Lowballed by the State

Landowners whose holdings are expropriated to make room for roads or other infrastructure are often offered several times lower than fair value. An upcoming reform may make the situation even worse.

It's not rare for a court to find that the amount state bodies offer property holders for expropriated is well below fair value.

Amounts awarded by the courts are often significantly greater than compensation initially offered by the expropriating authority.

Beit Habad Alley in Tel Aviv.
Ofer Vaknin

So it was when the Israel National Roads Company determined that owners of land it had expropriated near Hadera were entitled to NIS 2.5 million altogether in compensation, an expert appraiser ruled they were owed NIS 11.5 million. When a shop on Beit Habad Alley in Tel Aviv was expropriated to make way for the new rail, the authorities offered the protected tenants NIS 6,500 - until the deciding appraiser ruled on NIS 180,000 in compensation.

It happened also to owners of plots in the Segula section of Petah Tikva when their land was expropriated by Israel Railways. While the amount determined by the railroad's compensation committee totaled just NIS 2.7 million, an expert appraiser appointed by the court set payment at NIS 12 million.

Expropriation, or eminent domain, is the forced acquisition of private land for public purposes by the state or an entity acting on its behalf in exchange for compensation.

Land has sometimes been taken purportedly for public purposes but in fact put to non-public uses, like building private housing. In other cases expropriated land went unused, or was used for a limited time and not given back.

"The situation today is very problematic," says attorney Tzvi Shoob, an expert on real estate and planning and zoning law. "The sums offered in payment for eminent domain are biased downward. The state manages the whole compensation issue by trying to get away with what it can, hoping landowners won't demand more. In addition, local authorities tend to invoke the statute of limitations to avoid paying owners compensation. In the end they unquestionably come out ahead at the individual's expense."

Notice given late

One reason for low compensation assessments is the two-part process for submitting claims: The first stage is claiming compensation for expropriation, and the second is submitting a compensation claim for the zoning change (under Article 197 of the Planning and Construction Law ) - if a backyard was changed to a road, for example.

Segulah section of Petah Tikvah,
Nir Keidar

"The problem lies with Article 197 being limited to three years from the day the zoning takes effect, with the landowner's right to receive compensation expiring after that," says attorney Moshe Kammar. "Owners are seldom aware that zoning has been changed and therefore don't apply for compensation. They don't know about the expropriation until they're surprised with a notice from the local authority. That's why, in many expropriation cases, landowners don't get full compensation - since they aren't compensated for zoning damages under Article 197."

"The amount of compensation has always been controversial," says real estate appraiser Erez Cohen. "Appraisers working for the expropriator - the Roads Company, the railroad, or Netivei Ayalon [which operates the Ayalon freeway] - submit low assessments. Deciding appraisers, or appraisers appointed by the courts, look at the issue more objectively, so it's not surprising that their assessments are significantly higher than those of the expropriator." Cohen says state bodies try to lowball the landowners.

"Local authorities, who have the thinnest pockets, as well as others - Israel Railways, the Roads Company, Netivei Ayalon, and Highway 6, with much larger budgets - fight to reduce compensation payments to the minimum," he says. "There are many distortions in the state's favor, mainly arising from the intricate process of calculating compensation providing loopholes that the expropriators use to their own advantage."

When land was expropriated for Highway 531 in the Sharon, the state calculated compensation to landowners at $60 per square meter, but the court raised this to $90. In another case, Netivei Ayalon wanted to expropriate private land for building a bridge over residential housing. The government appraiser estimated compensation for all owners of the plots at $300,000 but the court ruled on $1.3 million.

"In many cases the land's potential isn't taken into account," says one real estate appraiser who prepares assessments for national infrastructure projects. "It turns out that when we check market value with respect to the land that's being expropriated, we find the offer we're submitting is much lower. There are many elements we don't take into account, like location or rezoning (to a park or road ), so farmland in Arad is the same as in Hadera."

Inadequate compensation

The overriding principle behind compensation for expropriated property is that owners don't suffer economic damage: It is meant to ensure them the means to acquire similar property. The actual situation, however, is completely different.

"In many cases the affected owner can't buy equivalent property," says Kammar. "This is due to several reasons: First, under the law, compensation assessments are calculated when the expropriation is announced, not when compensation is actually paid. Sometimes the difference is only a few years, but quite often it takes many years. Compensation is linked only to the general consumer price index, so there is often a large gap between what is paid and land prices according to market value."

Another factor is that compensation is subject to a betterment tax. Although the tax rate is half of what it is for selling a home, it is nevertheless a substantial amount.

"These factors end up preventing the property owner from buying a property equal in value to the expropriated property," says Kammar. "And we still haven't taken into account the entire procedure, which is very costly. There are court and lawyers' fees, which could amount to tens of percent of the property's value, and other costs. Some courts award full reimbursement and others don't, so owners often cover much of the cost from their own pockets." He adds that the process can often drag on for years, with court battles and appeals adding to the landowner's state of uncertainty.

"It could be a long time before he sees his money, and time isn't on his side," he says.

Things could still get worse

Over the next few weeks the Knesset's Internal Affairs and Environment Committee will discuss the section of the Planning and Construction Law dealing with expropriations. The most noteworthy provision under discussion requires local authorities to award landowners monetary compensation for all land seized. The law presently allows them to take 40% of the land without compensation.

Shoob and Kammar think the reform will actually worsen the landowners' position. They say the drawbacks of existing legislation are nothing compared to what awaits landowners wanting compensation for expropriated land.

"The reform expands the right to expropriate land, allowing land to be seized without a warrant from the court, as opposed to now," says Kammar. "It also perpetuates the problematic situation regarding the assessment of compensation, allowing for compensation to be awarded at historic values." He says the proposed reform contravenes Supreme Court ruling on the Basic Law on Human Dignity and Liberty.

"Many parts of the bill not only don't diverge from the archaic - and sometimes draconian - rules of the British Mandate's land ordinance, but even add more stringent provisions on owners of expropriated rights and enrich the expropriating authority at his expense," Kammar says. "The bill should have been expected to toe the line laid out by the Basic Law on Human Dignity and Liberty, Supreme Court rulings, and conclusions of the joint committee appointed by the finance minister - and set provisions protecting the property rights of landowners. Provision after provision, the noose on landowners becomes tighter."

Prof. Rachelle Alterman, who chairs the Technion's Center for Urban and Regional Studies and serves as adviser to the Internal Affairs and Environment Committee on reforming the law, thinks the reform contains changes for the benefit of landowners.

"Whereas until this law it was possible to expropriate 40% of the land without payment, the reform fixes this," she says. "Hence the reform falls in line with court rulings that for the past 15 years have gradually reduced the power of local authorities to expropriate without payment." Alterman says the reforms will also force authorities to give notice of eminent domain designs in the planning stage, and not in the final stage, as they do now.

However, Alterman thinks the reform still hasn't provided a full solution to the harm done to citizens' property rights. "The process of submitting a compensation claim remains complex," she admits. "The new law also completely rules out any compensation for the land's potential. From this diminished compensation taxes are also taken off. Why should tax, like betterment tax, be paid if the land was taken by force? Compensation should be given on the full value of the expropriated land because this is an extreme act of property seizure."