Annual and Transition Report (foreign Private Issuer) (20-f)

Date : 03/28/2018 @ 11:35AM
Source : Edgar (US Regulatory)
Stock : Optibase Ltd. - Ordinary Shares (OBAS)
Quote : 8.8501  0.0 (0.00%) @ 4:00PM

Annual and Transition Report (foreign Private Issuer) (20-f)

As filed with the Securities and Exchange Commission on March 28, 2018

 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 20-F
 
 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2017
 
OR
 
 ☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________ to
 
 
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-29992

OPTIBASE LTD.
(Exact name of Registrant as specified in its charter)

N/A
(Translation of Registrant’s
 name into English)
Israel
(Jurisdiction of incorporation
 or organization)

8 Hamenofim Street
Herzliya 4672559, Israel
+972-73-7073700
(Address of principal executive offices)

Mr. Amir Philips, Chief Executive Officer
Telephone Number: +972-73-7073700, Fax Number: +972-73-7946331, Email: amirp@optibase-holdings.com
8 Hamenofim Street
Herzliya 4672559, Israel
(Name, Telephone, E-Mail and/or Facsimile and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of Each Class
Name of Each Exchange on Which Registered
Ordinary Shares,
par-value NIS 0.65 each
The Nasdaq Global Market
 

Securities registered pursuant to Section 12(g) of the Act:
None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Not Applicable


 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 5,214,256 Ordinary Shares, par value NIS 0.65 per share, including 29,895 Ordinary Shares held by the Registrant awarding their holders no voting or equity rights.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes ☐           No  ☒
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
Yes            No ☒
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes ☒           No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes ☒           No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “accelerated filer, “large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated filer ☐           Accelerated filer ☐           Non-accelerated filer ☒
 
Emerging growth company
 
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP ☒
 
International Financing Reporting Standards as issued by the International Accounting
Standards Board ☐
 
Other
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
 
Item 17 ☐           Item 18
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ☐           No ☒
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- 3 -

 
CERTAIN DEFINED TERMS
 
In this annual report, unless otherwise provided, references to the “Company,” “Optibase”, “we”, “us” or “our” are to Optibase Ltd., a company organized under the laws of Israel, and its wholly owned subsidiaries. In addition, references to our financial statements are to our consolidated financial statements, except as the context otherwise requires. References to “U.S.” or “United States” are to the United States of America, its territories and its possessions.
 
In this annual report, references to “$” or “dollars” or “U.S. dollars” or “USD” are to the legal currency of the United States, references to “CHF” are to Swiss Francs, references to “€” or “Euro” or “EUR” are to the legal currency of the European Union and references to “NIS” are to New Israeli Shekels, the legal currency of Israel. The Company’s financial statements are presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. Except as otherwise specified, financial information is presented in U.S. dollars. References to a particular “fiscal” year are to the Company’s fiscal year ended December 31 of such year.
 
FORWARD‑LOOKING STATEMENTS
 
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTIONS ENTITLED “RISK FACTORS”, “INFORMATION ON THE COMPANY” AND “OPERATING AND FINANCIAL REVIEW AND PROSPECTS” AND ELSEWHERE IN THIS REPORT. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT’S BELIEFS, ASSUMPTIONS AND EXPECTATIONS OF OUR FUTURE OPERATIONS AND ECONOMIC PERFORMANCE, TAKING INTO ACCOUNT CURRENTLY AVAILABLE INFORMATION. IN ADDITION, READERS SHOULD CAREFULLY REVIEW THE OTHER INFORMATION IN THIS ANNUAL REPORT AND IN THE COMPANY’S PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME. WE DO NOT UNDERTAKE ANY OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE, EXCEPT AS MAY BE REQUIRED UNDER APPLICABLE SECURITIES LAWS AND REGULATIONS.
- 4 -

 
PART I
 
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Not applicable.
 
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
ITEM 3. KEY INFORMATION
 
3.A. SELECTED CONSOLIDATED FINANCIAL DATA
 
We derived the consolidated statement of operations data for the years ended December 31, 2015, 2016, and 2017 and consolidated balance sheet data as of December 31, 2016 and 2017 from the audited consolidated financial statements included elsewhere in this annual report. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, and audited by our independent registered public accounting firm. We derived the consolidated statement of operations data for the years ended December 31, 2013 and 2014 and the consolidated balance sheet data as of December 31, 2013, 2014 and 2015 from audited consolidated financial statements   that are not included in this Form 20-F that were also prepared in accordance with U.S. GAAP and audited by our independent registered public accounting firm. The selected financial data set forth below should be read in conjunction with and are qualified by reference to “Item 5. Operating and Financial Review and Prospects” and the financial statements, and notes thereto and other financial information included elsewhere in this annual report on Form 20-F.

 
Year Ended December 31,   
 
 
2013
   
2014
   
2015
   
2016
   
2017
 
Consolidated Statement of Operations Data:
 
(U.S. dollars in thousands, except per share data)
 
                               
Fixed income from real estate rent
 
$
13,711
   
$
13,938
   
$
15,273
   
$
16,338
   
$
16,587
 
                                         
Costs and expenses:
                                       
Cost of real estate operation
   
2,199
     
2,777
     
2,958
     
3,159
     
3,057
 
Real estate depreciation and amortization
   
3,369
     
3,813
     
3,925
     
4,244
     
4,209
 
General and Administrative
   
1,870
     
2,167
     
1,849
     
2,615
     
2,698
 
Other operating costs
   
-
     
-
     
2,352
     
-
     
-
 
Total costs and expenses
   
7,438
     
8,757
     
11,084
     
10,018
     
9,964
 
Gain on sale of operating properties
   
-
     
2,709
     
-
     
-
     
-
 
Operating income
   
6,273
     
7,890
     
4,189
     
6,320
     
6,623
 
                                         
Other income
   
384
     
394
     
429
     
1,116
     
597
 
Financial expenses, net
   
(1,343
)
   
(1,151
)
   
(1,807
)
   
(3,366
)
   
(2,769
)
Net income before taxes on income
   
5,314
     
7,133
     
2,811
     
4,070
     
4,451
 
Taxes on income
   
(1,518
)
   
(1,502
)
   
(1,609
)
   
(1,627
)
   
(1,602
)
Equity share in losses of associates, net
   
(172
)
   
(186
)
   
(31
)
   
(323
)
   
(1,677
)
                                         
Net income from continuing operations
   
3,624
     
5,445
     
1,171
     
2,120
     
1,172
 
                                         
Net income from discontinued operations
   
-
     
-
     
-
     
-
     
-
 
Net income
 
$
3,624
   
$
5,445
   
$
1,171
   
$
2,120
   
$
1,172
 
                                         
Net income attributable to non-controlling interest
   
2,159
     
2,106
     
2,239
     
1,925
     
2,295
 
Net income (loss) attributable to Optibase LTD
 
$
1,465
   
$
3,339
   
$
(1,068
)
 
$
195
   
$
(1,123
)
                                         
Net earnings (loss) per share :
                                       
Basic and Diluted net earnings (loss) per share from continuing operations
 
$
0.38
   
$
0.65
   
$
(0.21
)
 
$
0.04
   
$
(0.22
)
Basic and diluted net income per share from discontinued operations
 
$
0.00
   
$
0.00
   
$
0.00
   
$
0.00
   
$
0.00
 
                                         
Basic and diluted net earnings (loss) per share
 
$
0.38
   
$
0.65
   
$
(0.21
)
 
$
0.04
   
$
(0.22
)
                                         
Weighted average number of shares used in computing basic and diluted net earnings (loss) per share (in thousands):
                                       
Basic
   
3,822
     
5,127
     
5,133
     
5,147
     
5,180
 
Diluted
   
3,826
     
5,131
     
5,133
     
5,157
     
5,180
 
 
- 5 -


 
Year Ended December 31,
 
 
2013
   
2014
   
2015
   
2016
   
2017
 
Consolidated Balance Sheet Data:
 
(U.S. dollars in thousands)
 
                               
Cash and cash equivalents
 
$
18,811
   
$
22,902
   
$
23,806
   
$
16,024
   
$
20,268
 
Working capital
   
10,112
     
14,500
     
10,360
     
97
     
8,927
 
Real estate property net
   
209,761
     
185,204
     
214,840
     
207,690
     
216,726
 
Total assets
   
238,748
     
218,004
     
262,944
     
250,384
     
259,303
 
Long term loans and bonds, including current maturities
   
127,741
     
112,481
     
161,100
     
149,781
     
155,181
 
Capital Stock
   
138,813
     
138,886
     
138,949
     
139,148
     
139,163
 
Total shareholders’ equity
 
$
78,924
   
$
77,075
   
$
75,584
   
$
74,128
   
$
77,068
 
 
3.B. CAPITALIZATION AND INDEBTEDNESS
 
Not applicable.
 
3.C. REASONS FOR THE OFFER AND USE OF PROCEEDS
 
Not applicable.
 
3.D. RISK FACTORS
 
Our business operations are subject to various risks resulting from changing economic, political, industry, business and financial conditions. In addition, this annual report contains various forward-looking statements that reflect our current views with respect to future events and financial results. Below we attempt to identify and describe the principal uncertainties and risk factors that in our view at the present time may affect our financial condition, cash flows and results of operations and our forward-looking statements. Readers are reminded that the uncertainties and risks identified below in this annual report do not purport to constitute a comprehensive list of all the uncertainties and risks, which may affect our business and the forward-looking statements in this annual report. In addition, we do not undertake any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
 
Risks Relating to the Economy, Our Financial Condition and Shareholdings
 
We have a history of losses and we might not be able to sustain profitability.
 
Since 2012 and during 2013, 2014, 2016 except for 2015 and 2017, we have been profitable. During 2015, we operated at a loss mainly due to acquisition-related costs of $2.4 million related to the acquisition of the twenty-seven (27) supermarkets in Bavaria. During 2017, we operated at a loss mainly due to equity losses related to the investment in 300 River Holdings, LLC, which beneficially owns the rights to a 23-story Class A office building located at 300 South Riverside Plaza in Chicago, IL.
 
- 6 -

As of December 31, 2017, we have accumulated losses of $82 million. Given current market conditions, the demand for our real estate properties and other expenses, we may operate at a loss and may not be able to sustain profitability in the future, and our operating results for future periods will continue to be subject to numerous uncertainties and risks. We cannot assure you that we will be able to increase our revenues and sustain profitability. For further details regarding our cash flow, see Item 5.B “Operating and Financial Review and Prospects - Liquidity and Capital Resources”.
 
We may be affected by instability in the global economy, including the recent European economic and financial turmoil.
 
Instability in the global credit markets, including the European economic and financial turmoil related to sovereign debt issues in certain countries, the instability in the geopolitical environment in many parts of the world and other disruptions, such as changes in energy costs, may continue to put pressure on global economic conditions. The world has experienced a global macroeconomic downturn, and if global economic and market conditions, or economic conditions in key markets, remain uncertain, stagnant or deteriorate further, we may experience material adverse impacts on our business, operating results, and financial condition.
 
Our ability to freely operate our business is limited as a result of certain covenants included in the deed of trust of our Series A Bonds.
 
The deed of trust governing the Series A Bonds, or the Series A Deed of Trust, contains a number of covenants that limit our operating and financial flexibility (such as our minimum equity (excluding minority interest) will not be less than $33 million; our equity (including minority interest) to balance sheet ratio will not be less than 25%; and the net financial debt to CAP ratio will not be greater than 70%). For a description of Series A Deed of Trust, see Item 5.B “Operating and Financial Review and Prospects - Liquidity and Capital Resources”. As of December 31, 2017 the outstanding amount under the Series A Bonds was 11.4 million.
 
Our ability to continue to comply with these and other obligations depends in part on the future performance of our business. Such covenants may hinder our ability to finance our future operations or the manner in which we operate our business. In particular, any non-compliance with our financial covenants and other undertakings under Series A Deed of Trust could result in demand for immediate repayment of the outstanding amount under the Series A Bonds and restrict our ability to obtain additional funds, which could have a material adverse effect on our business, financial condition and our results of operations.
 
We may continue to seek to expand our business through acquisitions that could result in a diversion of resources and our incurring additional expenses, which could disrupt our business and harm our financial condition.
 
As we have done in the past, we may in the future continue to pursue acquisitions of businesses, or the establishment of joint ventures, that could expand our business. The negotiation of potential acquisitions or joint ventures as well as the integration of an acquired or jointly developed business, could cause diversion of management’s time as well as our resources. Future acquisitions could result in:

·
Additional operating expenses without additional revenues;
 
·
Potential dilutive issuances of equity securities;
 
·
The incurrence of debt and contingent liabilities;
 
·
Amortization of bargain purchase gain and other intangibles;
 
·
Impairment charges; and
 
·
Other acquisition-related expenses.
 
Acquired businesses or joint ventures may not be successfully integrated with our operations. If any acquisition or joint venture were to occur, we may not receive the intended benefits of the acquisition or joint venture. If future acquisitions disrupt our operations, our business may suffer.
- 7 -

 
A large percentage of our ordinary shares are held by one shareholder who could significantly influence the outcome of actions.
 
The Capri Family Foundation, or Capri, a foundation organized under the laws of the Republic of Panama, beneficially owns, directly and indirectly through its subsidiaries, approximately 73.28% of our outstanding ordinary shares as of March 20, 2018, or within 60 days thereafter. For further information, see Item 4.A. “History and Development of The Company” and Item 7.A. “Major Shareholders” below. As a result of such holdings in our ordinary shares, Capri can significantly influence the outcome of corporate actions requiring an ordinary majority approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions.
 
We are currently, and may be in the future, the target of securities class action, derivative claim or other litigation, which could be costly and time consuming to defend.
 
In the past, following a period of volatility in the market price of a company’s securities, securities class action lawsuits, derivative claims and other actions have often been taken against public companies and their directors and officers. Recent years have been characterized by a substantial increase in the number of requests for certification of class actions and derivative claims filed and approved in Israel. In May 2015, we were served with a motion to approve the filing of a derivative claim against the Company's controlling shareholder, directors and CEO and certain former controlling shareholder and directors in which we are sued for approximately $ 41.9 million. If this motion is approved and the derivative claim is accepted, this may have a material adverse effect on our financial results. Additionally, and due to the nature of derivative claim s, regardless of its outcome, and even if the claims are without merit, we may incur substantial costs and our management resources that are diverted to defending such litigation. In July 2017, our subsidiary Eldista Gmbh, received an application for conciliation from its largest tenant in Switzerland, LEM Switzerland SA, or LEM, pursuant to which LEM mainly demands the elimination of certain alleged defects in the CTN Complex and that LEM be authorized to carry out the works at the expense of Eldista Gmbh if the works are not executed within a specific time frame as well as a 20%-reduction in rent from February 2012 and until the completion of the works. LEM demands that Eldista Gmbh be ordered to reimburse a monthly amount of CHF 47,600 as rent overpayment from February 2012 (representing the 20% reduction in rent) until (i) the completion of the works or (ii) the month of the entry into force of the judgment, whichever occurs first and that Eldista Gmbh be ordered to pay an amount of app, CHF 147,000 (subject to amplification) plus interest as of May 5, 2017 as consequential damages. LEM further demands to be reserved the right to claim the reimbursement of overpaid ancillary fees. According to the application, the dispute amounts to a total of CHF 3.54 million (app. $ 3.68 million). If LEM’s demands will be accepted by first instance court for lease matters of canton of Geneva, it may has a material adverse effect on our financial results. For further information see Item 8. “Financial Information - Legal Proceedings”.
 
We have experienced significant fluctuations in our results of operations at times in the past and expect these fluctuations to continue. These fluctuations may result in volatility in our share price.
 
We have experienced at times in the past, and may in the future experience, significant fluctuations in our quarterly and annual results. Factors that may contribute to the fluctuations in our quarterly results of operations include:
 
·
The purchase or failure to purchase real-estate assets;
 
·
Changes in rent prices for our properties;
 
·
Changes in presence of tenants and tenants' insolvency;
 
·
Changes in the availability, cost and terms of financing;
 
·
The ongoing need for capital improvements;
 
·
Changes in foreign exchange rates;
 
·
Changes in interest rates; and
 
·
General economic conditions, particularly in those countries or regions in which we operate.
 
It is likely that in some future periods, our operating results may be below expectations of public market analysts or investors. If this occurs, the market price of our ordinary shares may drop.
- 8 -

 
The trading price of our ordinary shares has been volatile, and may continue to fluctuate due to factors beyond our control.
 
The trading price of our ordinary shares is and will continue to be subject to significant fluctuations in response to numerous factors, including:

·
Availability of funding resources for the acquisition of new real estate assets;
 
·
General market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors;
 
·
Seizure of a substantial business opportunity by our competitors or us;
 
·
Changes in interest rates;
 
·
Changes in foreign exchange rates;
 
·
The entering into new businesses;
 
·
Quarterly variations in our results of operations or in our competitors’ results of operations; and
 
·
Changes in earnings estimates or recommendations by securities analysts.
 
This volatility may continue in the future. In addition, any shortfall or changes in our revenues, operating income, earnings or other financial results could cause the market price of our ordinary shares to fluctuate significantly. In recent years, the stock market has experienced significant price and trading volume fluctuations, which have particularly affected the market price of many companies and which may not be related to the operating performance of those companies. These broad market fluctuations have affected and may continue to affect adversely the market price of our ordinary shares. In recent years, the trading price of our ordinary shares has been highly volatile. From January 2017 through March 20, 2018, the closing price of our ordinary shares listed on the NASDAQ Global Market fluctuated reaching a high of $10.30 and decreasing to a low of $6.60. The fluctuations and factors listed above, as well as general economic, political and market conditions may further materially adversely affect the market price of our ordinary shares.
 
Our effective tax rate could be materially affected by several   factors including, among others, changes in the amount of income taxed by or allocated to the various jurisdictions in which we operate that have differing statutory tax rates, changing tax laws, regulations and interpretations of such tax laws in multiple jurisdictions.
 
We conduct our business globally and file income tax returns in multiple jurisdictions. We report our results of operations based on our determination of the amount of taxes owed in the various jurisdictions in which we operate. The determination of our consolidated provision for income taxes and other tax liabilities requires estimation, judgment and calculations where the ultimate tax determination may not be certain. Our determination of tax liability is always subject to review or examination by authorities in various jurisdictions.
 
If a tax authority in any jurisdiction reviews any of our tax returns and proposes an adjustment, including as a result of a determination that the transfer prices and terms we have applied are not appropriate, such an adjustment could have a negative impact on our financial results .
 
There is a substantial risk that we are a passive foreign investment company, and holders of our ordinary shares who are United States residents face income tax risks.
 
There is a substantial risk that we are a passive foreign investment company, commonly referred to as PFIC. Our treatment as a PFIC could result in a reduction in the after-tax return to the holders of our ordinary shares and would likely cause a reduction in the value of such ordinary shares. For U.S. federal income tax purposes, we will be classified as a PFIC for any taxable year in which either (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, cash and real estate properties are considered to be an asset, which produces passive income. As a result of our substantial cash position and the decline in the value of our stock, we believe that there is a substantial risk that we may have been   a PFIC during the taxable year ended December 31, 2017, under a literal application of the asset test described above, which looks solely to the market value. If we are classified as a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. holders owning ordinary shares. Accordingly, you are urged to consult your tax advisors regarding the application of such rules. In addition, there can be no assurance that we will not be classified as a PFIC in the future, because the determination of whether we are a PFIC is based upon the composition of our income and assets from time to time, and such determination cannot be made with certainty until the end of a calendar year. United States residents should carefully read “Item 10.E. Taxation” under the heading “United States Federal Income Tax Consequences” below for a more complete discussion of the U.S. federal income tax risks related to owning and disposing of our ordinary shares.
 
- 9 -

We do not intend to pay dividends.
 
We have never declared or paid any cash dividends on our ordinary shares. We currently intend to retain any future earnings to finance operations and expand our business and, therefore, do not expect to pay any dividends in the foreseeable future.
 
We manage our available cash through investments in various bank deposits and money market funds with leading banks. We are exposed to the credit risk of such banks.
 
  During 2017, our available cash was invested in various bank deposits and money market funds with various banks. Our available cash is subject to the credit risk of the banks with which the funds are deposited and as such we may suffer losses if those banks fail to repay those deposits.
 
The extenuations given to us as a   foreign private issuer impact our publicly available information.
 
As a foreign private issuer, we are permitted to file less information with the SEC than a company incorporated in the United States. Accordingly, there may be less publicly available information concerning us than there is for companies incorporated in the United States.
 
We are obligated to develop and maintain proper and effective internal controls over financial reporting. These internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our ordinary shares.
 
The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors. We are required, pursuant to Section 404 of the Sarbanes–Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting on an annual basis. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. We are required to disclose changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 since the company is Non-accelerated filer.
 
Risks Relating to our Business
 
The real estate sector continues to be cyclical and affected by changes in general economic, or other business conditions that could materially adversely affect our business or financial results.
 
The real estate sector has been cyclical historically and continues to be significantly affected by changes in industry conditions, as well as in general and local economic conditions, such as:
 
·
employment levels;
 
·
availability of financing for homebuyers and for real estate investors/funds;
 
·
interest rates;
 
·
consumer confidence and expenditure;
 
·
levels of new and existing homes for sale;
 
·
demographic trends;
 
·
urban development and changes;
 
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·
housing demand;
 
·
local laws and regulations; and
 
·
acts of terror, floods or earthquakes.
 
These may occur on a global scale, like the recent housing downturn, or may affect some of the regions or markets in which we operate. An oversupply of alternatives to our real estate properties can also reduce our ability to lease spaces and depress lease prices, thus reducing our margins.
 
As a result of the foregoing matters, we may face difficulties in the leasing of our projects and we may not be able to recapture any increased costs by raising lease payments.
 
We rely on one large property for a significant portion of our revenue.
 
As of December 31, 2017, our commercial property, CTN complex, in Geneva, Switzerland, accounted for approximately 64% of our portfolio annualized rent. Our revenue would be materially adversely affected if this property was materially damaged or destroyed. Additionally, our revenue would be materially adversely affected if rental payments at this property decrease or if tenants at this property fail to timely make rental payments due to adverse financial conditions or otherwise, default under their leases or file for bankruptcy. Additionally, our subsidiary Eldista Gmbh has a dispute with   its largest tenant in Switzerland, LEM Switzerland SA or LEM. LEM filed an application, pursuant to which LEM mainly demands the elimination of certain alleged defects in the CTN Complex and that LEM be authorized to carry out the works at the expense of Eldista Gmbh if the works are not executed within a specific time frame as well as a 20%-reduction in rent from February 2012 and until the completion of the works. LEM demands that Eldista Gmbh be ordered to reimburse a monthly amount of CHF 47,600 as rent overpayment from February 2012 (representing the 20% reduction in rent) until (i) the completion of the works or (ii) the month of the entry into force of the judgment, whichever occurs first and that Eldista Gmbh be ordered to pay an amount of app, CHF 147,000 (subject to amplification) plus interest as of May 5, 2017 as consequential damages. LEM further demands to be reserved the right to claim the reimbursement of overpaid ancillary fees. According to the application, the dispute amounts to a total of CHF 3.54 million (app. $ 3.68 million). For further information regarding the CTN complex and the dispute with LEM, see Item 8 “Financial Information - Legal Proceedings”.
 
With respect to our commercial properties, we are dependent on the continued tenant demand for our properties. If there is a decrease in tenant demand and an increase in vacancy of our commercial properties, it would adversely affect our financial condition and results of operations.
 
We own, through our subsidiaries, holdings in several commercial real estate properties, which are currently leased to third parties. In most of our commercial properties we rely on a few tenants which occupy a significant portion of the available rentable area in such properties. For further details regarding the leases of tenants in our properties see Item 4.B. “Business Overview - Properties”. If the lease agreements with such tenants are terminated, there is no assurance that we will be able to attract new lessees in favorable terms or at all, which would materially adversely affect our financial condition and results of operations.
 
Economic recession, pressures that affect consumer confidence, job growth, energy costs and income gains can affect the financial condition of prospective tenants, and a continuing soft economic cycle may impact our ability to find tenants for our properties. Failure to attract tenants, the termination of a tenant’s lease, or the bankruptcy or economic decline of a tenant may adversely affect the rent fees for our properties and adversely affect our financial condition and results of operations.
 
We may have difficulties leasing real-estate properties.
 
