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Sandro Rosell
FC Barcelona President
Tuesday, October 24, 2017

Lawyers, accountants, government officials, underwriters – all working in unison to sift through financial statements, analyze business plans and find out every detail about you and your firm - a private company’s worst nightmare. Same process, different country, and of course, all part of the standard procedure for taking a company to the public markets. And let’s not forget the grueling “road show”, where these same companies spend weeks gauging the demand for their offering from potential mutual funds, pension funds, and high net worth individuals, often taking multiple meetings a day.

So why are so many private real estate companies turning to Israel to raise public debt for their commercial real estate investments? The answer is simple; the money makes sense. For large-scale real estate companies, they are able to secure supplemental financings at a much lower rate than they would in the United States. For smaller scale companies, it gives them access to corporate-grade debt they never would have had access to in the United States. Israel, or as it recently and more appropriately has been called, “the real estate financing land of milk and honey” has increasingly become New York real estate moguls’ preferred source of financing.

The trend began back in 2007 when Gal Amit and Rafael Lipa, cofounders of Victory Consulting and pioneers of this movement, advised their first client. On March 10, 2008 Abraham Lesser, a Brooklyn-based developer, became the first American real estate developer to secure financing – approximately $40 million dollars – by offering real estate backed bonds on the Tel Aviv Stock Exchange (TASE).

The mechanics work like this: U.S. real estate firms are able to bundle a portfolio of income-producing real estate and/or future developments into a separate off-shore investment vehicle and issue corporate debt against those assets. U.S. real estate investors thereby can raise more money at once and spread risk across a portfolio as opposed to traditionally raising the debt on a property-by-property level. 

TASE allows for companies to go public with debt-based offerings, a practice not granted in the U.S. U.S. real estate companies, especially those with strong assets in New York, can often secure a higher credit rating in Israel than back home. Israeli regulators often perceive the New York real estate market as stable and the United States as having low country-level risk. “Small” U.S. companies are often considered large in Israel and do not need to have a billion dollar market capitalization to raise public, corporate-grade debt. Mezzanine financing, a popular method of raising junior loans for commercial real estate properties in the U.S., often garners rates of approximately 10-12%. On TASE, these same developers can issue corporate bonds at rates hovering around 5-7%. 

Further, Israel follows International Financial Reporting Standards (IFRS) and in contrast to GAAP, it permits accountants to record the market value of real estate assets as opposed to its historical purchase price. With real estate rising exponentially since the financial crisis, developers are able to greatly use this to their advantage. Moreover, using the corporate structure available in Israel, real estate developers can often save on taxes. Israel allows for developers to create a “pass through” corporate entity, which allows them to avoid much of the taxation corporate entities in the U.S. are subject to. Investors who create corporate entities in the U.S. are subjected to individual taxes as well as capital-gain taxes. These same real estate investors often choose to create LLCs in the U.S. for each property, which acts as a “pass-through” entity to get around the double-tax issue, albeit losing many of the benefits of a corporate entity. 

The trend of issuing debt on TASE has picked up steam as of late. In 2015 and 2016, U.S. real estate firms have raised approximately $1.07 billion dollars and $878.5 million respectively from the Israeli bond market. At least 14 U.S. real estate developers have tapped into the markets including the likes of the Joseph Moinian (Moinian Group), Jeff Sutton (Wharton Properties) Gary Barnett (Extell Development) and Boaz Gilad (Brookland Capital).

