Abraham Lesser first tapped the Tel Aviv bond market for financing in 2008. At the time, the idea of securing financing in Israel was novel. Why go to Israel when financing was available in the United States? But as the real estate industry reeled from the great financial crisis, debt became more expensive and the Tel Aviv Stock Exchange (TASE) was the trendy place to find it.
Prominent investors like Stephen Ross, Gary Barnett, Larry Silverstein, and Jeff Sutton embraced the trend. Once the spigot turned on, it never stopped. The deal was enticing and rather straightforward: secure mezzanine debt in the United States that carried an 10% -11% interest rate or a fixed coupon of less than 5% in Tel Aviv. It was an attractive proposition and everyone jumped on the bandwagon.
In 2018, when bond issuances reached a staggering $5.7 billion (north American issuances exceed this number today), the quality of sponsors and real estate assets backing the debt declined. Second-tier developers like Brookland Capital and Urbancorp joined the frenzy.
And yet, as risk grew, bondholders were not differentiating between New York City assets and quality sponsors. Bondholders didn’t simply value assets based on cash-flow –– properties were dangerously valued based on speculative rapid appreciation. The frenzy also led to lax corporate governance oversight.
Circumstances also played a role in some under-performance as investors in rent regulated residential assets faced distress after new rent laws passed in 2019. These assets have gone down around 25% since then because increasing rents is essentially no longer worthwhile. To date, though, Israeli bondholders have been hit hardest by the decline of shopping centers that has hurt many retail REITs in the United States as well.
In May, Starwood Capital defaulted on a $254 million bond issued for a seven-property regional mall in 2018. The COVID-19 pandemic further accelerated a decrease in rent collection to around 20 percent, and six competing proposals were submitted to restructure the assets, The Real Deal reported at the time.
Enter Ardon Wiener of Chestnut Holdings, a 31-year old entrepreneur, who was scouring public records on ACRIS and discovered some questions surrounding All Year Management’s development project at 54 Noll Street. This led the young developer to open a short position across All Year’s bonds, and subsequently file a lawsuit in March 2020 alleging that All Year and Mishmeret Trust Company were in violation of their securities agreement. The case is still being adjudicated.
Wiener’s attorney, Zvi Gabbay, a partner at Barnea, is also representing Israeli bondholders in a slew of new lawsuits against the Brooklyn developer.
In an interview with DailyBeatNY, Wiener says his goal was loftier than simply shorting the bonds to make money –– he wanted to bring awareness to the behavior that could lead Israeli pension funds to enormous losses. And there was a precedent: “Urbancorp, Brookland Capital, and Starwood were all ensnared in controversies,” he explained.
In a February 2020 letter to Mishmeret Trust company, Wiener made the following three allegations surrounding 54 Noll Street (AKA Denizen Bushwick) in Brooklyn.
- Yoel Goldman had signed the mortgage document for 54 Noll Street on behalf of the lender, Mishmeret Trust company. Wiener alleges that this wrong signature could “undermine the enforceability of the loan” putting the security of the asset at risk.
- All Year Holdings transferred over 78,000 SF of air rights secured by the asset without bondholder approval. At the time of the lawsuit, Wiener valued these development rights at $15,000,000. He pointed out, “It was an immediate red flag. Lenders rarely release collateral without a paydown.”
- Wiener also alleged a conflict of interest: Jeffrey Zwick, the attorney responsible for overseeing the signatures of the mortgage on behalf of the Series E bondholders, was the same attorney who signed off on the air rights transfer on behalf of the bondholders, and also represented All Year on the purchase and initial financing of the same asset. “Even after notifying Mishmeret and All Year about the conflict, Zwick continued to work on behalf of All Year, representing them in the unsuccessful Brooklyn portfolio sale to David Werner,” Wiener noted.
All Year replied to the letter two weeks later and said it would correct the mortgage document, calling it a “technical mistake.” Mishmeret Trust denied the second charge by saying that this transfer was recorded in accordance with the bond terms, and that “all floor area included in the collateral at the time of issuance is still encumbered by the bonds.” We reached out to Yoel Goldman and All Year’s representatives multiple times for comment to give the developer an opportunity to respond to Wiener’s third allegation, and All Year didn’t reply.
Although Mishmeret and All Year continue to deny any wrongdoing, Wiener believes that his actions, “coerced All Year into filing a new mortgage document with proper signatures.”
With questions continuing to arise about All Year in the Israeli media outlets Calcalist and Bizportal, Wiener is proud to have potentially saved All Year’s series E bondholders from hundreds of millions of shekels in losses by upholding the integrity of the collateral. As of December 23rd, All Year series E bond closed at 88.6 (NIS), trading around 4 times higher than their unsecured series B counterparts, which closed at 22.37 (NIS).
Zvi Gabbay who is representing Wiener explained the legal situation to DailyBeatNY: “There are currently two pending class actions against All Year. The first, was filed a while ago, and involved illegal transfers of funds from All Year to Goldman.” This conduct led to the Israel Securities Authority (ISA) recently imposing penalties on Godlman via administrative enforcement after $3.7 million was “accidentally” transferred to his personal accounts in 2018, Calcalist reported.
And earlier this week, documents filed yesterday with TASE revealed the pressing challenges Goldman faces at Denizen Bushwick –– the very site Wiener initially questioned. JPMorgan Chase, the senior lender on the rental property has put All Year in default on its $170 million mortgage, Calcalist and CO reported. The second phase of the 750-unit complex was already facing foreclosure on the mezzanine interest after failing to make payments on a $65 million mezzanine loan from Mack Real Estate.
“We believe that our case exemplifies what can happen when the controls that should have protected the investing public – don’t work,” Gabbay warned. It’s clear that with better corporate governance and independent directors with local market expertise appointed by bondholders, the TASE bond market can continue being a great source of financing for American developers.