San Carlos, Sonora, Mexico

Right Time, Right Place

Over the past decade, the growth of American interest in Mexican real estate has been astounding.  Reportedly, 1.5 million Americans now own property in Mexico. The primary reason for this tremendous growth is the simple fact that real estate prices in coastal areas of the US are becoming out of reach for most Americans.  While at the same time, laws pertaining to non-resident ownership of coastal real estate in Mexico have relaxed considerably.  The Mexican government has been working hard to promote foreign real estate acquisition, recognizing as Mexico’s President Vicente Fox articulates, “The tourist industry is the passport towards the future”.

The following section will partly illustrate some reasons why San Carlos, Mexico is a great investment opportunity. You will note some parallels with the Spanish Costa del Sol development opportunities of the 1990s. [Map]. Index:

Land and Construction Costs

Currently, land costs in San Carlos are approximately 1/20th that of comparable land on the coast of Florida.  For instance, a recent 60’ beach-front lot in San Carlos sold for $180,000, or approximately $3,000 per front foot.  A comparable beach-front lot in south Florida would sell for $60,000 - $70,000 per front foot.

Not only are land costs incredibly reasonable, but construction costs are approximately 1/4th of those in the US.  A hand-crafted, solid adobe-brick house with marble finishes wholesales for approximately $50 per square foot (psf) and retails for approximately $80 psf in San Carlos, versus a lesser-quality construction comparably finished house in the US at over $300 psf.

Low hard costs are important, but the key to incredible profit margins in San Carlos is the disparity between costs and pricing.  While land and construction costs are but a fraction of those in the US, sales prices of completed units, although viewed by consumers as a large discount from the US, are not as proportionately low.  This disparity between building costs and sales prices offer developers a rare opportunity for abnormally high return.

Foreign Ownership of Land (Index)

Beginning with the passing of the Foreign Investment Law of 1993, the Mexican government liberalized ownership provisions of all property within the constitutionally protected area known as the Restricted Zone. This designated area includes all property within 100 kilometers (62 miles) of all borders, 50 kilometers (31 miles) of all coastlines, and all of Baja California.

Prior to 1993, foreign nationals were completely prohibited from direct ownership of real estate located in the Restricted Zone. Today ownership may be accomplished through one of two ways, depending upon the intended use of the property. Direct ownership of non-residential real estate is possible through the creation of a Mexican corporation which may be 100% foreign owned. This includes real estate purchased for development which will be sold off to foreigners for residential use. The corporation is considered Mexican and therefore the foreign shareholders may own the land directly through this Mexican person.

Foreigners purchasing property for residential use may do so through a Mexican bank trust, known as a fideicomiso. In a fideicomiso, a bank holds legal title to the real estate and acts as the trustee while the beneficial interest in the trust is owned by the foreign individual. The trust exists strictly for the benefit of the beneficiary who is for all practical purposes the owner of the underlying property. The primary difference between a fideicomiso and a US trust is in Mexico the beneficiary controls the trust, not the trustee as in the United States. The owner’s beneficial interest in the property may be sold, rented, used as collateral for a loan, or passed on by will or inheritance. Fideicomisos have a term of 50 years, with 50-year perpetual renewals. (Source: Michael Foor, MA, J.D., LLM of the National Law Center for Inter-American Free Trade)

One interesting note to keep in mind regarding fideicomisos and the requirement of a Mexican bank holding legal to the real estate, is that the second largest Mexican bank, Banamex, is actually owned by Citigroup which purchased it for $12.5 billion in 2001. So indirectly, the title to the real estate may be held by an American entity, offering buyers further piece of mind.

The Mexican State of Sonora (Index)

Sonora is the country’s second largest and one of its most progressive. Sonora has long recognized the importance of American visitors, residents, and investors and has consistently taken concrete steps to make travel to and from Sonora simple and safe helping to assure investors of the security of their holdings.

Sonora boasts some of the most spectacular coastline in North America. Despite the explosion of development Puerto Penasco is experiencing, well over 90% of the 300-plus miles of coastline between Rocky Point and San Carlos (often referred to as the "Gold Coast") is just now becoming available to homeowners, investors, and developers.

