This coming Sunday, the shareholders of the Castro fashion house will be asked to approve a deal between the controlling shareholders in the company, Gabriel and Etti Rotter and Aharon and Lina Castro, and the fashion house. The four controlling shareholders, who hold 64 percent of the Castro stock, want to lease to the company the store that they recently purchased, which is situated on an area of 900 square meters at the corner of Dizengoff and King George streets in Tel Aviv, for an annual fee of $390,000.
The store served Bank Hapoalim in the past, and was bought from the Mango fashion company for $2.2 million. The owners of Mango bought the store at a higher price, but the plan to open a Mango store there was canceled. According to Castro's executive director Gabi Rotter, the company has a women's store in Dizengoff Center, and after the company decided to lease a store for men as well, for the Castro Man chain, it began a search for a store in the mall. Finally they found the large corner store, which was purchased privately.
According to Rotter, the rental fee, backed by an estimate made by a real estate assessor, was determined according to the repayment of the loan taken to purchase the asset, taking into account the rental costs of similar stores in the area. "This is the best corner in Tel Aviv," he added. After subtracting the agent's fee, appreciation tax and additional payments, the return for Rotter and Castro comes to about 16 percent. The controlling shareholders have apparently carried out an exceptionally successful real estate transaction, considering the slump in the real estate market. However, even in good times, it's hard to find a real estate transaction that will yield 16 percent annually, especially in high-demand areas.
According to Rotter, Castro, which deals in fashion only, is not interested in dealing in real estate, because the return in real estate is much lower. This was why Castro leased stores instead of buying them, he said.
Castro's annual return on equity is about 28 percent. On the advice of economists, Castro has, in fact, not purchased real estate for years. The three stores that it owns, together with the building in Bat Yam where its offices are located, are worth about NIS 30 million and were purchased before 1994. Rotter said that if Castro had bought the store on its own rather than through another company, it would have encountered greater difficulties, as a result of revealing its interest in this location.
Israel's Companies Law requires that this type of transaction, which is called a transaction of interested parties, be approved by a meeting of the company's shareholders. The law demands that among the majority votes at least one-third be those of shareholders who are present at the voting and are not controlling shareholders with a personal interest in the decision ["non-interested shareholders"], or that the total number of opposing votes be no more than 1 percent of the voting rights in the company.
The largest minority shareholder in Castro - the Bank Leumi pension funds - is also apparently the key to the deal's approval. Leumi, which holds about 8 percent of the shares, wanted to change the transaction somewhat and introduce a clause requiring a reassessment of the value after five years, with the rental fee updated accordingly. Castro agreed to Leumi's request, which should remove any obstacle to the deal.
Castro's women's store in Dizengoff Center, on an area of 190 square meters, is leased at a monthly rent of about $15,000. The proposal is that Castro transfer its operation to the new store, with two options - renting the entire area of the store for $32,800 a month, or renting part of the store (550 square meters) for $5,000 less. Rotter said that the shareholders would let Castro's board decide which option was preferable. He added that the contract with the owners of the present store had not yet terminated and that Castro would have to find someone to sublet the store.
The average cost of the store that Castro leases at present is $80 per square meter. On the other hand, the average cost of the deal if Castro leases the entire area of the new store will be $36.4 dollars per square meter. Castro's financial manager, Ron Meital, said that the rental fee for the store was even lower because as part of the rental agreement, the store could post a huge sign without any additional payment to the controlling shareholders. She said that Castro was known for its huge signs and paid hundreds of thousands of dollars a year to post them. According to the assessment of Dovrat Ulpiner, the value of the wall on which the sign will be posted is $150,000 a year.
The value assessment mentions surveys that have shown that the location of the proposed store is the best in terms of business. Of the two buildings comprising the shopping center, it is obvious that the southern structure is the most active; and of the five gates to the shopping center, the three nearest the store are those with the most traffic. Of those entering the mall, 25 percent pass through the King George gate. In addition, Ulpiner says that 65 percent of those coming to shop via public transportation got off the bus at the stations near the Dizengoff South and King George gates.
She says that the location of the store, with storefronts facing the two main streets, and next to the two main gates, is unique. So is the sign for the entire height of the store, which faces the direction of the people traveling on the two streets, which are main traffic arteries in the city center.
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