding after closure of the contract and registration of a caveat.
Possible risks for the landowners and developer
Together with the benefits, a combination transaction also poses several risks to both parties. The landowners risk entering into a partnership with a developer whom they do not know and whose performance capacity and financial stability in the face of changing market conditions they are unsure of. They are also at risk of the developer disappearing before completing the contract – from which they can benefit only after completion of the project in the future.
The combination percentages in the contract, which are based on the value of the land, are critical to the developer. In this regard, the developer may incur losses due to incorrect assessment of the land value, and might be required to absorb losses if, after signing the contract, the building permit allows for a smaller number of units. Although the developer is the actual project manager, the mere fact that the landowners are involved in some of the decision making could lead to delays – after all, they have proprietary and emotional ties to the project. Finally, even if operating as the contractor, the developer is directly responsible and subject to the Sale Law, and is therefore exposed to lawsuits for seven years from the handover date.
Duties of a professional real estate agent in a profitable and safe combination transaction
To enjoy the benefits of a combination transaction, or to avoid or deal with the risks, it is advisable for both parties to use the services of a professional real estate agent who specializes in combination transactions and has significant experience in the field. As opposed to the developer’s representative or the attorney guiding the transaction from the legal aspect, the professional real estate agent works only to the benefit of the landowners at no cost to them – this is paid by the developer only. The real estate agent must choose the developers presented to the landowners carefully and ensure that they are strong, with substantial knowledge and experience in the industry, financial strength and no financial debts. The landowners will select the most suitable developer.
The developer also benefits from the services of a professional real estate agent who is well acquainted with the quality of the property and familiar with the applicable legal rights and restrictions. The developer can trust that a good and reliable real estate agent will offer only profitable properties for the transaction. When issues and disputes arise on the part of the landowners, the real estate agent, who is familiar with each personally, assists the developer in finding the best solutions.
As the party representing complex transactions of this kind, the last of which was signed between the owners of an apartment building in the Old North Tel Aviv and a reliable well-established developer – I am intimately familiar with the concerns of both parties to the transaction. Thanks to my knowledge and experience in the field and my acquaintance with the top developers, I was able to introduce a professional and reliable developer to the landowners. After assisting in solving issues raised by the landowners, who had dissimilar opinions and wishes regarding the transaction, we reached joint agreements. The future profit of this deal made it highly worthwhile for both the landowners and the developer.
