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Future Tourism Projects In Jeopardy


April 5, 2001
Copyright © 2001 CARIBBEAN BUSINESS. All Rights Reserved.

New investors willing to develop tourism-related projects in Puerto Rico better bring their own financing.

The Tourism Development Fund (TDF), a Government Development Bank (GDB) subsidiary created in 1993 to jumpstart hotel real estate investment by guaranteeing principal and interest, has disappeared.

The reason, according to government officials, is simple: there is no more money left in the TDF pot.

"The TDF was used by the government in a liberal way and it has come to a point where its capitalization has reached its maximum," said Samuel Rosado, deputy executive director of planning and development at the Puerto Rico Tourism Co.

Now the GDB proposes to issue up to 10% in subordinated debt to prospective investors instead of guaranteeing 60% of the total cost of a hotel project to be financed.

The remaining 90% will have to be split as follows: private banking institutions must finance 50% of the total hotel project and the private investors must put up 40% in capital or equity.

"Rather than compete with the private sector, we want to make hotel projects in Puerto Rico more effective," Jose Pagan, first vice president for financing at the GDB recently told CARIBBEAN BUSINESS. "The GDB will be giving priority to those hotel projects with private financing."

"This demonstrates either their total lack of commitment to the development of the tourism industry in Puerto Rico, or their woeful ignorance of market conditions right now, or both," a source formerly involved in tourism development told CARIBBEAN BUSINESS. "As in the early ‘90s [when TDF was created], the market for private financing has dried up. It will be virtually impossible to finance any new major tourism project in Puerto Rico under those terms," the source said.

TDF’s primary mission was to provide credit enhancement, or guarantees, for financing hotel development or tourism-related projects. For example, TDF would be used to guarantee revenue bonds issued by hotel developers through Afica, another GDB subsidiary that issues government-backed, tax-exempt bonds to finance eligible private sector projects.

TDF was originally capitalized in 1993 at $50 million. Based on the top rating received from credit rating agencies, the government was able to leverage the fund on a 10:1 proportion. That meant that through TDF, the government was able to guarantee up to $500 million. Since the TDF would guarantee up to 60% of total project costs based on its $50 million in original capital, the government was able to facilitate approximately $835 million worth of tourism project investments.

Since its creation, the TDF has been or will be responsible for the construction of 13 hotel projects in Puerto Rico or over 3,000 hotel rooms. Starting from the 419-room Ritz-Carlton San Juan Hotel & Casino to the 125-room Caguas Hampton Inn.

"Under the old structure (using the TDF), any hotel could be financed," said Jose Arias, first vice president of UBS PaineWebber Inc. of Puerto Rico. "Now with the government’s 10% participation, it will be more difficult to find private bank financing."

According to the Tourism Co.’s revised room inventory list, there are currently 23 hotel projects under construction, representing 2,300 rooms. Of those 23 hotels, five hotels with a combined room inventory of 1,441 have used TDF.

The list also has 14 hotels ready to begin construction on or before Dec. 31. These hotels will not be able to use TDF, however, the Fairmont Coco Beach Hotel in Rio Grande and the Marriott Courtyard in Isla Verde are two that have already qualified to use the government’s new financing structure.

Reinhard Werthner, general manager of The Westin Rio Mar Beach Resort & Country Club & Ocean Villas, says his hotel would have not been built if it weren’t for the government incentives and the TDF guarantee.

"What made it financially feasible to build in Puerto Rico were those incentives," Werthner said.

The idea of the TDF was born out of a deep economic recession that racked the U.S. in the 1980s. Real estate values plummeted. As Japan’s economy plunged into economic turmoil, Japanese investors, who spent lavishly on landmark real estate, went bankrupt and lost billions of dollars. Thus, private financing for real estate development dried up.

"The reasoning behind the government guarantee was to revitalize hotel construction in Puerto Rico," said Ivan Mendez, president and CEO of Scotiabank. "I believe that once the hotels have stable cash flow during the first five years in operation, they should be able to go to the market and find conventional financing."

However, Mendez’ idea has not materialized because of the way the hotel’s bond issues are structured, which does not allow a hotel owner using TDF to refinance its loan without having to pay penalties.

"The government should subsidize those penalties in order for the hotels to refinance their loans before the five to 10 year call protection," Mendez said. "This way they could re-capitalize the TDF fund."

The first hotel to relieve TDF of its $116 million debt was The Westin Rio Mar Beach Resort & Country Club Ocean Villas in November 1998. It was the first property to benefit from the fund in 1994.

A source whose expertise is in finance told CARIBBEAN BUSINESS that there are a few banks willing to finance hotel projects.

"Banks like to finance seasoned properties that have a track record and are reluctant to take risks with new properties," the source added. "Government incentives to minimize those risks are critical, more so in Puerto Rico, where construction costs are so high."

This Caribbean Business article appears courtesy of Casiano Communications.
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