Sonora's Governor, Eduardo Bours, has undertaken an unprecedented agenda to encourage outside investment in Sonoran tourist destinations. He has established an ambitious construction schedule for Sonora's new 375-mile coastal highway, committing to a 2009 completion date in Guaymas. This highway will offer a high-speed route from points north of Puerto Penasco all the way to Guaymas, making Sonora that much more accessible to southern California and Nevada.

Last December, Governor Bours moved the vehicle inspection point from Kilometer 21 (12 miles south of the Arizona border) to the town of Empalme, which lies south of Guaymas. This move is anticipated to further encourage tourists to venture south to San Carlos. In the past, only Puerto Penasco enjoyed this ease of entry.

The Sonoran government also introduced a $1 million advertising campaign in 2005, in order to lure tourists to the state. The majority will be spent in Arizona ($800,000), with the remainder used to target the New Mexico market. For comparison purposes, the Arizona Office of Tourism planned a $120,000 campaign to convince Mexicans to shop in Tucson and Phoenix and explore places such as Sedona and the Grand Canyon.

The New Coastal Highway (Index)

Dubbed, the "Gulf Coast Highway", the Mexican government began construction last spring on a $200 million, 375-mile long four-lane highway designed to provide access to the yet to be developed coastal areas of Sonora. "Eventually, the highway will be lined with tourist stops, restaurants, stores and industry", said Oscar Lopez, the director of the Sonoran coastal highway project.

The project has the attention of investors who foresee an unprecedented opportunity to invest heavily in Sonora having a major draw - Sonoran beaches - to enjoy. Noted Tucson real estate consultant, Bruce Greenberg, commented that the coastal highway would surely "open up the California marketplace." With a coastal highway entering the U.S. not far from Arizona's border with California, "this is going to attract people from San Diego and Orange County to the Sea of Cortez. It's another stimulus recognizing the economic growth of Sonora," he said.

American Investor Confidence in Mexico is on the Rise (Index)

Mexico has evolved into a highly attractive environment for investment. To begin with, Mexico’s political evolution has impacted the economic climate and the lenses through which investors view the country. Mexico has long been a democracy ruled by one political party, the Institutional Revolutionary Party ("PRI"). The 2000 Mexican presidential election was significant in that it signaled to the Mexican people that their voices could be heard through the PRI and also showed the international community that the country was on the road to self-legitimization of its democratic process.

In 2002, the international investment community recognized Mexico’s years of fiscal control and political stability with the upgrading of Mexico to investment grade. This clearly is the single-most important step in bringing Mexico into the institutional investor world.

Peabody, Hines, and Equity International Properties were the first large-scale institutional investors to get into the game in Mexico, primarily focusing on the industrial sector. Public companies such as Strategic Hotels, NH Hotels, AMB, and Kimco followed, broadening the scope of investment to include the hotel, retail, and office markets. The evolution has since accelerated to include all sectors, including residential. In 2005, Hines and CalPERS, the nation’s largest public pension fund, teamed up to create a $200 million fund to invest in the Mexican residential and retail markets.

Today there are approximately 15 foreign institutional investors with significant holdings in Mexican real estate, including such notables as Metlife and Prudential. In 2005, GE Commercial Finance Real Estate acquired a portfolio of 112 industrial properties in Mexico for $450 million, one of the largest Latin American real-estate transactions to date. GE Commercial currently operates $2.5 billion in assets in Mexico, with about $1.9 billion in structured debt and about $550 million in hard assets. Plans are in the works to expand that presence to $5 billion within the next two to three years.

The ever-increasing confidence in Mexico on behalf of institutional investors signifies to the mainstream investor and average US citizen that investment in Mexico is a sound, safe option. As in any emerging market, those that recognize the trends and invest early will reap enormous benefits.

San Carlos (Index)

The resort community of San Carlos encompasses 12,500 acres of pristine, picturesque mountain and marine environment. The unbelievable opportunity still exists to develop the majority of the town, as 9,000 acres (72%) remain untouched. Yet remarkably, infrastructure is in place for 36,000 residents in this town with a current population of less than 7,000 people.

