Global Compendium of Land Value Capture Policies

Israel

Land value capture in Israel

Land value capture is used systematically in Israel (Table 2.29). Land value capture instruments often recover a large share of the increase in land values, and the revenues they raise are sometimes a major part of local budgets. Due to high urban density and demand, urban development and redevelopment may be highly profitable even after land value capture charges.

Table 2.29. Israel: Main instruments

Instrument (OECD-Lincoln taxonomy)	Local name	National legal provisions	Implementation	Use
Developer obligations	היטל השבחה (Heytel Hashbakha – ‘betterment levy’)	Town Planning Ordinance/1936; and Planning and Building Law/1965	Local governments	Always
	מס השבחה מטרון (Metro Mas Hashbakha – ‘metro betterment tax’)	Metro Law/2022	National government	Not yet used
Infrastructure levy	היטלי פיתוח (Heytelei Pituach)	Local Governments Ordinance/1949	Local governments	Always
Land readjustment	איחוד וחלוקה (Iikhud veKhaluka)	Town Planning Ordinance/1936; and Planning and Building Law/1965	Local governments and landowners	Frequent
Strategic land management	N/a	Land Ordinance (Acquisition for Public Purposes)/1943	National government (Israel Lands Authority)	Rare

Enabling framework

Israel is a unitary state with one subnational level of government: 251 local governments (OECD, 2022[3]). Land-use planning is highly centralised with strong oversight at the national level (OECD, 2017, p. 130[2]). Local officials have little discretion when issuing planning permits when these conform with local or national detailed plans. The national government level creates the legal framework for land value capture.

Developer obligations (Heytel Hashbakha and Metro Mas Hashbakha)

Developers are subject to the Heytel Hashbakha to obtain approval for new development, densification, or exceptions from urban planning regulations. The Heytel Hashbakha consists of a monetary payment to capture some of the ‘betterment’ of plots that have been granted development rights of higher value than before. The Heytel Hashbakha dates back to the 1920s, but the legislation was dysfunctional until thoroughly revised in 1981-83. It is implemented by local governments, and its revenues are sometimes a major part of local budgets.

The Heytel Hashbakha amounts to 50% of plots’ estimated value increase. It is to be paid at the earliest occurrence among the following: the granting of development rights, relaxation of existing regulations or sale of property. A building permit will not be issued until the Heytel Hashbakha is paid. To estimate the value increase of plots that are granted development rights, local governments obtain an appraisal by a legally certified real estate valuer. The appraisal is based on the site-specific market value of land, using relevant criteria as determined by the real estate valuer. If developers contest the amount, they may request a second appraisal by a nationally appointed valuer among a list of highly experienced real estate valuers. These must cease private practice and are certified to decide on appraisals contested by private parties and local governments.

Local governments can use the revenues from the Heytel Hashbakha for an open-ended list of infrastructure or development anywhere within the jurisdiction. A recent amendment also allows directing 10% of the revenues to school education. Public buildings, social services, small housing units and specific types of urban regeneration projects are fully or partially exempt from the Heytel Hashbakha. Local governments are currently arguing against the nationally imposed waiver for urban regeneration projects due to a lack of other funding sources for public services.

In addition, developers must provide up to 40% of a newly developed or redeveloped plot unless 40% of land were already provided in the past. The land provision, to be required, must be included in a statutory plan. It can be used for local public roads, limited public buildings and public space. Such improvements do not necessarily have to benefit adjacent properties directly. For example, a kindergarten may cause nuisance to developers who are required to provide land.

Although only land can be required from developers – not in-kind infrastructure –, land is very valuable in Israel’s high urban density and demand context. Even after the land provision and Heytel Hashbakha, urban development is highly profitable for developers. On the other hand, local governments rarely cover their full funding needs even with these instruments.

The 2022 Metro Law introduced a new type of ‘developer obligation’, the Metro Mas Hashbakha, to finance the first underground metro lines in Israel’s highly built-up and congested central district. The Metro Mas Hashbakha will apply to landowners or developers located in the lines’ proximity, in predesignated zones expected to benefit from higher land values linked to the higher development rights from amended plans and metro infrastructure improvements. The usual Heytel Hashbakha in these zones will be 40% and local governments will continue to levy it. Newly designated national government authorities will appraise and levy the balance of approximately 10% and the revenues will go to the metro financing fund.

