Israel — A Growing Source of Capital
Israeli companies and investors are putting money in U.S. real estate in increasing numbers.
Jaime Lackey

While foreign investors have long put their money in U.S. real estate holdings, it seems that the amount of Israeli money invested in U.S. real estate is increasing.

“The U.S. real estate market presents an advantageous investment opportunity to foreigners for many reasons,” according to Arnon Cohen, a lawyer with Israeli law firm Goldfarb, Levy, Eran, Meiri & Co. “The region is politically stable, and well regulated and supervised. Sophisticated and comprehensive market practices encourage transparency. High ‘Western’ standards are maintained and produce good quality and reliable construction. These advantages, among others, allow the investor to make an informed decision about investment alternatives, leverage his investment through considerable financing, and enjoy relatively steady yields.”

According to Elchanan Rosenheim, managing director of Profimex (Israel) Ltd., institutional investors do not have the same tax-exempt status in the U.S. that they enjoy in Israel and are therefore less likely to be interested in U.S. investments. However, he says, “There is a strong demand from the individual Israeli investor for U.S. real estate. The U.S. is a familiar and comfortable place for Israelis to invest due to the close relationship of our countries as well as the similarities of our consumer bases.”

Rotem Rosen, CEO of Africa Israel, USA, agrees: “The U.S. is a very good ally to Israel; as a result, Israelis feel very comfortable here.” He also notes that the U.S. has a very developed legal system, which makes it a great place to do business.

Doron Valero, managing partner of Global Fund Investments, adds that America is the most efficient market in the world. “Things get done faster here,” he explains, “in all aspects of the real estate business from acquisitions to ground-up developments, which can take decades elsewhere.”

Valero says that Israeli entrepreneurs particularly like to invest in real estate as their premise is that real estate appreciates over time. “It is a tangible asset class, and in developed markets like the U.S., the risk is relatively low,” he explains.

“Retail is attractive,” according to Rosenheim, “because the property’s location is more important than the credit of the individual tenants. If the location and space are attractive, there will always be demand for space.”

 “It is a no-brainer that the Israeli investor likes to invest in U.S. real estate and in U.S. dollar-denominated investments,” Valero says. “Israeli companies like Elad and Africa Israel are investing here in the billions — in different sectors — and they are doing very well.”

However, Cohen cautions, “While the U.S. market produces security and stability for the investor, the returns are relatively low in comparison with other investment opportunities.”

Many Israelis today invest in Eastern European countries, such as Hungary, Romania and Bulgaria, and also in India and other Asian countries, Cohen adds. “The returns in these countries may be leveling off, though the risk of this occurring needs to be pragmatically considered. Regardless of the current or future investing trends, Israeli investors will continue to maintain a portfolio of U.S. assets in order to enjoy the advantages of the U.S. market and to diversify a portfolio that includes real estate investments in developing countries.”

Arnall Golden Gregory is one U.S. concern that is helping Israelis to invest in real estate in the U.S. The Atlanta-based law firm began networking through the Israeli Bar Association 2 years ago based on the suggestion of Shelly Rabinovitch, an Israeli attorney who works at the firm. Lawyers from Arnall Golden Gregory have visited Israel six times in the last 2 years, and the firm has introduced several Israeli companies to developers and owners in the U.S.

“We learned early on that these Israeli law firms represented very big companies that had access to tremendous capital. They were interested in investing in the tens and hundreds of million dollar range,” says Abe Schear, partner with Arnall Golden Gregory.

Phil Skinner, also a partner with Arnall Golden Gregory, adds, “They are a varied group of people who are looking for different kinds of investment opportunities. They look at the whole world as their investment opportunity, not just the U.S.”

“Many are interested in upside,” he continues. “They want to find an opportunity to redevelop a property, develop air rights on piece of property, or convert a property to a different use.”

Schear adds, “Generally, most of people we’ve met with are interested in equity, not debt.”

Schear says that Israeli partners are an excellent choice for developers that are long on land and need good development partners. And, he adds, “if they are long on product and want to sell a portfolio, Israeli investors are an excellent choice.”

