Monday, April 13, 2009
Dear Reader,
True rental guarantees—that accurately reflect the market—are rare. So rare, that I think of them as a unique type of program for savvy investors—it’s a type of resort rental, but I call them “Gilt Resort Programs” because of the guaranteed fixed payments. I know of a few programs like this in France…and one in Mexico, which is the opportunity I’m writing to you about today.
Gilt Resort Programs offered at a retail level are difficult to find. The good deals are typically taken up by funds and high net worth individuals. I can understand why—who wouldn’t want to lock in a strong and guaranteed return with the upside potential of capital appreciation?
Here’s how Gilt Resort Program deals work: The developer makes plans to build a condo building or a hotel. He pitches the location, the building and the resort to a hotel or travel operator. If the operator likes what he sees he signs an agreement to lease all the units in the project or hotel from the owners for a fixed period of time. The rent to be paid by the operator is agreed in advance. The operator takes on the entire risk of selling the rooms.
The operator is confident he can make a margin on the difference between what he rents the units for and the net revenue he can generate from selling the unit by the night or week to vacationers. The operator and the developer agree a standard unit fit-out.
We have the chance to get in on one such deal with special reader-only pricing and terms. This deal guarantees a fixed net rental yield of over 6%. This is paid by the resort operator. Early-in pricing offers the prospect for strong capital appreciation. Special reader-only terms gives leverage. Leverage could increase return on investment.
The Resort
Gran Bahia Principe is located on Mexico’s stunning Maya Riviera; 35 minutes from Playa del Carmen and one hour from Cancun airport. It boasts all the amenities you would expect from a resort of this quality and size. The Robert Trent Jones golf course opens later this year. It will be the best golf course along this stretch of coast.
Gran Bahia Principe is owned by Spanish company, Grupo Pinero. They also own Europe’s second biggest travel agency Soltour, which sells and runs 2.5 million vacations every year. Grupo Pinero’s hotels along this stretch of coast have been operating at 88% occupancy for the past 10 years. Gran Bahia Principe has a total of 2,700 rooms. Fortunately for us 2,700 isn’t enough. They need 3,000.
The Developer
Serial developer and entrepreneur Benjamin Beja spotted this opportunity. Benjamin has sold and/or developed more than 1,000 homes (mostly targeted at the North American market) in Mexico City, Puerto Vallarta, Riviera Nayarit, and Riviera Maya over the last 10 years. Gran Bahia Principe (through another Grupo Pinero company) have agreed to lease the 300 units Benjamin is building. They want the lease for the whole project to expire at the same time—eight years from now. That’s why they’re staggering the lease period in line with the build period for each phase. So, they’ve agreed to lease phase 1 units for seven years…phase 2 units for six years…and phase 3 units for five years.
The Project
Benjamin is building 300 condos on the Robert Trent Jones golf course. Condos will be built to hotel specs. These condos will be located a block from the new 7,600-square-meter clubhouse. Amenities here include commercial area, tennis courts, spa and restaurants overlooking the natural cenote (well) dotted course. A shuttle bus takes you from here to the beach and main hotel amenities every 10 minutes. Residents and visitors have full use of the entire resorts amenities.
The Price
Phase 1 will be delivered in 12-18 months, Phase 2 in 24 months, and Phase 3 in 36 months. Benjamin is currently selling Phase 1. Prices here are $149,000, $199,000, and $199,000 for 56-, 90- (Penthouse), and 130-square-meter (Garden) units respectively. Prices start at $1,530 per square meter. Sympathetic design maximizes the use of outside space. The 90-square-meter penthouse units have roof gardens. The 130-square-meter garden units have private outside space.
At prices from $1,530 per square meter these units are “priced to sell”. There is the potential for substantial capital appreciation. In Playa del Carmen, 35 minutes down the coast, beachfront units cost $4,000-$5,000 per square meter. Units back from the beach are in the $2,650-$2,700 per square meter range.
Rental Yield
Owners of the 56-, 90-, and 130-square-meter units will receive a fixed annual rent of $9,000, $13,500, and $13,500 respectively. Rent is paid quarterly. The operator will take care of all the expenses. During the course of the lease you will not pay maintenance, HOA, administration fees, or property tax. That gives you a net yield of just over 6% or 6.5% depending on which unit you opt for. Remember, each unit comes with approximately $18,000 worth of furniture and appliances.
Run your yield numbers from the purchase price less fit-out costs and you are looking at a yield of 6.9% to 7.5%. (You should base your yield numbers on total outlay. I point out this higher yield range as many developers present rental yields based on unit price net of fit-out. You need to make sure you are making a like-for-like comparison when analyzing a deal).
Benjamin expects to launch Phase 3 on June 1. Benjamin has agreed to special pre-release pricing and terms on Phase 3.
The Deal
Developers like Benjamin raise prices as they move from phase to phase. In many instances they raise prices once they achieve a certain level of sales within a phase. Early sales secure the project. The cream comes at the end. When Phase 3 is launched I expect prices to be substantially higher than current phase 1 prices.
Readers can pre-reserve Phase 3 units at Phase 1 prices.
As you’ve heard me say many times, real estate isn’t all about “location, location, location.” It’s also about “terms, terms, terms.” Benjamin has agreed to the following terms: A refundable $1,000 deposit secures a unit. On contract signature, $10,000 is due. Monthly payments of 0.5% are made during the 36-month construction period. There will be balloon payments of $5,000 at the end of month 12 and 24. Here’s how these numbers play out on a $149,000 condo:
| Reservation: Contract signature 36 Monthly Payments of Balloon Payment month 12 Balloon Payment month 24 Balance on completion |
$1,000 $10,000 $745 $5,000 $5,000 $101,180 |
Mortgage financing (up to 85%) is available in Mexico subject to the lender’s terms and conditions. This unit on completion will kick off an annual rent of $9,000. This rent is fixed and guaranteed by the operator, and not dependant on the occupancy achieved by the operator. They assume the entire risk for filling the unit. The term of the lease on Phase 3 units will be five years from the completion date.
These units come fully furnished to the hotel’s specs. Owners will not be responsible for any costs associated with the unit. That’s right—you will not be responsible for a single expense.
At the end of the lease period the operator may invite owners to enter into a new lease contract. If they do, participation will be at owner’s discretion. You could chose to keep your unit for private rental or personal use. You know the current rental demand for this unit is strong. The operator would not agree to lease this unit from you if they weren’t confident in the demand. They know this business—they are in the business of selling rooms and filling resorts.
I have recommended the Phase 3 units as I like the low money down and the prospect for capital appreciation during the build period. Phase 1 however may suit you better if you have cash sitting on deposit and would like to start generating a rental income as fast as possible.
Who to Contact
Benjamin’s team is standing by to answer any questions you may have: (JavaScript must be enabled to view this email address)
As with any real estate transaction I recommend you use an independent lawyer. At Pathfinder we use Robin Hammond ((JavaScript must be enabled to view this email address)) for this area. We have been happy with the work Robin has done on our behalf.
Wishing you good real estate investing,
Ronan McMahon
P.S. The strength, stability and track record of the operator is key to a deal like this. A promise to pay a fixed rental income is only as good as the group making the promise. This group is strong. However, no company can be considered exempt from the risks of doing business in the current environment.
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Posted Under:
mexico, rental yield, profit play
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