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A Matter Of Trust

Uncertainty Over The Validity Of Government-Issued Construction Permits Is Worrying Investors And Financial Institutions. Now Even The Legislature Wants To Have A Hand In The Permitting Process.


May 29, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

Under siege: Endless hurdles and challenges to local developers in getting their projects off the ground could bring the construction industry and the island’s economy to a grinding halt.

Construction has been Puerto Rico’s most dynamic sector and its economic backbone since the 1990s, growing faster than most other sectors and helping to sustain the local economy’s overall growth.

Since 1999, the total value (public and private) of the island’s construction activity has surpassed the $6 billion mark each year, reaching a record high of $6.9 billion in fiscal year 2000.

In recent years, though, local developers and their multimillion-dollar projects, which would bring thousands of jobs and spur much-needed economic activity throughout the island, have come under siege and, in many cases, to a full stop.

Route 66, the Condado Trio, Princesa del Mar, Madeira Condominium, the Golden Triangle Convention Center, the Millennium Condominium and, most recently, Paseo Caribe in Puerta de Tierra are a few examples of the more than 40 construction projects around the island whose government-approved and -issued construction permits have been stalled, questioned, challenged, and even revoked, either by the communities or by the government in local courts and in other forums.

Paseo Caribe, the latest victim

As if the all the government red tape and the horribly long and costly permitting process weren’t enough, developers and their projects might now have to face the scrutiny of the legislative branch--even if they have the green light from the appropriate government agencies and the executive and judicial branches.

Such is the case of developer Arturo Madero, managing partner of San Geronimo Development Corp., and his megaproject Paseo Caribe, a $200 million tourist, residential, and entertainment complex being built next to the Caribe Hilton hotel in Condado.

Construction of Paseo Caribe began eight months ago and so far, Madero and San Geronimo Development Corp. have invested $26 million in the project. Additionally, a $115 million interim construction loan was obtained from FirstBank.

It took three-and-a-half years of battling government bureaucracy and legal challenges to obtain the necessary government approvals and building permits for Paseo Caribe. Concessions included altering the project’s blueprints to satisfy neighbors opposing the project.

Paseo Caribe’s opponents are residents of San Luis Condominium, which is adjacent to where San Geronimo Development Corp. plans to build Caribe Plaza, a 21-story condominium with 46 luxury apartments. Paseo Caribe has four main components that make it a world-class entertainment destination: the Condado Lagoon Villas condo-hotel, an entertainment & retail center, the Caribe Plaza condominium, and a 1,700-vehicle parking structure.

So far, the Puerto Rico Supreme Court and the Appellate Court have each issued two decisions in favor of the project. Additionally, Paseo Caribe has received the support of both the Rossello and Calderon administrations.

Project has government’s backing

"Paseo Caribe is a beneficial project for Puerto Rico as a tourist destination because it provides entertainment options that are much needed not only for tourists but also for island residents," said Jose Suarez, executive director of the Puerto Rico Tourism Co.

Economic Development & Commerce (EDC) Secretary Milton Segarra said he also backs the project. "Paseo Caribe is a major economic project for Puerto Rico," he said. "The project entails more than $200 million in private investment, which proves the good investment atmosphere in Puerto Rico."

"The executive branch of the government has been totally behind the project," said Madero. "The support we’ve received from EDC Secretary Milton Segarra has been significant and much appreciated."

All the government agencies that had to approve a project such as this one under the Rossello administration studied Paseo Caribe and gave the developer the go-ahead by issuing all the necessary permits. When Gov. Calderon took over in 2001, those same agencies under her administration reviewed all the permits and issued new ones for the project.

Some community members raised questions about the project’s impact on the community and took the developer to court. On four occasions, the courts ruled in favor of the developer.

Legislature wants to step in

Once again, the developer started to move forward with the construction and once again the project was stopped, this time by the Legislature, which now wants to review the entire project.

In the meantime, the bank that provided the construction financing has no way out because there obviously haven’t been any closings on any of the optioned units, from which the bank would normally get paid. Because of all the hold-ups over the past three-and-a-half years, the developers have already had to pay interest on the loan when the project has barely entered the construction phase.

Rep. Luis Raul Torres, chairman of the Municipality Development Committee, is calling for public legislative hearings on the project, even though Paseo Caribe has received all the required endorsements and approvals from all the permitting agencies, followed all the regulations, and prevailed in court four times.