The fixed income real-estate sector relies on the presence of tenants in the real-estate assets. The failure of a tenant to renew its lease, the termination of a tenant’s lease, or the bankruptcy or economic decline of a tenant can have a material adverse effect on the economic performance of the real-estate asset. There can be no assurance that if a tenant were to fail to renew its lease, we would be able to replace such tenant in a timely manner or that we could do so without incurring material additional costs. In addition,   we are dependent on our ability to enter into new leases on favorable terms with third parties, in order to receive a profitable price for each real-estate property. We may find it more difficult to engage tenants to enter into leases during periods when market rents are increasing, or when general consumer activity is decreasing, or if there is competition for tenants from competing properties. The existence of competitive alternatives could have a material adverse effect on our ability to lease space and on the level of rents we can obtain. The global economic condition, pressures that affect consumer confidence, job growth, energy costs and income gains can affect retail sales growth, and a continuing soft economic cycle, may impact our ability to find tenants for our properties. Failure to attract tenants, the termination of a tenant’s lease, or the bankruptcy or economic decline of a tenant may adversely affect the price obtainable for our real estate projects and adversely affect our financial condition and results of operations. The failure of tenants to abide by the terms of their agreements may cause delays or result in a temporary or long term decline in rental income, the effects of which we may not be able to offset due to difficulties in finding a suitable replacement tenant.
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We are depended on the solvency of our tenants and may lease properties at below expected rental rates.
 
Rental leases may decrease below our expectations. In the case of such decrease, or if circumstances arise beyond our control, such as market prices, market demand and negative trends, we may have to sell a project at a price below our projections. In addition, we could be in a position where there would be no demand at acceptable prices and we would be required to hold, operate and maintain the project until the financial environment would improve and allow its disposal.
 
In addition, the ability to collect rents depends on the solvency of the tenants. Tenants may be in default or not pay on time, or we may need to reduce the amount of rents invoiced by lease incentives, to align lease payments with the financial situation of some tenants. In all of these cases, tenant insolvency may hurt our operational results.
 
We may experience future unanticipated expenses.
 
Our performance depends, among others, on our ability to pay for adequate maintenance, insurance and other operating costs, including real estate taxes. All of these expenditures could increase over time, and may be more expensive than anticipated. Sources of labor and materials required for maintenance, repair, capital expenditure or development may also be more expensive than we expected. An unplanned deviation from one of the above expenditures, and other, could increase our operating costs.
 
The fair value of our real estate may be harmed by certain factors, which may entail impairment losses not previously recorded which, in turn, will adversely affect our financial results.
 
Certain circumstances may affect the fair value of our real estate assets and/or on certain of our shareholding rights in the companies owning such assets, including, among other things, (i) the absence of or modifications to permits or approvals required for the operation of any real estate asset; (ii) lawsuits that are pending, whether or not we are a party thereto. In addition, certain laws and regulations, applicable to our business in certain countries where the legislation process undergoes constant changes, may be subject to frequent and substantially different interpretations; (iii) agreements which may be interpreted by governmental authorities so as to shorten the term of use of real estate, and which may be accompanied by a demolition order with or without compensation, may significantly affect the value of such real estate asset. The fair value of our real estate assets may be significantly decreased, thereby resulting in potential impairment losses not previously recorded in our financial results.
 
Since market conditions and other parameters (such as macroeconomic environment trends, and others), which affect the fair value of our real estate, vary from time to time, the fair value may not be adequate on a date other than the date the measurement was executed (in general, immediately after the annual balance sheet date). In the event the projected forecasts regarding the future cash flows generated by those assets are not met, we may have to record an additional impairment loss not previously recorded.
 
In addition, any change in the yield rate of any of our real estate assets may cause a significant decrease to the fair value of such assets, thereby resulting in potential impairment losses not previously recorded in our financial results.
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We may not be able to raise additional financing for our future capital needs on favorable terms, or at all, which could limit our growth and increase our costs and could adversely affect the price of our ordinary shares.
 
Real estate activities are largely financed from external sources. We cannot be certain that we will be able to obtain financing on favorable terms for our future real estate activities, or at all. In addition, an adverse change can occur in the terms of the financing that we receive. Any such occurrence could increase our financing costs and/or result in a material adverse effect on our results and ability to develop our real estate business. The amount of long term loans currently outstanding may inhibit our ability to obtain additional financing for our future capital needs, inhibit our long-term expansion plans, increase our costs and adversely affect the price of our ordinary shares.
 
It is probable that we will need to raise additional capital in the future to support our strategic plans. We cannot be certain that we will be able to obtain additional financing on commercially reasonable terms or at all. If we are unable to obtain additional financing, this could inhibit our growth and increase our operating costs.
 
In the event we are unable to continuously comply with the covenants, including with respect to financial covenants, which we undertook with respect to our properties, our results of operations may be adversely affected.
 
In connection with the financing of most of our properties, we have long-term agreements with several banks. The agreements that govern the provision of financing include, among other things, undertakings and financial covenants that we are required to maintain for the duration of such financing agreements. For further details see Item 5.B. “Liquidity and Capital Resources” . Those existing agreements allow the lender to demand an immediate repayment of the loans in certain events (events of default), including, among other things, a material adverse change in the Company's business and noncompliance with the financial covenants set forth in those agreements. The occurrences of any event of default may have an adverse effect on our financial position and results of operations and on our ability to obtain outside financing for our continued growth.
 
Rapid and significant changes in interest rates may adversely affect our profitability.
 
We have financed the purchase of the CTN complex and the Rumlang property with loans bearing floating interest rates and further refinanced during 2017 the existing loan secured by our condominium units in Miami with a loan which bears floating interest rate (as of December 31, 2017 the balance of all such loans was $113.1 million, see also Item “Item 5.B Operating and Financial Review and Prospects – Liquidity and Capital Resources.”). As a result we are exposed to changes in the LIBOR interest rate (LIBOR on the US Dollar and LIBOR on the CHF). An increase in the LIBOR interest rate could materially adversely affect our financial expenses and thereby our profitability. In light of the low interest rate environment we have also decided at this stage not to perform hedging against our exposure to such changes in interest rates.
 
An adverse change in the Swiss real estate market will adversely   affect our results of operations.
 
Two of our investments, including our most significant property (the CTN complex in Geneva), are located in Switzerland. During 2013 and throughout 2017, as Swiss interest rates declined, the Swiss real estate prices increased mainly due to the low interest rates and lack of investment alternatives. Along with the historically low interest rates, the overall availability of financing has decreased significantly as LTV (Loan to Value) rates have been reduced by lenders, leading to more pressure on leveraged transactions further decreasing investments yields. At the same time, there was no increase in the demand for new rental spaces and the rental market appeared to be keeping stable with a slight slowdown, in particular the demand for prime office space and the price for such real estate properties. In addition and partially due to the low available yields in the investment market, there is a significant increase in new developments, based on available equity investments (as opposed to leveraged investments). Such investments will mature and be available in the near future and may have a significant impact on our rental properties as they will significantly increase the availability of rentable area in the vicinity of our rental properties. Any significant adverse change in the real estate market in Switzerland, such as lack of attractive financing, a decline in the real estate rates or decrease in demand for the type of properties we own, will adversely affect our results of operations.
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We may suffer adverse consequences if our revenues decline since our operating costs do not necessarily decline in proportion to our revenue.
 
We earn a significant portion of our income from renting our properties. Our operating costs, however, do not fluctuate in relation to changes in our rental revenue. As a result, our costs will not necessarily decline even if our revenues do. Similarly, our operating costs could increase while our revenues stay flat or decline. In either such event, we may be forced to borrow to cover our costs or we may incur losses.

Because of our small size, we rely on a small number of personnel who possess both executive and financial expertise, and the loss of any of these individuals would hurt our ability to implement our strategy and may adversely affect our financial results.
 
Because of our small size and our reliance on a limited financial and management personnel, our continued growth and success depends upon the continued contribution of the managerial skills of our financial and management personnel. If any of the current members of the management is unable or unwilling to continue in our employ, our results of operations could be adversely affected.
 
We may experience difficulties in finding suitable real-estate properties for investment, either at all or at viable prices.
 
Being a company that engages in investments in real-estate, finding a suitable real-estate property for investment is critical to our income. Such finding becomes difficult as the demand for real-estates in the markets we are involved in grows, and the supply decreases. Therefore, difficulties in finding suitable real-estate properties for investment may affect our growth and the number of assets we have to offer, and therefore materially affect our potential profit and our business and results of operation.
 
The choice of suitable locations for real estate projects is an important factor in the success of the individual projects. For example, office space should ideally be located within, or near, the city center, with well-developed transportation infrastructure (road and rail) located in close proximity to facilitate customer access. If we are not able to find sites in the target cities which meet our criteria or which meet our price range, this may materially adversely affect our business and results of operation.
 
In addition, we may be unable to proceed with the acquisition of properties because we cannot obtain financing on favorable terms or at all. We may require substantial up-front expenditures for property acquisition. Accordingly, we may require substantial amounts of cash and financing from banks and other capital resources (such as institutional investors and/or the public) for our real estate operations. We cannot be certain that such external financing would be available on favorable terms or on a timely basis or at all.
 
We face risks associated with property acquisitions.
 
We may acquire individual properties and portfolios of properties, including large portfolios that could significantly increase our size and alter our capital structure. Our acquisition activities may be exposed to, and their success may be adversely affected by, the following risks:
 
·
even if we enter into an acquisition agreement for a property, it is usually subject to customary conditions to closing, including due diligence investigations to our satisfaction;
 
·
we may be unable to finance acquisitions on favorable terms or at all; 
 
·
acquired properties may fail to perform as we expected; 
 
·
we may not be able to obtain adequate insurance coverage for new properties; and
 
·
we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations, and therefore our results of operations and financial condition could be adversely affected.
 
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We may acquire properties or property holding companies subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against us arising from our ownership of those properties, we might have to pay substantial sums to settle it, which could adversely affect our cash flow. Unknown liabilities with respect to properties acquired might include:
 
·
liabilities for clean-up of undisclosed environmental contamination; 
 
·
claims by tenants, vendors or other persons arising from dealing with the former owners of the properties; 
 
·
liabilities incurred in the ordinary course of business; and 
 
·
claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.
 
The illiquidity of real-estate properties may affect our   ability to sell our properties.
 
Real estate properties in general are relatively illiquid. Such illiquidity may affect the ability to dispose of or liquidate part of real-estate assets in a timely fashion and at satisfactory prices in response to changes in the economic environment, the real estate market or other conditions.
 
An adverse change in the German real estate market will adversely   affect our results of operations.
 
Since 2015, we own through our wholly-owned subsidiary, a portfolio of supermarkets located mainly in Bavaria, Germany. In recent years the German real estate market was showing signs of growth, and stabilization towards the end of 2017. As the European economy have been stagnant at best over the last few years, the German economy and its real estate sector have shown significant signs of improvement also fueled by a steady decrease in interest rates, an increase in availability of financing and the increasing demand for real estate investments by foreign investors drown to the German market for the reduced availability of other rewarding investment opportunities in the European market. During 2017, the German real estate market has shown signs of maturity and stabilization. Availability of financing and interest rates is stable, as well as the demand for rental properties. Any significant adverse change in the real estate market in Germany, such as an increase of interest rates, a decrease in availability of financing, a decline in the real estate rates or decrease in demand for the type of properties we own, will adversely affect our results of operations .
 
An adverse change in the U.S. real estate market will adversely   affect our results of operations.
 
We own, through our wholly-owned subsidiary, several real estate properties located in Philadelphia, Texas, Chicago and Miami, in the U.S. During 2013, the pressure on properties’ pricing have eased somewhat and the U.S. real estate market was showing signs of stabilization and an increase towards the end of the year. During 2014 and throughout 2015 the U.S. real estate market has shown signs of improvement and a consistent increase in assets prices as the demand for investments increased significantly also driven by financial institutions increased willingness to finance new transactions along with low interest rates. Throughout 2017, we have witnessed certain changes in the U.S real estate market. While the commercial segment has kept stable along with a steady demand for commercial and office space rental, the high-end residential market has experienced a significant decrease in the demand for investment properties along with an increase in the availability of such assets, which in turn, puts pressure on properties prices. Any significant adverse change in the real estate market in the United States, such as a significant increase of interest rates, a decline in the real estate rates or decrease in demand for the type of properties we own, will adversely affect our results of operations .
 
With respect to our residential properties in Miami, Florida,   the success of our investment will depend on market conditions.
 
We own, through our wholly-owned subsidiary, 25 residential properties in Miami and Miami Beach, Florida, including 21 luxury condominium units and two penthouse units in the Marquis Residences, one penthouse unit in Ocean One Condominium and one condominium units in the Continuum on South Beach Condominium. To date, 23 of the units have been fully constructed and are in rentable condition, while two penthouses are still undergoing renovations and remodeling . Currently 18 of the units are occupied by tenants and the remaining units are being marketed to potential tenants and potential buyers. For further information, see Item 4.B. “Business Overview - Real Estate Business”.
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We intend to keep holding the units for investment purposes and will consider renting or selling the units in accordance with our business considerations and market conditions. Depending on our decision, we may be unable to sell or lease up these condominium properties on schedule or on favorable terms, which may result in a decrease in expected rental revenues and/or lower yields, if any.
 
We depend on partners in our partnerships and collaborative arrangements.
 
We are currently, with respect to our real-estate properties in Geneva, Switzerland, Philadelphia, Chicago and Texas, and we may, in the future, own interests in real-estate assets or real-estate holding companies in partnership with other entities. Our investments in these partnerships may, under certain circumstances, be subject to (i) the risk that one of our partners may become bankrupt or insolvent or may not fulfill its financial obligations under our partnership agreements, which may cause us to provide financing in excess of our ownership share or which may cause us to be unable to fulfill our financial obligations, possibly triggering a default under our bank financing agreements or, in the event of a liquidation, preventing us from managing or administering our business or entail a compulsory sale of the asset at less favorable terms; (ii) the risk that one of our partners may have economic or other interests or goals that are inconsistent with our interests and goals, and that such partner may be in a position to veto actions which may be in our best interests; and (iii) the possibility that disputes may arise regarding the continued operational requirements of our assets that are jointly owned. In addition, we hold approximately 30%, approximately 22% and approximately 4%, respectively, of the beneficial interest in the real-estate properties located in Chicago, Philadelphia and Texas. Our minority interest causes us to rely on our partners to manage the properties, and our influence over decisions regarding the properties and their management is limited.
 
Cause of physical damages and other nature losses may affect our   properties.
 
Properties could suffer physical damage caused by fire or other causes, resulting in losses which may not be fully compensated by insurance. In addition, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, terrorism or acts of war that may be uninsurable or are not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors, including terrorism or acts of war, also might result in insurance proceeds being insufficient to repair or replace a property if it is damaged or destroyed. Under such circumstances, the insurance proceeds may be inadequate to restore the economic position with respect to the affected properties. Should an uninsured loss or a loss in excess of insured limits occur, we could lose capital invested in the affected property as well as anticipated profits from that property. No assurance can be given that material losses in excess of insurance proceeds will not occur in the future.
 
Competition for acquisitions may reduce the number of acquisition opportunities available to us and increase the costs of those acquisitions.
 
We plan to continue acquiring properties as we are presented with attractive opportunities. We may face competition for acquisition opportunities from other investors, particularly private investors who can incur more leverage, and this competition may adversely affect us by subjecting us to the following risks:
 
·
an inability to acquire a desired property because of competition from well-capitalized real estate investors, including publicly traded and privately held REITs, private real estate funds, domestic and foreign financial institutions, life insurance companies, sovereign wealth funds, pension trusts, partnerships and individual investors; and 
 
·
an increase in the purchase price for such acquisition property, in the event we are able to acquire such desired property.
 
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Environmental discoveries may have a significant impact on the value, viability and marketability of our assets.
 
We may encounter unforeseen decrease in value of our assets due to factors beyond our control caused by previously unknown soil contamination or the discovery of archaeological findings which may have a significant impact and a detrimental effect on the value, viability or marketability of our assets or cause legal liability in connection with our real estate properties. We may be liable for the costs of removal, investigation or remedy of hazardous or toxic substances located on or in a site owned or leased by us, regardless of whether we were responsible for the presence of such hazardous or toxic substances. The costs of any required removal, investigation or remedy of such substances may be substantial and/or may result in significant budget overruns. The presence of such substances, or the failure to remedy such substances properly, may also adversely affect our ability to sell or lease such property or to obtain financing using the real estate as security. Additionally, any future sale of such property will be generally subject to indemnities and warranties to be provided by us to the purchaser against such environmental liabilities. Accordingly, we may continue to face potential environmental liabilities with respect to a particular property even after such property has been sold. Laws and regulations may also impose liability for the release of certain materials into the air or water from a property, and such release can form the basis for liability to third persons for personal injury or other damages. Other laws and regulations can limit the development of, and impose liability for, the disturbance of wetlands or the habitats of threatened or endangered species. Any environmental issue may significantly cause decrease in value of our assets or vacancy periods in our leased properties, which could have a material adverse effect on the profitability of that asset and our results of operations and cash flows.
 
We are exposed to cyber security risks that, if materialized, may affect our business and operations.
 
Our operations rely on computer, information and communications technology and various computer hardware and software applications. Despite our implementation of network security measures, our tools and servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems and tools located at customer sites, or could be subject to system failures or malfunctions for other reasons. System failures or malfunctioning could disrupt our operations and our ability to timely and accurately process and report key components of our financial results.
 
Risks Relating to the Sale of our Video Solutions Business
 
On March 16, 2010 we and our subsidiary, Optibase Inc., entered into an asset purchase agreement for the sale of all of the assets and liabilities related to our Video Solutions Business. For further details see Item 10.C “Material Contracts”. The following is a risk related to the sale of our Video Solutions Business:
 
We have been and may, in the future, be subject to further review in connection with government programs that we participated in or received.
 
During our activities in the Vitec Solutions Business, we received grants from the Israel Innovation Authority, or the IIA, in the Israeli Ministry of Industry, Trade and Labor for research and development programs that meet specified criteria. In addition, we were also involved in joint research projects with European Companies under the auspices of, and with financial assistance from, the European Union Research and Development Framework Programs.
 
In that respect, during 2009 and 2010 we were audited by the European Union, or the EU, for grants received under three FP6 contracts. As a result of the audit findings implementation, during 2012, we paid an aggregate amount of approximately Euro 340,000 which settled and concluded the financial audit.
 
Furthermore, we were undergoing an audit by the IIA for royalties paid before the sale of our Video Solutions Business. A payment to the IIA will adversely affect our cash flow, although from financial prospective, at this time, we believe that we have sufficient provisions to cover the final outcome of such review processes. For further details see Item 4.B “Business Overview - Remaining items of the Video Solution Business”.
 
In addition to such audits, we may in the future be subject to further reviews in connection with government programs that we participated in or received during our activities in the Video Solutions Business. Any review of such kind could result in substantial cost which would have a negative impact on our financial condition.
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Risks Relating to Operations in Israel
 
The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
 
We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our articles of association and by the Israeli Companies Law, 1999, or the Companies Law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, pursuant to the Companies Law each shareholder of an Israeli company has to act in good faith in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his or her power in the company, including, among other things, in voting at the general meeting of shareholders and class meetings, on amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers, and transactions requiring shareholders’ approval under the Companies Law. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote, or who has the power to appoint or prevent the appointment of a director or officer in the company, or has other powers toward the company, has a duty of fairness toward the company. However, Israeli law does not define the substance of this duty of fairness. Because Israeli corporate law has undergone extensive revision in recent years, there is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.
 
Because a significant amount of our revenues is generated in Swiss Francs and in Euro but a portion of our expenses is incurred in New Israeli Shekels and in US dollars, our results of operations may be harmed by currency fluctuations.
 
Our management believes that the U.S. dollar is the currency in the primary economic environment in which we operate. Thus, our functional and reporting currency is the U.S. dollar. Notwithstanding, we generate a significant amount of our revenues in CHF (Swiss Franc) and in Euro and incur a portion of our expenses in NIS and in U.S. dollars. As a result, we are exposed to currency fluctuation of the U.S. dollar against the CHF the Euro and the NIS.
 
The fluctuations in the dollar costs of our operations in Israel related primarily to the costs of salaries in Israel, which are paid in NIS and constitute a portion of our expenses and the interest and principal payments of our series A bonds are made in NIS. We cannot assure you that we will not be adversely affected in the future if inflation in Israel exceeds the fluctuation of NIS against the U.S dollars or if the timing of such fluctuation lags behind increases in inflation in Israel.
 
Our operations could also be adversely affected if we are unable to guard against currency fluctuations in the future. Accordingly, we perform hedging transactions from time to time according to our board's approval. In the future we may enter into additional currency hedging transactions to decrease the risk of financial exposure from fluctuations. These measures, however, may not adequately protect us from adverse effects due to the impact of inflation in Israel.
 
The deflation rate in Israel was approximately (1)% and (0.2)% in 2015 and 2016, respectively, and an inflation rate of approximately 0.4% in 2017. The changes of the NIS against the dollar was a devaluation of approximately (0.3)% in 2015 and appreciation of approximately 1.5% and 9.8% in 2016 and 2017, respectively. The change of the CHF against the dollar was a devaluation of approximately (0.2)% and (2.8)% in 2015 and 2016, respectively, and an appreciation of approximately 4.4% in 2017. The change of the Euro against the dollar was a devaluation of approximately (10)% and (3.6)% in 2015 and 2016, respectively, and an appreciation of approximately 13.7% in 2017.
 
Our shares are listed for trade on more than one stock exchange, which may result in price variations.
 
Our ordinary shares are listed for trade on The NASDAQ Global Market and on the Tel Aviv Stock Exchange Ltd., or TASE. This may result in price variations. Our ordinary shares are traded on these markets in different currencies, U.S. dollars on The NASDAQ Global Market and New Israeli Shekels on the TASE. These markets have different opening times and close on different days. Different trading times and differences in exchange rates, among other factors, may result in our shares being traded at a price differential on these two markets. In addition, market influences in one market may influence the price at which our shares are traded on the other.
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Potential political, economic and military instability in Israel and its region may adversely affect our results of operations.
 
We are incorporated under the laws of the State of Israel, our principle offices are located in central Israel and some of our officers, employees and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region may directly influence us. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. Any hostilities involving Israel or the interruption or curtailment of trade within Israel or between Israel and its trading partners could adversely affect our operations and results of operations and could make it more difficult for us to raise capital. In addition, recent political uprisings and conflicts in various countries in the Middle East, including Egypt and Syria, are affecting the political stability of those countries. It is not clear how this instability will develop and how it will affect the political and security situation in the Middle East. This instability has raised concerns regarding security in the region and the potential for armed conflict. It is also widely believed that Iran, which has previously threatened to attack Israel, has been stepping up its efforts to achieve nuclear capability. Iran is also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza and Hezbollah in Lebanon. The tension between Israel and Iran and/or these groups may escalate in the future and turn violent, which could affect the Israeli economy generally and us in particular. Any armed conflicts, terrorist activities or political instability in the region could adversely affect our business conditions, harm our results of operations and adversely affect our share price. No predictions can be made as to whether or when a final resolution of the area’s problems will be achieved or the nature thereof and to what extent the situation will impact Israel’s economic development or our operations.
 
Anti-takeover provisions could negatively impact our shareholders.
 
The Companies Law provides that certain purchases of securities of a public company are subject to tender offer rules. As a general rule, the Companies Law prohibits any acquisition of shares in a public company that would result in the purchaser holding 25% or more, or more than 45% of the voting power in the company, if there is no other person holding 25% or more, or more than 45% of the voting power in a company, respectively, without conducting a special tender offer.
 
The Companies Law further provides that a purchase of shares or voting rights of a public company or a class of shares of a public company, which will result in the purchaser's holding 90% or more of the company’s shares or class of shares, is prohibited unless the purchaser conducts a full tender offer for all of the company’s shares or class of shares. The purchaser will be allowed to purchase all of the company's shares or class of shares (including those shares held by shareholders who did not respond to the offer), if either (i) the shareholders who do not accept the offer hold, in the aggregate, less than 5% of the issued and outstanding share capital of the company or of the applicable class, and more than half of the shareholders who do not have a personal interest in the offer accept the offer, or (ii) the shareholder who do not accept the offer hold less than 2% of the issued and outstanding share capital of the company or of the applicable class. The shareholders, including those who indicated their acceptance of the tender offer (except if otherwise detailed in the tender offer document), may, at any time within six months following the completion of the tender offer, petition the court to alter the consideration for the acquisition. At the request of an offeree of a full tender offer which was accepted, the court may determine that the consideration for the shares purchased under the tender offer, was lower than their fair value and compel the offeror to pay to the offerees the fair value of the shares. Such application to the court may be filed as a class action.
 
