Jerusalem Economy Ltd : Engagement for the Granting of Option to Market “S

Jerusalem Economy Ltd.

JEC

March 5, 2012

The Securities Authority Tel Aviv Stock Exchange Ltd.

22 Kanfei Nesharim Street 54 Ahad Ha'am Street

JerusalemTel Aviv

Dear Sir / Madam:

Re: Engagement for the Granting of Option to Market "Solelim Compound"

The Company is honored to announce that it is conducting advanced negotiations with the Tidhar Company, which is active in the field of residential and office construction, for an agreement in which the Company would grant Tidhar the option to market by way of organization of purchasing groups of housing units and office space, construction of which is planned for the area known as the "Solelim Compound" in Tel Aviv.

The Solelim Compound is the Bitzron neighborhood of Tel Aviv and is bound by the Hashalom Road in Tel Aviv in the north and by Hasolelim St. in the west. The area of land in the Solelim Compound is 2.4 hectares. According to the existing plan applying to the compound, 300 housing units can be constructed on it with a main area of 27.5 thousand m², 52 thousand m² (main area) for offices, 3.5 thousand m² of commercial space and 1.6 thousand m² of public structures. The Company has leasing rights to the land from the City of Tel Aviv until 2059.    

As a condition for the agreement, the Company has undertaken to act to arrange payments to the City of Tel Aviv for construction rights in the compound.

The following are the details of the engagement between the Company and Tidhar according to the understandings achieved to date by negotiations between the parties, in connection to constructing and marketing the project in the compound.

1. Tidhar will design the project at its own expense and will be responsible for advancing the process of securing building permits for the project. The project will be supervised by a steering committee in which the Company and Tidhar will have an equal number of representatives. In the event that the marketing option is not exercised by Tidhar, the Company shall be entitled to receive from Tidhar, free of charge, the work plans, the quantities listings and so on it that had prepared.

2. Tidhar will market the project in stages, with two residential towers marketed in Stage A, in Stage B - a single office structure, and Stage C - the second office structure and the commercial areas in the project, and it shall be entitled to exercise the option separately for each stage.

3. The option period for marketing the project shall not exceed one year but will be extended as necessary, in such a manner that at least 6 months will remain after the approval of the construction plans for the compound and the arrangement of payment to the City of Tel Aviv for rights, as noted above. If the construction plan and the arrangement of rights are not completed by April 5 2014, the agreement will be cancelled. In the event that the option to market Stage A is exercised, the option to market Stages B and C in the project will be extended by an additional 6 months.

4. The compensation expected for the Company in the event of the sale of all of the housing units and office space will be no lower than 489 million NIS ("the Minimal Compensation"), based on the construction areas detailed above, and is subject to adjustments in the event of changes of the built-up area that will be permitted for construction in the compound. In addition, the Company will be paid additional compensation according to mechanisms linking the sales price in practice to the proceeds paid for the land.

5. The free cash flow created for the Company from the engagement will equal the sum of the compensation received from the buyers less the payment to the city for the additional rights to the compound, less debts to banks guaranteed by liens on the compound and less tax and other transaction costs. In light of the uncertainty regarding the scope of the compensation received in practice and regarding payment to the City of Tel Aviv, at this stage we cannot estimate the size of the free cash flow and the profit (loss) expected for the Company from the transaction.

The above reflects interim understandings reached between the parties during negotiations. There is no certainty that a binding agreement will be signed on the basis of these understandings and that no changes will occur to the understandings and points of agreement in question before the signing of the binding agreement, inasmuch as it is signed.

In addition, the completion of the agreement is stipulated on various conditions, including the approval of new construction plans for the land and the arrangement of payment for construction rights on the land with the City of Tel Aviv. Therefore, there is no certainty at this stage that the agreement will be signed. Whether these conditions exist is not under the Company's control. In the event that significant delays occur or hindrances arise to the approval of the construction plans for the compound or to the arrangement of payments to the City of Tel Aviv for the compound, the transaction shall be delayed, which may also lead to its cancellation. Furthermore, there is no certainty that even if the agreement is signed that the options for the various stages of the project will be exercised, as the exercise of the options is stipulated on marketing the housing units and/or office spaces for buyers at minimal prices set by the parties.