Sometimes I feel that no matter how much I write, speak or push the subject, the same types of investors will keep coming to the office, as if they had not read or heard that before entering a deal it is worth running checks, and not rushing into a deal just because the price looks really attractive to them.
David met Shlomi through a mutual friend who had studied with Shlomi at university. David said they met several times in Tel Aviv bars, together with their mutual friend and others, until one day he got a phone call from Shlomi inviting him to a gathering at which he would present an interesting business proposal. Shlomi took care to stress that the proposal was for a limited group of his friends, and that the two men's mutual friend would not take part in the gathering.
At that gathering Shlomi proposed setting up a purchase group for land in an Eastern European country. The presentation he prepared, according to David, spoke of land on a lakeshore in an area considered touristic in the country, with a plan to build a hotel there. The sum Shlomi quoted for buying the land sounded very low to David, and according to the business plan Shlomi presented to them, it involved raising about 1 million euros, including building the hotel. He presented them with a hotel profit of 38% from operations. David was enthusiastic and joined the investor group without checking the deal himself, relying on Shlomi's presentation. He understood that in the first stage they would buy the land together, and the sum each was required to pay for this was truly “ridiculous,” as he put it. In the next stage Shlomi was supposed to take care of planning, permits and building the hotel. When Shlomi started stalling and inventing excuses for why the matter was delayed and construction was not getting under way, David decided to meet me and look into the matter in depth.
When David showed me the documents he had signed, and after several checks we carried out with the help of the local office, I summoned David to another meeting and presented him with the findings:
- The good news is that Shlomi did buy land on the lakeshore.
- Despite Shlomi's undertaking in the agreement that all 20 investors signed, they were not registered as shareholders in the company that was set up and bought the land. Shlomi is the sole shareholder in the company.
- It will most likely not be possible to build on the land that was bought, because under local regulation it is not permitted to build near the lake in the area in question.
David asked that we hold a meeting with Shlomi and try to understand from him how, if at all, the money could be saved.
The meeting with Shlomi was not easy for either of them. I tried above all to understand from Shlomi what data he had based his decision to buy the land on. It turns out that Shlomi, of course, had not run comprehensive checks. He had not looked at the local outline plans, and did not know about the prohibition on building on the lakeshore. He relied on the fact that there are hotels on the other side of the lake, and was convinced that it was possible, and worthwhile, to build on the side where he bought the land too. Shlomi was so sure of himself that he consulted an architect who specializes in designing hotels, but did not check with a local architect what could be built on the land. Only after the purchase, when he began meeting local planners, did he realize that the story was not simple. According to him, a few months ago he filed an application to change the land's designation so that it could be built on, but it is far from certain that the application will be approved.
What conclusion is called for by the story? You already understand.
- Do not be tempted by cheap deals.
- Check. Check. Check. Do not be lazy: check with the local authority the land's designation and the building rights.
- Consult suitable and appropriate professionals before carrying out the purchase.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית