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Sending The Wrong Message
Millennium Condominium Controversy Has Construction Industry In Uproar; Deemed Fatal For The Industry And For Islands Economy
BY JOSE L. CARMONA
November 28, 2002
The latest report by the Independent Citizens Committee for the Evaluation of Government Transactions, the so-called Blue Ribbon Committee, entitled "Irregularities in the Land Acquisition & Permits Granting process of Millennium Condominium in San Juan"in which committee members recommended the condominiums demolition if irregularities in the permits process are foundhas everyone in the construction industry in an uproar.
Construction industry representatives questioned by CARIBBEAN BUSINESS described the recommendation and the controversy behind the building as "absurd," "ridiculous," "insane," and "pure, raw politics."
Professional organizations such as the Puerto Rico Homebuilders Association (PRHA) and the local chapter of the Associated General Contractors of America (AGC)and their respective membershave publicly condemned the committee and its recommendation.
"It is our understanding that the decision by the Blue Ribbon Committee relating to the Millennium Condominium has no legal value whatsoever, shows a total ignorance of our industry, and is incredibly damaging to the well-being and stability of our local economy," reads a prepared statement by the PRHAs board.
"Additionally, it places the future financing of our projects in jeopardy, reduces the credibility of the governments commitments, and adversely affects Gov. Sila Calderon and her administrations ability to promote economic activity and jobs for Puerto Rico," added the PRHA.
Despite Gov. Sila Calderons assurances that the demolition of the Millennium Condominium is unlikely, construction industry representatives insist the idea has created further uncertainty about the validity of government-issued permitsalready in question by financial institutionsand about the entire process, casting a cloud of doubt among investors.
"This isnt the first time the AGC and other associations have stated that we must provide strength and validity to the permits already issued. I think its time we have some guarantees and put an end to the uncertainties, because these bring terrible problems," said local AGC President Jose Gonzalez Nolla. "These uncertainties could paralyze the private sector, because no one would dare to invest here."
For Levitt Homes President Rafael Torrens, if irregularities are found in the permits-granting process of the Millennium, the government must take legal action against those who committed the wrongdoing. It mustnt penalize those who had nothing to do with the circumstances, such as banks, mortgage lenders, and homebuyers.
When Torrens first heard about the idea to demolish the building, he was shocked and dumbfounded; he couldnt believe someone could even suggest such a thing.
"The idea of demolishing the Millennium is totally absurd," Torrens said. "First of all, theres a $36 million loan with a bank; there are 25 families already living there; and there are mortgages. It causes damages to the developer, to the bank, to those who bought apartments, to the mortgage lenders, to the title companies, and to those who are already living there. It will make it much more difficult to secure financing for projects like this one," Torrens said.
Local financial institution Banco Bilbao Vizcaya Argentaria Puerto Rico (BBVA), which provided the $36 million construction financing to Millenniums developer, said in a corporate statement that "one of the main requirements established by BBVA to grant this type of financing is that it must comply with all required permits for real-estate projects, the same way other financial institutions do.
"The trust in the validity of issued government permits is one of the main foundations on which any countrys economic development is based," BBVA continued. "Just as in any other real-estate financing project, BBVA financed the Millennium Condominium project using the best financing practices and in support of Puerto Ricos economic development."
Bird Construction President Miguel Sabater believes the idea to demolish the condominium is an extreme one which will never be a solution. Hes confident Gov. Sila Calderon wont allow it, because to do so would send a fatal message.
"This could be disastrous for the closings and for the mortgages. Im sure it is already affecting the ability of Millennium developer Cesar Cabrera to close those cases that have optioned or have given a down payment," Sabater said. "It affects a lot of people, because of the construction industrys multiplier effect on the economy."
It is estimated the construction industry generates 85,000 direct jobs and has a multiplier effect of three, meaning it generates at least 255,000 indirect jobs throughout Puerto Rico.
Sabater considers the Millenium a good construction project, a gem that enhances the area and shouldnt be torn down.
"Its impossible that demolishing the building can be a solution, especially when theres a housing shortage and a general government directive to densify the metropolitan area," Sabater said. "The way to densify is by building up. This project is in harmony and in accordance with everything it pretends."
Both Torrens and Gonzalez Nolla pointed out that the Blue Ribbon Committees report on the Millennium comes a little too late, since the project has been in the public limelight for several years, has gone through a long and arduous permitting and environmental process that allowed people to express their opinions on the project, and, whats worst, there are homeowners already living in it.
"You dont hide a 17-story apartment building in your pocket and suddenly bring it out to public view. It went through a five-year permits process, during which people had an opportunity to express their opinions on and objections to the project. Its a little too late to wait until now, when there are people moving into the building, to come up with the idea to demolish it," said Torrens. "It sends a fatal message to investors, to the banking industry, and to the secondary markets on which banks depend to sell the mortgages. Its a totally negative message for Puerto Ricos economy in general," said Torrens.
"Why are you going to question and investigate everything now? Why now, when projects go through a lengthy process to obtain the necessary permits?" asked Gonzalez Nolla. "This goes straight to the islands economic core, the construction industry, the trust of those who invest, and the jobs they generate. This affects everyone," he said.
Gonzalez Nolla describes the construction industry as the backbone of Puerto Ricos economy.
"Theres a lot of investment involved. What is happening is extremely worrisome, with the validity of permits being constantly questioned," said Gonzalez Nolla, who is also president of Nogama Construction. "It has reached a crisis level and we need to find a solution."