The current residential population of San Carlos consists of 70% Americans and Canadians. The majority of which hale from Arizona and other Southwestern states including California, New Mexico, Nevada, Utah, and Texas. A combination exists of second home owners and retirees, most who have quietly been coming to San Carlos for years to enjoy the beautiful beaches, world-class fishing and scuba diving, and spectacular boating.

The Population Moves South and West (Index)

The US population is on the move. For the 19th straight year, Nevada was the fastest growing state. Its population rose 3.5 percent for the year ended at mid-year in 2005. The population in Arizona, the No. 2 fastest growing state, grew at just under 3.5 percent. The other fastest growing states were Idaho (up 2.4%), Florida (up 2.3%) and Utah (up 2%), in the top five. Much of the increase in the populations of the fastest growing states was due to migration of residents from elsewhere. Simply put, the US population is moving South and West.

This isn’t just an isolated one year statistic. The Census Bureau indicates that the top five fastest-growing states between 2000 and 2030 will be Nevada (114 percent), Arizona (109 percent), Florida (80 percent), Texas (60 percent) and Utah (56 percent).

In ever increasing numbers, the population is seeking to live in warmer environments. And anyone who has ever seen a satellite image of the US at night will tell you that people flock to the coastlines. Put these two pieces of information together, and you come up with an undeniable increase in demand for affordable coastal destinations easily accessible from the western United States.

Baby Boomers (Index)

The Baby Boom generation is made up of the 78 million people born in the US between 1946 and 1964.

When added to that, the 10 million Canadians born during this period, this amounts to a demographic phenomenon 88 million people strong.

This generation has been defining and redefining major aspects of the economy for more than half a century.

And now as the leading edge of this wave reaches their prime second-home buying years and nears retirement, the real estate industry is beginning to feel the effects of this massive force.

Second Home Sales (Index)

Second home sales have been soaring for the past five years. Wealthy baby boomers, favorable tax law changes, low interest rates, rapid home price appreciation, the influx of stock market refugees looking for safe investment havens, and more domestic travel due to post-911 security concerns have all been a boon to the second home industry -- especially the investment segment.

In 2004, second home sales rose 16.3 percent over 2003, to 2.8 million homes, accounting for more than one-third (36%) of all homes sales in the US. The majority of these second homes, 1.8 million of them, were purchased primarily for investment, with the balance being purchased for personal use. Continued demand from baby boomers as they enter the prime years for second-home purchases is likely to fuel this trend for the next decade and beyond.

When this trend in second home sales is coupled with the trend in population moving westward, it creates an undeniable increase in demand for homes in resort destinations south of the border. San Carlos will likely benefit greatly from both of these trends.

Fractional Shares (Index)

A second home has been called the ultimate discretionary purchase -- something that many people would like to have but no one needs. People who do own a place at the beach, the lake or in the mountains often are quick to express frustration at not being able to spend more time there. It hardly makes sense to have the expense of a mortgage, upkeep, insurance and taxes for a place you don't use more than a couple of weeks a year.

To deal with that situation, family members and friends often have joined forces to buy a place. It cuts down on the cost and everyone gets to enjoy a place that's more than just a hotel room. As a result of this trend, in 1994, the concept of fractional ownership debuted in the real estate industry. Fractional ownership offers individuals the opportunity to buy partial ownership of a vacation home in a resort area. Unlike timeshare, fractional shares are deeded ownership, and since their value is tied to the underlying real estate, fractional shares appreciate along with the asset. The concept has obviously taken off, as the fractionals industry tripled in 2004 over the prior year, generating more than $1.5 billion in sales, according to research firm Ragatz Associates.

We anticipate San Carlos to have a vast fractional share market and intend to offer fractionals as an alternative to buying an entire residential unit. This strategy will allow us to offer product to a wider demographic, one which may not have the wherewithal to purchase an entire residential unit, or possibly just lacks the free time to use a second home more than a few weeks per year.