Bullish on Israeli Real Estate

I love to see articles like this. For all the Israelis buying up commercial and residential real estate here in New York, it is good to see that investors believe that Israeli real estate is a good investment, too.
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"I’d jump into Israeli real estate with both feet"

CIBC’s Benjamin Tal: People understand the gap between how Israel looks on CNN and the real Israel.

Roy Meltzer 21 May 06 17:01

“I’d jump into Israeli real estate with both feet. I now see in it the same economic signs we saw in the US and UK a few years ago, and I think that the present situation is just the beginning of a recovery in Israel’s real estate market,” CIBC World Markets chief economist Benjamin (Benny) Tal told “Globes” in an exclusive interview.

Tal is in Israel to attend today’s CIBC conference with leading Israeli companies listed on Wall Street. His assessment is based on his perception of “economic developments that affect the real estate market. I’m talking about convenient interest rates, competition in the mortgage market, and the market’s inflexible demand. I read the exact same figures five years ago in other markets, which is why I believe that we’ll see an annual 10-15% increase in housing prices in Israel over the next five years.”

As a regular participant in international conferences, Tal says the people marketing Israel are doing good work. “I can tell you that Israel’s name now has a positive connotation as a good place to do business. People understand the gap between how Israel looks on CNN and the real Israel, so they invest here.

“In my opinion, what we’re seeing in Israel now is just the beginning of a positive economic period. The economic policies we’ve seen in recent years are driving this process forward, and I think that if these same economic policies are maintained in the coming years, we’ll see further rapid growth. The biggest risk I see at the moment to the Israeli economy is a possible slowdown in the US market, which could affect exports, as well as political factors that are hard to analyze.”

Published by Globes [online], Israel business news - www.globes.co.il - on May 21, 2006

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006

More on the 421-a Tax Abatement Program

I found this on Crain's website. The City Comptroller says the 421-a tax abatement has benefited mostly luxury housing in Manhattan. One suggestion instead of scrapping the whole program is to change the mix of affordable to market rate housing required in order to receive the tax abatement.

Good idea.

We saw a presentation from Forest City Ratner regarding the Atlantic Yards project in Brooklyn. They apparently have 50-50 ratio between market rate housing as well as middle and low income housing. The impression is that this is very progressive for such a huge development in New York City.

Perhaps the 421-a tax abatement program might be revised to require that future housing construction conform to a similar formula.
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May 23, 2006

Luxury buildings gain from tax break: report
by David Jones

A tax incentive program designed in the 1970's to spur new housing development has mainly benefited luxury buildings in Manhattan, said city Comptroller William Thompson Jr.

An analysis of the property tax savings generated under the city's Section 421-a program shows that most of the subsidies went to some of the most expensive housing in the city, according to the comptroller's report, released Tuesday.

The 421 program provides tax exemptions to developers to build new multi-family housing and requires that recipients in the Manhattan "exclusion zone" -- between 14th and 96th streets -- must help finance affordable housing.

The "exclusion zone" was created in the mid-80s in response to critics of the 421 program who said the city was giving away money to developers. In accordance with the "exclusion zone" requirements, developers have to agree to provide a substantial amount of affordable housing if they want to build within the defined area.

The comptroller said that, in fiscal 2005, Manhattan developments got 78% of all 421-a benefits, yet accounted for only 48% of the units that received the benefits. Outside of Manhattan, the pattern was reversed, with the percentage of units receiving the benefits exceeded the percentage that of total value of the exemptions.

Mr. Thompson suggested possibly extending the exclusion zone, reevaluating the affordable housing contribution required in the zone, devising other methods of determining which projects must contribute to affordable housing among other options.

A Major Change in the Works

Last month I mentioned a tax abatement program that is being reconsidered. Now I know what it is: the 421-A Tax Abatement Program. It is defined as follows (from the nyc.gov site):

The Section 421a Program is administered by the NYC Department of Housing Preservation and Development (HPD) to promote multi-family residential construction by providing a declining exemption on the new value that is created by the improvement. The 421a benefits vary depending on location in the City, whether construction is carried out with substantial government assistance, and whether requirements for affordable housing have been met.