Israeli courts might not enforce judgments rendered outside of Israel, which may make it difficult to collect on judgments rendered against us.
 
We are incorporated in Israel. Most of our directors and officers are not residents of the United States and some of their assets and our assets are located outside the United States. Service of process upon our non-U.S. resident directors and officers and enforcement of judgments obtained in the United States against us, and our directors and executive officers may be difficult to obtain within the United States.
- 19 -

 
We have been informed by our Israeli legal counsel, that there is doubt as to the enforceability of civil liabilities under U.S. securities laws in original actions instituted in Israel. However, subject to certain time limitations, an Israeli court may declare a foreign civil judgment enforceable if it finds that all of the following terms are met:

·
The judgment was rendered by a court which was, according to the laws of the state of the court, competent to render the judgment;
 
·
The judgment can no longer be appealed;
 
·
The obligation imposed by the judgment is enforceable according to the rules relating to the enforceability of judgments in Israel and the substance of the judgment is not contrary to public policy; and
 
·
The judgment is executory in the state in which it was given.
 
Even if the above conditions are satisfied, an Israeli court will not enforce a foreign judgment if it was given in a state whose laws do not provide for the enforcement of judgments of Israeli courts (subject to exceptional cases) or if its enforcement is likely to prejudice the sovereignty or security of the State of Israel. An Israeli court will also not declare a foreign judgment enforceable in the occurrence of any of the following:

·
The judgment was obtained by fraud;
 
·
There was no due process;
 
·
The judgment was rendered by a court not competent to render it according to the laws of private international law in Israel;
 
·
The judgment is at variance with another judgment that was given in the same matter between the same parties and which is still valid; or
 
·
At the time the action was brought in the foreign court a suit in the same matter and between the same parties was pending before a court or tribunal in Israel.
 
ITEM 4. INFORMATION ON THE COMPANY
 
4.A. HISTORY AND DEVELOPMENT OF THE COMPANY
 
History
 
We are a real estate company engaged through our subsidiaries in purchasing and operating of real estate properties intended for leasing and resale primarily for the purpose of commercial, industrial, office space use as well as for residential purposes.
 
We were founded and incorporated in the State of Israel in 1990 under the name of Optibase Advanced Systems (1990) Ltd. In November 1993 we changed our name to Optibase Ltd. Our ordinary shares have been trading on The NASDAQ Global Market under the symbol “OBAS” since our initial public offering on April 7, 1999.

We listed our ordinary shares for trade on the Tel Aviv Stock Exchange Ltd., or the TASE, on August 6, 2007. On September 23, 2008, we decided to delist our ordinary shares from trade on the TASE. The delisting of our ordinary shares from trade on the TASE was effective on September 28, 2008. The last day for trading of our ordinary shares on the TASE was September 24, 2008.   In April 2015, we listed again our ordinary shares for trade on the TASE. According to the Israeli legislation, Israeli companies whose shares are traded on certain stock exchanges outside of Israel are allowed to have shares listed on the TASE, while reporting, in substance, in accordance with the provision of the relevant foreign securities law applicable to the Company. In August 2015, we completed an offering of NIS 60 million non-convertible bonds to the public in Israel and such bonds have been traded on the TASE. For further information, see “Item 5.B Operating and Financial Review and Prospects – Liquidity and Capital Resources.”
- 20 -

 
Commencing in February 2001, Festin Management Corp., a British Virgin Island corporation jointly owned by Shlomo (Tom) Wyler and Arthur Mayer-Sommer began to acquire our ordinary shares on the open market. On September 10, 2004, Festin Management Corp. transferred all of its holdings in us to its shareholders. In addition, during 2008 and 2011, we issued an aggregate number of 1,063,381 ordinary shares in a private placement to Mr. Wyler, who was considered, until September 12, 2012, our controlling shareholder, and as of the date of this annual report, serves as the Chief Executive Officer of our subsidiary, Optibase Inc. Since 2012, Capri, our current controlling shareholder, and Gesafi Real Estate S.A., a Panama Corporation, or Gesafi, acquired 1,797,290 of our ordinary shares from Mr. Wyler. In addition, during November 2013, Gesafi transferred all of our ordinary shares held by it to Capri and on December 31, 2013, we issued a net sum of 1,300,580 of our ordinary shares to Capri, in consideration for twelve luxury condominium units purchased by us. During January-February 2015, Capri acquired additional 71,229 of our ordinary shares in two different transactions with an unrelated third party and on the Nasdaq Global Market.  For additional information see Item 7.A. “Major Shareholders”.
 
From our formation until 2010   we were engaged in the Video Solution Business.   On May 11, 2009, our board of directors resolved to expand and diverse our operations and enter into the fixed-income real estate sector. At a special shareholders meeting held on June 25, 2009, our shareholders approved the diversification of our operations by entering into the fixed income real-estate sector. Such approval was sought solely for cautionary purposes and without any obligation to do so. As of the date hereof, we have entered into certain agreements for the purchase of real estate assets. For further information, see Item 4.B “Business Overview” and Item 10.C “Material Contracts”.
 
On March 16, 2010, we and our subsidiary, Optibase Inc., entered into an asset purchase agreement with Optibase Technologies Ltd. and Stradis Inc., wholly owned subsidiaries of S.A. Vitec (also known as Vitec Multimedia), pursuant to which Optibase Technologies Ltd. and Stradis Inc. purchased all of the assets and liabilities related to our video solutions business. The closing of the transaction occurred on July 1, 2010.
 
In addition, we held, on a fully diluted basis, approximately 2.04% of the issued and outstanding share capital of Mobixell Networks Inc., or Mobixell, a private company which designs, develops and markets solutions for mobile rich media adaptation, optimization and delivery. As of December 31, 2012, such investment was written off completely in our financial reports for 2012. In January 2014 we sold all of our holdings in Mobixell to Flash Networks Ltd., or FN, without consideration, since Mobixell entered into a share acquisition agreement with FN.
 
Our principal executive offices are located at 8 Hamenofim Street, Herzliya 4672559, Israel, and our telephone number at that location is +972-73-7073700. Our website is located at www.optibase-holdings.com . We use a local agent in California for administrative purposes and domestic filings, which is Formation Solutions Inc. 400 Continental Boulevard, 6th Floor El Segundo, CA 90245 .
 
4.B. BUSINESS OVERVIEW
 
The real estate market includes the purchasing and operating of real estate properties intended for leasing and resale primarily for the purpose of commercial, industrial, office space, parking garage, warehouse use as well as for residential purposes. The real estate market is affected by growth or slowdown in the economy, and by changes in the demand and the available supply of commercial and/or residential properties, as well as the construction of additional commercial and/or residential properties. The real estate market is also affected by governmental, municipal and tax authority policies regarding planning, building, marketing and taxation of land.
 
 
Commencing in the fourth quarter of 2008 and as a result of the global economic and financial market crisis, there has been a slowdown in the real estate market which is evidenced by a decline in the number of real estate transactions, a reduction in the availability of credit sources, an increase in financing costs and stricter requirements by banks for providing such financing. During the last few years and through 2016, the situation has changed in certain of the real estate markets we are active in ( i.e. , Central and Western Europe and North America) as interest rates decreased and financial institutions were more inclined to grant financing for qualified assets. This has led to increased demand for real estate properties and an increased volume of transactions in most asset classes. During 2017, the real estate market have yet experienced additional changes as financial institutions have again decreased the availability of financing resulting in more equity being invested in transactions.
- 21 -

 
Our strategy in our real estate activities is to become a substantial owner of properties. To achieve this goal, we intend to pursue a number of operating and growth strategies, which include:
 
·
purchase of real estate mainly in Central and Western Europe, North America and Israel;
 
·
developing and improving existing real estate;
 
·
maximize the leasing of existing properties to commercial users;
 
·
increase and develop unused building rights in our existing properties; and
 
·
acquire additional commercial, residential and other real estate assets in light of market conditions, while diversifying our real estate property base.
 
As of the date of this annual report, our portfolio includes the holdings of interests in six operating commercial properties as well as condominium units in three residential projects.
- 22 -

 
Properties
 
The following table provides details regarding real-estate assets properties wholly owned or controlled by us or by our subsidiaries, as of the date   of this annual report:

Property
Location
Acquisition
Date
Company Stake
Nature of Rights
Property Type
Net
Rentable
Square Meters
Excluding
Redevelopment
Space (1)
Annualized
Rent
($000) (2)
Rate of Occupancy (3)
Annualized
Rent per
Occupied
Square
Meter
($) (4)
Centre des Technologies Nouvelles (CTN)
Geneva, Switzerland
March 2, 2011
51%
Ownership with land lease
Commercial
34,686
10,872
96%
326
Edeka supermarkets
Bavaria, Germany
June 2, 2015 and July 8, 2015
100%
Ownership
Commercial
37,000
3,548
93%
103
Rümlang
Rümlang, Switzerland
October 29, 2009
100%
Ownership
Commercial
12,500
1,569
90%
140
Miami, Florida
Miami, Florida
2010-2013
100%
Ownership
Residential - Condominium Units
4,260
1,063
72%
347
Portfolio Total/ Weighted Average
-
-
-
-
-
88,460
17,052
93%
208
 
(1) Net rentable square meters at a building represents the current square meter at that building under lease as specified in the lease agreements plus management’s estimate of space available for lease based on engineering drawings. Net rentable square meter includes tenants’ proportional share of common areas but excludes space held for redevelopment.
 
(2) Annualized rent represents the monthly contractual rent under existing leases as of December 31, 2017 multiplied by 12.
 
(3) Excludes space held for redevelopment. Includes unoccupied space for which we are receiving rent and excludes space for which leases had been executed as of December 31, 2017, but for which we are not receiving rent. We estimate the total square meter available for lease based on a number of factors in addition to contractually leased square meter, including available power, required support space and common area.
 
(4) Annualized rent per square meter represents annualized rent as computed above, divided by the total square meter under lease as of the same date.
- 23 -

 
Non-GAAP Net Operating Income (“NOI”)
 
Net Operating Income, or NOI, is a non-GAAP financial measure. The most directly comparable GAAP financial measure is operating income, which, to calculate NOI, is adjusted to add back real estate depreciation and amortization and general and administrative expenses and other operating costs less gain on sale of operating properties. We use NOI internally as a performance measure and believe that NOI (when combined with the primary GAAP presentations) provides useful information to investors regarding our financial condition and results of operations because it reflects only those income and expense item that are incurred at the property level.
 
 A reconciliation of GAAP operating income to Non-GAAP NOI is as follows:

   
Year Ended December 31
 
   
Thousands US$
 
   
2015
   
2016
   
2017
 
                   
GAAP Operating income
   
4,189
     
6,320
     
6,623
 
                         
Adjustments:
                       
                         
Real estate depreciation and amortization
   
3,925
     
4,244
     
4,209
 
General and administrative
   
1,849
     
2,615
     
2,698
 
Other operating costs (*)
   
2,352
     
-
     
-
 
                         
Non-GAAP Total Net Operating Income (NOI)
   
12,315
     
13,179
     
13,530
 
 
(*) Acquisition-related costs related to the acquisition of the twenty-seven (27) supermarkets in Bavaria, Germany .
- 24 -


We consider the NOI to be an appropriate supplemental non-GAAP measure to operating income because it assists management, and thereby investors, to understand the core property operations prior to depreciation and amortization expenses and general and administrative costs. In addition, because prospective buyers of real estate have different overhead structures, with varying marginal impact to overhead by acquiring real estate, we consider the NOI to be a useful measure for determining the value of a real estate asset or groups of assets.
 
The metric NOI should only be considered as supplemental to the metric operating income as a measure of our performance. NOI should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. NOI should also not be used as a supplement to, or substitute for, cash flow from operating activities (computed in accordance with generally accepted accounting principles in the United States).
 
Non-GAAP Funds From Operation (“FFO”) and Non-GAAP Recurring FFO (“Recurring FFO”)
 
Funds from operation, or FFO, is a non-GAAP financial measure. The most directly comparable GAAP financial measure is net income, which, to calculate FFO, is adjusted to add back depreciation and amortization and after adjustments for unconsolidated associates. We make certain adjustments to FFO, which it refers to as recurring FFO, to account for items we do not believe are representative of ongoing operating results, including transaction costs associated with acquisitions. We use FFO internally as a performance measure and we believe FFO (when combined with the primary GAAP presentations)   is a useful, supplemental measure of our operating performance as it’s a recognized metric used extensively by the real estate industry. We also believe that Recurring FFO is a useful, supplemental measure of our core operating performance. The company believes that financial analysts, investors and shareholders are better served by the presentation of operating results generated from its FFO and Recurring FFO measures.
 
A reconciliation of GAAP net income to Non-GAAP FFO and Recurring FFO is as follows:
 
   
Year Ended December 31
 
   
Thousands US$
 
   
2015
   
2016
   
2017
 
                   
GAAP Net income (loss) attributable to Optibase Ltd.
   
(1,068
)
   
195
     
(1,123
)
                         
Adjustments:
                       
                         
Real estate depreciation and amortization
   
3,925
     
4,244
     
4,209
 
Pro rata share of real estate depreciation and amortization from unconsolidated associates
   
541
     
1,282
     
2,022
 
Non-controlling interests share in the above adjustments
   
(1,170
)
   
(1,142
)
   
(1,141
)
Non-GAAP Fund From Operation (FFO)
   
2,228
     
4,579
     
3,967
 
                         
Other operating costs (*)
   
2,352
     
-
     
-
 
Non- GAAP Recurring Fund From Operation (Recurring FFO)
   
4,580
     
4,579
     
3,967
 
 
(*) Acquisition-related costs related to the acquisition of the twenty-seven (27) supermarkets in Bavaria, Germany.
- 25 -


We consider the FFO and Recurring FFO to be an appropriate supplemental non-GAAP measure to operating income because it assists management, and thereby investors, in analyzing our operating performance.
 
The metric’s FFO and Recurring FFO should only be considered as supplemental to the metric net income as a measure of our performance. FFO (i) does not represent cash flow from operations as defined by GAAP, (ii) is not indicative of cash available to fund all cash flow needs, including the ability to make distributions, (iii) is not an alternative to cash flow as a measure of liquidity, and (iv) should not be considered as an alternative to net income (which is determined in accordance with GAAP) for purposes of evaluating our operating performance.
- 26 -

The following table provides details regarding our non-controlled real-estate assets or projects in which we indirectly own a minority stake, as of the date   of this annual report:

Property
Location
Acquisition
date
Company Stake
Nature of Rights
Property Type
Net
Rentable
Square Feet
Excluding
Redevelopment
Space (1)
Annualized
Rent
($000) (2)
Rate of Occupancy (3)
Annualized
Rent per
Occupied
Square
Feet
($) (4)
2 Penn Center Plaza
Philadelphia, Pennsylvania
October 12, 2012
22.16%
Beneficial interest in the owner of the property
Commercial
515,000
11,635
95%
24
Texas Shopping Centers Portfolio
Houston, Dallas, San Antonio, Texas
December 31, 2012
4%
Beneficial interest in the portfolio
Commercial
2,125,700
27,544
94%
14
South Riverside Plaza Office Tower
300 South Riverside Plaza, Chicago
December 29, 2015
30%
Beneficial interest in the owner of the property
Commercial
1,073,177
15,363
68%
21
Portfolio Total/ Weighted Average
-
-
-
-
-
3,713,877
54,542
87%
17
 
(1) Net rentable square feet at a building represents the current square meter at that building under lease as specified in the lease agreements plus management’s estimate of space available for lease based on engineering drawings. Net rentable square meter includes tenants’ proportional share of common areas but excludes space held for redevelopment.
 
(2) Annualized rent represents the monthly contractual rent under existing leases as of December 31, 2017 multiplied by 12.
 
(3) Excludes space held for redevelopment. Includes unoccupied space for which we are receiving rent and excludes space for which leases had been executed as of December 31, 2017, but for which we are not receiving rent. We estimate the total square meter available for lease based on a number of factors in addition to contractually leased square meter, including available power, required support space and common area.
 
(4) Annualized rent per square meter represents annualized rent as computed above, divided by the total square meter under lease as of the same date.
- 27 -

 
Set forth below is additional information with respect to our projects:
 
Geneva, Switzerland
 
On March 3, 2011, we acquired, through our newly owned subsidiary, an office building complex in Geneva, Switzerland known as Centre des Technologies Nouvelles, or CTN complex. The acquisition was undertaken by OPCTN S.A., or OPCTN, a Luxembourg company owned 51% by Optibase and 49% by The Phoenix Insurance Company Ltd. and The Phoenix Comprehensive Pension, or, collectively, The Phoenix. OPCTN executed the transaction by acquiring all of the shares of the property owner, Eldista. The seller, Apollo CTN. S.a.r.l, is an entity majority owned by area property partners.
 
The transaction was based on a property value of CHF 126.5 million, including existing non-recourse mortgage financing in the principal amount of CHF 85.3 million provided by Credit Suisse (app. $136.5 million and $92.4 million respectively, as of the purchase date). The purchase price for the transaction was approximately CHF 37.7 million (app. $40.6 million, as of the purchase date).
 
The CTN complex is a six-building complex located in the Plan-Les-Ouates business park in the outskirts of Geneva. The complex includes approximately 35,000 square meters of leasable space (app. 377,000 square feet), is currently leased to 50 tenants, primarily in the field of advanced industries including biotech electronic and information technology industries, and is currently 96%   occupied.
 
The following table sets forth certain information regarding leases of tenants in the CTN Complex, as of December 31, 2017:
 
   
Number of tenants whose
leases will expire *
   
Total area covered
by these leases
   
Area covered
by these leases (%)
   
Annual rent
at expiration ($000)
   
Percent of annual rent at expiration (%)
 
2018
   
15
     
6,356
     
18.32
%
   
2,054
     
18.89
%
2019
   
7
     
836
     
2.41
%
   
270
     
2.49
%
2020
   
8
     
11,211
     
32.32
%
   
3,827
     
35.20
%
2021
   
7
     
1,763
     
5.08
%
   
577
     
5.31
%
2022
   
10
     
4,956
     
14.29
%
   
1,529
     
14.06
%
Thereafter
   
14
     
8,189
     
23.61
%
   
2,615
     
24.05
%
Sub-total
   
61
     
33,311
     
96.04
%
   
10,872
     
100
%
Vacant
   
-
     
1,375
     
3.96
%
   
-
     
-
 
Total
   
61
     
34,686
     
100
%
   
10,872
     
100
%
 
* The leases with the tenants described in the above table include either fixed end date, or notice periods ranging from one to twelve months. Number of tenants includes several tenants with multiple lease agreements with different expiration dates.
 
In connection with the transaction, Optibase and The Phoenix entered into an agreement regarding their shareholdings in OPCTN. The agreement provides that Optibase will make day-to-day decisions and provide The Phoenix with customary protective rights. For further information see Item 10.C “Material Contracts”.
 
For a summary of the principal terms of the financing agreement entered by us for the purchase of the CTN complex, see Item 5.B Operating and Financial Review and Prospects - Liquidity and Capital Resources”.
- 28 -


 
On March 1, 2017, our subsidiary Eldista Gmbh, received a notice from its largest tenant in Switzerland, LEM Switzerland SA, or LEM, regarding the deposit of the monthly rent for March 2017 amounting to approximately CHF 279,400 (app. $276,800 vat inclusive)  with Banque cantonale de Genève under the control of the Pouvoir judiciaire of the Canton of Geneva, as a preliminary process for filing a claim with the Commission de Conciliation en Matière de Baux et Loyers of the Canton of Geneva, or the Commission. LEM claims that there are serious defects affecting the rented premises, which merit LEM with a reimbursement of approximately CHF 2.4 (app, $2.4 million) (excluding VAT) as well as approximately CHF 69,200 (app, $68,500) as indemnification for consequential damages for the years 2014 and 2015. LEM also reserves its claims regarding damages suffered before year 2014. On April 5, 2017 LEM withdrew the deposit of the monthly rent for March 2017 with Banque cantonale de Genève under the control of the Pouvoir judiciaire of the Canton of Geneva and released the amount to the Company. Thus, paying the full payment of the rent. In July 2017, LEM filed an application, pursuant to which LEM mainly demands the elimination of certain alleged defects in the CTN Complex and that LEM be authorized to carry out the works at the expense of Eldista Gmbh if the works are not executed within a specific time frame as well as a 20%-reduction in rent from February 2012 and until the completion of the works. LEM demands that Eldista Gmbh be ordered to reimburse a monthly amount of CHF 47,600 as rent overpayment from February 2012 (representing the 20% reduction in rent) until (i) the completion of the works or (ii) the month of the entry into force of the judgment, whichever occurs first and that Eldista Gmbh be ordered to pay an amount of app, CHF 147,000 (subject to amplification) plus interest as of May 5, 2017 as consequential damages. LEM further demands to be reserved the right to claim the reimbursement of overpaid ancillary fees. According to the application, the dispute amounts to a total of CHF 3.54 million (app. $ 3.68 million). On October 23, 2017 LEM filed a claim with the first instance court, requesting a rent reduction and related damages amounting to a minimum capital amount of CHF 3,833 (approximately $ 3,926 as of December 31, 2017), based on various defects allegedly affecting the rented premises. On February 16, 2018, Eldista submitted a reply brief to the court, the Tenant will have until April 9, 2018 to submit a complementary brief and Eldista until May 14, 2018. The Company has sufficient provision to cover the expected outcome of this claim.
 
Rümlang , Switzerland
 
On October 29, 2009, our wholly-owned subsidiary, Optibase RE 1 s.a.r.l., acquired a commercial building located at Riedmattstrasse 9, Rümlang from the Swiss property company Zublin Immobilien AG. Rümlang is situated 15 km from Zurich and as many commercial buildings due to its strategic location in proximity to Zurich international airport. The purchase price for the transaction was approximately CHF 23.5 million of which CHF 18.8 million (app. $22.8 million and $18.1 million respectively, as of the purchase date) was financed by a local Swiss bank pursuant to a mortgage agreement.
 
The five-story building includes 12,500 square meters (approximately 135,000 square feet) of rentable space with office, laboratory and retail uses. The office building in Rümlang is currently leased to 13 tenants, and is currently 90% occupied.
 
The following table sets forth certain information regarding leases of tenants in the Rümlang property, as of December 31, 2017:
 
   
Number of tenants whose
leases will expire*
   
Total area covered
by these leases
   
Area covered
by these leases (%)
   
Annual rent
at expiration ($000)
   
Percent of annual rent at expiration (%)
 
2018
   
6
     
5,764
     
46.35
%
   
786
     
50.08
%
2019
   
2
     
1,208
     
9.71
%
   
207
     
13.20
%
2020
   
2
     
431
     
3.47
%
   
100
     
6.38
%
2021
   
1
     
3,369
     
27.09
%
   
425
     
27.10
%
2022
   
2
     
370
     
2.98
%
   
51
     
3.24
%
Sub-total
   
13
     
11,142
     
89.59
%
   
1,569
     
100
%
Vacant
   
-
     
1,294
     
10.41
%
   
-
     
-
 
Total
   
13
     
12,436
     
100
%
   
1,569
     
100
%
 
* The leases with the tenants described in the above table include either fixed end date, or notice periods ranging from three to six months.
- 29 -

 
For details regarding an option agreement granted to Swiss Pro for the purchase of twenty percent (20%) of the shares of Optibase RE 1 s.a.r.l, the owner of the property, see Item 10.C Material Contracts . For details on a demand received from Swiss Pro to receive certain data in connection with the option agreement, see Item 8 . “Financial Information - Legal Proceedings”.
 
For a summary of the principal terms of the financing agreement entered by us for the purchase of the Rumlang property, see Item 5.B “Operating and Financial Review and Prospects - Liquidity and Capital Resources”.
 
Two Penn Center Plaza in Philadelphia, PA
 
On October 12, 2012, our wholly-owned subsidiary, Optibase 2 Penn, LLC, acquired an approximately twenty percent (20%) beneficial interest in the owner of a Class A twenty story commercial office building in Philadelphia known as Two Penn Center Plaza.
 
The transaction was based on a valuation of Two Penn Center Plaza of approximately $66 million, including existing non-recourse mortgage financing in the principal amount of approximately $51.7 million provided by UBS Real Estate Securities, or UBS. The UBS mortgage loan has a fixed interest rate of 5.61%, maturing in May 2021, and requiring monthly payments of principal and interest of approximately $300,000. We made a capital contribution of approximately $4 million to acquire a 19.66% indirect beneficial interest in the owner of the property. As of December 31, 2017, the indirect beneficial interest is 22.16%. For further information, see Item 7.B. Related Party Transactions .
 
