The Mediterranean sun caressed the golden shores of Cyprus, and Gil, a young and energetic Israeli real estate developer but one lacking international experience, gazed at the port city of Larnaca. His eyes sparkled as he imagined skyscrapers and a bustling mall rising on the virgin land he had bought. His vision was clear: “Cyprus is the next Dubai,” he declared, and he was determined to be the one to realize the enormous potential.
Gil did not waste time. He completed the purchase of the land without having carried out, through a local team, serious due diligence on the land, and settled for a minimal legal check regarding the rights in the land. He signed agreements and invested all his savings in the project “Larnaca City,” an ambitious project that included building a residential, entertainment and commercial complex. He was sure of his success; after all, he saw every day a growing number of ads for property offers in Cyprus on social media and concluded from this that demand for properties in Cyprus was only rising, and according to the calculations he made, time after time, he found that the project's profits were supposed to be astronomical. Just as he did not do complete and comprehensive due diligence, he also did not make a detailed business plan and did not carry out checks, neither on the authorities' requirements from a planning standpoint nor on construction costs (labor costs, for example, are not the same in Cyprus as in Israel). Gil thought that the successes in the 2 TAMA 38 (Israel's urban renewal program for strengthening existing buildings) projects he initiated in Holon had made him an experienced real estate developer and that he had the knowledge and tools for a project in Cyprus, and did not understand that developing abroad (certainly for the first time in a country where you have not operated before) is not like developing in Israel.
But as the months went by, cracks began to appear in the rosy picture. Bureaucratic delays, complex local regulation, and difficulties obtaining credit from local banks began to delay the project's progress and eat into its profitability. Unexpected cost overruns (who would have thought the authorities would require him to carry out soil contamination tests, or pave an access road at his own expense), difficulties cooperating with professionals, and internal struggles with partners led to the project getting stuck in place, and to financial losses.
Gil, who refused to throw in the towel, tried to raise additional investors, but they were put off by the mess. He tried approaching banks in Israel, but they were not keen to finance a real estate project in Cyprus. When he arrived at our office he was on the verge of despair, his equity dwindling, and he could not find a solution that would get him out of the tangle he had landed in and out of the commitments he had taken on.
A study by the international research institute McKinsey states: “A business plan is the compass of every real estate developer, but it is especially important when it comes to a project abroad, where the risks are greater and the obstacles more complex.”
A professional business plan, as the American real estate developer Sam Zell emphasizes, gives us, the developers, a forward-looking view, which will prevent unexpected difficulties and the collapse of the project: “Neglecting the early planning of any action brings the planner to regret.”
A professional business plan has five important components:
1. Market analysis: Understanding the local market, including demand and supply, trends, competitors and regulation.
2. Financial planning: Estimating costs, sources of financing, cash flow, profit and loss forecasts.
3. Marketing planning: Developing a marketing strategy tailored to the local target audience.
4. Operational planning: Project management, timetables, supply chain and hiring of manpower.
5. Risk management: Identifying potential risks and developing contingency plans.
When we began to handle Gil, the first thing we did was instruct him to stop every expense and action. In the first stage we shut ourselves in together with Gil and a local Cypriot professional team put together by the local partner (a local architect we had worked with on previous projects, a local project manager, Gil's local accountant, and from time to time we also consulted local building contractors on matters of raw material costs and execution costs) for 3 days of brainstorming, examining options and preparing a business plan. The deeper I dug, the more I understood that Gil's great luck was that the investors trusted him out of previous acquaintance, since the plan he had prepared was not really a plan backed by data and serious research that he had conducted. As a result we built several planning alternatives for the land owned by Gil and for each of them we built a business plan, and decided to begin precisely with a feasibility check from the authorities' standpoint for each of the alternatives, and only after meetings with the mayor and the city architect of Larnaca and receiving a “green light” from them for some alternative, to proceed to detailed planning and try to get the project out of the mud.
An academic study by Columbia University states: “Meticulous preparation will save many headaches, and above all financial losses and excuses.”
Gil's story is a warning sign for any real estate developer who wishes to expand his activity overseas. Do not be tempted by grandiose dreams, do not underestimate the small details, do not ignore the risks. Plan carefully, consult professionals, and remember: “Think before you act.”
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית