Hamburger Evron & Co.

  • 25.01.2015, Under examination: Insurance Companies to Finance Real Estate Projects under the Law, Globes

More and more insurance companies are extending credit for construction and even issuing insurance policies as an alternative to Sales Law guarantees – and the Government is examining their inclusion in the Law  The Ministry of Housing: “The matter is to be examined as part of the amendments currently under consideration.”

It appears that more real estate developers are considering opting for project financing from insurance companies, as an alternative to traditional financing by the banks. Harel Insurance Company, for example, recently signed a financing deal with developer Shlomo Berkovich, according to which Harel will extend financing amounting to 260 million shekels to construct a luxury residential project on the beachfront in Netanya. The financing includes extending a credit line for construction as well as credit for issuing policies in accordance with the Sales Law. As it happens, Berkovich purchased the land two years ago from the Gurevich family, one of the owners of the Menorah Insurance Company.

Following the Hephzibah affair, which erupted in 2007, once it became clear that monies paid by apartment buyers were deposited in bank accounts that were not the accounts accompanying the projects, the Sales Law was amended with the goal of assuring the safety of purchasers’ monies. The Ministry of Housing explains that the Sales Law (Assurance of Investments of Apartment Buyers) requires the seller to give the buyer a security from among the five existing in law: three options are related to the asset itself - a caveat, lien, or transfer of rights in the apartment, and two of the options are of a financial nature - a bank guarantee and an insurance policy – and they are the most common options.

In the past, the banks were the sole players in the financing of real estate projects, and their method of financing is such that the apartment buyers’ money is deposited in a special account, and the financing bank extends credit for construction of the project in a number of rounds, according to the pace of construction progress. In parallel with extending a credit line to the developer, the bank also extends bank guarantees to the apartment buyers. In recent years, however, financing by non-banking entities has accelerated, and insurance companies have also become entities providing financing to developers and insurance policies to buyers as prescribed in the Sales Law.

The current wording of the Sales Law refers to a banking corporation and not to insurance companies - i.e., the severe wording on Sales Law guarantees, to which the banks are obligated, is not imposed on insurance companies, but some of them voluntarily adopt it.

Thus, for example, explains an attorney specializing in real estate financing, although the Sales Law stipulates that guarantees must state that buyers’ money is to be returned to them within 60 days in the case of a “crisis” – he had encountered a case where one of the insurance policies stated that monies paid would be transferred to the buyers within six months. The Ministry of Housing told us this week that any appeal on this matter to Sales Law Commissioner, Moshe Rubinstein, would have led to his intervention.

At the Ministry of Housing they explain that the reasons for enforcing an insurance policy are identical to those applicable to enforce a bank guarantee, but that the wording could differ when put to the test. So too in the matter of sanctions: the Law relates in certain cases to the need for intervention of the Supervisor of Banks, whereas there is no mention of the Supervisor of Insurance Companies. However, the Ministry of Housing is of the opinion that should disputes reach the courts, there is little chance of insurance companies trying to raise arguments that contradict the Sales Law.

Nevertheless, at the Ministry of Housing, they point out that the definition of the Law currently relates to “financing provided by a banking corporation.” It is worth considering whether it is necessary to add “or an insurance company” and the matter will be considered within the framework of amendments currently under examination but, as stated, such cases probably do not currently exist in the market and no such cases have reached us,” they add.

From cooperation to taking the lead

So how did it even happen that insurance companies entered the field of project financing, which until very recently was the sole domain of the banks? Attorney Assaf Englard, a partner at law firm Hamburger Evron & Co. and a specialist in banking and real estate, explains that “in the past there were collaborations between banks and insurance companies in financing real estate projects in a way in which the bank was the entity that led on the credit transaction and extended the monetary credit and brought in the insurance company as a relatively passive partner.

“Recently, insurance companies are also coming in as the entity leading on the transaction and itself extending all the funding and the project financing – both the credit for construction and the insurance policies in accordance with the Sales Law. The reason for this is probably a combination of the regulatory restrictions that apply to the banks regarding exposure to loans in real estate, as well as recognition by the insurance companies of the business potential inherent in extending credit to such projects, which may yield them a good return. Extending credit to a project also gives the insurance company access to other projects – often even with the possibility of purchase of the project itself by the insurance company.”

According to Englard, these considerations led to the insurance companies opening departments dedicated to project financing, and to leading on extending credit for construction, thus finding another destination for the large amounts of money they hold and manage.

“The entry of insurance companies into the project financing sector creates real competition with the banks,” Englard adds. “Competition may also lead to a reduction in the price of credit. At the same time, criticism can sometimes be heard in the financial community on the grounds that this competition is not entirely fair as the banks are subject to stringent regulation, including on the issue of adequate capital retention, which can lead to an increase in the cost of credit – while insurance companies are not subject to the same rules.”

According to Adv. Tamar Cohen, a partner at Gornitzky & Co., and specializing in the field of financing and real estate: “The grounds for enforcing the bank guarantee or the insurance policy are set in the Law and are identical. However, whereas the text of the bank guarantee given to the buyer is determined by the legislator and provided in the Regulations, inasmuch as we know, such regulations does not exist for insurance policies, thus giving insurance companies more flexibility in making arrangements pertaining to collateral. Some will voluntarily adopt the requirements set for the banks whereas others will not, and they may set different terms for collateral, such as payment dates, and the documentation the buyer is required to present to receive such payment.”

Cohen also notes that, “the Law provides, inter alia, that a banking corporation must verify, as part of its duties, that the buyer has received collateral to secure his money according to the provisions of the Law, and where this is not done, the banking corporation will face criminal sanctions and civil penalties. Thus far, the Law does not impose this duty on any entity that is not a banking corporation that is financing a project. It has been the domain of the banks. But the more this method of financing expands to other entities, the legislator may well find it appropriate to also impose on them the duties that currently apply to banking corporations.”

Englard notes too that the Sales Law also stipulates that when a developer contracts with a bank in an agreement for project financing, he must do so in fixed way set out in law, which includes, among others, arrangement of the payment vouchers. “According to the arrangement, the payments for the apartment can be carried out only by using payment vouchers to ensure that all proceeds go directly to the accompanying account and will be used solely for the construction of the project.” Englard adds. Except that the duty, as mentioned, applies only to banking corporations, as do the criminal sanctions.

“While it may be a little more complex to apply a payment voucher system to insurance companies, it can be resolved. In practice, we know that insurance companies do often use a payment voucher arrangement, but they do so voluntarily, and not as a result of the requirement set by Law,” says Englard. He believes there is room for the legislator to address the issue and close the loophole, and impose the payment voucher system as a requirement that is also applicable to a developer contracting with an insurance company. “Such an amendment will improve the protection of apartment buyers,” he says.