Optibase 2 Penn, LLC is a limited partner in a larger joint venture that owns 99% of the beneficial interests in the owner of the Two Penn Center Plaza. Two Penn Center Plaza has approximately 500,000 rentable square feet and is located in the Center City neighborhood of Philadelphia opposite City Hall and Love Park. The building is currently leased to 148 tenants, primarily for general office and retail related usage. As of December 31, 2017, the Two Penn Center Plaza was 94% occupied and the annual rental income for the year 2017 totaled to approximately $11.2 million.
 
Texas Shopping Centers Portfolio
 
On December 31, 2012, our wholly-owned subsidiary, OPTX Equity LLC, acquired an approximately 4% beneficial interest in a portfolio of Texas shopping centers. OPTX Equity LLC undertook this investment as an approximately 16.5% limited partner in Global Texas, LP a Florida limited partnership that is controlled by Global Fund Investments. Global Texas, LP is a limited partner in Global Texas Portfolio, LP a joint venture that acquired 49% of the beneficial interests in a shopping center portfolio.   The partnership agreement of Global Texas, LP provides for contributions of capital and distributions of proceeds pro rata among the partners according to their respective partnership interests. OPTX Equity LLC has the right to participate in certain major decisions of Global Texas, LP that require the approval of 51% of the Global Texas, LP partnership interests.
 
In connection with the transaction, our wholly-owned subsidiary, OPTX Lender LLC, became an owner of approximately 16.5% of the partnership interests in Global Texas Lender, LP a Florida limited partnership. Global Texas Lender, LP provided a loan to Global Texas Portfolio, LP to finance the purchase price paid by Global Texas Portfolio, LP to acquire its 49% beneficial interest in the shopping center portfolio. The terms of the partnership agreement of Global Texas Lender, LP are substantially similar to the terms of the partnership agreement of Global Texas, LP.
- 30 -

 
The transaction was based on a portfolio valuation of approximately $342 million including existing nonrecourse mortgage financing in the principal amount of approximately $252 million. The primary mortgage loan had a fixed interest rate of 5.73% and was refinanced in December 2015 with a mortgage for a $247.5 million with a fixed interest rate of 4.1% matures in January 2026.
 
At the closing of the transaction, which occurred on December 31, 2012, we made an aggregate capital contribution of approximately $4 million to OPTX Equity LLC and OPTX Lender LLC in order to fund our share in the transaction.
 
The shopping centers portfolio includes more than two million square feet of leasable area and is located in Houston, Dallas, and San Antonio areas of Texas. The leasable area is currently 94% occupied . For the year ended on December 31, 2017, Texas shopping centers portfolio   annual rental income totaled to approximately $28.3 million .
 
Marquis Residences in Miami, Florida
 
On December 30, 2010, our wholly-owned subsidiary, Optibase Real Estate Miami LLC, had acquired 21 luxury condominium units in the Marquis Residences in Miami, Florida. The condominium units were sold by Leviev Boymelgreen Marquis Developers, L.L.C., a Florida limited liability company. In consideration for the 21 condominium units, we paid a net purchase price of approximately $8.6 million. In addition to the purchase price, we have invested approximately $823,000 in finishing the units.
 
 The Marquis Residences is a 67-story tower with 292 luxury residential units ranging from 1,477 to 4,200 square feet, a restaurant, a hotel, a spa and fitness center.
 
 To date, 17 of the 21 units are rented out and the remaining unit is being offered for rental or sale. We intend to hold the units for investment purposes and will consider to continue renting or selling the units in accordance with our business considerations and market conditions.
 
21 units are pledged in connection with a financing agreement entered into by us, see Item 5.B “Operating and Financial Review and Prospects - Liquidity and Capital Resources”.
 
Penthouses Units in Miami, Florida
 
On April 9, 2013 and on August 22 , 2013, our wholly-owned subsidiary, Optibase Real Estate Miami LLC, had acquired two luxury condominium penthouses located in the Marquis Residence in Miami and one condominium penthouse located in the Ocean One condominium in Sunny Isles Beach, Florida. In consideration for the three penthouses, we paid a net purchase price of approximately $4.8 million.
 
The Ocean One condominium in Sunny Isles Beach is a twin tower project with 241 luxury residential units ranging from 1,990 to 2,610 square feet, with penthouses containing more square footage, and the amenities include, 700 feet of ocean frontage, a private beach club, a health and fitness center, a pool and spa and two tennis courts .
 
To date, one penthouse is still undergoing renovations and remodeling, while the other two unit’s renovation has been recently completed. We intend to hold the remaining units for investment purposes and will consider renting or selling the units in accordance with our business considerations and market conditions.
 
Condominium Units in Miami Beach, Florida
 
On December 31, 2013, our two wholly-owned subsidiaries, Optibase FMC LLC and Optibase Real Estate Miami LLC, had acquired twelve luxury condominium units located in the Flamingo-South Beach One Condominium and in the Continuum on South Beach Condominium, both located in Miami Beach, Florida, in consideration for the issuance of our 1.37 million newly issued ordinary shares (of which approximately 67,000 ordinary shares were off set against the lease of one unit), representing, as of the date of the approval of the transaction by our board of directors, a value of approximately $8.8 million. The condominium units were sold by private companies indirectly controlled by Capri, our controlling shareholder. At closing, and following the approval of the transaction by our shareholders, we issued to Capri a net sum of 1,300,580 of our ordinary shares. The net fair value of the condominium units as recorded in our financial statement as of the closing date was approximately $7.2 million, representing the fair value of the ordinary shares issued as of the closing date .
- 31 -

 
The eleven units at the Flamingo-South Beach One Condominium, or Flamingo Condominium, are located on various floors of the South Building of the Flamingo Condominium, and ranging in size from 924 to 2,347 square feet. The Flamingo Condominium is a 15-story tower with 513 luxury residential units ranging in size from approximately 450 to approximately 2,347 square feet. On October 20, 2014, we sold the eleven units located in the Flamingo Condominium, in consideration for an aggregated gross price of $6.4 million, and w e recorded a capital gain of approximately $2.7 million resulting from such transaction . For further details on the transaction to sell such eleven units, see Item 7.B. Related Party Transactions and Item 10.C. “Material Contracts”.
 
The unit at the Continuum on South Beach Condominium, or Continuum, is located on the 33rd floor of the North Tower of the Continuum on South Beach Condominium located at 50 S. Pointe Drive, Miami Beach, Florida. The Continuum on South Beach Condominium is a 37-story ocean-front tower with 203 luxury residential units ranging in size from 1,554 to 3,497 square feet. Residences of the Continuum on South Beach Condominium enjoy the right to use the common areas of the residence, including swimming pool, tennis courts, spa and a sporting club. At the closing of the acquisition of the Continuum Unit, the seller of the unit leased the Continuum Unit from us for a term of 36 months. We intend to hold the unit for investment purposes and will consider to continue renting or selling the unit in accordance with our business considerations and market conditions.
 
On December 29, 2016, our shareholders approved, following the approval by our audit committee and board of directors, a new lease agreement to be entered into with an affiliate of Capri, or the Tenant. The new lease will be in effect for a one-year term commencing on January 2, 2017, which will be automatically extended by a one-year term and up to a total of three years. For further details, see Item 7.B. “Related Party Transaction” .
 
Four units are pledged in connection with a financing agreement entered into by us, that was refinanced in November 2017, see Item 5.B “Operating and Financial Review and Prospects - Liquidity and Capital Resources” .For further information, see Item 7.B. Related Party Transactions .
 
German Commercial Properties Portfolio
 
On December 18, 2014, our wholly owned European subsidiary, Optibase Bavaria GmbH & Co. KG, or Optibase Bavaria, entered into a purchase agreement with Lincoln Dreizehnte Deutche Grundstucksgellschaft mbH and Lincoln Land Passau GmbH, unrelated third parties, or the Sellers, to acquire a retail portfolio of 26 separate commercial properties in Bavaria, Germany, and one commercial property in Saxony, Germany, or the German Portfolio. On June 2, 2015 the closing of the transaction occurred and at the first stage we acquired 25 supermarkets in Bavaria. In consideration for the 25 supermarkets, we paid a net purchase price of €24 million . On July 8, 2015 we acquired the two remaining supermarkets for an additional purchase price of €4.75 million.
 
The German Portfolio represents a homogenous retail portfolio in established retail locations. It has approximately 37,000 square meters of total rental space and currently generates annual net rental income of approximately EUR 2.9 million (app. $3.3 million). The leasable area is currently 93% occupied, and the properties have an average remaining lease term of approximately five years.
 
The tenants currently operate on the properties includes 26 supermarkets, and one commercial building with partly office use. The largest tenant in the German Portfolio is EDEKA Handelsgesellschaft Südbayern mbH, or Edeka, one of the largest supermarket chain in the German market, which currently leases 19 of the rental properties in the German Portfolio. In addition to the supermarkets, smaller shops (such as bakeries and post offices) operate on several locations as subtenants of Edeka.
- 32 -

 
The following table sets forth certain information regarding leases of tenants in the portfolio by property, as of December 31, 2017:
 
   
Number of tenants whose
leases will expire*
   
Total area covered
by these leases
   
Area covered
by these leases (%)
   
Annual rent
at expiration ($000)
   
Percent of annual rent at expiration (%)
 
2018
   
2
     
2,379
     
6.43
%
   
268
     
7.98
%
2019
   
1
     
1,701
     
4.60
%
   
200
     
5.95
%
2020
   
6
     
9,657
     
26.11
%
   
888
     
26.39
%
2021
   
-
     
-
     
0.00
%
   
-
     
0.00
%
2022
   
5
     
6,716
     
18.16
%
   
604
     
17.95
%
Thereafter
   
11
     
14,078
     
38.06
%
   
1,404
     
41.74
%
Sub-total
   
25
     
34,531
     
93.36
%
   
3,364
     
100
%
Vacant
   
-
     
2,457
     
6.64
%
   
-
     
-
 
Total
   
25
     
36,988
     
100
%
   
3,364
     
100
%
 
* Number of tenants by property of which 19 are leased by Edeka.
 
For a summary of the principal terms of the financing agreement entered by us for the purchase of the portfolio, see Item 5.B “Operating and Financial Review and Prospects - Liquidity and Capital Resources”.
 
South Riverside Plaza Office Tower, Chicago
 
On December 29, 2015, our wholly-owned subsidiary, Optibase Chicago 300 LLC, completed an investment in 300 River Holdings, LLC, or the Joint Venture Company, which beneficially owns the rights to a 23-story Class A office building located at 300 South Riverside Plaza in Chicago under a 99 year ground lease expiring in 2114. We invested $12.9 million in exchange for a thirty percent (30%) interest in the Joint Venture Company.
 
The property is located in Chicago’s premier West Loop submarket, along the Chicago River. The building, situated on the riverfront, offering 360 degree views at every level of the building, including the following major tenants: Zurich American Insurance, DeVry, Inc., National Futures Association, Federal Deposit Insurance Corporation and Newark Corporation. On June 17, 2016, and in accordance with our initial investment agreement in 300 South Riverside Plaza, Chicago, we have invested an additional amount of $3 million which accrues interest of 12% per annum which was distributed back to the Company on November 21, 2017.
 
JPMorgan Chase who was an anchor tenant in the building, occupying approximately 486,000 square feet, or 46% of the rentable area, has exercised its option to terminate its entire office space at no penalty on September 2016. As a result, we have secured new leases with a variety of new tenants and we are currently seeking and negotiating additional alternative tenants to fulfil the vacant space. To date, approximately 80% of the rentable square feet of the building are secured by various singed lease agreements.
 
Material Tenants
 
Our commercial properties in Switzerland are supported by anchor tenants who, due to size, reputation and other factors are considered as such. Our largest tenants in Switzerland are LEM SA and Novimune SA, located in the CTN complex. As of December 31, 2017, these tenants occupied approximately 13,000 square meters and accounted for approximately $4.5 million of rent income, or approximately 28% of our gross leasable area in Switzerland and approximately 36%, of our annual rent in Switzerland. For further details regarding the receipt of an application for conciliation from LEM, see Item 8.A. “ Consolidated Statements and Other Financial Information ”.
- 33 -

 
Our largest tenant in Germany is Edeka. As of December 31, 2017, Edeka occupied approximately 30,300 square meters and accounted for approximately $2.8 million of rent income, or approximately 82% of our gross leasable area in Germany and approximately 85%, of our annual rent in Germany. Our other tenant in Germany is Buchbauer Handelsmärkte GmbH. Or Buchbauer. As of December 31, 2017, Buchbauer occupied approximately 5,300 square meters and accounted for approximately $400,000 of rent income, or approximately 14% of our gross leasable area in Germany and approximately 12%, of our annual rent. No other tenant accounted for over 10% of our annual rent (on a consolidated basis).
 
Competition
 
The real estate market is highly competitive and is characterized by a large number of competitors. The main factor affecting competition in this market is geographic location of property. There are properties in close proximity to some of our properties that are similar in purpose and use, which has the effect of increasing competition for the leasing of those properties as well as reducing the rental rates for those properties. Other factors affecting competition are the leasing price, the physical condition of the properties and their energy efficiency rate, the finishing of the properties and the level of the management services provided to tenants. Furthermore, the overall economic and financial trends as reflected, among other things, in interest rates, may further increase competition, leading to a reduction of rental fees and a decline in demand for properties. However, as most of our real estate is leased under medium to long term agreements, we believe that our exposure is limited to most of the effects of slowdown in the real estate market, although a significant change in market conditions may adversely affect our ability to maintain current rates of occupancy or current rent levels.
 
Remaining items of the Video Solution Business
 
In connection with the sale of our Video Solutions Business to Vitec, we transferred all rights related to the support of the IIA for the period ending on the date of the closing of the Vitec Transaction to Vitec. Although we have no further obligation to pay royalties on revenues generated by our Video Solutions Business subsequent to its sale. We were undergoing an audit by the IIA, for royalties paid before the sale of our Video Solution Business. The Company has sufficient provision to cover the expected outcome of such review process.
 
4.C. ORGANIZATIONAL STRUCTURE
 
As of December 31, 2017, we have been managing our activity through our two wholly-owned direct subsidiaries: Optibase Inc. which was incorporated in California, the United States in 1991, Optibase Real Estate Europe SARL, or Optibase SARL, which was incorporated in Luxembourg in October 2009, and through our 51% held subsidiary OPCTN S.A., which was incorporated in Luxembourg on February 24, 2011. Our subsidiaries hold the following companies: Optibase Inc. wholly owns Optibase Real Estate Miami LLC, Optibase 2Penn LLC, OPTX Equity LLC, OPTX Lender LLC, Optibase FMC LLC, and Optibase 300 Chicago LLC, all limited liability companies which were incorporated in Delaware or Florida, United States. Optibase SARL wholly owns Optibase RE1 SARL and Optibase RE2 SARL, which were incorporated in Luxemburg. Optibase SARL wholly owns Optibase Bavaria GmbH & Co. KG, a German partnership, and Optibase Bavaria Holding GmbH, a German corporation. OPCTN S.A. wholly owns Eldista GmbH, which was incorporated in Switzerland.
 
Our real estate activity is managed through several subsidiaries held directly and indirectly by Optibase Ltd. or its abovementioned subsidiaries.
 
4.D. PROPERTY, PLANTS AND EQUIPMENT
 
Since December 2011, our headquarters were located in offices occupying approximately 1,399 square feet in Herzliya Pituach, Israel. Our lease for this space expired in December 2015. From December 2015 until April 2016, our headquarters were located in offices occupying approximately 1,080 square feet in Herzliya Pituach, Israel. Currently, our new headquarters occupying approximately 3,412 square feet in Herzliya Pituach. Our lease for this space expires in 2020.
 
Our European subsidiaries occupy offices totaling approximately 500 square feet in Luxembourg. The current leases do not have an expiration date and can be terminated at any time with a three months prior notice.
- 34 -

 
ITEM 4A. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
The following discussion and analysis about our financial condition and results of operations contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth under “Item 3.D. Risk Factors” above and “Item 5.D. Trend Information” below, as well as those discussed elsewhere in this annual report. You should read the following discussion and analysis in conjunction with the “Selected Consolidated Financial Data” and the Consolidated Financial Statements included elsewhere in this annual report.
 
Overview
 
We invest in the fixed-income real estate field and hold properties and beneficial interest in real-estate assets and projects in various locations. Our revenues are comprised of rental income we receive from tenants in our various properties. We derive additional income as dividends and interest from various real estate investments where we hold certain beneficial interests. Our consolidated financial statements are presented in accordance with generally accepted accounting principles in the U.S., or U.S. GAAP.

The presentation currency of the financial statements is the U.S dollar.

The functional currency of the Company is the U.S Dollar.

The functional currencies of Optibase’s subsidiaries are CHF, EUR and U.S dollar. Assets and liabilities of these subsidiaries are translated at the year-end exchange rates and their statement of operations items are translated using the average exchange rates for all periods presented. The resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income in shareholders' equity.
 
As of December 31, 2017, we had available cash, cash equivalents, long term investments, restricted cash and other financial investments net of approximately $23.1 million. As of March 20, 2018, we have available cash, cash equivalents, long term investments, restricted cash and other financial investments net of approximately $24.8 million. For information regarding the investment of our available cash, see Item 5.B. “ Operating and Financial Review and Prospects - Liquidity and Capital Resources” below.
 
Our business may be affected by the condition in Israel, see Item 3.D. “Risk Factors”.
 
Fixed income from real estate rent

Fixed income real-estate consists primarily of revenues derived from real estate properties, held through our subsidiaries, in Switzerland (Rümlang and Geneva), Miami and Germany.
 
Cost of real estate operations
 
Cost of real estate operations consist primarily of direct costs associated with operating the real estate properties such as building insurance, management company fees and property tax.
- 35 -

 
Real estate depreciation and amortization
 
Real estate depreciation and amortization consist primarily of depreciation expenses related to the value of properties net of amounts accounted for land, as well as amortization expenses associated with intangible assets derived from the purchase of real estate properties.
 
General and administrative expenses
 
General and administrative expenses consist primarily of fees to outside consultants, legal and accounting fees, expenses related to the purchase of real estate assets, stock option compensation charges and certain office maintenance costs.
 
Other operating cost
 
Other operating cost consists of acquisition related cost of $2.4 million related to the acquisition of the twenty-seven (27) supermarkets in Bavaria, Germany during 2015.
 
Gain on sale of operating properties

Gain on sale of operating properties consists of sale of eleven condominium units located in Miami Beach, Florida during 2014.
 
Other income
 
Other income, net, consists of dividend received and interest income on loan to associated company.
 
Financial expenses, Net
 
Financial expenses consist primarily of interest we paid in connection with bank loans, debt issuance, currency hedging transactions, and losses from realization of securities and financial instruments. Financial income consists mainly of interest received on deposits and other financial assets held in our bank accounts and gains from realization of securities and financial instruments. Our exchange differences occur primarily as a result of the change of the NIS, CHF and Euro value relative to the U.S. dollar.
 
Taxes on income
 
Israeli companies are generally subject to corporate tax on their taxable income. As of 2017, the corporate tax rate is 24% (in 2015 and 2016, the corporate tax rate was 26.5% and 25%, respectively). In December 2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which reduces the corporate income tax rate to 24% (instead of 25%) effective from January 1, 2017 and to 23% effective from January 1, 2018.
 
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA").  The TCJA makes broad and complex changes to the Code. The changes include, but are not limited to:

1.
A corporate income tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017 ("Rate Reduction");
 
2.
The transition of U.S international taxation from a worldwide tax system to a territorial system by providing a 100 percent deduction to an eligible U.S. shareholder on foreign sourced dividends received from a foreign subsidiary;
 
3.
A one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017; and
 
4.
Taxation of GILTI earned by foreign subsidiaries beginning after December 31, 2017. The GILTI tax imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations.
 
- 36 -

 
Taxable income of Luxemburg, Switzerland, Germany and the United States is subject to tax at the rate of approximately 29%, 24%, 16% and 34% respectively in 2017.

We have final tax assessments through the tax year 2013.
 
As of December 31, 2017, we had approximately $68 million of net operating loss carry-forwards for Israeli tax purposes. These net operating loss carry-forwards have no expiration date. Optibase Inc. had U.S. federal net operating loss carry-forward of approximately $37 million that can be carried forward and offset against taxable income for 20 years, no later than 2037. Utilization of U.S. net operating losses may be subject to the substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986, and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.
 
Equity share in losses of associates, net
 
Associates in which we have significant influence over the financial and operating policies without having control are accounted for using the equity method of accounting, accordingly we recorded during 2017 an equity income in associate of our holdings of Two Penn Center Plaza in Philadelphia, Pennsylvania and an equity loss in associate of our holdings of 300 South Riverside Plaza in Chicago.
 
Net Income Attributable to Non-Controlling Interest.
 
Net income attributed to non-controlling interest following the acquisition of the CTN property in Geneva, Switzerland in March 2011. We have entered into the said transaction with The Phoenix group, who owns 49% of the property. Thus, 49% of the net operating results of the property are attributed to them.
 
5.A. OPERATING RESULTS
 
The following table sets forth, for the years ended December 31, 2015, 2016 and 2017 statements of operations data as percentages of our total revenues:
 
   
Year Ended December 31
 
   
2015
   
2016
   
2017
 
                   
Fixed income from real estate rent
   
100
%
   
100
%
   
100
%
Costs and expenses:
                       
Cost of real estate operations
   
19.4
     
19.3
     
18.4
 
Real estate depreciation and amortization
   
25.7
     
26
     
25.4
 
General and administrative
   
12.1
     
16
     
16.3
 
Other operating expenses
   
15.4
     
-
     
-
 
Total costs and expenses
   
72.6
     
61.3
     
60.1
 
Operating income
   
27.4
     
38.7
     
39.9
 
Other income, net
   
2.8
     
6.8
     
3.6
 
Financial expenses, net
   
(11.8
)
   
(20.6
)
   
(16.7
)
Income before taxes on income
   
18.4
     
24.9
     
26.8
 
Taxes on income
   
(10.5
)
   
(10
)
   
(9.7
)
Equity share in losses of associates, net
   
(0.2
)
   
(2
)
   
(10.1
)
Net income
   
7.6
     
12.9
     
7.0
 
Net income attributable to non-controlling interest
   
14.6
     
11.7
     
13.8
 
Net income (loss) attributable to Optibase Ltd.
   
(7
)
   
1.2
     
(6.8
)
 
- 37 -

Results of Operations for the Years Ended 2017 and 2016
 
Fixed income from real estate rent .   Our fixed income real estate rent increased in 2017 to $16.6 million, compared to $16.3 million in 2016.
 
Cost of real estate operations . Our cost of real estate operation decreased in 2017 to $3.1 million, compared to $3.2 million in 2016.
 
Real estate depreciation and amortization . Our real estate depreciation and amortization in 2017 and in 2016, totaled to $4.2.
 
General and Administrative Expenses . General and administrative expenses increased in 2017 to $2.7 million, compared to $2.6 million in 2016.
 
Operating Income . As a result of the foregoing, we recorded operating income of $6.6 million in 2017 compared to an operating income of $6.3 in 2016. The increase in our operating income in 2017, is mainly attributed to increase in fixed income from real estate rent and due to decrease in cost of real estate operations, offset by an increase in general and administrative expenses.
 
Other income (loss) . We recorded other income of $597,000 in 2017, compared to other income of $1.1 million in 2016, related to dividend received and interest income on loan to an associated company. The decrease in other income in 2017 is mainly attributed to the realization of two shopping centers of Texas portfolio during 2016.
 
Financial Expenses, Net . We recorded financial expenses, net of $2.8 million in 2017, compared with financial expenses, net of $3.4 million in 2017. The decrease can be mainly attributed to one-time $335,000 interest refund from the Swiss tax authorities.
 
Taxes on Income . We and our subsidiaries account for income taxes in accordance with ASC Topic 740 “Income Taxes”, or   ASC 740. Under the requirements of ASC 740, we reviewed all of our tax positions and determined whether the position is more-likely-than-not be sustained upon examination by regulatory authorities. The tax expenses of $1.6 million in 2017 and in 2016, mainly related to our Luxemburg and Germany subsidiaries.
 