Repeated calls were made to get comments from Rep. Torres and House Vice Speaker Ferdinand Perez, but there had been no response as of press time Monday.

Construction industry representatives contend the uncertainty about the validity of government-issued permits--and now the intrusion of the legislative branch--is scaring investors and making it much more difficult to secure financing. They claim this is hampering the island’s economic development and competitiveness. Some local developers and investors, in fact, are looking into moving their operations to the Dominican Republic or Florida if the situation isn’t resolved soon.

Consider, for instance, that upscale hotel chain Four Seasons said three weeks ago that it might abandon plans to open a hotel resort in Puerto Rico if its $579 million project is rejected again (CB May 8). The Toronto-based company has been planning for 10 years to manage and partially own a five-star hotel on three plots between Luquillo and Fajardo.

Two weeks ago, officials from the Hyatt Regency Cerromar Beach Resort & Casino announced they would be closing the resort on July 16, after 18 years in operation. The hotel’s closing will leave 800 workers jobless, though some will have the opportunity to transfer to other Hyatt properties, including the Hyatt Dorado Beach.

In light of this bleak scenario--plus mounting competition from the Dominican Republic’s competitively priced all-inclusive resorts--many industry observers have been asking the local government to act as an aid rather than a hindrance. Industry sources contend the proposed House hearings on Paseo Caribe will only further delay a project that would generate much-needed jobs and economic activity and, most importantly, would secure Puerto Rico’s position as a major player in the Caribbean and in the world.

Construction & banking industries react

Professional organizations such as the Puerto Rico Homebuilders Association (PRHA), the local chapter of the Associated General Contractors of America (AGC), the College of Architects & Landscape Architects of Puerto Rico, and the Puerto Rico Bankers Association have publicly expressed their concerns about the questioning of government-issued permits and the intrusion of the legislative branch on private-sector projects.

Homebuilders: Not good for Puerto Rico

"The message of the association and of the construction industry is that this doesn’t do Puerto Rico any good," PRHA President Federico Stubbe told CARIBBEAN BUSINESS. "If this continues, it will scare away investment capital. We are extremely concerned."

Stubbe said Paseo Caribe is a significant project that will make the new convention center, the Caribe Hilton hotel, and the entire Condado area much more attractive, which will bring more visitors and more money to the island. This type of project, he added, is very important to the island’s competitiveness in the global market.

"The political sector must understand that Puerto Rico is part of a highly competitive world, where we don’t control the flow of investment because capital knows no frontiers," added Stubbe. "What they [politicians] are doing is instilling a lot of fear of this kind of project among investors and scaring them away. They will invest somewhere else."

Stubbe believes we can have local differences; however, we can’t afford to allow these differences to damage the island’s competitive position in the world, which is what the Legislature is doing by engaging in what he calls an inquisition. "We must project Puerto Rico as a productive, safe, and politically stable place, where we welcome investors and their investment. This, in turn, will benefit workers in Puerto Rico," said Stubbe. "This inquisition represents political instability from the investors’ point of view."

Stubbe said this type of legislative investigation, whose main purpose is to paralyze projects, must end. "This isn’t only about Arturo Madero and Paseo Caribe. It’s about any person who wants to make a good-faith investment in Puerto Rico," said Stubbe. "Unless we develop a viable economy in Puerto Rico that is productive on a global scale, we aren’t going to be able to compete and survive."

AGC: Legislature sending a negative message

For Elpidio Rivera, president of the local AGC chapter, the Legislature’s intention to evaluate a project that has already received the endorsement of every government agency there is, not to mention the court’s blessing, sends a negative message to the construction industry, developers, investors, and financial institutions.

"Government-issued permits have lost credibility. This goes beyond the stoppage of a project; it means bringing the construction industry to a halt, as the private sector and financing institutions depend on the permits and the agency endorsements," said Rivera. "Every case like this one creates panic and chaos in the financing and construction sectors."

Rivera said the AGC has been clear in that the validity of government-issued permits should never be questioned. If someone committed a crime in issuing a permit, that person should be investigated and punished, but the permit should be honored. "If someone can dispute or refute a permit once it has been issued, no one will have trust in the system," said Rivera. "I and past AGC presidents have taken this message to Gov. Sila Calderon through her construction industry advisory committee."