HPD determines eligibility for this program, and Finance implements the benefits once HPD approves your application. Please refer to the HPD site for further information on eligibility and on applying to this program.

Once approved, you will receive a Certificate of Eligibility from HPD, which you can then return to Finance along with the 421a application.

The tax abatement was created in the '70s as a means of trying to spur development at a time when people and businesses were leaving New York City. The tax abatements phase out according to this schedule (from the 421-A application form):

click on the image to enlarge

Very generous indeed. Some say that this tax abatement is used more often for the construction of luxury high rises than for the more affordable (i.e. non-luxury housing as opposed to what is usually understood as affordable housing which is often at least partially subsidized by the state).

The main issue is who is allowed to used this abatement and if the purpose of the housing development is submitted to some kind of test of intent by the authorities or if anyone who wants to build a residential complex can apply for the abatement.

An article appeared about the abatement last summer in The Real Deal:

A taxing head scratcher

City's tax break provisions a boon for new developments – if they can be deciphered
By Alison Gregor

Benjamin Franklin wrote that death and taxes are the only things we can be certain of, but Ben didn't live in New York City.

Savvy city real estate brokers know that paying property taxes – and more importantly, getting a break from them – are anything but certain in this metropolis.

For real estate professionals, that's nearly as big a source of frustration as it is to homeowners, because the way property taxes are calculated can be crucial to marketing real estate.

For many, it comes down to one key number: the 421, a provision of the city tax code intended to spur new residential projects, which can significantly lower an apartment buyer's taxes for many years. It's indispensable for brokers marketing new developments. The 421a provides tax breaks for new construction, while the more limited 421g provides tax breaks for conversions in Downtown Manhattan. There's also the lesser perk of the J-51, covering rehabilitation or conversion projects outside Downtown.

But while the 421a is as well-known to most New York City property owners as the 1041 is to federal income taxpayers, it doesn't mean that navigating the tax system is simple.

"I'd just like to see something that's consistent across the board," said Shaun Osher, who recently founded Core Group Marketing after spending many years marketing new development at Prudential Douglas Elliman Real Estate. "The value of two properties may be the same, but the real estate tax numbers will be completely different. It's very confusing."

In one recent example, the New York Times reported that 650 West End Avenue on the Upper West Side, a condo building, saw an increase in valuation of 400 percent in one year – extraordinary appreciation even in New York City's turbocharged real estate market. The tax implications were similarly turbocharged, and disproportionate to other buildings in the area, according to the condominium board president, who hired a lawyer to contest the assessment.

But what irks some real estate agents more than perceived inconsistencies in valuations are complicated tax calculations, some of which favor ground-up construction over building rehabilitations, which are easier and cheaper for developers.

In the past decade, the routes to tax breaks for apartment building rehabilitations or conversion projects have shrunk, to the real estate industry's unhappiness.

"The overtaxing of conversions is a negative trend," said Steven Ganz, executive vice president of Core Group Marketing. "You could have 80 cents per square foot [of purchase price] being just your taxes."

Meanwhile, a 421a for new construction can mean a difference of thousands of dollars in monthly taxes to buyers.

When a development gets the tax break, most brokerages feature "421a" prominently in their real estate listings, and call it a valuable marketing tool.

"We encourage developers to apply for the 421a tax abatement when doing new construction," said Patricia Cole, senior vice president at Corcoran Group Marketing, the new development division of The Corcoran Group.

The savings can be large. For projects that don't have a tax abatement, common charges and taxes used to total $1 or $1.25 a square foot monthly. "But now, taxes alone come in close to those numbers," said Cole.

