Are Tama 38 funds offering good yields…or too good yields? In the end they will damage the project but, more importantly, the investor.
In many Israeli Cities, chancing upon a big bill-board stating “TAMA 38 project about to begin on this site” has become as routine as a passing a branch of Starbucks in Manhattan. These projects, aimed to encourage home-owners to strengthen their buildings in the anticipation of a natural disaster, are considered to be win-win and mutually beneficial. The developer gains the rights to sell two or more additional floors whilst providing additional space and stronger infrastructure for the existing owners.
As with every new real estate product comes a new financial vehicle. Like mushrooms after the rain have popped up fund-like vehicles which offer high returns at “low” risk to finance these TAMA 38 projects.
To be quite honest, I never took any of them seriously. Nothing offering 15+% and stating low risk, when interest rates are zero, should be taken seriously. But when my 80-year-old mother-in-law asked me what I think because to her it looked great, I realized that I should share my concerns with others.
The vast majority of TAMA 38 projects are just complex real estate deals. If a builder asked you for a loan for a project because he cannot obtain finance, would you consider it as an investment? Investing in a TAMA fund is much the same…but worse.
These projects are generally built at very low profit margins. If this fund is paying its investors 16% it is charging at least 20% to the developer. A short delay is enough to cause the project to go from profit to loss just because of finance costs. And we all know what happens when a builder feels he is losing money.
This type of project is relatively new and the unknowns are huge. When you start peeling away at an old building and digging down at its foundations, it is more than possible that you will end up having to do far more work than planned, if not having to knock down the whole edifice. A little like going to a dentist with a rotten molar.
Banks are lending to good TAMA 38 projects. A project which is forced to borrow from a fund is one which the banks turned down. It is true, banks are not the epitome of openhandedness with their money, but from scratch the private funds lend to tier 2 projects.
It is ok to advertise high risk high yield investors. History has taught us that if it looks too good to be true, it probably is. Any financial vehicle requires transparency on an ethical level and a full prospectus on a legal level. I recommend extreme caution when considering these products.