Equity share in losses of associates, Net. We recorded an equity loss of $1.7 million in 2017, compared to an equity loss of $323,000 in 2016 associated with 2 Penn Philadelphia LP and Optibase Chicago 300 LLC . For further details regarding 2 Penn Philadelphia LP and Optibase Chicago 300 LLC , see Item 7.B. “Related Party Transactions” and Item 10.C “Material Contracts”, respectively.
 
Net Income. As a result of the foregoing, we recorded net income of $1.2 million in 2017, compared with a net income of $2.1 million in 2016.
 
Net Income Attributable to Non-Controlling Interest. Net income attributed to non-controlling interest was first recorded in 2011 following the acquisition of the CTN complex in March 2011. We have entered into the said transaction with The Phoenix, who owns 49% of the property. Thus, 49% of the net operating results of the property are attributed to them.
 
Net income (loss) attributable to Optibase Ltd. Net income (loss) attributed to Optibase Ltd., is the result of net income (loss) as affected by net income attributed to non-controlling interest. As a result of the foregoing, we recorded net loss of $1.1 million in 2017, compared with a net income of $195,000 in 2016.
- 38 -

 
Results of Operations for the Years Ended 2016 and 2015
 
Fixed income from real estate rent . Our fixed income real estate rent increased in 2016 to $16.3 million compared to $15.3 million in 2015. The increase is mainly attributed to rental income deriving from our German Portfolio purchased in June and July 2015.
 
Cost of real estate operations . Our cost of real estate operation increased in 2016 to $3.2 million compared to $3 million in 2015. Such costs increased mainly due to an increase in building maintenance expenses related to the German Portfolio purchased in Germany in June and July 2015.
 
Real estate depreciation and amortization . Our real estate depreciation and amortization in 2016 increased to $4.2 million compared to $3.9 million in 2015. Such costs increased in 2016 mainly due to increase in depreciation expenses related to the German Portfolio.
 
General and Administrative Expenses . General and administrative expenses increased in 2016 to $2.6 million compared to $1.8 million in 2015. The increase can be mainly attributed to increase in general and administrative expenses related to the German Portfolio.
 
Other operating cost. Other operating costs in 2015 consist of acquisition related costs of $2.4 million related to the acquisition of the German Portfolio and to a one-time, non-recurring expenses.
 
Operating Income . As a result of the foregoing, we recorded operating income of $6.3 million in 2016 compared to an operating income of $4.2 in 2015. The increase in our operating income in 2016 is mainly attributed to acquisition related costs of $2.4 million recorded in 2015 and due to an increase in rental income offset by an increase in operation expenses and depreciation expenses.
 
Other income (loss) . We recorded other income of $1.1 million in 2016 compared to other income of $429,000 in 2015, related to dividend received and interest income on loan to an associated company.
 
Financial Expenses, Net . We recorded financial expenses, net of $3.4 million in 2016, compared with financial expenses, net of $1.8 million in 2015. The increase can be mainly attributed to the interest payments made as part of Miami long term loan, Germany long term loan and bonds issuance transactions as well as foreign currency translation differences .
 
Taxes on Income . We and our subsidiaries account for income taxes in accordance with ASC Topic 740 “Income Taxes”, or   ASC 740. Under the requirements of ASC 740, we reviewed all of our tax positions and determined whether the position is more-likely-than-not be sustained upon examination by regulatory authorities. Accordingly, we recorded tax expenses of $1.6 million in 2016 and in 2015, mainly related to our Luxemburg and Germany subsidiaries.
 
Equity share in losses of associates, Net. We recorded an equity loss of $323,000 in 2016, compared to an equity loss of $31,000 in 2015 associated with 2 Penn Philadelphia LP and Optibase Chicago 300 LLC . For further details regarding 2 Penn Philadelphia LP and Optibase Chicago 300 LLC , see Item 7.B. “Related Party Transactions” and Item 10.C “Material Contracts”, respectively.
 
Net Income. As a result of the foregoing, we recorded net income of $2.1 million in 2016, compared with a net income of $1.2 million in 2015.
 
Net Income Attributable to Non-Controlling Interest. Net income attributed to non-controlling interest was first recorded in 2011 following the acquisition of the CTN complex in March 2011. We have entered into the said transaction with The Phoenix, who owns 49% of the property. Thus, 49% of the net operating results of the property are attributed to them.
 
Net income (loss) attributable to Optibase Ltd. Net income (loss) attributed to Optibase Ltd., is the result of net income as affected by net income attributed to non-controlling interest.
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Critical Accounting Policies
 
Our consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require management to make certain estimates, judgments and assumptions based upon information available at the time that they are made, historical experience and various other factors that are believed to be reasonable under the circumstances. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented.
 
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Our management reviewed these critical accounting policies and related disclosures with our audit committee. See Note 2 to our Consolidated Financial Statements, which contain additional information regarding our accounting policies and other disclosures required by U.S. GAAP.
 
Our management believes the significant accounting policies which affect management’s more significant judgments and estimates used in the preparation of our consolidated financial statements and which are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

v
Long-lived assets including intangible assets
 
v
Investment in companies
 
v
Contingencies; and
 
v
Income Taxes.
 
Long- Lived Assets including intangible assets

The Company and its subsidiaries long-lived assets are reviewed for impairment in accordance with ASC 360, “Property, Plant and Equipment” , whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

The Company reviewed assets on a component-level basis, which is the lowest level of assets for which there are identifiable cash flows that can be distinguished operationally and for financial reporting purposes. The carrying amount of the asset group was compared with the related expected undiscounted future cash flows to be generated by those assets over the estimated remaining useful life of the primary asset. In cases where the expected future cash flows were less than the carrying amounts of the assets, those assets were considered impaired and written down to their fair values. Fair value was established based on discounted cash flows.
 
Investment in companies

Investments in non-marketable equity securities of companies in which the Company does not have control or the ability to exercise significant influence over their operation and financial policies are recorded at cost.

Management evaluates investments in non-marketable equity securities for evidence of other-than temporary declines in value. When relevant factors indicate a decline in value that is other-than temporary the Company recognizes an impairment loss for the decline in value.
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Contingencies
 
We periodically estimate the impact of various conditions, situations and/or circumstances involving uncertain outcomes to our financial condition and operating results. These events are called “contingencies”, and the accounting treatment for such events is prescribed by the ASC 450 “Contingencies” . ASC 450 defines a contingency as “an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur”. Legal proceedings are a form of such contingencies.
 
In accordance with ASC 450, accruals for exposures or contingencies are being provided when the expected outcome is probable. It is possible, however, that future results of operations for any particular quarter or annual period could be materially affected by changes in our assumptions, the actual outcome of such proceedings or as a result of the effectiveness of our strategies related to these proceedings.
 
Income Taxes
 
The Company and its subsidiaries accounts for income taxes in accordance with ASC Topic 740, “Income Taxes” or ASC 740, which prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to amounts more likely than not to be realized.

ASC 740 clarifies the accounting for uncertainties in income taxes by establishing minimum standards for the recognition and measurement of tax positions taken or expected to be taken in a tax return. Under the requirements of ASC 740, the Company must review all of its tax positions and make a determination as to whether its position is more-likely-than-not to be sustained upon examination by regulatory authorities. If a tax position meets the more-likely–than-not standard, then the related tax benefit is measured based on a cumulative probability analysis of the amount that is more-likely-than-not to be realized upon ultimate settlement or disposition of the underlying issue. Our policy is to accrued interest and penalties related to unrecognized tax benefits in our financial expenses.
 
Recent Accounting Pronouncements
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued, Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The guidance substantially converges final standards on revenue recognition between the FASB and the International Accounting Standards Board providing a framework on addressing revenue recognition issues and, upon its effective date, replaces almost all exiting revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles.
 
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
 
 
Step 1 : Identify the contract(s) with a customer.
 
Step 2 : Identify the performance obligations in the contract.
 
Step 3 : Determine the transaction price.
 
Step 4 : Allocate the transaction price to the performance obligations in the contract.
 
Step 5 : Recognize revenue when (or as) the entity satisfies a performance obligation.
 
The Company   examined the new revenue recognition and conclude that the Company is still within the scope of the standard ACS 840 and not the new revenue recognition ASC 606.
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In February 2016, the FASB issued the ASU 2016-02, Leases (Topic 842). The main provision of this ASU is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. The FASB decided to not fundamentally change lessor accounting. However, some changes have been made to lessor accounting to conform and align that guidance with the lessee guidance and other areas within U.S. GAAP. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. This update is effective for public entities with reporting periods beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. The company is currently evaluating the impact, if any, of the adoption of this new standard, and does not anticipate that this adoption will have a significant impact on its financial position, results of operations, or cash flows. 
 
In January 2016, the FASB issued ASC 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities . The ASU makes the following targeted changes for financial assets and liabilities: i) requiring equity investments with readily determinable fair values to be measured at fair value with changes recognized in net income; ii) simplifying the impairment assessment of equity securities without readily determinable fair values using a qualitative approach; iii) eliminating disclosure of the method and significant assumptions used to fair value instruments measured at amortized cost on the balance sheet; iv) requiring use of the exit price notion when measuring the fair value of instruments for disclosure purposes; v) for financial liabilities where the fair value option has been elected, requiring the portion of the fair value change related to instrument-specific credit risk (which includes a Company's own credit risk) to be separately reported in other comprehensive income; vi) requiring the separate presentation of financial assets and liabilities by measurement category and form of financial asset (liability) on the balance sheet or accompanying notes; and vii) clarifying that the evaluation of a valuation allowance on a deferred tax asset related to available-for-sale securities should be performed in combination with the entity's other deferred tax assets. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those years Early adoption of item (v) above is permitted for financial statements (both annual and interim periods) that have not yet been issued. The Company have not determined when the Company will adopt item (v) above of this ASU. The Company will adopt the remaining provisions of the ASU on January 1, 2018. The Company are evaluating the impact of this ASU on Ambac's financial statements.
 
5.B. LIQUIDITY AND CAPITAL RESOURCES
 
We have funded our operations primarily through private and   public sales of our equity securities and banks credit. As of December 31, 2017, we had cash and cash equivalents of $20.3 million, and as of March 20, 2018, we have available cash, and cash equivalents of approximately $22.3 million.
 
Net cash provided by our operating activities was $7.9 million, $7.3 million and $4 million in December 31 of each of the years 2017, 2016 and 2015, respectively. Net cash provided for operating activities in 2017 and in 2016 was primarily the result of net income for the period, as adjusted for depreciation and amortization and minority interests in losses of a subsidiary, increase in accrued expenses and other accounts payable, offset by the increase in other accounts receivable and prepaid expenses and in trade receivables, and by decrease in deferred tax liabilities and in land lease liabilities. Net cash provided for operating activities in 2015 was primarily the result of net income for the period, as adjusted for depreciation and amortization, decrease in other accounts receivable and prepaid expenses, decrease in trade receivables, offset by the increase accrued expenses and other accounts payables, decrease in short term liabilities and in land lease liabilities, and by decrease in deferred tax liabilities.
 
Net cash provided by investment activities in 2017 totaling $1.1 million reflects primarily the return of $3 million investment in 300 River Holdings, LLC a Joint Venture Company held by our wholly-owned subsidiary Optibase Chicago 300 LLC offset by investment in building improvements . Net cash used for investment activities in 2016 totaling $5 million reflects primarily the additional investment in 300 River Holdings, LLC a Joint Venture Company held by our wholly-owned subsidiary Optibase Chicago 300 LLC ., And investment in building improvements. Net cash used for investment activities in 2015 totaling $49.4 million reflects primarily the investments we have entered into during 2015 for the acquisition of a portfolio in Germany and the acquisition of 30% beneficial interest in Class A office building in Chicago, investment in long term deposits and investment in building improvements.
 
Net cash used for financial activities in 2017 totaling $5.4 million reflects loans and bonds repayment, dividend distribution to non-controlling interests partially offset by $5.1 million proceeds from controlling shareholders' loan. Net cash used for financial activities in 2016 totaling $9.6 million reflects loans and bonds repayment, dividend distribution to non-controlling interests and proceeds from shares capital issuance. Net cash provided for financial activities in 2015 totaling $47.2 million reflects proceeds from bonds offering, bank loan relates to loan received for the acquisition of the portfolio in Germany and loan received for certain condominium units the Company own in Miami and Miami Beach, Florida partially offset by loans repayment and dividend distribution to non-controlling interests.
- 42 -

 
Non-GAAP NOI increased by $351,000, or 2.7%, for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in NOI was primarily driven by the increase in fixed income from real estate rent and due to decrease in cost of real estate operations, and was offset by an increase in general and administrative expenses. For further details regarding the definition of NOI please see Item 4.B.
 
Non-GAAP Recurrent FFO decreased by $612,000, or 13.4%, for the year ended December 31, 2017, compared to the year ended December 31, 2016. The decrease in FFO was mainly due to increase in Equity share in losses of associates, related to the investment in 300 River Holdings, LLC offset by increase in fixed income from real estate rent and decrease in finance expenses, net. For further details regarding the definition of Recurrent FFO please see Item 4.B.
 
During 2017, we invested our available cash solely in various bank deposits and money market funds with various banks. As of the date hereof, we do not have any material contractual commitments related to capital expenditure.
 
In March 2017, our audit committee and board of directors approved, in accordance with the Israeli Companies Regulations (Relieves for Transactions with Interested Parties) of 2000, the receipt of a $5.1 million loan, or the Loan, from our Controlling shareholder. The Loan was granted to the Company on March 28, 2017 for the purpose of strengthening the Company's liquidity.   The Loan does not bear any interest or linkage differentials and is unsecured. The Loan is due on April 1, 2019, however, we may prepay the Loan prior to such date at our sole discretion without any penalty.
 
In November 2017, our subsidiary, Optibase Real Estate Miami, LLC, or Optibase Miami refinanced 25 residential apartment units in Miami, Florida, or the Property, with City National Bank of Florida, or CNB. Under the refinancing, the existing loan on the Property from CNB, with a principal balance of $9.4 million, was replaced with a refinanced loan in the principal amount of $9.4 million. The refinanced CNB loan bears interest at an annual floating rate equal to the 30-Day LIBOR plus 2.65% which may be increased to 30-Day LIBOR plus 3.25% if Optibase Miami and Optibase, Inc. as its parent, fail to maintain depository accounts with CNB totaling $1.5 million. The principal of the refinanced loan is amortized on a monthly basis with principal payments of approximately $19,000 per month plus accrued interest until the loan matures on July 8, 2020 when all remaining principal and interest become due and payable. The refinanced loan is secured by a senior mortgage over the Property and is guaranteed by Optibase Inc. Prepayments of principal are allowed without penalty. The covenants under the new financing agreement are substantially the same as under the previous loan on the Property. For additional information on the covenants, please see the table below.
 
In June 2017, Aberdeen Associates LLC, a Delaware limited liability company, or Aberdeen Lender, extended a $7 Million, 5-year fixed-rate loan facility, the Aberdeen Loan Facility, to the Company’s subsidiary, Optibase Inc.. As the date hereof, Optibase Inc. has not drawn down any funds under the Aberdeen Loan Facility.  The Aberdeen Loan Facility may be drawn down in $250,000 increments, and beginning with the first such draw-down, will bear interest at an annual rate of 5% of the amount drawn, and is compounded and paid quarterly until the maturity on June 1, 2022, at which point all outstanding principal and interest will become due and payable. The Aberdeen Loan Facility is secured by a pledge by Optibase Inc. of 100% of its membership interest in Optibase Chicago 300, LLC. Prepayments of principal on the Aberdeen Loan Facility are allowed without penalty, on ten (10) days’ prior notice to the Aberdeen Lender.
 
In November 2017, Shinhan Bank, a Korean Bank, or Shinhan, extended a $175 Million, 5-year fixed-rate loan, the Shinhan Loan, to South Riverside Building LLC, or 300 Riverside Owner, an entity in which Optibase owns a thirty percent (30%) beneficial interest. The Shinhan Loan bears interest at an annual rate of 5.50% and is compounded and paid monthly until the Shinhan Loan matures in November, 2022, at which point all remaining principal and interest will become due and payable. The Shinhan Loan is secured by 300 South Riverside Plaza, a newly renovated, 22-story LEED Gold Certified office tower located in the West Loop of Chicago, IL, USA which is owned by 300 Riverside Owner. Optibase Ltd. received a repayment of its senior notes to 300 Riverside Owner’s parent company, 300 River Holdings LLC, in the amount of USD $3 million plus accrued interest from the proceeds of the Shinhan Loan.
- 43 -

 
The following table summarizes the principle terms of our material financing agreements of the Company in effect as of December 31, 2017:

Type of Facility
Borrower
Original Date and Maturity Date
Original Amount*
Outstanding Amount (as of December 31, 2017)**
Annual Interest
Payment Terms
Principal Securities
Principal Covenants
Additional Information
Non-convertible Series A Bonds issued to the public in Israel
The Company
Original Date- August 9, 2015;
Maturity Date- December 31, 2021
NIS 60 million
(app. $15 million)
NIS 40 million
(app. $11.5 million)
6.7%
Interest - payable in semi-annual payments
 
Principal - payable in semi-annual payments on June 30 and on December 31 of each of the years of 2016 through 2021 (last payment on December 31, 2021)
none
· negative pledge regarding the creation of a floating charge on all of the Company's assets, subject to certain exceptions.
· no distributions in an amount greater than 35% of the profits
· no distributions that immediately following which the Company's equity (excluding minority interest) will decrease below $50 million
· increase of interest rate in case of certain decreases in the bonds' rating.
· minimum equity (excluding minority interest) will not be less than $33 million
· equity (including minority interest) to balance sheet ratio will not be less than 25%
· net financial debt to CAP ratio will not be greater than 70%
· net financial debt to EBITDA ratio will not be greater than 16.
 
As of December 31, 2017, the Company meets all the required covenants.
The bonds are rated at a rating of "Baa1/Stable" on a local scale by Midroog Ltd., an affiliate of Moody’s.
 
Events of default include, among which, the existence of a real concern that the Company will not meet its material undertakings towards the bondholders; breach of the Company's financial covenants during two consecutives fiscal quarters; cross default provisions; the sale of the majority of the Company's assets, subject to certain exceptions; and occurrence of certain 'change of control' events.
 
No restriction on the issuance of any new series of debt instruments, subject to certain exceptions. Expansion of the series is subject to maintaining the rating assigned to the bonds prior to the expansion date and continued compliance with the financial covenants.
- 44 -

Type of Facility
Borrower
Original Date and Maturity Date
Original Amount*
Outstanding Amount (as of December 31, 2017)**
Annual Interest
Payment Terms
Principal Securities
Principal Covenants
Additional Information
Refinancing agreement of the CTN complex
OPCTN, S.A. (Mezzanine Borrower)
Original Date- October 3, 2011; Maturity Date- Up to 7.5 years from the original date.
CHF 15 million
(app. $16.5 million).
CHF 2.5 million (app. $2.6 million).
LIBOR + either: (a) 1.30%; or (b) a maximum of 2.50% if the lender's risk assessment requires such a change.
Interest due quarterly, beginning March 31, 2012.
 
CHF 2 million to be paid per year on a quarterly basis, beginning 31.12.2011.
A senior  mortgage over the property + a pledge of Eldista's shares
 
· Transfers/sales of property are prohibited.  Any sale will result in the loan being repayable and a prepayment fee of 0.1%, plus difference between interest rate at time of termination and interest rate that bank can achieve for residual interest (LIBOR) term.
· Distributions of dividends/shareholder loans are only permitted in line with available yearly profit after loan payments.
Eldista GmbH (Senior Borrower)
Original Date- October 3, 2011;
Maturity Date- 2061
CHF 85 million
(app. $93.5 million).
CHF 85 million (app. $87 million).
LIBOR + 0.75% per annum.
Interest due quarterly, beginning March 31, 2012.
 
CHF 2 million to be paid per year on a quarterly basis, beginning 31.12.2018.
· Distributions of dividends/shareholder loans are only permitted: (a) to OPCTN to make its loan payments; and (b) otherwise in line with available yearly profit after loan payments.
 
Financing agreement (as amended) of the Edeka Portfolio
Optibase Bavaria GmbH & Co. KG
Original Date- May 2015; Maturity Date- May 31, 2020
€21 million
(app. $23 million) of which €20.5 million (app. $22.5 million) has been drawn down
 
€19.3 million (app. $23.2 million)
3 month Euro Interbank Offer Rate + either: (a) 1.75%; or (b) if certain mortgage requirements under German law are not met, 1.89%.
 
There is a Hedge Agreement in place securing an interest rate of a maximum of 2.15% per annum.
Quarterly amortization of €105,000 each from June 30, 2015 until the maturity date.
Land charges over the Portfolio properties;
 
Assignment of rent, insurance right and claims as well as claims of all future purchase agreements;
 
Pledge of rent accounts;
 
Enforceable abstract promise of debt;
 
Assignment of right and claims under the Hedge Agreement.
 
· Debt service cover ratio ("DSCR") of at least 130% (breach is a "Soft Default", requiring surplus income from the portfolio properties to be used to remedy the breach) or of at least 110% (breach is a "Hard Default" requiring payment by Borrower to fully remedy the breach- DSCR of 130% must be restored).  DSCR must be proven towards the bank by the Borrower every six months from December 31, 2015.
· Loan to value of 70% in the first three years and 65% in the fourth and fifth years (breach requires Borrower to make payment by the Borrower to remedy the breach).  Portfolio was valued at approximately €32.4 million on December 3, 2014, and new valuations may be done at intervals of two years (first on September 30, 2016) at the cost of the Borrower or at any other time at the Lender's cost.
 
As of December 31, 2017, the Company meets all the required covenants.
· The Borrower should pay certain release amounts (as set out in the loan agreement) if a mortgaged property is sold prior to the maturity date. The release amount is the higher of (i) the minimum re-payment amount agreed for the sold property or (ii) 75% of the net sales proceeds received for the sold property.
· Exit Fee for prepayment prior to Maturity Date equal to 0.30% per remaining year of the term plus compensation for loss of interest to the Lender.
· The Bank has a claim for damages in the event of a partial or full prepayment of the loan amount.
· If the Borrower fulfils certain requirements with respect to expanding the Lenggries property on or by December 31, 2017, a part of the undrawn loan in the amount of €525,884 will be paid out to the Borrower. If the conditions are not met on or by December 31, 2017 then the loan will be reduced by €525,884 and Borrower will repay an amount of €74,116. To date, the Company is negotiating with the bank regarding an extension until December 31, 2018.
· The Lender is authorized to syndicate or transfer parts or the entire loan at its own cost.
 
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Type of Facility
Borrower
Original Date and Maturity Date
Original Amount*
Outstanding Amount (as of December 31, 2017)**
Annual Interest
Payment Terms
Principal Securities
Principal Covenants
Additional Information
Financing agreement of condominium units in Miami
Optibase Real Estate Miami, LLC
Original Date- July 7, 2015;
Maturity Date- July 8, 2018, extended to July 8, 2020
$9.4 million
$9.3 million
Libor (30-day rate) + either: (a) 2.65%; or (b) 3,25% if Borrower and Guarantor fail to maintain depository accounts with the Lender totaling $1.5 million.
Interest – payable  monthly commencing on August 1, 2015.
Principal: is amortized on a monthly basis with principal payments of approximately $19,000 per month until the loan matures on July 8, 2020 when all remaining principal and interest become due and payable.
(i) A senior mortgage spread over 25 residential condominium units; and (ii) Guaranty from Optibase, Inc., under which Optibase, Inc. guarantees the obligations of the Borrower, including the punctual payment of amounts owed under the loan documents.
· Borrower to keep $1 million in a Restricted Account, from which interest payments are deducted if such payments are not paid in cash.
· Guarantor and the Borrower must collectively maintain unrestricted and unencumbered Liquid Assets of at least $2 million including any amounts held as Interest Reserve under the Loan Agreement.
Guarantor not to transfer a material portion of its assets, other than in the ordinary course of business, for fair market terms, and such transfer will not have material adverse effect on its ability to perform its obligations.  Guarantor can make advances to affiliates in ordinary course of business without consent.
 
As of December 31, 2017, the Company meets all the required covenants.
· The Mortgage will be partially released so that a sale of a Unit can occur, provided: no Event of Default exists at the time the Borrower presents a contract for sale to the Lender executed by a buyer; the sale is to a bona-fide third party purchaser upon the terms and conditions set out in Exhibit B of the Loan Agreement.
· Lender may obtain a new or updated Appraisal of the Project at Borrower’s expense once annually, or more often if an Event of Default exists or if required by a governmental or banking agency or authority.
 
