What led to the biggest, NIS 1.4 billion real-estate bond offering by a US company on the Tel Aviv Stock Exchange in late May? By the beginning of July, bonds from the offering had closed at 100.3, representing a small profit for those participating in the institutional and retail auction on top of the main attraction of the bonds – the regular interest paid to investors.
The most successful real-estate bond offering to date, led by New York real-estate tycoon Joseph Moinian of the Moinian Group, took place in the context of a trend of debt offerings dating back to 2007- 2008. But it took off only in the last two years, with $1 billion in bonds expected to be issued in 2015 over a range of around a dozen offerings.
It’s a story of complex corporate and tax structural analysis.
But it is also a story of vision by a few individuals who were originally sitting in their offices thousands of miles away from each other, eventually united together to pull off a financial coup that made headlines in both the US and Israel, which until now has not been fully explained.
Ori Eisenberg, a financial adviser and the architect of the offering, told The Jerusalem Post that the Moinian Group’s careful and gradual planning was the key to the deal’s success.
Moinian got a very high rating, which in turn yielded a need to pay around a mere 4-percent interest to debt investors – whereas in the US the same opportunity might require paying them 10%-15% interest.
Eisenberg said not all potential investors were as deliberate and careful in approaching the issue; of four other groups that tried to penetrate the market in the last quarter, two failed completely and one entered with a worse rating and thus had to pay debt investors more than double the interest at around 9%.
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But with US bond markets taking off and able to borrow large funds at relatively low rates, why would some of New York’s largest real-estate investors be traveling thousands of miles to Israel to drum up cash in the first place? Eisenberg; Ofer Greenbaum, who represented the debt offering’s underwriter, Bank Leumi; and Lawrence Sternthal, a partner at Gross, Kleinhendler, Hodak, Halevy Greenberg & Co. and head of the firm’s Real Estate Capital Markets Group, explained as follows: A lot of the answer is differences between the US and Israeli tax structure.
In the US, if an investor wants to raise funds by offering debt to investors to invest in, he needs to establish a corporation that will expose him not only to individual taxes on any profit, but also an additional corporate capital- gains tax.
Investors like Moinian want to avoid paying that “double tax,” so they avoid any investments that require them to establish a standard corporation, favoring corporate entities such as a limited-liability company. This loses some of the advantages of a corporation, but it avoids the double- tax issue by functioning as a “pass-through” entity.
A partial solution that allows investors to raise equity using inexpensive corporate debt was the creation of the real-estate investment trust (REIT).
But once an investor is part of a REIT, the REIT must file costly reports with the US Securities Exchange Commission and must comply with the “5/50 rule” – that no five shareholders can control more than 50% of the equity of the REIT.
This means that a controlling shareholder like Moinian would need to give up control of his empire.
But Israel allows investors like Moinian to form a corporate entity that satisfies the definition of an Israeli corporation while still being just another pass-through entity from the US perspective.
This means investors can raise the same massive equity based on debt that they could in the US, but without paying the double tax and without giving up control.
Israel is not completely unique in this respect, Eisenberg said, noting that Cyprus and Thailand facilitate similar investment opportunities. In fact, Greenbaum said he is getting much more interest now from non-Jewish businesspersons, including from Europe.
However, some of it absolutely does come down to the Jewish connection to the Holyland, Eisenberg said.
There is a “reason why every single guy who came to Israel to invest was Jewish. You need to like to come to Israel,” he said. “From my experience in the Israeli road show, you could see the great enjoyment of businessmen from the US that they are having a financial impact in Israel.
“For me, it’s a sweet spot – this is what I love… It feels much better, at the end of the day, to see that the Hebrew calendar is what dictates the deal, like filing after Passover dictates the deal.”
From the Israeli investor angle, Greenbaum said they are excited to own part of a company that is invested in prestigious real-estate holdings in Times Square or other parts of New York City.
How did this landmark debt offering start off, and what was so key about the planning process that yielded such an impressive outcome? Eisenberg said he started to notice the debt-offering trend about 18-24 months ago.
Greenbaum said the deal was about the 10th deal of its kind, but it had dwarfed its predecessors in size, part of a vision he, Eisenberg and a group of others shared from the start.
Eisenberg said he met with Moinian for the first time in September 2014 and that the choice of working with Moinian was carefully made while also vetting about 30-40 other potential players in the field.
Having spent some of his earlier years in Israel, Moinian traveled to Israel every year.
But he was not sufficiently “informed enough about the field” and “needed someone to guide him and to explain what others did and what could be done.”
Eisenberg described his own background as being the right match for providing that guidance.
“I worked for a public real-estate investment trust, have strong exposure to the American market, but I am also Israeli,” he said.
Next, Eisenberg recalled how he had once seen a few other American groups raise bond money in Israel. He started to think “about ways to bring in higher volume” by coming in with large-scale investors with high ratings.
Before choosing to work with Moinian, Eisenberg said that “many wanted the money” they could make in Israel, viewing offering company debt for investors to invest in as a “cheap source of equity,” but they “did not understand” the scale and sophistication necessary to succeed.
Barriers to success, Eisenberg said, could include a variety of special transaction costs, including acclimating to investing “in a different part of the globe… being under regulatory scrutiny in Israel” and that you need a certain skill in navigating foreign cultures as well as large steady cash flow and debt capacity to justify it.
Put more simply, investors earning $5 million per year were not realistic candidates, but those earning $50m. per year were. Moinian had the right capacity in that area.
Other factors Eisenberg looked for in an investor he would partner with were an “established group, with a real management team, many operations, with solid cash flow and a core of income-producing assets” – all factors he said the Moinian Group met.
Helping with this process on the Israeli side was using Bank Leumi as the underwriter for the debt offering. “We aren’t a regular underwriter,” Greenbaum said. “Other underwriters do not have the same power. We are very careful about who we do business with to make sure there are no problems.”
Other elements of the deal included hiring Davis Polk to handle American law aspects of the deal and Moinian’s selection of GKH as Israeli counsel to represent him in the debt offering.
Sternthal, who worked the deal at GKH along with Aya Yoffe and Adva Bitan, said: “Since the beginning of the recovery of the US real-estate market in 2010, our large institutional clients have been actively investing in the US real-estate market. The Moinian offering and similar recent offerings enables both large and small Israeli institutions to access the US real-estate market through the Tel Aviv Stock Exchange.”
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