Michelle Tanzer is a Partner in our Fort Lauderdale office.

Only a few short years ago a snapshot of Caribbean resort development would show broad smiles on the faces of everyone: developers, buyers, lenders and brands. In the background, we'd see new hotels, golf courses, marinas and residences. No project was too vast or too small to win the hearts of vacationers and purchasers. Resort and golf course brands and lenders around the world fought for deals. Then, the "Pirate" came [–] the economic crisis that few could predict and none could prevent – and the Caribbean was hit by an economic tsunami. As a result, it's a different picture today: buying, lending and developing have come to a virtual halt.

What the Pirate left behind falls generally into three categories: (1) those in "Ruin"; (2) those in need of "Repair"; and (3) a handful that were relatively unscathed and "Resilient" enough to remain afloat and even flourish. Now in the aftermath, opportunity exists for the brave, the optimistic and those with the resources and patience to find once-in-a-market-cycle bargains.

Finding the Hidden Jewels

There's no easy formula to tell which properties fall into the "Ruin," "Repair" or "Resilient" categories, but there are certain factors that weigh heavily in the determination:

  • Transportation and Airlift. How far is the property from the nearest airport? Is the airport large enough to accommodate the air traffic necessary to support occupancy at the property? Are there regular commercial flights to and from major cities or, if not, can such flights be established or expanded?
  • Highways and Roadways. Is transportation via existing paved roadways to the property available? Are they convenient and well maintained? If not, can they be easily improved or added?
  • Infrastructure and Utilities. Are the components for basic utility infrastructure currently in place, i.e., potable water and wastewater treatment, electricity and telecommunications? Can capacity be increased if necessary? Who controls the production and distribution of utilities? Are they government owned or privately held? What is the status of applicable franchise agreements? Are they assignable?
  • Local Labor Force. Is there a sufficient number of potential employees available locally for construction, maintenance and operation of the project? If not, does the applicable jurisdiction approve work permits for non-resident workers? How do labor costs factor into overall costs?
  • Tax Structure. Does the applicable jurisdiction provide for tax benefits and incentives for resort development? Are there hotel investment acts that will substantially impact return on investment? Can income be removed from the jurisdiction and what are the tax consequences of doing so? Can structuring strategies be implemented to reduce tax liability?
  • Status of Construction and Operation. Has construction of all or any portion of the project been started or completed? Is the project, or any portion of it, operational? If not, what is the cost necessary to become operational to immediately generate cash flow?
  • Timing. Can the "for sale" product be made available to coincide with the consumers' demand when the demand returns? Will the product be ready too early or too late? What signs of recovery can assist in determining the appropriate timing?
  • Location. Is the property located in an established, well known destination, or is it relatively unknown? If established and well known, how many competing properties are already in close proximity or in the same general area? Is the competition Resilient? How can competing properties be leveraged to increase occupancy at the subject property?
  • Uniqueness. Does the property offer a unique and special quality that can establish or generate more demand than a typical property? Are the facilities iconic and landmarked, or grandiose and over capitalized? Do "barriers to entry" create special value?
  • Legal Structure and Documentation. What is the current legal structure of the resort? Is the existing structure documented in an efficient and usable way? Are there master associations, condominium associations, club amenity programs, rental programs, or other structures in place? Are these programs functional and attractive for the market? Do the legal documents need to be created and amended, or both, to facilitate effective operation and governance of the property? What additional agreements, such as example, reciprocal easements, cost sharing or shared facilities agreements, need to be executed to maximize operational and financial benefits?
  • Existing Unit Owners. Are there existing unit owners that have expectations or legal claims against the previous or successor developer. Can the existing unit owners be bought out to regain complete control of the property? Does it make sense to do so? Are negotiations with existing owners feasible and are they likely to be fruitful?
  • Permits, Approvals and Registrations. Have applicable federal, state or local authorities granted the necessary permits, approvals or registrations necessary for the proposed development? Were land sales, timeshare or condominium registrations appropriately made? Are they required? What promises were made to unit owners that have not been met for which liability may exist?
  • Product Type and Price Point. Is the proposed or existing product type sufficiently attractive for the current marketplace? Can the offering be retrofitted to match the marketplace? The high-end luxury product may still have great appeal in certain markets, and the modest lower-end may have appeal in others, but in what category does this property fall? Is there a place for the middle market?
  • Amenity Program and Density. Are there golf, marina, spa, tennis or other amenities existing, or do they need to be constructed? Can a membership offering be used to recoup amenity costs to achieve a return on these investment dollars and ensure income production? Should a mandatory membership program be implemented? Can access to nearby facilities be "shared" through access and use agreements to consume any over supply or can the cost of new construction be justified? If there is golf, is the emphasis on golf appropriate in relation to other amenities and activities? Will there be a sufficient number of potential users to support the amenities that will be available?
  • Family Orientation. What is the focus of the property: adult, family or something else? Is the orientation appropriate given the attributes of the property and the desired end users? Can the focus be changed, either with changes to the property physically or with marketing a new image?
  • Price. Is there an obvious discount considering current price to relative value? Can all costs (hard and soft) associated with acquisition and implementation of the opportunity be reasonably anticipated to yield a positive return on the investment?

These are some of the key factors in determining whether a project is Resilient. All relevant details should be analyzed and weighed. While no one can predict the future, a sound analysis of the relevant factors will only increase the potential for success.

Capturing Opportunity – Resources Available?

Once a Resilient target property is identified, one must determine whether the resources necessary to capture it are reasonably available. The following are areas of important consideration:

  • Equity. Is there sufficient investment capital necessary to achieve acquisition/renovation/operation to proceed with the opportunity or to obtain debt financing? Do the cash flow projections make good sense in the new economy? Can private equity or venture capital sources be tapped?
  • Debt. Is debt available for the project? While debt is still relatively unavailable in comparison to former conditions, some debt financing may still be available in certain situations. Are the conditions of any available financing attractive?
  • Management and Branding. Can the value of the property be improved with branding, rebranding or repositioning? The value of management and branding cannot be underestimated in some environments for certain types of properties, while other properties can be successfully managed independently. What is the relative cost in comparison to the benefits of flagging the property?
  • Consultants. Is your management, sales, marketing and legal team experienced with a proven track record? Would including specialized consultants to the team add value and improve the final result? Is your team qualified to conduct the due diligence necessary to avoid unanticipated road blocks and to handle them when they arise?
  • Owners. In an honest and objective assessment, do the principals and decision makers possess the experience and knowledge necessary to allow the Resilient property to reach its full potential?

In the New Caribbean, the Pirate has buried some treasure that will require some perseverance to find. And when it is found, often the misfortune of one may ultimately create another's fortune. The key is to find the map to the hidden treasure. It may not be easy, but following the winding and sometimes confusing path will yield great rewards to the few. Seek the treasure before others do, and make sure you have the right crew.

Holland & Knight lawyers have worked with a variety of developers and managers to help them identify, acquire and operate developments in multiple destinations around the world, including the Caribbean.

This article was published in Lodging Hospitality, July 7, 2010.

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