He notes that the changes in the shopping center industry — the trend toward mixed-use — “is an interesting coalescence of [Israelis’] needs and what is going on in the United States. Those are much bigger developments. While they have a little more risk, they also tend to have better yield. That interests [Israeli investors] very much. While they may not always be the perfect buyer for a fully leased strip center, they are a very good partner or buyer of a partially built or entitled piece of property.”

According to Skinner, his firm’s contacts in Israel have changed the dialogue he has with developers in the U.S. “It is great to have new sources of capital. This presents a new range of opportunity for U.S. companies to do business with new investors,” he says.

A few of the companies where Israelis are placing their money:

Profimex

Profimex (Israel) Ltd. is an Israel-based real estate investment house that offers cross-border real estate investments to institutional investors and high net worth individuals. “We specialize in indirect property vehicles by way of co-investment with overseas partners — established, leading real estate companies with proven track records,” Rosenheim says. “To date, we have participated in cross-border real estate investments totaling more than $20 billion, and delivered our investors an average per-annum return of over 20 percent.”

He adds, “Because of our business model of creating joint ventures with experienced, reputable owner-operators, we have unique product to offer Israelis. We aggregate the investors into a single partnership and use that as a vehicle to invest in our partners’ deals.”

The company’s U.S. operation, Profimex Inc., has been co-investing with partners in U.S. real estate for 5 years and has interests in more than 30 properties and portfolios. The company invests in all sectors, including shopping centers, multifamily, land development, logistic and warehouse development, CBD office buildings, suburban office parks and hotel redevelopments.

Rosenheim says, “We have a strong entrepreneurial spirit and evaluate each deal for its merits.”

The key to the company’s success is its partners, according to Rosenheim. He explains, “Many real estate deals have similar investment dynamics; however, the returns can vary widely. The difference is people. When we look at a deal we see the same metrics as any other investor might see. Our advantage is our partners. We select only the most reputable, proven firms to invest with. We stand side-by-side with them in their deals, creating a strong relationship.”

The company also acts as a placement agent to some of the leading fund mangers in the U.S. and has raised hundreds of millions of dollars since 2003 for 13 funds.

Africa Israel Investments, Ltd.

Africa Israel, USA, is a subsidiary of Africa Israel Investments Ltd., an Israel-based international holding company that is listed on the Tel Aviv Stock Exchange. The company’s chairman and controlling shareholder, Lev Leviev, made most of his money in another arena — he is the second largest syndicator of diamonds in the world. Now his company, LGC, invests in multiple industries around the world.

Africa Israel, USA, has been investing in the U.S. real estate market since 2001. Its corporate office is in New York.

Today, the company is active throughout the U.S., including Los Angeles; San Francisco; Las Vegas; Phoenix; Myrtle Beach, South Carolina; Texas; Miami; and New York.

“We know the U.S. marketplace,” says Rosen. “We are by far the largest Israeli investor in the U.S.”

In the last few months, the company has acquired $1.5 billion worth of U.S. real estate.

The company owns 23 Wall Street, a very high-end retail development in front of the New York Stock Exchange. They acquired it and are redeveloping it. “All of the most exquisite retail brands want to be at 23 Wall Street,” Rosen says.

In early July, Africa Israel and partners Credit Suisse, Steve Witkoff and Giuseppi Cipriani purchased 60 acres in Las Vegas next to the Hard Rock Hotel. They plan to develop a convention center and several hotels with a huge retail component that will open in 4 years.

The company is also developing an amusement park with a Hard Rock theme in Myrtle Beach, South Carolina, with real estate developer Ziel Feldman. The park will open in April 2008.

Rosen also notes that Africa Israel has purchased the three largest trophy buildings in New York City: the Apthorp, the highest-end residential building in New York City; the Clock Tower on Madison Avenue; and the old New York Times building in Times Square, which will be redeveloped to contain Class A office and a pure retail shopping mall, which will open at the end of 2008.

The company concentrates on places with upside. Rosen says Leviev’s entrepreneurial eye guides the company’s decisions on what locations to buy.

According to Rosen, Leviev “truly believes in the economy within the U.S. He is very comfortable doing business here.”

