Combination transactions: how owners and developers share value

When it comes to real estate transactions, a combination deal involves transferring partial rights to a contractor or developer in exchange for a fixed, pre-determined number of units instead of a cash payment. This allows the landowner to enjoy the advantages of construction without entering into the high costs of building, and also avoids the betterment-tax (mas shevach) payments involved in selling the entire plot. The developer benefits from the arrangement in that they will have to pay only part of the construction cost and a reduced purchase tax on the portion of the plot transferred. Cooperation between the landowner and the developer is the key to maximising the benefit for all the parties involved. That said, it should be noted that combination deals involve both potential profits and risks that must be assessed carefully.

What are the different types of combination deal?

• When it comes to combination deals, the percentage deal is a common type. This arrangement involves the landowner and the developer setting a pre-agreed percentage for the landowner’s share of the housing units that will be built. The exact percentage rate is determined by the value of the land; the more valuable the area, the higher the percentage. However, it is worth noting that the returns from percentage deals are not certain, due to the influence of many factors on the value of the built units.
• In the field of real estate, the net deal refers to a transaction in which both the landowner and the developer reach an agreement on the sum of money the landowner will receive in exchange for transferring the land. In this type of transaction, the developer takes upon themselves full financial responsibility for all the payments involved. Choosing a net deal grants a sense of security to the landowner, since the agreed sum is received directly, without any need to worry about tax payments or about the uncertain value of the units built on the land.

What advantages can be gained from a combination deal?

• By choosing a combination deal, landowners can expect to receive a higher return than if they had sold their land without carrying out such a deal. This is a particularly beneficial option for those seeking to maximise their profits as landowners.
• As a developer, the plot-purchase transaction is a cost that can be avoided with this method. This is a considerable advantage, since it removes the developer’s need to secure funds for the full purchase price of the land. Instead, payment is made through the provision of construction services, which is a manageable option.
• When it comes to transactions involving land, taxes can be a major concern for both parties involved. However, there is potential for significant savings on tax payments. The landowner needs to pay betterment tax only on the portion of the land sold to the developer, and is not liable for purchase tax on any of the built units received in the deal. Meanwhile, the developer is responsible for paying purchase tax on the portion of the land received in the deal.

What are the risks that exist in a combination deal?

• When carrying out a combination deal, it is important to be aware of the potential risks that may arise. These risks may include legal complications, financial implications and negative effects on business relationships. It is essential to thoroughly research and analyse every aspect of the transaction in order to minimise potential risks and ensure a successful outcome.
• Undoubtedly, a combination deal carries risks for both parties involved, primarily because of the unpredictability inherent in the transaction. First, since the transaction is a long-term process, the landowner is expected to receive compensation for their land only after several years. As for the developer, their main risk lies in the valuation of the land and in their ability to obtain the expected building permit. A mistaken valuation could lead to the developer being unable to realise the estimated profits, and could even result in the loss of the deal. For example, if the percentage pre-agreed between the developer and the landowner is too high, the developer may be left with a few units of limited value. Furthermore, the creation of a partnership between the two parties is itself a risk, since it may lead to disputes and complications that could weigh heavily on each side.

What is a combination deal in a purchase group?

The term “combined transaction” refers to the process by which a purchase group brings multiple buyers together under a single transaction, usually in order to simplify the purchasing process and gain cost savings. This practice is generally used when there are multiple buyers in the same project.

Often, purchase-group projects involve a combination deal. Here, the landowner and the incorporated members of the purchase group sign a construction agreement. This agreement allows the group to make use of the standards and services of the developer or the contractor during the construction process. In the course of this transaction, the landowner sells part of their rights in the land to the members of the group. The parties also agree that each of the group’s members will receive an apartment of their own upon completion of the construction process.