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Type of Facility
Borrower
Original Date and Maturity Date
Original Amount*
Outstanding Amount (as of December 31, 2017)**
Annual Interest
Payment Terms
Principal Securities
Principal Covenants
Additional Information
Financing agreement of the property in Rumlang
Optibase RE 1 SARL
Original Date- October 2009; Maturity Date- 2059
 
CHF 18.8 million ($18.4 million )
 
CHF 15.8 million (app. $16.2 million)
Libor (for a period determined by borrower per each interest payment for the next payment) +  0.8%
Interest - payable in four quarterly payments annually;
 
The principal amount is payable in four quarterly amortization payments annually, each in the amount of CHF 94,000 (approximately $92,000 as of the purchase date).
A senior mortgage over the property +
Pledge over the holdings in borrower.
· Undertaking not to grant any encumbrance or mortgage on the Rümlang property without the lender's approval.
 
As of December 31, 2017, the Company meets all the required covenants.
· The lender may adjust the margin at its sole discretion on account of deterioration in Optibase RE 1's credit standing or the value of the property.
· The principal payments may be adjusted at the lender's sole discretion if the lease of major tenants is terminated and no replacement tenant is found within 6 months.
· Borrower may repay the mortgage at any time, subject to a prior notice of three months with no subject penalty.
·            The lender holds the right to accelerate future loan payments, upon occurrence of certain default conditions.
 
 
(1)
In November 2017, our subsidiary, Optibase Real Estate Miami, LLC, refinanced 25 residential apartment units in Miami, Florida, with City National Bank of Florida.
*
Translation of the amounts into US Dollar was made in accordance with the representative rate of exchange of the relevant currency into US Dollar as of the date the loan was taken.
**
Translation of the amounts into US Dollar was made in accordance with the representative rate of exchange of the relevant currency into US Dollar as of December 31, 2017.

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We believe that, considering the use of cash in our ongoing operations, together with the existing sources of liquidity described above, our working capital will be sufficient to meet our present requirements and our needs for cash for at least the next 12 months. However, our liquidity and capital requirements are affected by many factors, some of which are based on the normal ongoing operations of our businesses and some of which arise from uncertainties related to global economies and the markets that we target for our services. In addition, we routinely review potential acquisitions, which may require additional funds than are currently available. Therefore, we would likely seek additional equity or debt financing, although we cannot assure you that we would be successful in obtaining such financing on favorable terms or at all.
 
5.C. RESEARCH AND DEVELOPMENT
 
Irrelevant.
 
5.D. TREND INFORMATION
 
Starting in 2008 the global economic downturn caused a slowdown in the real estate market. In the later part of 2008 and through 2010, banks have lowered interest rates, but at the same time were reluctant to provide financing or perform refinancing of existing debt. Although interest rates have increased during 2011, banks are still reluctant to provide financing or perform refinancing of existing debt. Moreover, in the past few years, several European countries were experiencing difficulties refinancing their governmental debts. Such difficulties influenced the European and entire world economy, and eventually brought to a sovereign debt crisis in Europe during 2011.
 
In 2012, the economy showed signs of improvement, but recovery has been slow and volatile. Furthermore, severe financial and structural strains on the banking and financial systems have led to significant lack of trust and confidence in the global credit and financial system. Consumers and money managers have liquidated and may liquidate equity investments, and consumers and banks have held and may hold cash and other lower-risk investments, resulting in significant declines in the equity capitalization of companies and failures of financial institutions. The recent economic downturn resulted in many companies shifting to a more cautionary mode with respect to leasing of real estate properties. Potential tenants may be looking to consolidate, reduce overhead and preserve operating capital. The downturn also impacted the financial condition of some our tenants and their ability to fulfill their lease commitments which, in turn, impacted our ability in some of our regions to maintain or increase the occupancy level and/or rental rates of our properties.
 
Recent U.S. debt ceiling and budget deficit concerns have increased the possibility of additional downgrades of sovereign credit ratings and economic slowdowns. In August 2011, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the U.S. from “AAA” to “AA+”. The impact of this or any further downgrades to the U.S. government’s sovereign credit rating, or its perceived creditworthiness, is inherently unpredictable and could adversely affect the U.S. and global financial markets and economic conditions. These developments, and the U.S. government’s credit concerns in general, could cause interest rates and borrowing costs to rise. In addition, the lowered credit rating could create broader financial turmoil and uncertainty. In addition, during 2013, the pressure on properties’ pricing have eased somewhat and the U.S. real estate market was showing signs of stabilization and an increase towards the end of the year. During 2014 and through 2015 the U.S. real estate market has shown signs of improvement and a consistent increase in assets prices as the demand for investments increased significantly also driven by financial institutions increased willingness to finance new transactions along with low interest rates. Economically, that had been supported by moderate job growth, record housing affordability and fewer distressed property sales. Throughout 2016 and to date, we have witnessed a decrease in demand for high end residential projects in the U.S. market, while the demand for other quality projects both in the residential and the commercial markets is keeping stable and in certain cased showing a moderate increase.
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In addition, the Swiss economy led to a slight increase in demand in the office property market in 2011. In particular, Switzerland remains an attractive location for international service providers and corporate headquarters. There is also still a demand for high-quality, modern spaces, which ultimately allows for a certain stability on the rent level. However, while jobs were still being created at the beginning of 2011, the Swiss economy slowed down and consumer sentiment dimmed somewhat in the second half of the year. Towards the end of the year, the demand for office space slowed down due to announced and expected job losses. During 2015 and throughout 2016, as Swiss interest rates declined further, the Swiss real estate prices remained stable in most segments, while other segments were showing signs of increase mainly due to the low interest rates and lack of investments alternatives. At the same time, there was no increase in the demand for new rental spaces and the rental market appeared to be slowing down further, in particular the demand for prime office space and the price for such real estate properties . Although economic conditions were promising in 2013, stagnating sales, depressed income and ongoing structural challenges meant that demand for retail floor space was modest. In addition, the two most highly developed tenant markets, Zurich and Geneva, are still exposed to growing oversupply of office space. Despite the above, during 2014 and 2015, market values on direct investments generally continued to rise, mainly due to low interest rates, and lack of investment alternatives, but have been stable during 2016 and 2017. As this was accompanied by moderate demand for rents and stability in rental prices, the overall yields on such investments have decreased further. During 2015, 2016 and 2017 and to date, the Swiss Central Bank has set negative interest rates for CHF deposits. This in-turn pushed investors to further invest in the real estate market while looking for investments alternatives to generate positive returns on their investments.
 
Over the course of 2015, 2016 and 2017, the German real estate market continued its expansion and growth. While the majority of European countries are still suffering from the world economic downturn which have started back in 2008, the German economy and its real estate sector have shown significant signs of improvement supported by a decrease in interest rates and an increase in availability of financing. In addition, an increasing demand by foreign investors also supported the increase in assets value as well as the gradual devaluation of the Euro against the USD which made the German market also appealing for U.S. investors.
 
Our financial income is affected by changes in the 6-month Libor rate, see Item 3.D. “Risk Factors - Risks Relating to the Economy, Our Financial Condition and Shareholdings” above.
 
Since 2012 and during 2013, 2014 and 2016 except for 2015 and 2017, we have been profitable. During 2015, we operated at a loss mainly due to acquisition-related costs of $2.4 million related to the acquisition of the twenty-seven (27) supermarkets in Bavaria. During 2017, we operated at a loss mainly due to equity losses related to the investment in 300 River Holdings, LLC, which beneficially owns the rights to a 23-story Class A office building located at 300 South Riverside Plaza in Chicago, IL.
 
5.E. OFF-BALANCE SHEET ARRANGEMENTS
 
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
5.F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
 
Set forth below are our contractual obligations and other commercial commitments as of December 31, 2017:

 
Payments Due by Period
(USD in thousands)
 
Contractual Obligations
 
Total
   
Less than 1 year
   
1- 3 years
   
3-5 years
   
more than 5 years
 
Long-Term Debt*
   
144,240
     
3,165
     
41,736
     
4,867
     
94,472
 
Capital Lease Obligations
   
19,364
     
331
     
662
     
662
     
17,709
 
Lease Obligations
   
459
     
156
     
269
     
34
     
-
 
Bonds*
   
11,532
     
2,883
     
5,766
     
2,883
     
-
 
Total Contractual Cash Obligations
   
175,595
     
6,535
     
48,433
     
8,446
     
112,181
 
 
* Excluding interest
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
6.A. DIRECTORS AND SENIOR MANAGEMENT
 
The following table sets forth information with respect to the individuals who are currently our directors and executive officers. All of these individuals are presently serving in the respective capacities described below:
 
 
Age
Position
Alex Hilman
65
Executive Chairman of the board of directors
Amir Philips
50
Chief Executive Officer
Shlomo (Tom) Wyler
66
Chief Executive Officer of Optibase Inc.
Yakir Ben-Naim
46
Chief Financial Officer
Orli Garti Seroussi (1)(2)(3)
58
Director
Danny Lustiger (1)(3)
50
Director
Chaim Labenski (1)(2)(3)
70
Director
Reuwen Schwarz
41
Director
 
(1)
Member of our audit committee, financial statements review committee and nominating committee.
(2)
External director.
(3)
Member of our compensation committee.
 
On December 21, 2017, our shareholders approved the re-election of Alex Hilman, Danny Lustiger and Reuwen Schwarz as directors of the Company. On December 29, 2017 our shareholders approved the re-election of Orli Garti Seroussi and Chaim Labenski, as external directors of the Company. On November 9, 2017, our board of directors and our compensation committee approved an amendment to the Company’s undertaking to indemnify its current and future directors and officers and the grant of amended letters of indemnification accordingly. On December 21, 2017, following the approval of our board of directors and our compensation committee, our shareholders approved such amendment to the Company’s undertaking to indemnify: (1) its current and future directors who are non-controlling shareholders of the Company (or are not persons to whom the grant by the Company of such indemnification undertaking creates a personal interest to the Company's controlling shareholder); (2) Mr. Shlomo (Tom) Wyler, the Chief Executive Officer of the Company’s subsidiary Optibase Inc. who is affiliated with the controlling shareholder of the Company; (3) Mr. Reuwen Schwarz, a member of the Company’s Board of Directors, who is affiliated with the controlling shareholder of the Company; and (4) Mr. Amir Philips, the Company’s Chief Executive Officer; and the grant of amended letters of indemnification, accordingly. For further information, see item 6.B. “Compensation”. On May 16, 2016, our shareholders approved an amendment to the compensation terms of Mr. Shlomo (Tom) Wyler as the Chief Executive Officer of Optibase Inc., our subsidiary and certain amendments to the compensation terms of Mr. Amir Philips the Company's Chief Executive Officer.
 
Alex Hilman serves as Executive Chairman of our board of directors since September 2009. He has joined our board of directors in February 2002. Mr. Hilman is a certified accountant in Israel (C.P.A ISR.), and a partner in Hilman & Co., accountancy firm which provides auditing, tax and business consulting services to corporations. Mr. Hilman serves as a board member in other companies in Israel and abroad. Mr. Hilman was the president of the Israeli Institute of Certified Public Accountants in Israel, served on the board of IFAC (International Federation of Accountants), and was a member of the Small & Medium Practices committee in IFAC. Mr. Hilman has published professional works on tax and accounting, among them, The Israel Tax Guide. Mr. Hilman has also held professional and management positions at the ITA (the Israeli Tax Authorities) and lectured Taxation in Tel Aviv University. Mr. Hilman holds a B.A. in Accountancy and Economics from Tel-Aviv University.
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Amir Philips serves as our Chief Executive Officer. Mr. Philips has been serving in this position since June 2011. Prior to this position, Mr. Philips served as our Chief Financial Officer from May 2007, and as Vice President Finance of Optibase Inc. from July 2004. From 2000 until 2004, Mr. Philips held the position of Group Controller and Financial Manager at Optibase Ltd. Before joining Optibase, Mr. Philips was an accountant and auditor at Lotker Stein Toledano and Co., currently a member of BDO Ziv Haft. Mr. Philips is a Certified Public Accountant in Israel. He holds an MBA from the Kellogg-Recanati School of Business and a B.B. degree in Accounting and Business Management from the Israeli College of Management.
 
Shlomo (Tom) Wyler serves as the Chief Executive Officer of our subsidiary Optibase Inc. Until December 19, 2013, Mr. Wyler has served as a president and a member our board of directors. Since his investment in us in September 2001 (then through Festin Management Corp.), Mr. Wyler has served in various senior executive positions. His other areas of involvement include investment banking, foreign exchange, financial futures and real-estate. In the early 1990s, Mr. Wyler turned his efforts to real estate interests. Mr. Wyler holds a Masters degree in Business Economics from the University of Zurich. Mr. Wyler is Reuwen Schwarz' father in law.
 
Yakir Ben-Naim serves as our Chief Financial Officer. Ms. Ben-Naim has been serving in this position since June 2011. From 2004 until May 2011, Ms. Ben-Naim held the position of Corporate Controller and Financial Manager at Optibase Ltd. Before joining Optibase, Ms. Ben-Naim was a controller at V.Box Communications Ltd., and an accountant at Ernst & Young. Ms. Ben-Naim is a Certified Public Accountant in Israel.
 
Orli Garti Seroussi joined our board of directors on January 31, 2008 as an external director. Ms. Garti-Seroussi serves as an Independent Business Consultant and as an external director of Unet Credit Financial Services Ltd., Apio (Africa) Ltd. and of Gamatronic Ltd. From May 2017, Ms. Garti-Seroussi serves as a director of Meuhedet Healthcare Organization from May 2016, as a board member in the Israel Electricity Company Ltd. and as a council member of the Public Israeli Broadcast Corporation. During 2012 and 2013, Ms. Garti-Seroussi served as the Deputy Director and CFO of the Jerusalem Cinematheque - Israel Film Archive. From August 2001 until June 2011, Ms. Garti-Seroussi served as the General Manager of the Bureau of Municipal Corporation in the municipality of Tel-Aviv Jaffa. From June 1999 until July 2001 Ms. Garti-Seroussi served as manager of consulting department in Shif-Hazenfrats & Associations, CPA firm. Prior to that, Ms. Garti-Seroussi served as Deputy Director of the Department of Market Regulation in the Israel Securities Authority and as an Auditor in the Tel Aviv Stock Exchange. Ms. Garti-Seroussi holds an M.P.A from Harvard University and M.B.A degree and a B.A degree in economics and accounting from Tel Aviv University. Ms. Garti-Seroussi is a Certified Public Accountant in Israel.
 
Danny Lustiger joined our board of directors in October 2009. Mr. Lustiger is the president and Chief Executive Officer of Cupron Scientific Ltd. and has over 22 years of experience in various aspects of Hi-Tech industry at senior positions together with Real estate and infrastructure industries, experience at senior position in public companies. From 2007 until 2009, Mr. Lustiger served as the Chief Financial officer of Shikun & Binui Holdings Ltd. From 1996 and until 2005, Mr. Lustiger served at different managerial positions at Optibase including Chief Financial Officer. From 1993 to 1996 Mr. Lustiger held the position of an accountant and auditor at Igal Brightman & Co. (currently Brightman Almagor & Co., a member of Deloitte & Touche Tomatsu International). Mr. Lustiger is a Certified Public Accountant in Israel. Mr. Lustiger holds a B.A. degree in Accounting and Economics and an MBA in Finance and International management from the Tel-Aviv University.
 
Chaim Labenski joined our board of directors in December 2010. From 1977 to 1999, Mr. Labenski held a number of positions at Securities Division of Bank Hapoalim BM, including being First Vice president and Head of Foreign Securities and was involved in consulting, securities research, trading and I.P.O coordination with global investment houses. Since 1999 he acts as a private investor. Mr. Labenski holds a B.Sc degree in Civil Engineering from Aston University, U.K, a M.Sc degree in Engineering Management from Leeds University and D.B.A degree in Business Administration from Manchester Business School.
 
Reuwen Schwarz joined our board of directors in July 2014. Mr. Schwarz serves as an independent contractor providing services to the Company since November 2013. Since 2012, Mr. Schwarz serves as a real estate manager for a private company. From 2008 through 2012 Mr. Schwarz has served as a manager for Centris Capital AG. From 2006 through 2008 Mr. Schwarz has served as a banker for Meinl Bank AG, Vienna. Mr. Schwarz holds a Magister (MA) degree from the University of Economic and Business Administration Vienna, Austria. Mr. Schwarz is Mr. Wyler's son in law.
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6.B. COMPENSATION
 
The compensation terms for the Company’s directors and officers is derived from their employment and services agreements and comply with our Compensation Policy for Executive Officers and Directors as last approved by the Company’s shareholders on December 19, 2013 and on December 29, 2016, or the Compensation Policy.
 
The table and summary below outline the compensation granted to the five highest compensated directors and officers of the Company during the year ended December 31, 2017. The compensation detailed in the table below refers to actual compensation granted or paid to the director or officer during the year 2017.

Name and Position of director or officer
 
Salary or Monthly Payment (1)
   
Value of Social Benefits (2)
   
Bonuses
   
Value of Equity Based Compensation Granted (3)
   
All Other Compensation (4)
   
Total
 
 
(U.S. dollars in thousands)
 
Amir Philips,
Chief Executive Officer (5)
   
251.7
     
69.2
     
-
     
7.5
     
34
     
362.4
 
Shlomo (Tom) Wyler,
Chief Executive Officer of Optibase Inc. (6)
   
200
     
10.8
     
-
     
-
     
-
     
210.8
 
Yakir Ben-Naim,
Chief Financial Officer (7)
   
120
     
39.4
     
-
     
-
     
13.7
     
173.1
 
Alex Hilman,
Executive Chairman of our board of directors (8)
   
78
     
-
     
-
     
7.5
     
-
     
85.5
 
Reuwen Schwarz,
Director (9)
   
54.2
     
-
     
-
     
-
     
4.7
     
58.9
 
 
(1)
Salary ” means yearly gross base salary with respect to our Executive Officers (Mr. Philips, Mr. Wyler and Ms. Ben-Naim). “Monthly Payment” means the aggregate gross monthly payments with respect to the members of our board of directors (Mr. Hilman and Mr. Schwarz) for the year 2017.
 
(2)
Social Benefits ” include payments to the National Insurance Institute, advanced education funds, managers’ insurance and pension funds; vacation pay; and recuperation pay as mandated by Israeli law.
 
(3)
Consists of amounts recognized as share-based compensation (options and restricted shares) expense on our financial statements for the year ended December 31, 2017.
 
(4)
All Other Compensation ” includes, among other things, car-related expenses (including tax gross-up), telephone, basic health insurance, and holiday presents.
 
(5)
Mr. Philips’ employment terms as our Chief Executive Officer provide that Mr. Philips is entitled to a monthly base gross salary of NIS 75,000 (approximately $20,800). Mr. Philips is further entitled to vacation days, sick days and convalescence pay in accordance with market practice and applicable law, monthly remuneration for a study fund, contribution by us to an insurance policy and pension fund, and additional benefits, including communication expenses. In addition, Mr. Philips is entitled to reimbursement of car-related expenses from us (including tax gross-up). Mr. Philips’ employment terms include an advance notice period of six months. During such advance notice period, Mr. Philips will be entitled to all of the compensation elements, and to the continuation of vesting of any options or restricted shares granted to him. In May 2016, following the approval by our compensation committee and board of directors, our shareholders approved the following amendments to the compensation terms of Mr. Philips: (i) the monthly gross base salary will be updated to NIS 65,000 for a full time position, as of January 1, 2016 and to NIS 75,000 as of January 1, 2017; an d (ii) the grant of a special bonus in the amount of NIS 120,000.
 
(6)
For details on Mr. Wyler’s compensation terms as approved by our shareholders on December 19, 2013, see Item 7.B. “Related Party Transactions”, below. In May 2016, following the approval by our compensation committee, audit committee and board of directors, our shareholders approved an amendment to Mr. Wyler's compensation terms in a manner that Mr. Wyler's annual gross base salary shall be $200,000 for a full time position , as of January 1, 2016.
 
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(7)
Ms. Ben-Naim’s employment terms as our Chief Financial Officer provide that Ms. Ben-Naim is entitled to a monthly base gross salary of NIS 36,000 (approximately $10,000). Ms. Ben-Naim is further entitled to vacation days, sick days and convalescence pay in accordance with market practice and applicable law, monthly remuneration for a study fund, contribution by us to an insurance policy and pension fund, and additional benefits including communication expenses. In addition, Ms. Ben-Naim is entitled to reimbursement of car-related expenses from us. Ms. Ben-Naim’s employment terms include an advance notice period of three months. During such advance notice period, Ms. Ben-Naim may be entitled to all of the compensation elements, and to the continuation of vesting of her options or restricted shares, if granted. In March 2016, our compensation committee and board of directors approved an amendment to Ms. Ben-Naim's compensation terms in a manner that Ms. Ben-Naim's monthly base gross salary will be updated to NIS 36,000 for a full time position, as of January 1, 2016.
 
(8)
The compensation terms of Mr. Hilman as the Executive Chairman of our board of directors were approved by our shareholders on October 19, 2009. For details on Mr. Hilman’s compensation terms, including options and restricted shares granted to him, see Item 7.B. “Related Party Transactions”, below.
 
(9)
Mr. Reuwen Schwarz entered into a service agreement with us, for the provision of real estate related consulting services to us, our subsidiaries and affiliates. Such agreement, including the compensation terms of Mr. Schwarz in consideration for the services under the agreement, were approved by our shareholders on December 19, 2013 and on December 29, 2016. For further details see Item 7.B. “Related Party Transactions”, below.
 
(10)
See footnote no. 3 above. We granted Mr. Philips 20,000 options and 16,000 restricted shares that are currently exercisable or exercisable within 60 days as of March 20, 2018.
 
(11)
See footnote no. 3 above. We granted Mr. Wyler 20,000 options and 2,400 restricted shares that are currently exercisable or exercisable within 60 days as of March 20, 2018.
 
(12)
See footnote no. 3 above. We granted Mr. Hilman 20,000 options and 16,800 restricted shares that are currently exercisable or exercisable within 60 days as of March 20, 2018.
 
In addition, all of our directors and officers are entitled to benefit from coverage under our directors’ and officers’ liability insurance policies and were granted letters of indemnification by us. For further details see “Indemnification, exemption and insurance of Directors and Officers ”, below.
 
Following the approval by our shareholders on December 19, 2013 and in accordance with our Compensation Policy (for further information, see Item 6.D. “The Compensation Committee”) , each of our directors (including external directors and independent directors, but excluding the executive chairman of our board of directors and directors who serve in other roles at the Company) is entitled to a grant of compensation pursuant to the fixed amounts permitted to be paid to external directors (depending on our equity level), all in accordance with applicable regulations promulgated under the Companies Law, or the 'External Directors' Compensation Regulations, as may be from time to time . This remuneration is paid plus value added tax (as applicable). Directors are reimbursed for expenses incurred as part of their service as directors . None of the directors have agreements with us that provide for benefits upon termination of service.
 
As of March 20, 2018, our directors and executive officers beneficially owned 267,865 shares (of which 46,640 ordinary shares held by a trustee for the benefit of our directors and executive officers under our 2006 Plan, vested as of March 20, 2018 or within 60 days thereafter and 62,000 shares are issuable upon exercise of options that are currently vested or will vest within 60 days as of March 20, 2018). For further information, see Item 6.E. “Share Ownership”.
 
Indemnification, exemption and insurance of Directors and Officers
 
The Companies Law permits a company to insure its directors and officers, provide them with indemnification, either in advance or retroactively, and exempt its directors and officers from liability resulting from their breach of their duty of care towards the company, all in accordance with the terms and conditions specified under Israeli law. Our articles of association include clauses allowing us to provide our directors and officers with insurance, indemnification and to exempt them from liability subject to the terms and conditions set forth by the Companies Law, as described below.
 
