In 1952, Eugene Landy, then a 19-year-old US Navy cadet, touched ashore in Tel Aviv. He alighted from his ship for his first visit to Israel, wandered the streets of the city, and saw the buildings from a youthful tourist’s point of view. Two weeks ago, Landy now a 71-year-old New Jersey real estate developer, and president and CEO of Monmouth Real Estate Investment returned for his “umpteenth" visit to Israel to check out the possibility of buying some of those same buildings.
Landy, , has been dealing in REITs, or Real Estate Investment Trusts, for 40 years. In 1961, in the early days of REITs in the US, Landy established the first such fund, Monmouth Capital, today the smallest of his three funds, with independent capital equivalent to $19 million today (based on July 2004 figures). Seven years later, Landy established his two main funds, United Mobile Homes (with $115 million in independent capital) and Monmouth Real Estate (with $128 million in independent capital). The independent capital of all three funds equaled $260 million, and together with bank leverage, the three funds control instruments and investments totaling $450 million, all in the US.
For about a year now, Israeli Ministry of Finance staff and private investors alike have been talking about forming REITs made up of Israeli investors who would purchase properties in Israel. Last year, a potential investors’ conference was held in Tel Aviv that attracted 700 participants. The filled-to-capacity hall was testimony to the keen interest in the subject in both the real estate and the finance sectors.
In the months following the conference, companies and developers announced various plans to establish Israeli REIT funds, but meanwhile no such fund has been established. The bill containing the necessary legislation, which the Treasury announced that it would submit to the Knesset “in February or March 2004”, is still floating around somewhere.
Meanwhile, Landy’s idea is just the opposite: He wants to organize thousands of North American investors into an US-based REIT that will purchase real estate worth $100 million in Israel. As far as anyone knows, Landy is the first American planning to establish an American REIT that will invest in Israel. In an interview with "Globes", Landy revealed for the first time in Israel his business, and an investment plan that he claims will bring an influx of huge sums in to bolster Israel’s real estate market, which has been in crisis for years.
Globes: Who will invest in your funds?
Eugene Landy: "35,000 North American investors, mostly small and medium businesspeople, have so far invested in my three funds, and made excellent deals. Whoever purchased a Monmouth Real Estate investment certificate in 1983, for instance, for $10,000, today owns assets worth $400,000 via the fund. I myself purchased several such certificates, and I’ve done excellent business."
How will you build investment in Israel?
"I intend to offer each of 4,000 East Coast investors a investment certificates for $25,000, not a large sum for American investors. I assume that most of the investors will be Jewish, because non-Jewish Americans aren’t specifically interested in investing in Israel."
Net returns of 7.5%
Is it worth investing in Israeli real estate today, despite the crisis?
"The crisis of the past few years has brought about a situation wherein it’s a good idea today to purchase many properties in Israel at low prices, sometimes even at a bargain. The assumption is that over the years the market will recover, and the value of the properties will rise."
Let’s say you’re going to invest $100 million. What would you invest it in?
"Finding the right properties is one of the three problems or conditions that I have to solve, so that I can establish and run the fund. It’s clear to me that I won’t buy up lots, and likewise not apartments. Those investments don’t yield good, ongoing returns. On the other hand, I’ll check out office buildings, shopping centers, large companies’ warehouses, and private hospitals. $100 million in independent capital along with the right bank leverage could set up hundreds of millions of dollars in investments."
You mentioned three conditions for operating the new fund. What are the other two?
"First of all, you need a law that states that the taxes on income and profits will be paid by the individual investors in the fund, not by the fund 'from above'. As long as there’s no such law, the investors risk paying double taxes: once at the fund level, and again on an individual level, making the entire investment not worthwhile. It’s also a good idea to make sure that the tax is relatively low: If it’s 35%, for instance, it will deter investors. Let’s say an investor gets a return of 8% before taxes; after taxes and expenses, he’ll only have 5%not very appealing."
And what’s the third condition?
"The other condition is to raise money from the right people and places. My fund’s business plan states that the money will come only from investors in the US, not Israeli investors. It will be my responsibility, together with my staff, to locate the right investors. I intend to retain the services of an Israeli attorney, Eyal Keren, who works in my company in New Jersey, as well as another Israeli attorney, Haim Aharon. They both know all the properties in Israel as well as Israeli law, and they can thereby help my fund and my investors."