In the past, some local governments allowed and negotiated the provision of in-kind infrastructure by developers, fully or partly instead of the Heytel Hashbakha or in addition to it. This was useful for earlier construction of the infrastructure new development required because the Heytel Hashbakha comes late in the building permit process. However, the Supreme Court ruled it illegal in 2011. The 2022 Metro Law revives and explicitly allows this practice, but only related to metro-area works.

Infrastructure levy (Heytelei Pituach)

Landowners pay several types of levies for infrastructure built adjacent to their land by local governments, for example public roads, public utilities and green space (only in limited cases, where an area clearly lacks green spaces). The levies are set in local by-laws, which were broadly authorised in 1949 and are frequently amended. Local governments are in charge of implementation and receive the revenues. They always use the levies when they have the right to do so. However, the levies and thus the revenues are low. The burden on landowners is minimal, amounting to a few percents of property value. The precise amounts vary somewhat from place to place.

The levies are estimated using a fixed formula for each type of public work, based on their estimated cost. The formula takes into account the location and size of abutting or directly benefiting properties. The national government sets a range within which local governments have discretion to set the levies and charge landowners. If the levies fall short of the public investment needed by local governments, for instance because the national government sets a ceiling, the national government sometimes provides the missing funds – especially in ‘poorer’ municipalities.

An earlier version of the instrument was linked to the land value increase public works generate rather than their cost. However, it proved difficult to administer, and was replaced by the current levies, which are unrelated to a proof of added value to land plots.

Land readjustment

Land readjustment is used for new development, redevelopment and to unlock fragmented land ownership where private plots are co-owned by many family members or scattered among national land. It dates back to 1955, and the 1965 Planning and Building Law retained the relevant clauses. Local governments implement land readjustment, and use it frequently. Land readjustment areas are not treated as special development areas with a separate institutional structure. Rather, land readjustment is a routine practice set in almost-regular planning processes.

Local governments and private landowners can initiate a land readjustment stage in the plan-preparation process. For a plan with land readjustment to be approved, landowners whose property falls within the readjustment area need to consent. If some or even one landowner does not consent, the plan is approved without the consent of all landowners and they are compelled to participate. In reality, agreement with all landowners is sought and received.

For major new development, landowners must typically provide 50-70% of land readjustment areas for public improvements and services such as public roads and transport, public utilities, parks, schools, etc. Nevertheless, usually the remaining land is still much more valuable than undevelopable plots. In fact, in the Israeli high urban density and demand context, the value of land significantly increases if it is released for development, despite the often large share of land allotted for public services.

Both landowners and local governments often view land readjustment as a win-win. It occurs within regular planning processes and is financed through the same instruments as other public improvements: the Heytel Hashbakha for increases in land values, and compulsory land provision and the infrastructure levy for public infrastructure built on readjusted land (see sections above). Moreover, while development without readjustment is restricted to the 40% maximum land provision rule, any amount of land needed for public services in a land readjustment project may be taken as long as readjusted plots are more valuable than original ones. Expropriation is almost never necessary. However, the process usually takes long due to back-and-forth appraisals requested by landowners and interim appeals regarding land provision requirements.

After readjustment, landowners receive a new plot with a value proportional to their original holdings. The law also denotes that the new plots should be located on or as close as possible to landowners’ original land. However, this consideration is secondary in practice as it could conflict with good planning. Landowners are most often reallocated to newly created plots within the readjustment area to make space for reconfigured roads and public services required by higher densities. The new plots’ proximity to landowners’ original land is rarely an issue because most readjustments are conducted through agreements, and landowners focus on receiving plots with appropriate value. Due to high urban densities, landowners also frequently receive apartments instead of their original ground plots.

If there are disparities in the reallocated plots’ (proportional) values among landowners, local governments use a mutual-compensation mechanism. Owners of readjusted plots that are less valuable than original plots are to receive the difference in value from owners whose readjusted plots are more valuable. The latter owners pay into a fund the local government mediates. However, this mechanism is complex to handle and delays projects. Israeli valuers have learned to find reallocation solutions that balance plots’ values and avoid the mutual payments. Moreover, the compensations trigger the Land Increment Tax, which requires recipients to pay the State 25% of the received funds. For this further reason, landowners tend to cooperate to find a reallocation solution without compensation payments.

