Matti Munk
Specialises in multi-tier corporate finance for real-estate developers

The Myth of Tama 38: Is this bubble about to burst?

A couple of years ago, an article with the words Tama 38 in the title would start with a brief explanation of the topic. Now there is no need. In the Israeli building industry, if you do not know the intrinsic details of this field, you are evidently not part of the industry.

On paper, Tama 38 is a win-win-win plan. The homeowners gain safer and usually larger properties, the developer gains from the sales of the additional units and the country gains from rare land reserves for additional housing. So, when everyone is gaining, why is the country considering putting this to a halt? The National planning committee lately foiled a new amendment to the law and has instructed a national review on the Tama approval processes and policies.

Although Tama seems to be an all-around winner, when cutting a little deeper, all is not so rosy pink. There is a fourth collateral winner to this law, which could have started a healing process to a 60-year-old scar on the Israeli economy, but alas, is deepening the wound.

The Israeli economy has historically been oligopolistic and controlled by several powerful families, reducing competition and connecting political to economic power. The new wealth created from the hi-tech industries has somewhat improved this situation. However, these funds are not being channeled to real-estate, which is not a field for people looking for quick exits, leaving the core real estate industry controlled by the same original companies.

Tama could have changed this. The ability to take construction knowledge to development without the need to invest equity in the land could have given an opportunity to many small but knowledgeable construction firms to become real players on the development stage. Many tried, several already took a fall, with many more falls to comes.

Starting a project looks so easy and so cheap. Knocking on a few doors of a building which looks viable and compliable to Tama. Talking to the neighbors, signing them up, going to City Hall to getting a permit and then start building. Except, this is Israel. The first neighbor agrees who talks to others, they all have uncles or cousins who are contractors and can do it better, daughters who are lawyers, other ideas for developers who will give them more space or cut them into the profit.

Meanwhile, the contractor now developer needs a back office to answer calls from neighbors, to start with the basic architecture, financial management and to maintain the relationships so as not to “lose” the project. The average Tama 38 costs the contractor 400,000 NIS to manage prior to actually starting building. Only one in seven projects reaches construction. So for every project that actually gets underway, the company has spilled close to 3 million shekels. These are small construction companies which have barely been making ends meet for the last 20 years.

Once reaching the construction stage they have another hurdle. These companies have earned lousy credit ratings and are rarely bankable so they finance themselves with Mezzanine lending funds. I recall in the years prior to 2008, being asked by many clients and friends about guaranteed 12% per annum income offerings. Madoff stands out strongest in our memories, but he wasn’t the only one doing this. I answered that the only fixed income I know is from debt, and if they pay 12% they charge 17% to their borrowers. I do not know a business that can maintain profit paying 17% interest over time, so somewhere, something is not sustainable.

This is recurring in the Tama world. A Tama project, if leveraged sensibly, has a 22%-25% profit margin. At lending fund rates, all it takes is a short delay and the project is losing money. And when the developer is losing, everyone loses with him.

Is the National Committee going to cancel Tama? I doubt this will happen. I strongly recommend, however, that they add regulations not just to the structural side of the buildings and to the local infrastructure issues, but to the financial and legal structure of the project, in a similar way to the financial conditions of Pinui-Binui.

History does repeat itself, especially when human greed is involved. Those same attractions which drew people to Ponzi schemes from the last decade are drawing people to seemingly solid fixed-income investments in Tama real estate, but when peeling back the layers, are based on the success of new-age developers who have failed for the past 30 years in the building industry and are secured by a very weak thread dressed up in fancy legal jargon.

About the Author
Married + 4, Oleh from UK, living in Jerusalem. Founder of Western Wall Street, former Manager of International Division in Mercantile Discount Bank and Bank of Jerusalem. Board Member of several NGO's.
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