Kohan Properties Debt: $3.8M Owed by Principal

Kohan Properties, a US-based real estate firm that has tapped the Tel Aviv bond market, is under intense scrutiny following revelations that its principal, Mike Kohan, owes the company a substantial sum. Initially, the company suggested that funds withdrawn by Kohan for personal loan repayments had been fully reimbursed. However, subsequent disclosures indicate a remaining debt of approximately $3.8 million, a figure that has sent ripples through the market and impacted the company's bond performance.

The company's Series A bonds, which raised around 412 million shekels (approximately $110 million USD) in Tel Aviv, are now trading at a double-digit yield, reflecting investor apprehension. This situation has been exacerbated by the discovery that a significant portion of the funds, around $2.5 million from a preferred equity loan of $4.7 million, was diverted to settle personal debts rather than for its intended purpose. This diversion, coupled with interest and exit fees, brings the total owed for this specific component to nearly $3.9 million.

Further complicating matters, the company's audit committee has mandated a steep 15% annual interest rate on Kohan's outstanding debt, a premium reflecting the elevated risk, lack of collateral, and the nature of the fund's utilization. The situation also highlights potential control deficiencies within the organization, as some withdrawals occurred even after an additional signatory was appointed. This suggests that internal control procedures and the full integration of signing authority across subsidiary accounts were not yet complete.

In response to these governance concerns, Kohan Properties has implemented several corrective measures. The company has appointed a new Chief Financial Officer and an internal legal counsel, restricted Kohan's sole signing authority, and bolstered its oversight mechanisms. These steps aim to restore investor confidence and reinforce financial discipline. Since the initial disclosure, Kohan has reportedly repaid approximately $6 million, bringing the total returned to the company to about $11.7 million out of the $15.5 million that left the issuer's accounts post-IPO.

The revelation follows a period of intense regulatory inquiry, prompted by the Israel Securities Authority. Earlier in July, the company disclosed that Kohan had utilized roughly $9.6 million of the IPO proceeds for personal asset debt repayment without proper disclosure in the prospectus. Kohan's assertion that these funds were fully settled via a transaction related to Chicago's South Dearborn property has been contradicted by the latest reporting, underscoring the opacity surrounding these financial dealings.

This episode casts a shadow over the real estate investment sector, particularly for companies leveraging public debt markets. The incident echoes the recent collapse of Simed, another BVI-incorporated entity that raised bonds in Tel Aviv, raising concerns about due diligence and corporate governance standards among international issuers. The market will be closely watching Kohan Properties' ability to resolve this debt and rebuild trust with its bondholders.