Strategic land management

Approximately 90% of land is owned either by the state (about 73%) or by the Jewish National Fund, a quasi-state agency (about 17%). Most state-owned land was inherited from the Ottoman Empire and British Mandate. The Jewish National Fund also bought its land before the State of Israel was established. Until 1965, the state and Jewish National Fund administered their lands separately. The Jewish National Fund then passed managerial tasks to the Israel Lands Authority, a statutory government agency which acts for both owners.

Strategic land management is carried out almost entirely by the Israel Lands Authority. Local governments do not have legal powers or financial resources for land purchase and management.

Since the Israel Lands Authority already manages most land, the national government rarely buys land. Expropriation was used for large land purchases for urban development until the 1970s, when public protests brought it to a stop. Today, expropriation and land purchase are mainly used for national public services such as highways. Local governments only expropriate land for small-scale local public services. They try to avoid it and rely on ‘developer obligations’ (see section above).

Conversely, nationally-owned or managed (residential) land – occupied by approximately 60% of urban residents – is currently being privatised to the leaseholders. Underdeveloped urban land of more than 1.3 hectares, such as land with garages or low-density old industries, is not being privatised and awaits national tenders for redevelopment.

An important recent government policy promotes urban regeneration projects, often condominium housing on national land, which are carried out as if they were private property. The leaseholders agree as a condominium (with at least 67% majority) to hire a developer. They receive a brand new, often larger apartment with no extra payments, and the developer receives much larger development rights. The developer finances the demolition and reconstruction through the new apartments’ sale, and is partially exempt from taxes. Since 2017, in most new tenders for any type of urban land, the winners or homebuyers receive the land’s full ownership. In some affordable housing programmes, developers competing in the tender win if they offer the cheapest final apartment product that fulfils specific requirements the Israel Lands Authority sets. Eligible households are offered the apartments’ ownership by lottery. Such programmes have delivered thousands of affordable units throughout the country. In a new, ‘build to rent’ programme, developers are granted corporate tax discounts to build ‘affordable’ flats to be rented out for 10-15 years. Afterwards, the developer becomes the land and buildings’ full owner.

While national urban residential land will soon disappear, some urban commercial and industrial land continue to be leased, though such leases are also expected to gradually disappear. The national legislation for public land lease dates back to pre-State-of-Israel times, with further codification in the 1960s and an important change in 2010 to allow urban land’s privatisation.1

The lease length (until privatisation) mainly depends on the permitted use of leased land. For example, urban residential leases tend to be longer than commercial or industrial leases, which are often for 49 years only. After paying their lease charges, leaseholders can transfer the lease or sublease it to any third party. The annual ground rent share for leaseholds is fixed at 5% of the leased land’s value. However, since the 1980s, the Israel Lands Authority has been converting old leases with annual payments to new leases with upfront payments that are close to the full market price. This was motivated by the high costs of collecting annual payments. Some public and not-for-profit entities are eligible for reduced lease payments or full exemptions, such as community centres, schools, religious facilities or state-led affordable housing programmes.

The revenues from public land lease or sale are transferred by the Israel Lands Authority (after discounting costs) to the general state budget. When there is a tender for national land, the Israel Lands Authority estimates the infrastructure levy for a particular project (see section above), and the revenues are passed on to the local government. Leaseholders who add development over what was permitted under the original lease are also subject to the Heytel Hashbakha, compulsory land provision and land readjustment like private landowners (see sections above). The transfer of old leases triggers a charge on top of the national real estate capital gains tax. New leases only pay the national capital gains tax. Land held under long-term leaseholds may be expropriated just like private land.

References

[3] OECD (2022), “Subnational government structure and finance”, OECD Regional Statistics (database), https://doi.org/10.1787/05fb4b56-en (accessed on 13 January 2022).

[8] OECD (2021), “Subnational government structure and finance”, OECD Regional Statistics (database), https://doi.org/10.1787/05fb4b56-en (accessed on 25 November 2021).

[2] OECD (2017), Land-use Planning Systems in the OECD: Country Fact Sheets, OECD Regional Development Studies, OECD Publishing, Paris, https://doi.org/10.1787/9789264268579-en.

[1] OECD/UCLG (2019), 2019 Report of the World Observatory on Subnational Government Finance and Investment - Country Profiles, OECD/UCLG.