Purchasing a Piece of Paradise

Presented by: Allison Fogarty

Put yourself in the shoes of the hotel developer making his or her first foray into off-shore development. In keeping with your dream, you picture a postcard perfect resort in a secluded island destination anchored by a famous name hotel. The property boasts magnificent beaches, lush tropical landscaping, beautiful waterfront dining opportunities, and lots of additional property that can be developed as luxury housing with the development profit that offers. It would be the perfect complement to your portfolio, which already includes resort properties in the continental US. Given the state of the current global economy, a perfect site for your dream development is available at a fraction of what it would have cost, just a year ago! Before you dive head first into those azure waters, we provide some points to ponder for those considering investing outside US territory, and particularly in the Caribbean where we at the South Florida office of Pinnacle have been spending most of our consulting time as of late.

As Americans, we tend to forget that the influence of US law stops at the borders. And since most destinations in the Caribbean Basin, Bermuda and Central America are located in territory belonging to foreign countries, it is important to remember that each of those countries have differing laws. This is particularly true in the case of taxation policies, which vary greatly based upon the "agenda" (both stated and unofficial) items of the various governments. Even in Puerto Rico which is a Commonwealth of the United States and therefore qualifies as part of the US, the tax structure is very different from that in the 50 States.

Given this, and while most investors are shrewd enough to engage excellent local legal counsel to handle transactions in unfamiliar countries, they frequently forget that local advisors generally consider their laws to be "normal". Thus they may not mention to the developer that one needs government approval for typically unregulated actions. This can include some things as mundane as importing your own CFO from the US. Another typical quirk might be that you have to purchase your hotel linens locally (in the foreign country) or pay almost extortionate import duties. It is thus critically important to spend time asking dozens of not-so-obvious questions: about labor regulations and work permit fees, tax considerations, property law and import duties prior to developing a business model based on US-based experience.

Another quagmire can be in planning the exit strategy for the investment. At the very start, an exit strategy should be laid out that spells out the logistics for when the property is ultimately sold: How will local transfer taxes and stamp duties be assessed? Can the sales proceeds be easily repatriated to the U.S.? Local attorneys and accountants working together with in-house counsel may provide an appropriate way to structure the transaction to minimize taxation, such as the use of offshore holding companies and the like, although recent rumblings in Washington are making the structuring of such off-shore deals even much more difficult. In short, regulations regarding the ultimate disposition of property vary widely from country to country, and need to be carefully considered at the outset of the development.

Labor is a critical issue with off-shore developments. Unlike the United States, many countries require hefty severance or redundancy payments when workers are terminated or laid off. If an existing resort is closed for redevelopment, the owner may be required to make large cash payments to the existing employees. Since these payments are frequently based upon length of service, closing a resort that has been open for a number of years could have unanticipated and very expensive consequences in this regard.

Successful resort operations obviously require a service-oriented, reliable work force. While some locations have an ample well-educated work force, we have seen numerous resorts developed in unquestionably beautiful but very lightly populated areas with an insufficient work force to staff adequately. In such cases, the resort must recruit and hire from other geographic areas which may require the development of staff housing and recreational facilities . both expensive to develop. If expatriate workers (not native to the development location) will be required, it is imperative to understand regulations governing work permits including how much must be paid per employee for such a permit, how long such permits are valid, and whether work permits can be renewed. Expenses associated with the recruitment, permitting and housing of expatriate employees can run into the millions of dollars annually for a large resort. There is one breath of good news, unlike the US; many countries use their employment and other taxes to fund a national health program, thus eliminating the need for employerprovided employee health insurance coverage.

Mixed use, integrated resort developments hosting not only resort hotels, but extensive ancillary recreational facilities and residential housing have become the norm in the Caribbean. Unlike the United States, many countries require that foreigners seeking to purchase residential property are thoroughly investigated with respect to background. If the process to obtain an alien landholder's license is lengthy and the cost is high, sales are likely to be affected.

Transportation is the lifeblood of most island resorts.airlift is needed to transport guests to the destination. While private airstrips are desirable for all but the smallest resorts, excellent and affordable commercial service from major feeder markets is integral to the success of the destination. Even the most beautiful site in the world has little potential for resort success if visitors can't reach it easily and at reasonable cost.

The logistics of supplying products and services to island resorts is complicated at best. For example, a resort general manager in a remote destination cannot call a supplier and expect a replacement air-conditioning compressor to arrive in a few hours. It will generally require several days and a hefty freight bill for a part to be air-lifted, as the more usual containerships carrying toilet tissue, notepads and other consumables will require several weeks of lead time to arrive. Hopefully, that same General Manager will have befriended the local customs officials so when that critical piece of equipment does arrive, the customs clearance process will be swift.

Even so, import duties on these types of items are usually very high. The good news is that many governments provide tax and duty concessions to encourage development in the lodging industry. Some concessions may be automatically granted upon application, others are negotiated. In order to receive the most favorable treatment, however it is crucial to understand all of the local taxes and duties, so that the best deal can be negotiated up front, when the government may be courting the developer.

After you, the developer of your dream island property has considered all of these points; remember that it is also imperative to make meaningful contact with the locals. Taxi drivers can save you from spending time negotiating to buy a property with a world-class, spectacularly beautiful beach that happens to suffer from rip currents which make the water unfit for swimming. A local waiter may mention that a fabulous beach is great to frequent when the wind blows from the east, but not when it blows from the west because the Island land fill is located a few miles to the west. Or you may discover that the particular piece of paradise you are considering becomes surrounded in pandemonium every time a megacruise ship comes in, because (in most locations) beaches are public and your gorgeous beach is the one located closest to the dock where the cruise ships arrive.

Now is an excellent time to start planning for future resort expansion. Prices have declined across the board and governments are concerned about their tourism industries and anxious to spur development interest. Developers and operators who use the current downturn to their advantage will be able to find some excellent opportunities, so long as they remember that they are not working on their "home turf" and are careful to navigate around the mine-field of potential development and operational challenges.