Global Fund Investments

Global Fund Investments also has a number of Israeli investors. The Florida-based company, which was formed on April 1 of this year, is has raised approximately $40 million of discretionary capital to invest in value-added retail, with approximately $25 million of that coming fromprimarily from Israeli investors and institutions.

“The Israeli investment community is relatively tight, and once you have earned your reputation and track record, it is relatively easier to tap into Israeli sources of capital,” says Valero to explain Global’s connection with Israeli investors. Valero was one of the founders of Equity One, and, until recently, served as the president and COO of Equity One. He was born and raised in Israel; he came to the United States in 1983.

Global Fund Investments is focused on retail properties in Florida and Texas. The company has a management agreement with New York-based Investcorp and it is managing 25 properties in Houston, Dallas and San Antonio for Investcorp. Global and Investcorp have also formed a joint venture to identify acquisition and development opportunities in Texas. They plan to buy $100 million of retail properties in urban areas of Texas by April 2008. During the same time period, Global plans to buy $150 million of retail properties in urban areas of areas of Florida.

“Both Florida and Texas are strong demographicsally improving, high-growth states,” Valero says.

Global may also look into ground-up development opportunities to acquire development or holding companies.as well as acquisition of real estate holding companies.

Elad Properties

New York City-based Elad Properties is a subsidiary of Israel-based Elad Group. Israeli billionaire Yitzhak Tshuva is the majority owner of the company, and Elad Properties’ top executives are from Israel.

Elad Properties is known for its high-end residential developments in Manhattan; it owns a $7.5 billion Manhattan portfolio.

The company’s highest-profile project is the redevelopment of The Plaza, the world-famous historic hotel built in 1907 and located at Fifth Avenue and Central Park in Manhattan. The redeveloped building is being restored with replicas of the original décor, including a 1,200-square-foot stained-glass ceiling. The property will feature 182 private residences, a 282-room high-end hotel and a 160,000-square-foot retail component that will feature luxury retail, high-end boutiques and destination restaurants.

Elad Properties is planning to develop a similar project in Las Vegas. The company has purchased 34.5 acres containing The New Frontier & Casino for $1.2 billion. The casino will be demolished in early 2008. It is expected that the company will invest $5 billion to develop a luxury hotel, private residences, retail and a gaming complex bearing The Plaza brand. The project is slated to open in 2011.

Challenges to Investing

Israeli investors do face some hurdles when investing in U.S. real estate.

“The most concrete challenge of investing in the U.S. is clearly the distance,” says Rosenheim. “The East Coast of the U.S. is 6,000 miles away and seven time zones apart. Profimex has overcome this issue by operating with late working hours and opening up a New York office.”

Schear and Skinner say that the Israelis that they have worked with have been willing to fly to the U.S. for meetings and to see potential investment properties. “The distance between where they live and where the investment is — regardless of where it is in the U.S. — has not proven to be an obstacle. They are as willing to get on a plane and fly to the United States as we would be willing to fly to Chicago,” Schear explains.

Cohen notes that another challenge is dealing with an unfamiliar market and a different regulatory scheme. He says, “All investors face this challenge when investing in a foreign country. In order to overcome these obstacles, the entrepreneur needs to make a strategic decision to invest after allocating sufficient resources to learn about the market and regulatory framework, creating a local base through Israeli and local agents, and scrutinizing potential investments.”

The Big Picture

While Valero says that the amount of Israeli money in U.S. real estate projects is “a drop in the bucket” compared to the money invested by Asians or Europeans, Schear and Skinner stress that the Israeli investments present new opportunities to developers and to owners looking to sell their holdings.

Cohen sums it by saying, “Israeli investors do not significantly influence the U.S. market. The U.S. market is big and sophisticated enough to be influenced only by major economic trends, whether in the U.S. or elsewhere. Nevertheless, Israeli investors are, on average, more capable than others of thinking ‘out of the box,’ of pursuing ventures and acting swiftly to attain the goals that they have set for themselves. I think that Israeli investment sets an example for local investors and contributes to the U.S. economic engine.”


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