Rivera reiterated that since Paseo Caribe has legally obtained all the required permits and received the court’s blessing, any legislative inquiry into the project would hurt the entire construction industry, not just Arturo Madero’s project. "It will harm the construction industry at a time when it needs to move forward, when it needs trust and confidence to get the economy going," said Rivera. "Gov. Calderon and her advisers are well aware that the construction industry is the catalyst that will move the economy forward, but this action by the Legislature certainly doesn’t help."

The local AGC president said he was confident the construction industry would progress for the industry’s and the island’s sake, but there can be no uncertainty over issued permits. "All these megaprojects depend on bank financing, which is approved by each bank’s board. If the permits are questioned and rendered invalid after the financing has been issued, the bank will lose its investment and its credibility," said Rivera. "Someone has to take the bull by the horns before it’s too late."

Architects: Legislature adding yet another stage to the process

Emilio Martinez, president of the College of Architects & Landscape Architects of Puerto Rico, said the organization is concerned that these legislative hearings will send a negative message to the construction industry and especially to investors.

"Paseo Caribe went through not only the entire permitting process but also the courts, which found the project to be in order," said Martinez. "Now the Legislature wants to add yet another stage to the process."

Martinez said that although developers are in the business of making money, they risk a lot, investing time and money in a project’s permitting process. Martinez believes the Legislature is interested in Paseo Caribe only because of a few isolated cases in which the permitting process wasn’t followed according to regulations, casting doubt on the projects and their permits.

"The doubt is there. That’s why you have the Legislature and other forums wanting to inquire further," said Martinez.

At the heart of the Paseo Caribe case, according to Martinez, are the neighbors living next to the project. He said that although he understands the neighbors’ initial objections to the project, there is a government directive to densify that area.

"Where once stood just a hotel, a condominium, and three houses will be more people and more structures. At first, people will reject it, but the project is part of the densification process," said Martinez. "Cities are better when more people live in them."

Martinez believes that before calling for a public hearing on a project, the Legislature should perform an internal investigation on the project’s permitting process and, if needed, issue a statement. If no irregularities are found, it should leave the developer and the project alone.

"Unfortunately, it seems we will have to show up at the Legislature a few times, unless this is stopped," he said. "This is worrisome because in addition to the permitting process, developers will have to go through a legislative process to get their project off the ground."

Bankers raise their concerns, too

Arturo Carrion, executive director of the Puerto Rico Bankers Association, believes that with Paseo Caribe, the Legislature is trying to assume the duties not only of the executive branch but also of the judicial branch.

"We must honor the permits issued in Puerto Rico, especially if the project went through a thorough screening by two administrations and even got the green light from the courts, as Paseo Caribe did," said Carrion. "These proposed legislative hearings shouldn’t be allowed to have any consequence, because the executive and legislative branches have already ratified the Paseo Caribe project."

Carrion said this action by the Legislature deteriorates the investment climate in Puerto Rico and shouldn’t be allowed, especially when the government is trying to attract investment. "We can’t allow permits to be revoked once issued, because no one will trust the permits or the courts," he said. "Paseo Caribe not only has the permits but was under construction with a loan issued by a bank."

Banks have become increasingly concerned with the rash of lawsuits by neighbors and environmental groups opposing approved construction projects involving condominiums, resorts, and housing projects. When courts halt construction to study a case, workers are displaced and the committed financing is put on hold, thus raising a project’s costs, which the developer ultimately must pass on to buyers.

Industry observers agree that if this trend continues, it risks the credibility of the entire system, including the financing and permitting sectors.

House’s job is to legislate

New Progressive Party House Minority Leader Anibal Vega Borges said the House should only legislate and facilitate economic development in Puerto Rico, but that purpose changed with the arrival of the Calderon administration in 2001.

"With the change in government came a change in focus. Under the Rossello administration, permits were respected and priority was given to the construction industry," said Vega Borges. "What we have now are different dynamics."

What the Legislature must do, according to Vega Borges, is to be more prudent with these investigations so that investors don’t get the impression that the system could collapse at any moment. "The real danger lies in relaying a message that even though you build a project legally and according to regulations, someone else could revoke the permits and you could lose your investment," he said.

Vega Borges said he doesn’t know the reason behind the hearings on Paseo Caribe. He speculated, however, that they might have to do with future legislation to regulate that type of project or with investigating possible irregularities during the project’s permitting process.

"Beyond that, however, there’s nothing more the House can or should do," Vega Borges said. "Once you comply with all the agency requirements and the permits are issued, you are operating under the law."