Those questionedincluding several who spoke off the recordexpressed deep concern over the governments increased efforts to investigate transactions involving the private sector, as was the case with the Millennium Condominium.
The Blue Ribbon Committee was created by an executive order to evaluate government transactions. The Millennium is the committees first report involving a private-sector project. So far, all the committees investigations have been aimed at the past administration, raising concern among some of the interviewees who didnt want to be identified that it has a political agenda.
Some in the construction industry are even afraid to ask for variances (changes) on their projects, fearing it will raise a red flag that could open them to further scrutiny. Variances are common in construction projects and are regularly granted by government agencies, according to industry representatives.
In fact, the governor recently ordered a variance of land use, from agricultural land to industrial-use land, for Abbott Laboratories $350 million biotechnology plant in Barceloneta. Gov. Calderon felt the variance was necessary to help create 800 jobs.
"It sure sends an intimidating message, threatening to demolish a project that has obtained all its permits through a five-year process. But whats even more worrisome is the possibility of more evaluating forums to which we will be required to ask for avail, in addition to the regular government permits-granting agencies, when we present a project," said Sabater. "This could become ineffective."
Sabater added that the courts have intervened in some cases; the Legislature wants to intervene in others. In the case of the Millennium, a government-sanctioned committee intervened. With so much scrutiny, financial institutions will end up preferring to put their money in nondevelopment projects.
"The increased scrutiny will make it extremely difficult for developers, who already deal in a very high-risk industry such as construction," said Sabater.
Gonzalez Nolla noted the Millennium isnt the first project to come under attack because of variances or possible irregularities in the permits process. According to published reports, last year there were over 40 projects whose permits were questioned.
"Last year there was Princesa del Mar and the Madeira Condominium, just to mention two. Although these cases came under fire for different reasons, their essence is the same," said Gonzalez Nolla. "You have an investment; you have gone through a permits process. Where do they want to take us with this? Once permits are issued, they should be final. How can you obtain financing if financial institutions lose faith in the approved permits a developer presents? This is bad not only for the industry but also for the islands economy in general. It creates an unnecessary atmosphere of uncertainty among investors who provide the financing for projects like these," said Gonzalez Nolla.
Last year, then Government Development Bank President Juan Agosto Alicea also suggested the implosion of the Puerto Rico Coliseum when at that time it had been more than 50% completed by the last administration.
The Blue Ribbon report
In its 77-page report on the Millennium Condominium, the committee alleges that several government permits-granting agencies committed violations by issuing or approving illegal variances to the project. The report also includes developer Cesar Cabrera, his development company Rocca Development, former Highway & Transportation Authority Executive Director Sergio Gonzalez, and Juan Woodroffe, former president of the Puerto Rico Industrial Development Co. (Pridco), the government agency that owned the land.
Among the main irregularities mentioned by the Blue Ribbon Committee is the sale by Pridco in 1995 of the plot of land to Cabreras Rocca Development for $800,000 below its appraised value. Real-estate appraisal firm Robert McCloskey & Associates valued the land at $1.2 million, while the committee places its real value at $2 million.
McCloskey & Associates is considered one of the most prestigious appraisal firms in Puerto Rico. Its appraisals have been highly regarded and have been accepted by all financial institutions in Puerto Rico for many years.
The committee alleges the sale of many parcels of real estate owned by Pridco intensified under President Woodrooffe, who placed everything relating to the evaluation and sale of Pridco-owned real estate in the hands of Juan Jorge Hernandez, then the agencys vice president of finance.
The report also alleges that at the time of the sale, Rocca Development was not an accredited corporation at the State Department. Moreover, both the Regulations & Permits Administration (ARPE by is Spanish acronym) and the Planning Board allegedly approved the projects land consultation over the objections of the Land Use Consultation Bureau and authorized illegal variances that went against the governments own regulations.
The allegedly illegal variances mentioned in the report include the approval to build 17 stories instead of the allowed eight; the construction of the building on 6,600 when 9,584 square meters were required according to regulations; a 200-square-meter childrens play area where 600 square meters were required; issuance of a temporary permit for the buildings entrance and exit road access; and the Highway Authoritys commitment to invest $1 million for the acquisition of an adjacent plot of land for the construction of a permanent access to the building, requiring the developer to contribute only $96,162.
Members of the Blue Ribbon Committee included nine recommendations with their report. Among them is the suggestion that the Planning Board and ARPE not issue endorsements or additional permits to either the Millennium Condominium or individual apartment owners.
Additionally, the report recommends that in the event the Justice Department determines that issued permits were obtained illegally or that theres evidence that influence was used to obtain the necessary permits for the projects, all issued permits should be void and the condominium demolished.
Cabrera is executive director of the Republican Party in Puerto Rico and a relative of former Department of Transportation & Public Works (DTOP) Secretary and current New Progressive Party President Carlos Pesquera. Blue Ribbon Committee Chairman David Noriega has publicly said, "The only explanation for the irregularities in this case is that there was favoritism."
Despite his allegations, Noriega admitted the Blue Ribbon Committee has no evidence of any monetary compensation to government employees for the alleged favors.
The Calderon administration issued the construction and use permits for the Millennium Condominium from DTOP and ARPE on Sept. 17, 2002 and Oct. 17, 2002, respectively.
Blue Ribbon Committee reports issued to date:
Source: Blue Ribbon Committee
This Caribbean Business article appears courtesy of Casiano Communications.