In addition, the Israeli Securities Law of 1968, or the Securities Law, includes provisions to make the enforcement of violations of the Securities Law and certain provisions of the Companies Law more efficient by the Israel Securities Authority, or the ISA. Under the Securities Law, the ISA is allowed to initiate administrative proceedings against entities and individuals with respect to such violations, and to impose various sanctions, including fines, payment of damages to the person or entities harmed as a result of such violations, limitations on the service of any individual as director or officer and suspension or cancellation of certain permits granted to the entity. Under the Securities Law, a company is not allowed to indemnify or insure its directors and officers in connection with administrative proceedings initiated against them by the ISA, except that a company is allowed to insure and indemnify its directors and officers for any of the following: (i) financial liability imposed on any director or officer for payment to persons or entities harmed as a result of any violation for which an administrative proceedings has been initiated; (ii) expenses incurred by any director or officer in connection with administrative proceedings, including reasonable litigation fees, and including attorney fees.
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Subject to statutory limitations, our articles of association provide that we may insure the liability of our directors and offices to the fullest extent permitted by the Companies Law. Without derogating from the aforesaid we may enter into a contract to insure the liability of our directors and officer for an obligation or payment imposed on such director or officer in consequence of an act done in his capacity as a director or officer of Optibase, in any of the following cases:

v
A breach of the duty of care vis-a-vis us or vis-a-vis another person;
 
v
A breach of the fiduciary duty vis-a-vis us, provided that the director or officer acted in good faith and had a reasonable basis to believe that the act would not harm us;
 
v
A monetary obligation imposed on him or her in favor of another person;
 
v
Financial liability imposed on him or her for payment to persons or entities harmed as a result of violations in Administrative Proceedings, as detailed in section 52(54)(A)(1)(a) of the Israeli Securities Law;
 
v
Expenses incurred by him or her in connection with Administrative Proceedings (as defined above) he was involved in, including reasonable litigation fees, and including attorney fees; or
 
v
Any other matter in respect of which it is permitted or will be permitted under applicable law to insure the liability of our director or officer.
 
Our articles of association further provide that we may indemnify our directors and officers, to the fullest extent permitted by the Companies Law. Without derogating from the aforesaid, we may indemnify our directors and officers for liability or expense imposed on them in consequence of an action made by them in the capacity of their position as directors or officers of Optibase, as follows:

v
Any financial liability he or she incurs or imposed on him or her in favor of another person in accordance with a judgment, including a judgment given in a settlement or a judgment of an arbitrator, approved by a court.
 
v
Reasonable litigation expenses, including legal fees, incurred by the director or officer or which he or she was ordered to pay by a court, within the framework of proceedings filed against him or her by or on behalf of Optibase, or by a third party, or in a criminal proceeding in which he or she was acquitted, or in a criminal proceeding in which he or she was convicted of a felony which does not require a finding of criminal intent.
 
v
Reasonable litigation expenses, including legal fees he or she incurs due to an investigation or proceeding conducted against him or her by an authority authorized to conduct such an investigation or proceeding, and which was ended without filing an indictment against him or her and without being subject to a financial obligation as a substitute for a criminal proceeding, or that was ended without filing an indictment against him, but with the imposition of a financial obligation, as a substitute for a criminal proceeding relating to an offence which does not require criminal intent, within the meaning of the relevant terms in the Companies Law.
 
v
Financial liability he or she incurs for payment to persons or entities harmed as a result of violations in Administrative Proceedings, as detailed in section 52(54)(A)(1)(a) of the Securities Law. For this purpose “Administrative Proceeding” shall mean a proceeding pursuant to Chapters H3 (Imposition of Monetary Sanction by the Israel Securities Authority), H4 (Imposition of Administrative Enforcement Means by the Administrative Enforcement Committee) or I1 (Settlement for the Avoidance of Commencing Proceedings or Cessation of Proceedings, Conditioned upon Conditions) of the Securities Law, as shall be amended from time to time.
 
v
Expenses that he or she incurs in connection with Administrative Proceedings (as defined above) he was involved in, including reasonable litigation fees, and including attorney fees.
 
v
Any other obligation or expense in respect of which it is permitted or will be permitted under law to indemnify a director or officer of Optibase.
 
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In addition, our articles of association provide that we may give an advance undertaking to indemnify a director and/or an officer in respect of all of the matters above, provided that with respect to the first matter above, the undertaking is restricted to events, which in the opinion of our board of directors, are anticipated in light of our actual activity at the time of granting the obligation to indemnify and is limited to a sum or measurement determined by our board of directors as reasonable under the circumstances. We may further indemnify an officer therein, save for the events subject to any applicable law.
 
Our articles of association further provide that we may exempt a director in advance and retroactively for all or any of his or her liability for damage in consequence of a breach of the duty of care vis-a-vis Optibase, to the fullest extent permitted by the Companies Law. Notwithstanding the foregoing, the Companies Law prohibits a company to exempt any of its directors and officers in advance from their liability towards such company for the breach of its duty of care in distribution, as defined in the Companies Law, for such company’s shareholders (including distribution of dividend and purchase of such company’s shares by the company or an entity held by it).
 
The above provisions with regard to insurance, exemption and indemnity are not and shall not limit the Company in any way with regard to its entering into an insurance contract and/or with regard to the grant of indemnity and/or exemption in connection with a person who is not an officer of the Company, including employees, contractors or consultants of the Company, all subject to any applicable law.
 
All of the above shall apply mutatis mutandis in respect of the grant of insurance, exemption and/or indemnification for persons serving on behalf of the Company as officers in companies controlled by the Company, or in which the Company has an interest.
 
The Companies Law provides that companies may not give insurance, indemnification (including advance indemnification), or exempt their directors and/or officers from their liability in the following events:

v
a breach of the fiduciary duty, except for a breach of the fiduciary duty vis-à-vis the company with respect to indemnification and insurance if the director or officer acted in good faith and had a reasonable basis to believe that the act would not harm the company;
 
v
an intentional or reckless breach of the duty of care, except for if such breach was made in negligence;
 
v
an act done with the intention of unduly deriving a personal profit; or
 
v
Fine, civil penalty, a financial sanction or penalty imposed on the directors or officers.
 
We have a directors and officers liability insurance policy, as described below.
 
On December 29, 2016, following the approval by our compensation committee and board of directors, our shareholders approved an amendment to our Compensation policy which include clauses allowing us to provide our directors and officers with insurance, indemnification and to exempt them from liability subject to the terms and conditions set forth by the Companies Law; provided however, that insurance policies purchased under the Compensation Policy comply with all of the following conditions:
 
v
the maximum coverage amount under each policy shall not exceed the higher of: (i) US $20 million; or (ii) 25% of our shareholders equity based on our most recent financial statements at the time of approval by our compensation committee;
 
v
the maximum yearly premium to be paid by us for each policy shall not exceed 1% of the aggregate coverage of such policy;
 
v
the purchase of the policy (including any renewal or extension) shall be approved by our compensation committee (and, if required by law, by our board of directors) which shall determine whether the coverage amount and the relevant premium sums are reasonable considering our exposures, the scope of coverage and market conditions and that the policy reflects the current market conditions, and it shall not materially affect our profitability, assets or liabilities.
 
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We currently have an insurance policy for our directors' and officers' liability, including as directors or officers of our subsidiaries, for the period commencing on November 1, 2017 and ending on October 31, 2018, as approved by our compensation committee and board of directors. The coverage amount under such policy and the yearly premium to be paid by us for such policy are US $19 million and US $142,000, respectively. The terms of such policy are in accordance with our Compensation Policy.
 
As approved by our shareholders on December 21, 2017, following the approval by our compensation committee and board of directors, we have undertaken to indemnify all of our directors and officers, including Mr. Tom Wyler, the Chief Executive Officer of our subsidiary Optibase Inc., to the fullest extent permitted by the Companies Law and our articles of association and entered into an indemnity letter with each of our directors and executive officers. The aggregate indemnification amount shall not exceed the higher of: (i) 25% of our shareholders’ equity, as set forth in our financial statements prior to such payment; or (ii) $20 million. For further details regarding the approval of an amendment to the indemnification letters, see Item 6.A “Directors and Senior Management”.
 
6.C. BOARD PRACTICES
 
Pursuant to our articles of association, our board of directors is required to consist of three to nine members. Directors are elected at the annual general meeting of our shareholders by a vote of the holders of a majority of the voting power represented at such meeting. Each director holds office until the annual general meeting of shareholders following the annual general meeting at which the director was elected or until his or her earlier resignation or removal. A director may be re-elected for subsequent terms. At present, our board of directors consists of five members, including two external directors appointed in accordance with the Israeli law requirements, as detailed herein. Our articles of association provide that our directors may at any time and from time to time, appoint any other person as a director, either to fill in a vacancy or to increase the number of members of our board of directors.
 
Under the Companies Law, each Israeli public company is required to determine the minimum number of directors with “accounting and financial expertise” that such company believes is appropriate in light of the particulars of such company and its activities. A director with “accounting and financial expertise” is a person that, due to education, experience and qualifications, is highly skilled and has an understanding of business-accounting issues and financial statements in a manner that enables him/her to understand in depth the company’s financial statements and stimulate discussion regarding the manner of presentation of the financial data. Our board of directors resolved on March 30, 2006 and on June 27, 2010 that the minimum number of directors with accounting and financial expertise appropriate for us in light of the size of the board of directors and nature and volume of the Company’s operations is one director (such director may serve as an external director, see below).
 
External Directors
 
Under the Companies Law, Israeli public companies are required to appoint at least two external directors to serve on their board of directors (following Amendment 27 to the Companies Law all of such external directors are no longer required to be Israeli residents if a company's shares are listed on a foreign stock exchange, such as our Company). On December 29, 2016, our shareholders approved the re-appointment of Mr. Chaim Labenski and Ms. Orli Garti-Seroussi as our external directors for an additional three years term commencing on December 31, 2016 and January 31, 2017, respectively. In addition, each committee of the board of directors entitled to exercise any powers of the board is required to include at least one external director. The audit committee must include all the external directors, see “Committees of the Board of Directors” below.
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Pursuant to the Companies Law, at least one external director is required to have “accounting and financial expertise” and the other is required to have “professional qualification” or “accounting and financial expertise”. A director has “professional qualification” if he or she satisfies one of the following:
 
(i)
the director holds an academic degree in one of these areas: economics, business administration, accounting, law or public administration;
 
(ii)
the director holds an academic degree or has other higher education, all in the main business sector of the company or in a relevant area for the board position; or
 
(iii)
the director has at least five years’ experience in one or more of the following or an aggregate five years’ experience in at least two or more of these: (a) senior management position in a corporation of significant business scope; (b) senior public office or senior position in the public sector; or (c) senior position in the main business sector of the company.
 
(iv)
the evaluation of the professional qualification of a candidate shall be made by our board of directors and our nominating committee.
 
a director with “accounting and financial expertise” is a person that in light of his or her education, experience and skills has high skills and understanding of business-accounting issues and financial reports which allow him or her to deeply understand the financial reports of the company and hold a discussion relating to the presentation of financial information. The company’s board of directors will take into consideration in determining whether a director has “accounting and financial expertise”, among other things, his or her education, experience and knowledge in any of the following:
 
(i)
accounting issues and accounting control issues characteristic to the segment in which the company operates and to companies of the size and complexity of the company;
 
(ii)
the functions of the external auditor and the obligations imposed on such auditor;
 
(iii)
preparation of financial reports and their approval in accordance with the Companies Law and the securities law.
 
A company whose shares are traded in certain exchanges outside of Israel, including The NASDAQ Global Market, such as our company, is not required to nominate at least one external director who has accounting and financial expertise so long as another independent director for audit committee purposes who has such expertise serves on board of directors pursuant to the applicable foreign securities laws. In such case, all external directors will have professional qualification.
 
Under Israeli law, a person may not serve as an external director if he or she is a relative of any of the controlling shareholders or at the date of the person’s appointment or within the prior two years the person, or his or her relatives, partners, employers or entities under the person’s control or entities which he or she are subject to their control, have or had any affiliation with us, with our controlling shareholder, or its relative or any entity controlling, controlled by or under common control with us. Under the Companies Law, “affiliation” includes an employment relationship, a business or professional relationship maintained on a regular basis or control or service as an executive officer, excluding service as a director in anticipation of serving as an external director in a company that is about to offer its shares to the public for the first time.
 
Furthermore, under Israeli law, a person may not serve as an external director if he or she, or his or her relatives, partners, employers or a person or entity he or she is subordinate to directly or indirectly, or an entity controlled by the external director has business or professional relations (excluding insignificant relations) with a person or entity whose affiliation with such external director is forbidden.
 
A person may not serve as an external director if that person’s position or other business activities create, or may create, a conflict of interest with the person’s service as an external director or may otherwise interfere with the person’s ability to serve as an external director. If at the time any external director is appointed, all members of the board (who are not a controlling shareholder or its relative) are the same gender, then the external director to be appointed must be of the other gender.
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External directors are elected by a majority vote at a shareholders’ meeting, so long as either:
 
(i)
the majority of shares voted for the election includes the majority of the shares of non-controlling shareholders or with no personal interest excluding a personal interest not resulting from relation with controlling shareholders, voted at the meeting (votes abstaining shall not be taken into account in counting the shareholders' votes); or
 
(ii)
the total number of shares to total amount of shareholders listed in subsection (i) above, who voted against the election of the external director does not exceed two percent (2%) of the aggregate voting rights of the company.
 
The Companies Law provides for an initial three-year term for an external director which may be extended, for two additional three-year terms subject to provision specified in the Companies Law. In the case of a company whose shares are traded in certain exchanges outside of Israel, including The Nasdaq Global Market, such as our company, regulations promulgated under the Companies Law provide that the service of an external director can be extended to additional three-year terms, if both the audit committee and the board of directors confirm that in light of the expertise and contribution of the external director, the extension of such external director's term would be in the interest of the company. Election of external directors requires a special majority, as described above and that the period which that person served as an external director together with the reasons for the extension given by the audit committee presented to the shareholders prior to such approval. External directors may be removed only by the same special majority required for their election or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to the company. In the event the number of external directors is less than two external directors, our board of directors is required under the Companies Law to call a shareholders' meeting to appoint a new external director.
 
External directors may be compensated only in accordance with regulations adopted under the Companies Law.
 
Our board of directors has a majority of independent directors required pursuant to the NASDAQ Global Market rules.
 
Independent Directors
 
Under the Companies Law, the majority of the members of the audit committee must be independent directors. In addition, the Companies Law includes a corporate governance recommendation according to which the majority of the members of the board of directors in a public company that does not have a controlling shareholder should be independent directors, and in a company with a controlling shareholder at least third of the board of directors should be independent directors. A public company may classify an external director or an individual serving as a director, as an independent director only if (i) the audit committee has determined that he or she is qualified to serve as an external director (with the exception that such director does not have to have professional qualifications or accounting and financial expertise in order to serve as an independent director), and (ii) he or she is not serving as a director in the company for more than consecutive nine years (only a period of two or more years, in which such person did not serve as a director in the company, shall be deemed to discontinue the nine year sequence).
 
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Committees of the Board of Directors
 
As of the date of this annual report, we have four committees of the board of directors, which includes our audit committee, our financial statements review committee, our nominating committee and our compensation committee, as described below.
 
The Audit Committee
 
The Companies Law requires public companies to appoint an audit committee. The responsibilities of the audit committee include, among others, identifying irregularities and deficiencies in the management of the company’s business and approval of related party transactions as required by law. An audit committee must consist of at least three members, and include all of the company’s external directors. In addition, the majority of its members shall be independent directors in accordance with the requirements of The Companies Law.  However, the chairman of the board of directors, any director employed by the company or by its controlling shareholder or by any other entity controlled by such controlling shareholder or a director providing, on a regular basis, services to the company, to any controlling shareholder or to other entity controlled by such controlling shareholder, or any director whose livelihood relies on any controlling shareholder, may not be a member of the audit committee. Any controlling shareholder and any relative of a controlling shareholder may also not be a member of the audit committee. The chairman of the audit committee must be an external director, who has not been serving as a chairman of the audit committee for more than nine years. An audit committee recommends approval of transactions that are deemed interested party transactions, including directors’ compensation and transactions between a company and its controlling shareholder or transactions between a company and another person in which its controlling shareholder has a personal interest. The audit committee must also determine whether a transaction constitute an extraordinary transaction. Pursuant to Amendment 22 to the Companies Law, effective as of January 10, 2014, the responsibilities of the audit committee under the Companies Law also include the following matters: (i) to ensure that a competitive procedure is conducted for related party transactions with a controlling shareholder (regardless of whether or not such transactions are deemed extraordinary transactions), optionally based on criteria which may be determined by the audit committee annually in advance; and (ii) setting forth the approval process for transactions that are 'non-negligible' ( i.e. transactions with a controlling shareholder that are classified by the audit committee as non-negligible, even though they are not deemed extraordinary transactions), as well as determining which types of transactions would require the approval of the audit committee, optionally based on criteria which may be determined annually in advance by the audit committee. An audit committee may not approve an action or a transaction with an officer or director, a transaction in which an officer or director has a personal interest, a transaction with a controlling shareholder and certain other transactions specified in the Companies Law, unless at the time of approval the audit committee meets all the criteria required under the Companies Law.
 
Subject to the exceptions specified in the Companies Law, any person who is not eligible to serve in the audit committee shall not participate in its meetings.
 
Legal quorum shall be constituted when the majority members of the audit committee shall be present at the meeting, provided that: (a) the majority of the present members are independent directors; and, (b) at least one of the present members is an external director.
 
 Under the Companies Law there are restrictions regarding engagement or benefits with a person who served as an external director (or his or her relative) for period of two years commencing the time when such external director leaves office.
 
In accordance with the Sarbanes-Oxley Act of 2002 and NASDAQ requirements, our audit committee reviews our internal accounting procedures and consults with and reviews the services provided by our independent auditors.
 
The rules of NASDAQ currently applicable to foreign private issuers, such as us, require us to establish an audit committee of at least three members, comprised solely of independent directors. All of the members of the audit committee must be able to read and understand basic financial statements, and at least one member must have experience in finance or accounting, requisite professional certification in accounting or comparable experience or background. The board has determined that Ms. Orli Garti-Seroussi is an audit committee financial expert as defined by applicable Securities and Exchange Commission, or the “SEC” or “Commission” regulation. The responsibilities of the audit committee under the NASDAQ rules include the selection and evaluation of the outside auditors and evaluation of their independence.
 
The members of our audit committee are Mr. Chaim Labenski, Mr. Danny Lustiger and Ms. Orli Garti-Seroussi. These include our two external directors as required under the Companies Law, and we believe that all of the members of our audit committee are independent of management, and satisfy the requirements of Companies Law, the SEC’s rules and NASDAQ rules.
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The Financial Statements Review Committee
 
Our board of directors appointed a financial statement review committee, which consists of members with accounting and financial expertise or the ability to read and understand financial statements, with at least one of the members having “accounting and financial expertise” (as defined above). According to a resolution of our board of directors, the audit committee has been assigned the responsibilities and duties of a financial statement review committee, as permitted under relevant regulations promulgated under the Companies Law. From time to time as necessary and required to approve our financial statements, the audit committee holds separate meetings, prior to the scheduled meetings of the entire board of directors regarding financial statement approval.
 
The function of a financial statement review committee is to discuss and provide recommendations to its board of directors (including the report of any deficiency found) with respect to the following issues: (i) estimations and assessments made in connection with the preparation of financial statements; (ii) internal controls related to the financial statements; (iii) completeness and propriety of the disclosure in the financial statements; (iv) the accounting policies adopted and the accounting treatments implemented in material matters of the company; (v) value evaluations, including the assumptions and assessments on which evaluations are based and the supporting data in the financial statements. Our independent auditors and our internal auditor are invited to attend all meetings of the audit committee when it is acting in a role of the financial statement review committee or at which matters concerning the financial statements are discussed.
 
The financial statement review committee is required to consist at least three members, all of its members must be directors, and the majority of its members are required to be directors who meet certain independence requirements of the Companies Law. However, the chairman of the board of directors, any director employed by the company or by its controlling shareholder or by any other entity controlled by such controlling shareholder or a director providing, on a regular basis, services to the company, to any controlling shareholder or to other entity controlled by such controlling shareholder, or any director whose livelihood relies on any controlling shareholder, may not be a member of the financial statement review committee. In addition, any controlling shareholder and any relative of a controlling shareholder may also not be a member of the financial statement review committee. All the committee members are required to give a declaration before their appointment, and the chairperson of the committee must be an external director.
 
Legal quorum shall be constituted when the majority members of the financial statement review committee shall be present at the meeting, provided that: (a) the majority of the present members are independent directors; and, (b) at least one of the present members is an external director.
 
The members of our financial statement review committee are Mr. Chaim Labenski, Mr. Danny Lustiger and Ms. Orli Garti-Seroussi. These include our two external directors as required under the Companies Law, and we believe that all of the members of our financial statement review committee satisfy with the requirements of the Companies Law.
 
The Nominating Committee
 
The function of our nominating committee is described in the approved charter of the committee and includes responsibility for identifying individuals qualified to become a board members and recommending director nominees to the board of directors for election at the general meeting of shareholders. The nominating committee is also responsible for developing and recommending to the board of directors a set of corporate governance guidelines applicable to the Company, periodically reviewing such guidelines and recommending any changes thereto.
 
The members of our nominating committee are Mr. Chaim Labenski, Mr. Danny Lustiger and Ms. Orli Garti-Seroussi. We believe that all of the members of our nominating committee are independent of management, and satisfy the requirements of the NASDAQ rules.
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The Compensation Committee
 
Under the Companies Law, a public company is required to appoint a compensation committee. The compensation committee must consist of at least three directors, must include all the external directors, the majority of its members must be external directors, and its chairman must be an external director. In addition, all members of the compensation committee must meet the requirements under the Companies Law for membership in the audit committee, as described above, and all of its members shall be compensated in accordance with section 244 of the Companies Law.
 
Under the Companies Law and our compensation committee charter, our compensation committee is responsible, among others, for (i) recommending to the board of directors regarding its approval of a compensation policy in accordance with the requirements of the Companies Law, and any other compensation policies, incentive-based compensation plans and equity-based plans; (ii) overseeing the development and implementation of such compensation plans and policies that are appropriate in light of all relevant circumstances and recommending to the board of directors regarding any amendments or modifications that the compensation committee deems appropriate; (iii) determining whether to approve transactions concerning the terms of engagement and employment of our officers and directors that require compensation committee approval under the Companies Law or our compensation plans and policies; and (iv) taking any further actions as the compensation committee is required or allowed to under the Companies Law or the compensation plans and policies.
 
The members of our compensation committee   are Mr. Chaim Labenski, Mr. Danny Lustiger and Ms. Orli Garti-Seroussi.
 
Internal auditor
 
The Companies Law requires the board of directors of a public company to appoint an internal auditor pursuant to the audit committee’s proposal. The internal auditor must satisfy certain independence requirements as required by the law. The role of the internal auditor is to examine, among other things, the compliance of the company's conduct with applicable law and orderly business procedures. Our internal auditor is Mr. Doron Cohen of Fahn Kanne & Co., a member firm of Grant Thornton International Ltd.
 
Employment Agreements
 
Each of our executive officers entered into a written employment agreement with us that provides, among other things, that such officers be paid a monthly salary and bonuses. Each such agreement can be terminated either by us, or by the employee, upon prior notice, which ranges between 30 to 120 days for most of the management team. The employment agreements also provide that each executive officer will maintain confidentiality of matters relating to us and will not compete with us during the period of the officer’s employment and for a certain period thereafter.
 
6.D. EMPLOYEES
 
Since the sale of our Video Solutions Business on July 1, 2010 and as of the date of this annual report, we have 12 employees, including employees in our subsidiaries, all of them employed in our general and administrative, finance and human resources divisions. Out of whom 7 employees are employed in Israel, 4 are employed in the United States and 1 is employed in Europe. All of our employees are currently employed pursuant to personal employment agreements.
 
6.E. SHARE OWNERSHIP
 
As of March 20, 2018, our current directors and executive officers (eight persons) beneficially owned an aggregate of 267,865 ordinary shares of our Company of which 46,640 ordinary shares held by a trustee for the benefit of our directors and executive officers under our 2006 Plan, vested as of March 20, 2018 or within 60 days thereafter and 62,000 shares are issuable upon exercise of options that may be currently exercisable or exercisable within 60 days of March 20, 2018. All of our directors or executive officers hold less than 1% of our shares except for Mr. Shlomo (Tom) Wyler who holds, to the Company knowledge, approximately 179,218 ordinary shares of which 20,000 shares are issuable upon exercise of options that may be currently exercisable or exercisable within 60 days of March 20, 2018, which is approximately 3.45% of the Company's outstanding shares. See Item 7.A. “Major Shareholders” for more information regarding Mr. Wyler's holdings.
 
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Incentive Plans
 
As of March 20, 2018, options to purchase 62,000 of our ordinary shares were outstanding, with exercise prices ranging from $7.79 to $10 per share. As of March 20, 2018, 62,000 of the options described above have vested or are exercisable within 60 days of such date. The expiration date of the aforementioned options is generally seven years from the date of their grant. As of December 31, 2016 and 2017, the number of options reserved for issuance under our plans was 491,991 and 511,260, respectively.
 
