GFI, All Year admit errors on TASE docs, furthering anxiety about broader American bond crisis

Israel’s securities regulators required companies to report the changes

Jan.January 07, 2019 11:00 AM

Allen Gross and the Ace Hotel at 20 West 29th Street (Credit: Booking, Urban Land Institute, and iStock)

Two U.S. real estate companies had to correct financial statements with the Tel Aviv Stock Exchange last week, prompting further anxiety among investors about bonds issued by American companies in Tel Aviv.

Allen Gross’ GFI Capital Resources and Yoel Goldman’s All Year Management were required to make the amendments — of varying significance — by regulators at the Israel Securities Agency, Israel’s equivalent to the Securities and Exchange Committee.

GFI on Thursday made hundreds of changes to its year-end report from 2017, including lowering its 2015 net operating income to $8 million from $28 million. It also removed $20 million from its Funds From Operations, putting the company in the red for that metric at negative $11.5 million.

Meanwhile, All Year filed a notice regarding a “material error” in its second and third quarter financial statements, in connection with $3.7 million that had been accidentally moved from the company’s account to Goldman’s personal account. Further, the disclosure reveals that a $39 million mortgage from New York-based TNW Capital was backed by some properties that weren’t in the bond portfolio, in contrast to what All Year had previously claimed.

Gross, whose firm has raised roughly $120 million in Tel Aviv in two bond series, told The Real Deal that the changes were par for the course and were not material to the company.

“It has absolutely no effect,” Gross said, “It did not affect any NOIs or FFOs or any of our earnings, or any of our covenants.”

The changes were made to what’s known as a Barnea report, a required explanatory document that accompanies annual financial statements.

Gross added that investors were simply skittish because of the state of the market.

“If the climate in Israel with the bond market wasn’t this crazy, nobody would even notice this,” he said.

Indeed, the new disclosures come amid an extended crisis surrounding the bonds issued by American real estate companies in Tel Aviv. Many of the bonds have taken a beating, GFI and All Year among them, after a series of concerning financial disclosures emerged in late November.

The ISA has indeed been putting an extra spotlight on the American companies, according to multiple sources.

“It’s like a wave,” said one Tel Aviv-based lawyer. “Every day there are new dramas.”

In the case of All Year, the the ISA began looking into the deal that supposedly led to the $3.7 million accident after it was disclosed in early December. According to All Year’s documents, it was connected to a deal with TNW — a joint venture between Ran Eliasaf of Northwind Group and Joseph Tabak of Princeton Holdings — for two separate mortgages. One loan was backed by five properties in the bond portfolio, and another was for five properties unrelated to All Year’s Israeli entity. The title company that managed both loans had accidentally transferred funds meant for the Israeli entity to Goldman’s own accounts, All Year reported.

“All Year was one of the triggers that sent the market down,” the Tel Aviv-based lawyer said, “because that’s what made people realize that the corporate governance of American companies was lacking.”

However, it emerged in December that according to a mortgage document filed in New York, the two mortgages were in fact one loan totaling $39 million spread across the 10 properties. Under securities law, All Year would have needed approval for a deal that cross-collateralized properties inside and outside the portfolio, and would have been required to disclose it, as well.

In a report filed to TASE Thursday, All Year conceded that it was an affiliate deal, but argued that if it had disclosed the nature of the deal before it closed, it still would have been approved.

GFI came under scrutiny from Israeli regulators after a lawsuit against Gross came to their attention. In the suit, filed in New York in 2017 by John Saric, who owns roughly 1 percent of the Ace Hotel, claimed that Gross was stiffing him of proceeds from the hotel. After mediation failed, Saric renewed the suit in 2018, this time alleging that Gross had failed to disclose information to Israeli bondholders, and had benefited from the bond proceeds without including him.

GFI said the claim was “baseless” and was therefore immaterial to the company, according to a statement filed on TASE.

A key issue highlighted by the suit has to do with the ground lease for the Ace Hotel, which is due for a rent reset in 2032. According to the terms of the lease, the rent is fixed until November 2032, at which point the it can be renegotiated based on pre-existing terms and extended to 2049. GFI did not mention the rent reset to Israeli bondholders. Instead, it stated that the rent expires in 2032 with an option to extend to 2049, though it was reported in the appraisals that were published with the statements.

It’s clear that the rent will significantly increase, although the new rent has been estimated in various appraisals as anywhere between $5.5 million and $10 million, the latter being more than the the annual NOI of the hotel.

Gross said he is confident he will renegotiate with the Goldman family, which owns the leasehold, a deal that works in everyone’s favor,

and that in any case the property’s $100 million self-liquidating mortgage from AIG will mature in 2035, which means the company would simply swap mortgage payments for rent payments when the time came.

Real estate lawyer Joshua Stein said it’s not always that simple. “Typically in these cases, the landlord is not out for the common good of the property,” said Stein, in regard to ground leases with rent resets in general. “The landlord will be happy to get an uneconomic rent and then get the property back.”

Among the changes to its financial statements, GFI changed a 2015 loan amount on the Ace Hotel from $100 million to $83 million, and lowered the NOI for the hotel in 2015 by $3 million, which puts the NOI for the hotel at roughly $9 million for the last three years.

It’s not yet clear how serious the ISA’s findings were, and no further action has been taken by the agency. However, these and other disclosures have shaken bondholders’ faith in the oversight of the bonds issued by U.S.-based companies, whose complicated structure — they are incorporated in the British Virgin Islands, own property in the United States, and beholden to Israeli bondholders — has put investors on edge, according to multiple sources.

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