CARIBBEAN BUSINESS Associate Editor Evelyn Guadalupe-Fajardo contributed to this story.

$200 million Paseo Caribe megaproject will generate more than 2,000 jobs during construction plus 700 direct, 1,500 indirect jobs when operational

Paseo Caribe, the $200 million megaproject under construction in San Juan, is the dream of local developer Arturo Madero, managing partner of San Geronimo Development Corp.

The project, owned and privately financed by San Geronimo Development Corp., will generate more than 2,000 much-needed jobs during its construction plus 700 direct and 1,500 indirect jobs once operational.

Paseo Caribe will be situated on Caribe Hilton’s 5,400-square-meter outdoor parking lot, near Fort San Geronimo, and on a 20,000-square-meter lot next to the hotel that once belonged to the U.S. Navy.

Facing Condado--the island’s premier tourism sector--this new construction will boost the Caribe Hilton’s room inventory from 645 rooms to 930, the largest number of any hotel on the island. Paseo Caribe’s proximity to the new convention center will make the Caribe Hilton the ideal hotel choice for group business travelers.

"This is a world-class project, the work of more than 25 top professional consulting firms that have created a unique development in Puerto Rico," Madero told CARIBBEAN BUSINESS. "Paseo Caribe represents the efforts of a private sector that believes and understands the need for this type of project, which will create jobs, generate revenue, and improve the quality of life in Puerto Rico."

After three-and-a-half years of battling with government red tape and in courts for the necessary government approvals and building permits, construction of Paseo Caribe began eight months ago. The project has not only received the endorsements and approvals of every government agency there is, but has prevailed in four court challenges involving some 192 legal actions.

According to Madero, the project has received the support of both the Rossello and Calderon administrations. Recently, Economic Development & Commerce Secretary Milton Segarra also backed the project.

Paseo Caribe has four main components that make it a world-class entertainment destination: the Condado Lagoon Villas condo-hotel, a retail & entertainment center, the Caribe Plaza condominium, and a 1,700-vehicle parking facility.

Designed by local architectural firm Jimenez & Rodriguez Barcelo, the 88 luxury Condado Lagoon Villas--the equivalent of 264 hotel rooms--will be leased to the Caribe Hilton for 10 years. Owners will be able to use the property 60 days out of the year. Net income to Hilton International for renting the villas will be split with property owners, who will receive 55% of the profit.

The Paseo Caribe complex will also boast a state-of-the-art entertainment & recreation center with restaurants, retail stores, a 22,000-square-foot casino, and cinema lounges featuring big-screen monitors surrounded by some 200 tables where guests can sit and order food and drinks from the theater’s own restaurant and bar while watching a movie.

Some 75% of the entertainment center, designed by Beame Architectural Partnership, will be air-conditioned. An outdoor grand plaza overlooking the Condado Lagoon will include the restaurant portion of the complex.

A promenade called Paseo San Geronimo will connect Ponce de Leon Avenue to the hotel, allowing visitors to stroll between Ponce de Leon Avenue and Fort San Geronimo, which isn’t possible right now. The $3 million promenade, designed by Bruce Howard & Associates and Gabriel Berritz & Associates, will be shaded and will measure 380 meters long and eight meters wide, providing plenty of room for families to walk together.

The Enrique Marti Coll path for cyclists, joggers, and walkers will stretch from Dos Hermanos Bridge along Ponce de Leon Avenue to the Caribe Plaza condominium. Paseo Caribe will have both underground and aboveground parking for more than 1,700 vehicles, including valet parking. There will be an entrance on Ponce de Leon Avenue and direct access to the Caribe Hilton’s existing parking lot.

"The new access to Paseo Caribe via Ponce de Leon Avenue was designed to alleviate the traffic jams that usually occur in front of the Caribe Hilton," said Madero. "The new parking facility will have five gates to allow departure without causing traffic jams."

The Caribe Plaza condominium will be a 21-story high-rise with 46 luxury apartments, including six penthouses. The 3,500-square-foot apartments will start at $1.3 million. Penthouses will o occupy 5,200 square feet each on the sixth floor and up, above the entertainment center.

The condominium will include a gym, a swimming pool, and gardens. Connecting the villas and apartments will be a central lobby and elevators to the floors above the entertainment center.

Construction firms F&R Construction and Dick Corp. are Paseo Caribe’s general contractors.

