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Understanding the Legal and Commercial Considerations Behind Overseas Investments
For many Israeli investors, real estate abroad offers an opportunity to diversify investments, explore different markets, and potentially achieve attractive returns. At the same time, cross-border property transactions raise important questions concerning ownership rights, contractual obligations, taxation, financing, and the parties involved.
Against the backdrop of economic uncertainty, inflation, and regional instability, overseas real estate has become an increasingly relevant investment consideration. However, opportunities in foreign markets require more than an assessment of property prices and projected returns. Investors must also understand the legal and commercial framework of the transaction.
In a special episode of the radio program “Closing the Loop” on Radio North, Adv. Tal Kaufman hosts Adv. Keren Kapel Shmueli, Partner at ABADI & CO. and Head of Real Estate, for a discussion on the considerations that should guide investors before committing funds to real estate abroad. Drawing on her experience in real estate and commercial transactions, Keren examines the motivations behind overseas investments, the risks involved, and the contractual and legal issues that investors should address before proceeding.
About “Closing the Loop”
“Closing the Loop” is a weekly radio program that connects law, business, and society. Each episode is hosted by Adv. Tal Kaufman, Partner and Head of the Wealth Management and Intergenerational Transfer Department at ABADI & CO., who engages leading figures and experts in open and in-depth discussions on the legal and economic issues shaping Israeli society.
The program aims to make complex legal issues accessible and provide listeners with practical tools to protect their rights, assets, and interests.
Why Invest Abroad? Understanding Investors’ Motivations
The discussion opens by examining the factors that lead Israeli investors to consider real estate opportunities outside Israel.
Property prices and entry costs: High property prices and the substantial equity required to purchase real estate in Israel may encourage investors to explore foreign markets, where the initial investment may be lower. However, acquisition costs, taxes, financing, and ongoing expenses must be evaluated in each jurisdiction.
Diversification: Investing in different markets and currencies can help investors diversify their economic exposure. This approach also introduces additional considerations, including currency fluctuations and differences in local market conditions.
Potential returns: Overseas properties may offer attractive rental yields or opportunities to increase asset value. Nevertheless, projected returns should be assessed against the risks involved, the investment structure, and the costs associated with managing and eventually selling the property.
Personal and security considerations: Some investors are also motivated by the desire to establish assets outside Israel, particularly during periods of regional uncertainty.
As Adv. Keren Kapel Shmueli explains, these motivations should be considered alongside the legal and commercial characteristics of the investment. Purchasing property abroad is not simply a real estate transaction; it is an international commercial transaction that requires a clear understanding of the parties, the rights being acquired, and the obligations undertaken.
Five Essential Questions Before Investing in Real Estate Abroad
A central theme of the discussion is the importance of conducting thorough due diligence from the earliest stages of a transaction. Two principles underpin Keren’s approach: business is conducted between people, and a successful transaction should provide a clear commercial rationale for the parties involved.
1. Who are you actually doing business with?
Investors should establish whether they are dealing with the property owner, developer, marketing company, or intermediary. The party promoting an investment may not be the entity signing the agreement or assuming the relevant contractual obligations. Identifying the parties, understanding their respective roles, and assessing the involvement of reliable local professionals are essential steps.
2. What exactly are you acquiring?
An investment may involve direct ownership of real estate, shares in a company, or an interest in an investment fund. Each structure creates different rights and obligations and may affect the investor’s control over the asset, exposure to risk, and ability to exit the investment.
3. Are you an investor or a lender?
The legal and commercial distinction between lending money and investing in an asset is fundamental. Investors should understand whether they are entitled to interest and repayment under a financing agreement or whether their returns depend on the performance of the investment. Collateral, repayment terms, exit mechanisms, and the circumstances in which capital may be returned should be clearly defined.
4. Are the parties’ interests aligned?
Understanding how the developer, marketer, and other participants earn their fees or profits can provide important insight into the transaction. Investors should examine the parties’ financial incentives and identify potential conflicts of interest before making a commitment.
5. What does the contract actually provide?
Contractual documents should be reviewed carefully, particularly provisions concerning projected returns, property management, rental income, payment obligations, and the sale of the asset. Verbal assurances and marketing representations should not replace clear contractual commitments. Promises of fixed or guaranteed returns over an extended period warrant particular scrutiny.
The discussion emphasizes that a careful review of these questions can help investors better understand the transaction, identify potential risks, and make informed decisions before transferring funds.
Different Markets, Different Investment Models: Greece and the United States
The episode also examines investment opportunities in Greece and the United States, illustrating how different markets may involve distinct commercial objectives and investment structures.
Greece: Geographic Proximity and Rental Opportunities
Northern Greece, including Thessaloniki and Halkidiki, may appeal to Israeli investors because of its geographic proximity, property prices, and the possibility of combining investment with personal use. The discussion, featuring Tomer Ganzi, CEO and Partner at Gefen Global, also addresses financing opportunities and the importance of understanding the applicable tax framework.
The United States: Acquisition and Value Enhancement
The discussion with Ofir Badash, CEO of Avenues, focuses on a different investment model involving the acquisition of property, increasing its value, and ultimately selling the asset. In these transactions, the realization of returns may depend on completing the value-enhancement process and executing a successful sale, rather than generating ongoing rental income.
These examples highlight the importance of assessing each investment according to its specific structure, expected holding period, financing arrangements, and exit strategy. The characteristics of one market should not automatically be assumed to apply to another.
Cross-Border Investments: Taxation and Dispute Resolution
Beyond the commercial terms, overseas real estate investments raise legal and tax considerations that should be addressed before the transaction is completed.
Tax obligations: Depending on the investment structure and applicable law, investors may face tax reporting obligations in both the country where the asset is located and Israel. Professional advice may be required regarding tax filings, identification requirements, and representation before the relevant authorities.
Dispute resolution: Investors should establish which law governs the agreement and where disputes would be resolved. Contractual provisions determining jurisdiction and dispute resolution procedures can have significant implications for the cost, complexity, and practical management of a dispute.
These considerations reinforce the importance of obtaining appropriate professional advice at an early stage, rather than addressing legal and tax issues only after the investment has been made.
A Structured Approach to Investing Abroad
The discussion highlights several fundamental principles for investors considering overseas real estate:
- Treat the investment as a commercial transaction: Understand the structure, the parties involved, and the rights and obligations created by the agreement.
- Assess the alignment of interests: Examine how the parties are compensated and whether their commercial incentives are consistent with the investment’s objectives.
- Review the contractual framework: Ensure that representations, payment arrangements, management responsibilities, and exit mechanisms are clearly addressed.
- Seek professional advice early: Evaluate the legal, tax, and commercial implications before committing funds.
Overseas real estate investments can present opportunities, but their assessment requires a structured approach that considers both potential returns and the risks inherent in cross-border transactions. A thorough understanding of the legal framework and the commercial arrangements is essential to making informed investment decisions.
To listen to the full episode of “Closing the Loop” on Radio North, click here.
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