It emerges from figures that Landy presented to "Globes" that he believes the right investment exists for an American REIT fund, not an Israeli one. A conspicuous example is his United Mobile Homes fund, which invested in the purchase of 6,000 apartments and homes in New York, New Jersey, Pennsylvania, Ohio, and Tennessee. In the US, one can rent homes for high returns with a good chance of earning high profits; in Israel, the going rate for rent yields only 3.5% annually, and in recent years, capital profits aren’t even worth talking about. In the US, [Landy’s] fund has an annual return of 8%, a rate that in Israel we can only dream about.
Landy’s second main fund, Monmouth Real Estate, invested in the purchase of 34 industrial properties, including warehouses, all in one commercial center. The tenant of which Landy is most proud is the internationally known Federal Express, located in a row of warehouses owned by the fund on the East Coast of the US. The rest of the tenants, are relatively low-profile, but according to Landy, that’s not important, as the fund yielded returns of 7.5% last year.
The problem: Too few properties
Landy is a lawyer by training who has for years been engaged in REIT business transactions. The profits that he made from managing funds and from investments enable himas it is common practice in the USto devote himself to community work. Landy is a member of the board of directors of Yale Law School; active in New Jersey agricultural conservation; and writes articles on real estate and securities. He also keeps busy with his 200-acre horse ranch in New Jersey, where he himself loves to ride.
His wife, Gloria, is also active in the community: She is director of the United Synagogue of Conservative Judaism, , and vice-president of the World Council of Conservative/Masorti Synagogues, which doesn’t bother their son, Richard, an Orthodox rabbi in New York. The Landys’ other two sons, Samuel and Michael, work alongside their father managing the REIT funds.
The Landys visit Israel at least once a year. Last year, they bought an apartment in Netanya, while their most recent visit had a dual purpose: Eugene checked on the progress of REIT fund deals, and Gloria attended the dedication of the new Conservative/Masorti Movement headquarters in Jerusalem.
With whom have you met in Israel?
"In the two weeks since I’ve been here, I’ve met with a long list of people engaged in economics and real estate, and I’ve tried to interest them in the idea of establishing an American REIT fund that would invest in Israel."
Landy told "Globes" that he met with Industry and Trade Minister Ehud Olmert, who asked Landy to draft a memorandum on the subject of REIT funds. Landy also met with the head of the joint Ministry of Finance and Israel Securities Authority committee for the establishment of Real Estate Investment Trust (REIT) funds in Israel Moshe Asher; Azorim Construction and Real Estate Development chairman Roni Milo; Tefahot Israel Mortgage Bank general manager Haim Freilichman, who is now a candidate for the directorship of Phoenix Insurance; and representatives of the banks.
You actually didn’t meet with Finance Minister Benjamin Netanyahu, the person most responsible for advancing the issue of REITs?
"I was supposed to meet with him, but my appointment got cancelled at the last minute because Netanyahu was busy with some internal issues."
What’s your impression after your meetings with Israelis?
"What you [Israelis] need more than anything else in pushing for the establishment of REITs is to pass a law that will allow for the necessary tax breaks. I told everyone I met with: Don’t pass a complicated, convoluted law. All you need is a simple law. I suggest learning from the example of Australia, where they found a way to grant tax breaks in a simple way. Therefore, the REIT funds there are flourishing, as well as in other countries, including in Central America and England."
Are there enough properties in Israel to buy for your REIT fund?
"It is a problem, because this is a small country, and there aren’t many suitable properties. I wouldn’t recommend investing in hotels [for example], because the tourist industry is in danger. On the other hand, I believe that office buildings and shopping centers can be found that will yield the required returns."
Just enact the law
What, in your opinion, is the main obstacle to establishing a REIT fund in Israel?
"The fact that it’s still not regulated. I understand that you’ve been talking about it for a year now, but where’s the law? Without a law that allows investors to receive tax breaks, as I explained, no REIT fund can be established."
Is all the effort worth it?
"Absolutely. REIT funds in the US are one of the biggest drivers of the real estate industry. I have three funds with capital and bank leverage totaling $450 million. It sounds like a lot of money, but the truth is that our Monmouth Real Estate fund is in 147th place out of the183 REIT funds in the US. These funds have raised a total of $500 billion in independent capital and bank leverage.
"The industry has seen its ups and downs, and today it’s in an upward trend again. This enables millions of Americans to invest in real estate, injecting huge amounts of money into the industry. As of September of this year, the biggest fund of all, Simon Property, has $13.7 billion in capital. Number Two is Equity Office Properties, whose properties aren’t much below Simon’s at $13.3 billion. The next funds down the list are also big, not much smaller then the top two. That means a huge round of fundraising that could give momentum to real estate in Israel; just get your legislative act together, without unnecessary complications and delays, and let the people invest!"
Published by Globes [online] - www.globes.co.il - on Wednesday, November 17, 2004