But not every new development can get the 421a tax break. Construction in a Manhattan exclusion zone, between 96th Street and 14th Street on the East Side and 96th to Houston Street on the West Side, does not qualify for 421a benefits unless the developer has some sort of affordable component or concession, or government assistance.

Developers converting commercial buildings to residential apartments in Downtown Manhattan can get a hefty tax break called a 421g, but for those rehabilitation or conversion projects outside of that neighborhood, there is only the J-51, a less substantial perk.

The formulae for calculating these three types of tax breaks are complex, and even city officials had to think hard to determine which tax package hands apartment buyers – and thus brokers – the best deal.

"It's hard to say, because it's all relative to the amount of money you put in," said Lisa Yee, director of tax incentives programs at the city's Department of Housing Preservation and Development.

Yee's boss, Margot Sklar, the department's associate deputy director of tax incentives programs, agreed, pointing out that location also plays an important role. But she said that, when the dust settles, purchasers of rehabilitated or converted apartments end up getting a lesser deal.

"Under J-51, for a market rate condo you wouldn't get nearly as much," she said.

But it's not all bad news for conversions. Some real estate brokers still aren't aware of an amendment to tax legislation passed by the New York State Legislature in August 2003 that enables more development projects to qualify for the 421a. A project no longer has to be 100 percent new construction to meet the criteria, as long as more than half the project consists of new construction, Yee said.

That should make marketing partial conversions much easier, Ganz said.

"Sometimes you'll have a five- or six-story building being built up 10 more stories, and before you couldn't get a 421a, which does affect your sales price," he said.

Ganz pointed out that most Manhattan buyers are informed and savvy, and if they don't know the details of a 421a, they know it's a tax break for them.

"I'd say 80 percent of buyers I deal with know the tax terminology," he said.

In a more complicated twist, the city's Department of Finance also offers a tax break called the Condominium and Co-op Tax Abatement Program. Instead of spurring development, the perk is supposed to equalize the disparity in taxes paid between certain types of homeowners (namely, those in single-family homes and those in apartments).

Any condo or co-op building can apply for the abatement at any point in time, but receiving the 421a or 421g makes them ineligible. However, in some cases, a building receiving a J-51 tax break would be eligible. That abatement will expire in 2008, but will most likely be renewed, as it has been in previous years, city officials said.

Sound confusing? It is. And brokers trying to guide their clients through the tortuous world of New York City real estate are sending up signal flares – especially when they consider that the taxes paid are paying for the bureaucracy to assess more taxes.

Most find another way to present the situation to potential buyers, focusing instead on the city's high reading scores at public schools and excellent social services, among other assets.

"Yes, we do pay high property taxes here," said Richard Ingenito, manager of the new Bellmarc Property Management Sales Group. "But people are getting something back for their taxes, and they're deductible on the federal level."

On one hand, the city loses a lot of money from the abatement. On the other hand it also seems to stand in the way of the development that needs and is bound to to happen which is the conversion of old office space in Lower Manhattan to residential space (in that the downtown area which gets a less fovorable - but still healthy - tax break). If the tax abatement is abolished, some developers will lose money as their apartments become more expensive from the added tax burden, but on the whole development of housing could be spread out more evenly to the greater benefit of the city as a whole.

The Cheapest Cement in the World

Many things in Israel are as expensive or more expensive than they are in the US. Part of the reason is because so much is imported. Apparently, cement, along with kosher meat, is an exception.

Study: Cement in Israel is cheap

27.4.06 | 13:55 By Sharon Kedmi

Israel has among the lowest cement prices in the world: about $59 per ton, according to a Cement Review study.

The journal compared cement prices around the world and found that cement is cheaper in Israel than in the U.S., Europe and in other Mediterranean countries as well.

The Nesher cement works commented that although its costs of production have climbed a great deal, mainly because of the constant increase in energy prices, it continues to absorb most of the increase.

The price of cement comprises 2.6% of the price of materials for builders, Nesher said, adding that the cost of cement is usually only about 2% of the cost of the average apartment.