The 8 Iron-Clad Rules for Investors Who Don’t Want to Lose Money on Caribbean CBI Hotel ProjectsJune 24, 2020
The Caribbean is home to some of the world’s most spectacular hotels but, at the same time, it is littered with incomplete, abandoned buildings that scar some of the world’s most idyllic landscapes. The region has more than its fair share of half-built hotels whose opening date always seems to be “next year”.
The post-mortem results for each of these failed Caribbean developments are always the same; governments blame charlatans or inexperienced developers; developers point fingers at governments that did not keep their end of the bargain.
This article will not focus on the reasons for the failure of Caribbean development projects; this will be the subject of many chapters of my book. Rather, focus will be on the areas of due diligence that investors should delve into prior to making an investment into a Caribbean citizenship by investment project, with the objective of ensuring that an investor selects a credible enterprise that has been designed for completion rather than merely to attract citizenship capital.
Rule number 1: “Location, location, location” counts for CBI projects too
The feasibility of a CBI development project should be founded in logic and, at its simplest, make sense. As with any real estate project, the old adage of “location, location, location” remains a key consideration, also for CBI projects. Given the vast majority of tourists flock to the Caribbean for beach holidays, large hotel developments that are not located on a “swimmable” beach must be heavily scrutinized.
Beachside land in the Caribbean commands a significant premium and investors must ensure that the decision to develop a hotel on a non-waterfront parcel is not symptomatic of a capital-constrained developer. The exception to this general rule is that small, luxury boutique, hillside hotels in the Caribbean hotel can be successful.
Rule number 2: Make sure the developer has enough “skin in the game”
Continuing with the theme of capital adequacy, to achieve success, developers must commit significant equity to their projects. A thinly capitalized project relying solely on cash-flow from citizenship by investment receipts will struggle. That, in turn, will result in continual construction delays.
Cash-flow from sales will ebb and flow based on market conditions, varying citizenship processing timelines, and the competitive landscape. Developers must have “skin in the game”. Development in the Caribbean is far from child’s play and developers need to be fully vested to ensure completion.
Rule number 3: Make sure you know who owns the land
In the same vein, investors should carefully scrutinize the project’s land title documents. Anything less than freehold or long leasehold title registered in the developer’s name should be an immediate concern.
If a developer’s land rights are limited to an option to acquire the project land or the developer has created a charge over the land title in favour of a financier, legal counsel should be engaged to undertake full legal due diligence on the project. At the risk of sounding antiquated, it only makes sense to ensure a developer has fully paid for the project land (outright, without finance) before you invest your capital into their project.
I have come across CBI projects where there is litigation over the project land in which hundreds of CBI investors have invested. In such situations, investors only have themselves to blame for any capital loss that they may suffer.
Rule number 4: Pick a developer that builds to international standards
For most Caribbean developers operating in the citizenship by investment sphere, this will be their first development project. Building on a beach looks simple from afar; however, it is far from a benign construction environment. Execution risks should not be underestimated; supply chain management, availability of skilled labour, and management of sub-contractors are serious challenges across the Caribbean islands and require a special skill set.
Hotel brands will not compromise their brand standards just because a project is located on a tranquil island. Branded Caribbean hotel projects must incorporate the same stringent MEP (mechanical, electrical, and plumbing) and FLS (fire, life, and safety) standards as in all of their North American counterparts; hotel brands are bound by their insurers to ensure this.
So many times, I have asked Caribbean CBI developers if they adhered to NFPA 13, only to be met with a blank glaze. I am sure that after the publication of this article, this will become a well-searched term in Google amongst Caribbean developers as they anticipate your inquisition. Email me separately, and I will share with you some other acronyms for you to test developers.
Press the promoters on questions of development standards, processes, and quality. That’s is a very quick way to identify those projects that have been structured to succeed operationally.
Rule number 5: Look beyond the glossy renderings
Insist on seeing copies of final planning approvals, especially if a project is off-plan. To design a hotel, an army of consultants is required. Case in point: we have engaged more than 20 different design consultancy firms on our Six Senses Grenada project and design costs are in the many millions for a project of this magnitude.
All too often, projects are elegantly promoted on a couple of renderings and high-level sketches but with no underlying substance. This is an indication that the developer has not committed capital to the design process and is waiting to collect your citizenship funds to pay for the design.
Even for the most experienced development team, designing a hotel project takes upwards of 12 months and is a complex process. Request that developers show you detailed drawings and not just architectural ones. Inspect the kitchen, the pool, and the MEP design to ensure they exist (all can be done on Zoom these days).
