Court Rejects Tenant's Attempt to Block Urban Renewal Project Over "Excessive Developer Profit"
A Jerusalem apartment owner refused to sign an urban renewal agreement, claiming the developer's profit exceeded the threshold set by Standard 21.1. The court clarified that the standard establishes a minimum profitability floor to ensure project viability, not a maximum ceiling. Analysis by urban renewal expert, Advocate Dan Helpert.
In many urban renewal projects, there are recalcitrant tenants. Some have justified reasons, others less so, but one thing is certain: sometimes a single tenant can delay an entire project. An urban renewal project on Bar-Yohai Street in Jerusalem, involving 86 existing apartments in an old "train building," moved forward after the District Court rejected the objection of an apartment owner who refused to sign the agreement.
Under the agreement formulated with an absolute majority of owners, the apartment owner was entitled to compensation including an increase in her apartment area by 26 sq. m (an addition of more than 50% to its original size), an attached parking space, a 4-6 sq. m storage room, and a 10-12 sq. m balcony. Additionally, a profit-sharing mechanism was established: if the project's profitability exceeds Standard 21, about 25% of the excess profit is allocated to the tenants.
Despite these conditions, the owner refused to sign. Her central claim was that the estimated developer profit of approximately 20.89% was excessive and higher than the profit indicated in Standard 21.1 (which she claimed was 15%-17%). The refuser argued that if the developer settled for an entrepreneurial profit of 16.5%-17.5%, it would be possible to increase her new apartment by 42 sq. m instead of 26 sq. m.
The court rejected the refuser's position, determining that entrepreneurial profit exceeding the minimum does not indicate a discriminatory or uneconomical transaction for the owners.
In its decision, the judge clarified the role of Standard 21.1, which took effect in June 2022, replacing the previous standard (which specified a minimum profit of 25%-30%). The court determined that the new standard does not set a maximum profitability ceiling for developers. Parallel to this, the Chief Government Appraiser published minimum profit rates necessary to examine economic feasibility, ensuring proper incentives for project execution.
The court emphasized: "The profit rate specified by the Chief Government Appraiser is the minimum rate to ensure a proper incentive for the developer to carry out the project; it is not a maximum profit, the deviation from which indicates an unprofitable transaction for tenants, justifying the refusal of a single tenant to enter into a deal desired by the absolute majority."
The verdict further clarified that minimum entrepreneurial profit differs from market-accepted profit. The minimum threshold serves only as a safety indicator; below it, the risk increases that the project will be abandoned and remain a "useless stone." Conversely, as long as planning and market conditions allow, there is no limit on developer profits—in fact, maintaining sufficient profitability is desirable as it strengthens the project's viability and ultimately benefits the apartment owners.
The court concluded that the refuser's attempt to rely on 16.5%-17.5% profit rates to argue for excessive profit or lack of feasibility was unjustified and approved the continued promotion of the project.
"The issue of Standard 21 is not clear to everyone, and the court did well to clarify it," analyzes Advocate Dan Helpert, an expert in urban renewal. "One must understand that Standard 21 has changed. In the past, the standard determined the upper threshold for a developer's profitability. However, in June 2022, the approach was completely changed. According to the amended standard (21.1), there is no limit to the upper threshold of profitability; rather, they examine the lower threshold, which is a necessity of reality."
"The true purpose of the standard is not to intervene in commercial issues between the parties (apartment owners and the developer) but only to set a lower threshold of profitability. If a project falls below this, a red flag is raised to protect apartment owners from entering dangerous projects that might not be realized. As someone who represents hundreds of projects, I can say that we indeed do not need Standard 21 to obtain the best deal for apartment owners. We conduct an effective developer tender in every project that secures maximum compensation and the strongest guarantees for the owners."