Joseph Moinian issued the largest debt offering on TASE by a U.S. real estate company, closing on a $361 million bond deal in 2015. The bonds are backed by a portfolio of 15 properties including some of Moinian’s most prestigious assets – 3 Columbus Circle and 535-545 Fifth Avenue. A portion of the capital raised was deployed for two development projects, 220 11th Avenue and 572 11th Avenue. Due to the pedigree of the Moinian Group and the solid cash flows of the properties backing the bonds, Moinian secured an Aa3 rating from Moody’s Israeli subsidiary, Midroog and subsequently commanded a whopping 4.2% interest rate. Jeff Sutton, one of New York’s largest retail landlords, tried to follow up and supersede Moinian’s $361 million mark at the tail end of 2015, with plans of a $500 million debt offering. However, he was unable to garner the necessary Israeli demand for his offering and his deal ultimately fell through. He arranged a portfolio of 17 properties, valued at approximately $1.1 billion, to back the bonds. Sutton wanted to use the capital to repay mezzanine loans, as opposed to acquire/develop properties, ultimately leading to a very complex deal and weak demand. However, Sutton redeemed himself by arranging a $245 million bond offering in February of this year. This time around, the capital raised in the offering will be delegated more towards acquisitions and development. An 18-asset portfolio including some of Sutton’s most income-producing assets such as 747 Madison and 40 W. 34th Street backs these new bonds. Sutton initially sought to raise $100 million, but demand for his offering got so high that he was able to secure roughly $245 million. Further, he secured an AA rating from S&P’s Israeli subsidiary, Maalot, and commanded a 3.9%, interest rate, a rate even lower than Moinian’s. 

Other prominent Israeli bond offering deals include Gary Barnett’s $271 million bond offering in mid-2014. Barnett, a developer of some of the most luxurious residential real estate in New York, got an A2 rating from Midroog and secured his financing at a 4.9% rate. His bonds are backed by a portfolio of assets including One57, one of the most iconic residential buildings in Manhattan. Additionally, Barnett’s InterContinental Hotel in Boston and a New York site that will be home the city’s first Nordstrom are included in the portfolio. Having said that, it is not always smooth sailing for U.S. developers issuing debt in Israel. Earlier in 2016, Barnett had to pay a visit to Israel after his bonds experienced a major sell-off with yields rising to above 8%. After reports of a slowdown in the high-end luxury condominium market in New York, a space most correlated to Barnett’s business, hit the press, Israeli investors became rattled. Barnett visited Israel to mitigate investors’ worries and to restore confidence in his company’s business plan. 

It is not just the large Manhattan real estate developers that are able to secure financing on TASE. Boaz Gilad, founder of Brooklyn-based development firm Brookland Capital, issued a series of bonds to help fund his expanding development business. Brookland Capital develops 40-90 unit condominium sites in Brooklyn, usually never spending over $10 million for its development sites. Gilad was one of the first few U.S. based developers to raise corporate debt in Israel back in early 2014, closing on a $34.5 million offering at a 6.4% interest rate. Gilad’s bonds were given a BBB+ rating by Maalot and he has since issued a second round of bonds, raising approximately $30 million of additional financing. The proceeds of the offerings went towards developing more condominium/rental sites in Brooklyn areas such as Crown Heights, Bushwick and Bed-Stuy. Given his business model is heavily invested in condo development and less in cash-producing properties such as rental housing, Gilad had to make his case to the Israeli market. In response, Gilad agrees by stating, “the classic bond structure leans itself more towards traditional multifamily rent-producing assets” and that “it is more challenging to raise money as a development firm rather than as a multifamily player.” However, Gilad was able to uniquely position his firm given the sheer speed and volume of his developments. Brookland Capital completes projects in less than two months, focusing on mid-sized projects and thus is able have a steady stream of cash flows. When asked if he foresees more opportunity for himself on TASE in the future, Gilad responded, “ It’s a long-term commitment… to create this platform is expensive and I want to continue using it into the future.”

The Israeli relationship works so well for these U.S. developers because their offerings are very much in demand by Israeli investors. Much of this demand comes from Israeli pension funds, mutual funds, and institutional investors flushed with cash. A large proportion, roughly 25%, of the average Israeli’s salary, is contributed to pension funds, loading many long-term investment vehicles with deployable capital. There is a relatively small amount of companies to choose from to invest in Israel and many investors are interested in foreign exposure. These funds view the New York market favorably and are keen on gaining access to its real estate market. Further, they can accumulate more yield on these bonds compared to similar type Israeli corporate debt. This additional yield is to compensate the investors for its perceived risk in investing abroad. Further, mutual funds can only invest domestically so being able to gain exposure to international property markets on TASE is an enticing proposition. 

What started out as a mere $40 million bond offering back in 2008 has grown into a $1 billion plus a year movement. Both sides – the investors and issuers – seem to be enjoying the relationship. Time will tell how long Israeli investors will be interested in these real estate backed bonds, but in the meantime it is definitely here to stay. 

By: Dylan Margolin