The absence of these drawings will at best indicate a long delay before serious construction starts, and at worst the absence of an intent to complete (or even commence).
Again, putting this in context, we have submitted over 25,000 drawings for our Six Senses Grenada development to the Grenadian planning department in the past 12 months. An institutional-quality asset starts with institutional-quality design and, more so, with an institutionally-experienced development team.
Echoing this strand, carefully look at construction pictures. Discipline extends from the design into the construction phase. A developer that’s focused on best practices and completion will invest and ensure that simple things like site safety are observed. Absences of simple safety items like boots and hard-hats are all too frequent on Caribbean development sites.
Across our projects, we have had minimal incidents with over 4 million man-hours worked. Negligent deaths and serious accidents on construction sites are signs of inadequate regard being given to construction practices. Inquire into the project’s safety records. A tidy site results in tidy completion – a messy site, the paradigm opposite.
Rule number 6: A well-known brand doesn’t always equate to high quality
The signature of a hotel brand is far from a guarantee that a project will complete. Hotel brands (especially in the 3-4 star category) have been far too quick to enter into hotel management contracts across the Caribbean in their desire to achieve growth.
Caribbean developers all too often seem to drop their own corporate identity in favor of promoting the project exclusively under the third-party hotel brands. Developers should be proud to lead with their own brand and this is the way to develop market trust and confidence.
Delve into the terms of the agreement between the relevant hotel brand and the project. Hotel brands carry out heightened due diligence on promoters and their execution ability when there is a management contract at play rather than just a simple franchise agreement. Indeed, hotel brands are most protective when they enter into agreements for one of their “crown jewel” brands, such as the Ritz Carlton, Park Hyatt, Six Senses, Kempinksi, or Four Seasons.
Rule number 7: Making a hotel look nearly finished is easy, so check how much remains to be done on the inside.
A tell-tell sign of a project that has been conceived primarily to attract citizenship capital rather than to operate as a functional hotel is when a developer rushes to complete the structural work, install windows, doors, and the roofs while the insides remain bare.
In a well-planned project, all disciplines progress in tandem. Structural work only constitutes a maximum of 30 percent of the development timeline and budget, the rest being allocated to MEP and finishing work.
As soon as the empty box takes shape, Caribbean developers all too frequently announce they are opening next year; five years later, they are still opening next year.
It is embarrassing to see young, naïve, well-dressed CBI sales personnel at conferences (and now Zoom calls) peddle these falsehoods. It is a cause for concern once an original delivery date has been missed. The pandemic, which didn’t begin in earnest until 2020, is already being held accountable for developments failing to achieve their early 2019 delivery dates.
When a developer claims he is opening next year, I am sure you will be shown beautiful pictures of an on-site prototype room. Dig deeper and ask to see pictures of the kitchen and laundry installations, advanced MEP work, installation of plant and equipment (generators, sewage treatment plants, air conditioning, and so on), and sanitary ware. These are all long-lead items in the Caribbean and their conspicuous absence should give rise to caution.
Rule number 8: Ask about staff recruitment progression
Opening a hotel is a complex affair; it’s nothing like opening a block of apartments. A hotel is an eco-system of different skill-sets. Typically, for a first-time developer, the hotel’s general manager should be appointed 15-18 months before opening. The general manager, in turn, needs to recruit hundreds of staff (a luxury hotel has a 3-to-1 staff-to-room ratio, at a minimum), train these new recruits, identify procurement channels, and ensure sales and marketing channels are open and effective.
Upon claims by developers that they are opening next year, ask to be shown the CV of the General Manager. When a hotel is nine months out, the entire hotel’s executive team should be recruited. This includes the Chief Engineer, Head Chef, Director of Sales and Marketing, Director of Food & Beverage, and many more. Any claims of an imminent opening must be accompanied by the opening of booking engines – after all, a hotel needs guests on opening day.
The National (the daily newspaper of the UAE) ran an article a few years back highlighting some behavioral patterns of Caribbean charlatans, including flamboyant expressions of extravagance, consorting with sportspeople, the acquisition of various fancy titles, and the adopting of veneers of respectability. Whilst amusing, the article drums home a number of easily identifiable signs of trouble.
The announcement of multi-billion dollar projects on islands where the GDP is a fraction of the project’s required capitalization defies common sense. Logic can not be defied, even in the Caribbean.
It is an investor’s right to undertake due diligence on a project, but knowing the questions to ask is key to ascertaining the likelihood of success.