Why Developers Are Turning To Israel For Cheap Capital
When Boaz Gilad (pictured), co-founder of Brookland Capital, a Brooklyn developer with $500M in assets, wanted to borrow money for his projects, he could have gone to a traditional US bank to take out a mortgage on each one. And each deal would’ve required him to put down at least 40% in equity.
Instead, he found a more appealing alternative: issuing $57M in corporate bonds that could be used to finance a variety of developments in his portfolio, in two separate offerings, starting in 2014, on the Tel Aviv Stock Exchange. That approach has enabled him to finance 100% of his capital needs, at interest rates of 6.4% and 8.8%, he told Bisnow in a recent telephone interview. He plans to seek further debt financing in Israel in the future.
Gilad is one of a small but growing number of real estate developers who are finding a veritable promised land for cheap capital in the Israeli bond market.
Industry powerhouse Extell Development raised 1.65B shekels (more than $422M) in Israel for One57, home of the record-breaking $100M condo. Related Cos raised 847M shekels last year to finance part of its massive $20B Hudson Yards mega-development.
These deals have created a ripple effect, trickling down to the market's midlevel, says Joe Berko, president of Berko & Associates, a NYC commercial real estate brokerage that has helped some of its developer clients structure these deals.
“It’s starting to make more and more sense for our clients to issue unsecured debt through the Israeli stock exchange,” says Berko, who claimed CoStar's Power Broker Award in 2014.
According to various reports, at least 14 US property companies have borrowed about $2B on the Tel Aviv Stock Exchange since 2008.
The demand for such bond issuances is growing as Israeli investors look for portfolios with international exposure and developers seek lower interest rates, according to an E&Y report on 2016's real estate private equity trends.
“Last year represented something of a milestone for the Israeli bond market: not only did total issuance increase to more than $10B for the year," the report noted, "but 2014 also saw a large number of real estate companies seek capital there, with $2B of issuance accounted for by international companies."
So far, 2016 is shaping up to be another active year. In January, office landlord KBS Strategic Opportunity filed a prospectus with the Israel Securities Authority to become the first US REIT to raise capital through Israeli bonds.
The trust, which is managed by KBS Capital Advisors, wants to issue $100M to $150M in Series A bonds. The issuance will be backed by a 20-property portfolio valued at $1.5B. KBS’ biggest asset backing the issuance is 110 William St, a financial district office building valued at $405.7M.
In another notable transaction last month, Delshah Capital, the development company owned by East Village landlord Michael Shah (pictured), completed the first phase of a bond offering (almost $82M) to institutional investors, banks and pension funds. In total, the offering will raise 400M shekels (around $102M) to be traded on the Tel Aviv Stock Exchange.
Shah said that issuance was “oversubscribed by more than 50%." The first phase was backed by a 13-property portfolio worth more than $500M, according to the company.
They included more than 1,100 Section 8 units of federal subsidized housing in Staten Island. Delshah floated two series of bonds, one unsecured at 6.9% and the other a series of secured bonds at a 4.6% rate.
It’s not just East Coast property companies that are flocking to Tel Aviv. Last month, Strawberry Fields, a REIT that operates nursing homes and health facilities in the Midwest and South, borrowed about $68M on the bond market. The company says it plans to use the funds to expand into new states and diversify its properties and operations.
Why go all the way to Israel to raise cash? Developers are attracted to better interest rates, thanks to more favorable ratings than they can get in the Israeli market, E&Y says. “For example, an international B rating is equivalent to roughly an A rating in the Tel Aviv market.”
Gilad said that there is no comparable US product for a company like his, which is too small for the US ratings agencies to bother with.
In Israel, his company is rated BBB+. “You don’t have to bring in equity and your closing costs are smaller,” Gilad said. Another plus: There are no mortgage taxes or transfer taxes.
The alternative is to seek mezzanine financing in the US, which can often be more costly, he said.
Not everyone succeeds in the Israeli bond market. In September, a $500M debt offering on the Tel Aviv stock exchange by Jeff Sutton’s Wharton Properties failed to excite investors, and the offering was delayed.
Gilad, the Brooklyn developer, said becoming a public company in Israel is “an expensive shift,” which only makes sense for companies that plan to continue raising debt on the exchange.
“I’m very proud and happy we’ve done it,” Gilad said, adding that having a board helped enhance his company’s prestige and has made it easier for him to raise private equity investments as well.
E&Y estimates the whole process of registering and issuing debt on the Tel Aviv exchange can take three to six months.