Key Money' Apartments: A Vanishing Market

In most cases, landlords hasten to purchase the protected tenant's share to release the property and increase its value

Several weeks ago the tenants at 15 Arnon Street in Ramat Gan were suffering from demolition work on one of the empty apartments in a building in which they have been living for 40 years. The tenants, elderly Holocaust survivors, complained to the municipality about the contracting company, Shikun Ezrahi, which demolished part of the roof and made an opening in the external wall of the building. Some tenants claimed the work had caused damage to their apartments and one even filed a complaint with the police.

The tenants are protected tenants and they say this is an attempt by the contracting company to pressure them into evacuating their apartments. According to the municipality, an inspector from the engineering department came to the site and, on the instructions of the municipal engineer, demanded the contractors seal the apartment. The company was told that in order to carry out demolitions in the future it would have to obtain the appropriate permit in advance.

According to attorney Ofer Aviram, who represents the Shikun Ezrahi company, the work on the empty apartment was carried out at the request of the neighbors in order to thwart squatters and prevent the takeover of the apartment by criminal elements. With respect to the damages the tenants claimed had been done to their apartments, the company says it agreed to repair them, even though it was a matter of old cracks and not a result of the current work.

Similar disputes between protected tenants and property owners are relatively common. The landlord is interested in getting the tenants out as quickly as possible so that s/he will be able to realize the asset's full potential. The tenants, for the most part elderly people of 80 or over, do not necessarily share this interest. These disputes are one of the reasons why carrying out transactions in the protected apartment market is not simple and real estate agents prefer to keep away from it.

Another factor in the agents' reservations about this market is the lack of clarity about charging realtor commissions for these transactions. The Protected Tenants Law gives the property owners the right to acquire the rights of the protected tenant instead of replacing him with another tenant. Thus, it often happens that after a realtor finds a new tenant for an apartment, the transaction is never actually completed because the landlord has purchased the protected tenant's rights.

There are still entrepreneurs who see these properties as having potential for appreciation. The evacuation of tenants as a result of the natural processes of aging and death leads to an immediate rise of tens of percentage points in the value of the assets, provided there is no heir who can continue to enjoy a protected tenant's rights to the property. The landlords of buildings in which there are protected tenants include not only heirs of the original owners of the buildings but also companies and financial institutions that have purchased the assets as an investment.

The entrepreneurs' chase after evacuated apartments can be explained by the fact that it is often enough to sell two apartments in a building full of protected apartments for the investment in the entire building to pay off. Some of the entrepreneurs acquired the buildings several years ago because they sensed an interest in the building itself or in the plot on which it stands.

According to Eitan Kasbian of Benny & Chirich Realty, around two protected tenants a month now contact him to ask him to sell their rights. "Once every few months a deal like that is closed, but we prefer not to deal with these apartments as it is difficult to find buyers for them. These apartments are subject to many legal restrictions that also apply to those purchasing the protected rights."

In Tel Aviv every month only several dozen such apartments are offered for sale. Benny & Chirich Realty is now offering a three-room apartment for key money on King George Street. The apartment is 80 square meters and is on the third floor. The building dates from the 1950s and the tenant's rights have been on the market for about six months. Initially the asking price for the apartment was about $80,000 and now it is only $55,000, with the tenant paying a monthly rent of around NIS 250. For the sake of comparison, the full market price of a similar apartment now comes to about $140,000.

The purchaser of the rights takes over from the protected tenant and receives the protected residency rights to the apartment, in return for payment of key money to the holder of the rights and rent payments to the asset's owner. The protected tenancy laws will apply to him/her as well: S/he will not be allowed to leave the apartment for more than six months and in order to bequeath the rights to a relative, the latter will have to live in the apartment with the purchaser for at least half a year before the purchaser dies. According to the law, when a protected asset is sold, 33 percent of the income goes to the asset owners and 66 percent is paid to the tenant moving out. In other words, the owner also benefits from every change of tenants.

However, the most convenient situation for the property owner is the death of a tenant which often enables the owner to acquire full ownership without any extra expense. That is also the reason for the foot-dragging they often engage in. Recently, there was a case where an elderly protected tenant had to move to a nursing home. The tenant's daughter contacted the owner in an effort to work out an arrangement by which the tenant would receive a reduced amount for her rights. The owners refused the daughter's offer. During the five months that they were negotiating to sell the apartment, the tenant died in the nursing home and the asset's owners received it for no expense.

The relations between tenants and landlords are complicated for both sides. Just as the landlords are liable to harass tenants who want to leave an asset for a price, there are also cases where tenants don't make things easy for property owners. The tenants may exert pressure on a landlord who wants to purchase their rights by offering a very high sum, even if it is fictitious, for the purchase of their rights by a third party.

Several committees appointed by the Israeli government attempted to present a solution to the problem, but no government has dared to thoroughly deal with the root of the problem. They apparently hope the problem will eventually solve itself due to deaths and purchases involving owners and tenants.

A legacy from the British Mandate

There are approximately 15,000 apartments in Israel with protected tenants. A protected tenant is someone with whom a rental agreement was signed prior to 1940 and who has lived in the asset since then; a tenant who signed a rental agreement between 1940 and 1968 which does not specify that s/he is not a protected tenant is also considered a protected tenant; tenants who signed rental agreements after 1986 that do not specifically state that the tenant is a protected tenant are not considered such. Around 80 percent of the current protected tenant assets are located in Tel Aviv.