As of March 20, 2018 or within 60 days thereafter, an aggregate of 183,690 ordinary shares has been reserved for issuance under the 2006 Plan. As of December 31, 2016 and 2017, the number of restricted shares reserved for issuance under the 2006 Plan was 183,690.
 
The following table shows the number of options and restricted shares outstanding and reserved for issuance under each of our incentive plans, as of March 20, 2018 or within 60 days thereafter.

Plan
Number of options outstanding
Number of options reserved for issuance
1999 Israeli Plan
62,000
511,260
Plan
Number of shares outstanding
Number of shares reserved for issuance
2006 Israeli Incentive Compensation Plan
-
183,690
 
The following is a description of our incentive plans currently in effect.
 
1999 Plans
 
In January 1999, our shareholders approved the adoption of an Israeli option plan, or the 1999 Israeli Plan, and a U.S. option plan, or the 1999 U.S. Plan, collectively the “1999 Plans” both plans have a joint pool of underlying shares to be granted thereunder. The 1999 Plans were amended from time to time to include different tax tracks. The purpose of the 1999 Plans is to attract and retain the best available personnel, to provide additional incentive to employees, directors and consultants and to promote the success of our business. In December 1999, our board of directors adopted a resolution to amend the 1999 Plans in a manner that as of April 1, 2000, the number of shares made available for grant under the 1999 Plans will be automatically increased annually, to equal 5% of our outstanding share capital at the relevant time. In May 2003 we amended our 1999 Israeli Plan to provide for the grant of options to Israeli optionees under the new capital gains track provisions of the Israeli Tax Ordinance. As of March 20, 2018, or within 60 days thereafter, an aggregate of 511,260 ordinary shares has been reserved for issuance under the 1999 Israeli Plan, and 62,000 were granted and are outstanding. Unless specifically changed for a certain grantee, options vest monthly over a period of four years, starting one year after the date of grant, subject to the continued employment of the grantee. The exercise price of the options is determined by our board of directors, subject to limitations. Generally, options granted under each of the 1999 Plans will have a term of no more than seven years from the date of grant. All options are subject to earlier termination upon termination of the grantee’s employment or other relationship with us, generally no less than three months from termination. We may make certain exceptions, from time to time, in the vesting and expiration terms of options granted to certain grantees.
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2006 Israeli Incentive Compensation Plan
 
In May 2006, our board of directors approved the adoption of the 2006 Israeli Incentive Compensation Plan, or the 2006 Plan, the purpose of which is to secure the benefits arising from ownership of share capital by our employees, officers and directors who are expected to contribute to the Company’s future growth and success. The 2006 Plan provides for the grant of options, restricted shares and restricted share units in accordance with various Israeli tax tracks. We currently use the 2006 Plan for the grant of restricted shares only. The restricted shares are granted for no consideration and with a vesting schedule of two years (50% each year). The restricted shares are granted in accordance with the Israeli capital gains tax track. Termination of employment of a grantee for any reason will result in the forfeiture of such grantee’s unvested restricted shares. All restricted shares are subject to earlier termination upon termination of the grantee’s employment or other relationship with us, generally no less than 90 days from termination.   We may make certain exceptions, from time to time, in the vesting and expiration terms of the securities granted to certain grantees. In November 2013, our board of directors approved the increase of number of shares under the 2006 Plan in additional 50,000 shares and in August 2014, our board of directors approved the increase of number of shares under the 2006 Plan in additional 150,000 shares. As of March 20, 2018 or within 60 days thereafter, an aggregate of 183,690 ordinary shares has been reserved for issuance under the 2006 Plan.
 
NASDAQ Listing Rules pe rmit foreign private issuers to follow home cou ntry practices in regard to certain requirements, including the requirement to obtain shareholder approval in connection with the establishment of certain incentive plans. In June and September 2006, we notified NASDAQ that we elected to follow home practices with regard to the adoption of, and the amendment to, the 2006 Plan. Accordingly, the adoption of, and the amendments to, the 2006 Plan were not approved by our shareholders.
 
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
7.A. MAJOR SHAREHOLDERS
 
The following table sets forth certain information known to us regarding the beneficial ownership of our outstanding ordinary shares as of March 20, 2018 of (i) each person or group known by us to beneficially own 5% or more of the outstanding ordinary shares and (ii) the beneficial ownership of all officers and directors as a group, in each case as reported by such persons:

Name of Beneficial Owner
 
No. of Ordinary Shares
Beneficially Owned (1)
   
Percentage of Ordinary Shares Beneficially Owned
 
The Capri Family Foundation (2)
   
3,796,284
     
73.28
%
Shareholding of all directors and officers as a group (eight persons) (3)
   
267,865
     
5.11
%
_________________________
(1) Number of shares and percentage ownership is based on 5,214,256 ordinary shares outstanding as of March 20, 2018. Such number excludes: (i) 29,895 ordinary shares held by us or for our benefit. Beneficial ownership is determined in accordance with rules of the SEC and includes voting and investment power with respect to such shares. Shares subject to options that are currently exercisable or exercisable within 60 days of March 20, 2018 are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the percentage ownership of such person, but are not deemed to be outstanding and to be beneficially owned for the purpose of computing the percentage ownership of any other person. All information with respect to the beneficial ownership of any principal shareholder has been furnished by such shareholder and, unless otherwise indicated below, we believe that persons named in the table have sole voting and sole investment power with respect to all the shares shown as beneficially owned, subject to community property laws, where applicable. The shares beneficially owned by the directors include the ordinary shares owned by their family members to which such directors disclaim beneficial ownership.
(2) The information is accurate as of March 18, 2015, and based on Amendment No. 6 to Schedule 13D filed with the SEC on March 18, 2015, by The Capri Family Foundation. According to such Amendment No. 6 to Schedule 13D, Capri directly owns 3,796,284 of our ordinary shares. The core activity of Capri is the holding of investments. In addition, the beneficiaries of Capri are the children of Mr. Tom Wyler, the Chief Executive Officer of our subsidiary, Optibase Inc.
(3) Includes 159,225 ordinary shares , 46,640 ordinary shares held by a trustee for the benefit of our directors and executive officers under our 2006 Plan, which have vested on March 20, 2018 or within 60 days thereafter and 62,000 ordinary shares issuable upon exercise of options exercisable within 60 days of March 20, 2018. Other than Shlomo (Tom) Wyler, all of our directors or executive officers hold less than 1% of our shares.
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Significant changes in the ownership of our shares.

The following table specifies significant changes in the ownership of our shares held by The Capri Family Foundation. This information is based on Schedules 13D filed by The Capri Family Foundation during the period beginning on January 1, 2015, regarding ownership of our shares, and to date:

Beneficial Owner
 
Date of filing
 
No. Of Shares Beneficially Held
 
             
The Capri Family Foundation
 
March 18, 2015
   
3,796,284
**

  **
The information is based on Amendment No. 6 to Schedule 13D filed with the SEC on March 18, 2015, by Capri, in connection with the acquisition of an additional 71,229 ordinary shares by Capri, as follows: (a) on January 30, 2015, Capri acquired an additional 52,483 ordinary shares in a private transaction with an unrelated third party at a price of $6.71 per share; and (b) on February 25, 2015, Capri acquired an additional 18,746 ordinary shares on the Nasdaq Global Market, at a price of $6.40 per share.
 
All of our shares have the same voting rights.
 
On March 20, 2018, registered holders in the United States hold approximately 54% of our ordinary shares. To the best of our knowledge, except as described above, we are not owned or controlled directly or indirectly by any government or by any other corporation. We are not aware of any arrangement, the operation of which may at a subsequent date result in a change in control of us.
 
7.B. RELATED PARTY TRANSACTIONS
 
For a description of the insurance, indemnification and exemption granted to our directors and officers, see Item 6.B. “Compensation” above.
 
For a description of the grant of options to our directors and officers, see Item 6.E. “Share Ownership”, above. In addition, each member of our board of directors is granted compensation pursuant to the fixed amounts permitted to be paid to external directors (depending on our equity level), all in accordance with the 'External Directors' Compensation Regulations, as may be from time to time, for his/her service as a director. For additional information see Item 6.B. “Compensation” above.
 
On October 19, 2009, our shareholders approved the compensation of Mr. Alex Hilman, a director of the Company, who was appointed on September 1, 2009 as Executive Chairman of the board of directors. The principal terms of such compensation are as follows: a monthly payment of NIS 20,000 plus applicable value added tax, against the receipt of a tax invoice. The Company will also reimburse Mr. Hilman for his reasonable expenses directly incurred by him in the performance of his duties against the production of appropriate receipts. In addition, Mr. Hilman was granted on October 19, 2009, 20,000 options exercisable into 20,000 ordinary shares NIS 0.65 nominal value each of the Company under the Company's 1999 Israeli Share Option Plan. The options were granted under the Section 102 of the Israeli Tax Ordinance, through the capital gains tax track. The exercise price of each option is $5.96. The options vest over a period of four years in equal parts, and may be exercisable until their 10 th anniversary. All other terms of the options are as stated in the Company's 1999 Israeli Share Option Plan.
 
On May 6, 2010, our shareholders approved the grant of 50,000 options exercisable into 10,000 ordinary shares NIS 0.65 nominal value each of the Company under the Company's 1999 Israeli Share Option Plan to Mr. Danny Lustiger as a director of the Company. The options were granted under Section 102 of the Israeli Tax Ordinance, through the capital gains tax track. The exercise price of each option is $10. The options vest over a period of four years in four equal parts, and may be exercisable until their 10 th anniversary. All other terms of the options are as stated in the Company's 1999 Israeli Share Option Plan. Mr. Lustiger was also entitled to 800 restricted shares, which vest over two years in two equal parts, and which were granted pursuant to the Company's 2006 Israeli Incentive Compensation Plan.
 
On December 29, 2010, our shareholders approved the grant by the Company of 2,400 restricted shares of the Company, in three equal consecutive annual grants, to each of Mr. Alex Hilman, Ms. Dana Tamir-Tavor and Mr. Danny Lustiger, or the Recipients, who served at that time as directors of the Company, under the Company's 2006 Israeli Incentive Compensation Plan. The restricted shares were granted to the Recipients for no consideration, and vest after a two-year period (50% each year) from their date of grant, subject to the continued employment or service of the Recipients in the Company.
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On November 17, 2011,   and following the approval by our audit committee and board of directors, our shareholders approved a grant of 20,000 options exercisable into 20,000 ordinary shares NIS 0.65 nominal value each of the Company to Mr. Hilman,   the Executive Chairman of the board of directors, under the Company's 1999 Israeli Share Option Plan, without consideration. The Options were granted to a trustee for the benefit of Mr. Hilman in accordance with the requirements of the capital gains tax track chosen by the Company. The exercise price of each option is $10. The options vest during a four-year period as of their date of grant (25% each year), and may not be exercised following their 10 th anniversary.   All other terms of the options are as stated in the Company's 1999 Israeli Share Option Plan. Along with the approval of the grant of options to Mr. Hilman, the Company's shareholders approved a similar grant of 20,000 options exercisable into 20,000 ordinary shares to Mr. Shlomo (Tom) Wyler, the Chief Executive Officer of our subsidiary, Optibase Inc., who then served as our president and member of our board of directors, under the Company's 1999 Israeli Share Option Plan. The terms of grant of such options to Mr. Wyler are identical to the terms of grant of the options to Mr. Hilman as described above, except that the tax track available to Mr. Wyler, who considered to be our controlling shareholder as of the date grant of such options, is different from the capital gains tax track afforded to all other directors and officers of the Company. Under this tax track, we will also not be able to recognize expenses pertaining to this grant.
 
On December 19, 2013, and following the approval by our compensation committee and board of directors, our shareholders approved the grant of our 12,000 restricted shares, in three equal consecutive annual grants (commencing on January 1, 2014), to each of Mr.   Alex Hilman, the executive chairman of our board of directors, and Mr. Amir Philips, our chief executive officer, or the Recipients, under the Company's 2006 Israeli Incentive Compensation Plan. The restricted shares were granted to the Recipients for no consideration, and vest after a two-year period (50% each year) from their date of grant, subject to the continued employment or service of the Recipients in the Company.
 
On December 19, 2013, and following the approval by our audit committee, compensation committee and board of directors, our shareholders approved the compensation terms of Mr. Shlomo (Tom) Wyler, for his service as Chief Executive Officer of our subsidiary Optibase Inc. According to the terms approved by our shareholders, Mr. Wyler serves as Chief Executive Officer of Optibase Inc. and is responsible for the implementation of our strategy in North America, recognizing new local opportunities, forming strategic alliances and overseeing the ongoing management of our current U.S. real estate portfolio. The yearly gross base salary in consideration for Mr. Wyler's services as Chief Executive Officer of Optibase Inc. will be $170,000 for a full time position as well as reimbursement of health insurance expenses of up to $24,000 per year, and including reimbursement of reasonable work-related expenses incurred as part of his activities as Chief Executive Officer of Optibase Inc., of up to $50,000 per year. The employment of Mr. Wyler is for a three-year term commencing on January 1, 2014. Mr. Wyler's service as our president and member of our board of directors ended as of December 19, 2013. On May 16, 2016, following the approval by our compensation committee, audit committee and board of directors, our shareholders approved an amendment to Mr. Wyler's compensation terms in a manner that Mr. Wyler's annual gross base salary was set at $200,000 for a full time position, as of January 1, 2016. Mr. Wyler was also granted reimbursement of health insurance expenses of up to $24,000 per year, as well as reimbursement of reasonable work-related expenses incurred as part of his activities as Chief Executive Officer of Optibase Inc., of up to $50,000 per year.
 
On December 19, 2013, and following the approval by our audit committee and board of directors, our shareholders approved the service agreement between the Company and Mr. Reuwen Schwarz, currently serves also as a member of our board of directors, for the provision of real estate related consulting services to us, our subsidiaries and affiliates. Mr. Schwarz is a relative of the beneficiaries of Capri, our controlling shareholder. According to term of the service agreement with Mr. Schwarz, he will provide us with real estate related consulting services, including: (i) searching, introducing and advising us on real estate transactions, (ii) advising and negotiating with banks and financing institutions, (iii) advising us on our financing agreements, all as requested by us from time to time and at our sole discretion. Such services will be provided by Mr. Schwarz at the request of the Company. Mr. Schwarz will render such services faithfully and diligently for the benefit of the Company, and will devote all necessary time and attention for the performance of the services. Mr. Schwarz will also use his best efforts to implement the policies established by us in the performance of such services. In consideration for such services, we will pay Mr. Schwarz a monthly fee of EURO 4,000 (approximately $5,350) plus applicable value added tax (if applicable). Mr. Schwarz will also be reimbursed for expenses incurred as part of the services provided by him which shall not exceed EURO 12,000 (approximately $16,060) per year. In the event the service agreement with Mr. Schwarz is terminated during a certain month, Mr. Schwarz will be entitled to a pro rata fee based on the number of days that has lapsed until the termination date of the service agreement. Mr. Schwarz may either provide the services by himself or through a corporation under his control, provided that the consideration under the service agreement remains unchanged. The service agreement with Mr. Schwarz will be in effect retroactively from November 1, 2013 for a period of three years. On December 29, 2016, and following the approval by our audit committee and board of directors, our shareholders approved the extension of Mr. Schwarz' service agreement, which will be in effect retroactively from November 1, 2016 for a period of three years. Each of Mr. Schwarz and us may terminate the service agreement by giving a prior written notice of 30 days. During such advance notice period, Mr. Schwarz will be required to continue the provision of the services provided by him under the agreement (unless we have instructed him otherwise) and in any event Mr. Schwarz will be entitled to receive the consideration for such period, except for cause.
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On October 22, 2014, our shareholders approved, following the approval by our compensation committee, audit committee and board of directors, the following amendments to our prospective undertaking to indemnify our current and future directors, including our Chief Executive Officer and including directors and officers who are affiliated with our controlling shareholder, and the grant of amended letters of indemnification accordingly: (a) inclusion of additional events upon the occurrence of which the Company may indemnify its current and future directors and officers; and (b) increase of the aggregate and accumulated indemnification amount that the Company may pay its directors and officers, to an amount that shall not exceed the higher of: (i) 25% of the shareholders’ equity of the Company, as set forth in the Company’s most recent consolidated financial statements prior to such payment; (ii) 10 million U.S. Dollars. On December 21, 2017, our shareholders approved, following the approval by our compensation committee, audit committee and board of directors, the following amendment to our prospective undertaking to indemnify our current and future directors, including our Chief Executive Officer and including directors and officers who are affiliated with our controlling shareholder, and the grant of amended letters of indemnification accordingly: an increase of the aggregate and accumulated indemnification amount that the Company may pay its directors and officers, to an amount that shall not exceed the higher of: (i) 25% of the shareholders’ equity of the Company, as set forth in the Company’s most recent consolidated financial statements prior to such payment; (ii) 20 million U.S. Dollars.
 
On October 22, 2014, our shareholders approved, following the approval by our compensation committee and board of directors, the grant of the following compensation to Mr. Amir Philips, our Chief Executive Officer, and to amend the compensation terms of Mr. Philips, as follows: (a) the grant of a special bonus in the amount of $50,000 to Mr. Philips; and (b) the extension of Mr. Philips’ existing four (4) months advanced notice period under his employment agreement with the Company to an advance notice period of six (6) months. On May 16, 2016, our shareholders approved, following the approval by our compensation committee and board of directors, certain amendments to the compensation terms of Mr. Philips and the grant of special bonus as follows: (a) Mr. Philips' monthly gross base salary was updated to NIS 65,000 for a full time position, as of January 1, 2016 and would increase to NIS 75,000 as of January 1, 2017; and (b) Mr. Philips was awarded a special bonus in the amount of NIS 120,000. The new compensation terms shall be in effect for a three year term as of January 1, 2016.
 
On May 26, 2015 we utilized a guaranty given by our controlling shareholder to a financing institution that allowed us to withdraw from such financing institution a total of €5 million that were used to partially finance the closing of the portfolio acquisition transaction in Germany. The funds were drawn in a form of a monthly credit facility bearing a yearly rate of approximately 76 basis points (0.76%). On July 24, 2015 the Company covered the monthly credit facility in full.
 
On December 29, 2016, our shareholders approved the reappointment of Ms. Garti-Seroussi and Mr. Labenski as external directors of the Company for an additional three years term commencing on January 31, 2017 and on December 31, 2016, respectively, including the compensation terms for their service as external directors of the Company, in the compensation terms specified in Item 6.B. “Compensation” above.
 
In March 2017, our audit committee and board of directors approved the receipt of a loan from our Controlling shareholder. The Loan was granted to the Company on March 28, 2017. For further details see Item 5.B. “Operating and Financial Review and Prospects - Liquidity and Capital Resources” above.
 
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Condominium Units in Miami Beach, Florida
 
On December 19, 2013, following the approval of our audit committee and board of directors, our shareholders approved the purchase by two wholly owned subsidiaries of the Company of twelve luxury condominium units located in Miami Beach, Florida, or the Units, in consideration for the issuance of our 1.37 million newly issued ordinary shares (of which approximately 67,000 ordinary shares were off set against the lease of one unit), representing, as of the date of the approval of the transaction by our board of directors, a value of approximately $8.8 million. The Units were sold by private companies indirectly controlled by Capri, our controlling shareholder. At closing, and following the approval of the transaction by our shareholders, we issued to Capri a net sum of 1,300,580 of our ordinary shares, as detailed below. The net fair value of the condominium units as recorded in our financial statement as of the closing date was approximately $7.2 million, representing the fair value of the ordinary shares issued as of the closing date. Set forth below is additional information with respect to the transaction to purchase the Units.
 
The Flamingo Condominium Units
 
Our wholly-owned subsidiary, Optibase FMC LLC, a Delaware limited liability company, or Optibase FMC, has entered into two purchase and sale agreements, or the Flamingo Agreements, to acquire eleven luxury condominium units, or the Flamingo Units, including ten parking spaces in the Flamingo-South Beach One Condominium located at 1500 Bar Road in Miami Beach, Florida, or the Flamingo Condominium. The sellers of the Flamingo Units, or the Sellers, are two private companies indirectly controlled by Capri, our controlling shareholder.
 
The Flamingo Units are located on various floors of the South Building of the Flamingo Condominium, and ranging in size from 924 to 2,347 square feet. The Flamingo Condominium is a 15-story tower with 513 luxury residential units ranging in size from approximately 450 to approximately 2,347 square feet.
 
The purchase price agreed upon by the parties in consideration for the Flamingo Units was $3,870,750 in the aggregate, and was be paid by the Company in 600,115 newly issued ordinary shares of the Company issued to the Sellers, at a price per share of $6.45. The price per share was set based on a calculation of average closing price of our ordinary shares on the Nasdaq Global Market during the 30 trading days preceding the signing date of the Flamingo Agreements.
 
On September 17, 2014, following the approval of our audit committee and board of directors, we entered into a transaction to sell the eleven Flamingo Units, to an unrelated third party, in consideration for an aggregate price of approximately $6.4 million to be paid to us. The transaction was conditioned on the purchaser’s execution of a purchase and sale agreement to acquire an additional nineteen (19) condominium units located in the Flamingo Condominium from a company affiliated with our controlling shareholder. Therefore, in the interest of caution, we treated the transaction as a transaction between a public company and another party, in which the company’s controlling shareholder has personal interest, as defined under the Companies Law. The transaction was subject to a twenty (20) day inspection period during which the purchaser had the right to terminate the purchase and sale agreement. The closing of the transaction occurred on October 20, 2014.   At the closing of the transaction, the purchaser paid to us an aggregated gross price of $6.4 million, in consideration for the Flamingo Units. We recorded a capital gain of approximately $2.7 million resulting from such transaction.
 
The Continuum Unit
 
The Company's wholly-owned subsidiary, Optibase Real Estate Miami LLC, a Florida limited liability company, or Optibase Miami, has entered into an agreement, or the Continuum Agreement, to acquire a luxury condominium unit (including 2 parking spaces) in the Continuum on South Beach Condominium, or the Continuum Unit, located in Miami Beach, Florida. The seller of the Continuum Unit, or the Seller, is indirectly controlled by Capri, our controlling shareholder.
 
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The Continuum Unit is located on the 33rd floor of the North Tower of the Continuum on South Beach Condominium located at 50 S. Pointe Drive, Miami Beach, Florida. The Continuum on South Beach Condominium is a 37-story ocean-front tower with 203 luxury residential units ranging in size from 1,554 to 3,497 square feet. Residences of the Continuum on South Beach Condominium enjoy the right to use the common areas of the residence, including swimming pool, tennis courts, spa and a sporting club.
 
The purchase price under the Continuum Agreement is $4.95 million, to be paid by the Company in 767,442 newly issued ordinary shares of the Company to be issued to the Seller, at a price per share of $6.45. The price per share was set based on a calculation of average closing price of our ordinary shares on the Nasdaq Global Market during the 30 trading days, respectively, preceding the signing date of the Continuum Agreement. We were not required to pay any deposits in connection with the Continuum Agreement.
 
 
Beginning at the closing of Optibase Miami's acquisition of the Continuum Unit, the Seller leased the Continuum Unit from us for a term of 36 months. The rent for the entire period of the lease, or the Rent, was prepaid at a rate of $12,000 per month including sales tax (for a total rent of $432,000 including sales tax). The Rent was paid by the Seller at the closing date of the transaction in 66,977 ordinary shares of the Company, at a price of $6.45 per share (which were offset the number of Shares to be issued by us as detailed above).
 
The acquisitions pursuant to the Flamingo Agreements and the Continuum Agreement closed on December 31, 2013. Accordingly, at the closing of the transactions, and upon instructions provided to us by the sellers of the Units, we issued to Capri on December 31, 2013 a net sum of 1,300,580 of our ordinary shares as consideration for the purchase of the Units, represented, as of the closing date of the agreement, approximately 25.4% of our issued share capital on a fully diluted basis. The net fair value of the condominium units as recorded in our financial statement as of the closing date was approximately $7.2 million, representing the fair value of the ordinary shares issued as of the closing date.
 
On December 29, 2016, our shareholders approved, following the approval by our audit committee and board of directors, a new lease agreement to be entered into with an affiliate of Capri, or the Tenant. The new lease will be in effect for a one-year term commencing on January 2, 2017, which will be automatically extended by a one-year term and up to a total of three years. The Tenant may decide not