Consultants on Paseo Caribe

Architects: Project

Jimenez & Rodriguez Barcelo Condado: Lagoon Villas

Beame Architectural Partnership: Entertainment Center

Sierra, Cardona & Ferrer: Caribe Plaza condominium

Other Consulting Firms: Specialty

Alexis Molinari & Associates: Environmental consultants

Law Gibb Environmental Health & Safety: Environmental studies

Mark V and Richard Espinoza: Project management

Rolf Jensen & Associates: Safety code consultants

Jesus Vega and Virginia Rivera: Archeological studies

Suelos Inc.: Geotechnical studies

Enrique Blanes, EBP Design Group: Civil engineering

Gabriel Berritz & Associates: Landscape design

Bruce Howard & Associates: Landscape design

Jorge Rossello: Interior design

Theo Kondos & Associates: Lighting

Cordova & McCadney: Traffic study

David McKloskey: Structural engineering

JGP Engineers Group, Juan Requena & Associates: Electrical & mechanical engineering

Walker Parking: Parking studies

Karian Will & Associates: Leasing agent

RDWI: Wind analysis

Redmond Shwatz Design: Graphics

Luis Irizarry & Associates, Francisco Troncoso: Federal Aviation Administration studies

Marchand ICS Group: Public relations

Sanches Betances and Sifre: Legal advisers

Pietrantoni, Mendez, and Alvarez: Legal advisers on contracts

Jose Campo: Scale model

Source: San Geronimo Development Corp.

Stubbe: Puerto Rico needs megaprojects such as Paseo Caribe to compete as a world-class destination

For Federico Stubbe, president of the Puerto Rico Homebuilders Association, Paseo Caribe is one of several megaprojects in which the inefficiency of the government apparatus has been painfully evident.

"It clearly demonstrates that all investments are at risk, that there’s no political stability from the investor’s point of view," Stubbe told CARIBBEAN BUSINESS. "There’s a movement to attack projects that intend to position the island competitively in the world. We must solve this situation as soon as possible."

In addition to Paseo Caribe, Stubbe mentioned Dos Mares and Four Seasons in the Luquillo-Fajardo area as important projects that are facing tremendous challenges in the permitting process and are hanging in the balance.

Three weeks ago, upscale hotel chain Four Seasons said it might abandon plans to open a hotel resort in Puerto Rico if its $579 million project is rejected again (CB May 8). The Toronto-based hotel brand has been planning for 10 years to manage and partially own a five-star hotel on three plots between Luquillo and Fajardo, but it has been thwarted at every turn.

Stubbe explained that these projects are aimed at the top of the market--affluent people with plenty of disposable income. The Dominican Republic and Florida are becoming quite successful at attracting these customers; these destinations have made the development of luxury second and third homes a big business.

"Our projects are having terrible difficulties, stemming from a lack of vision about how we are going to position ourselves, how we are going to make a living," said Stubbe.

According to Stubbe, two areas in which Puerto Rico can become competitive are finance and entertainment (service sector, including hotels and resorts). The island has a solid financial base and Puerto Ricans are an excellent market for entertainment. We can no longer only rely on the manufacturing industry to provide economic development and jobs, Stubbe added.

"We must also develop the entertainment business because it’s a natural for us, but that requires vision," said Stubbe. "Living in Puerto Rico should be like living in a big park. If we can turn the island into a big park, attracting visitors who will spend money here, then we are going to be very successful in the entertainment business. Who doesn’t like to visit a nice park?"

Stubbe said we don’t need outside investors to make these projects a reality, because there are already developers here, like Arturo Madero, who are willing to invest in Puerto Rico.

The island is being counterproductive, said Stubbe, when the most sophisticated and most beneficial projects--such as Paseo Caribe and Four Seasons, which can bring in money and jobs--are being attacked while those that are indiscriminately affecting the environment are allowed to proliferate.

"Take Piñones, for example," said Stubbe. "For years, the Katz family has been trying to develop a well-planned project [Costa Serena] to compete in the world, yet makeshift food stands are allowed to be built there. How do these people get the permits for these businesses? Do they pay for water or electricity? Where are they disposing the waste? How can this be allowed?"

Contrary to what some people claim, projects such as Paseo Caribe aren’t "ghettos for the rich" but "creators and processors of jobs," Stubbe said. "These are the new factories for Puerto Rico and the world, which will provide benefits and jobs for those who really need them."

Stubbe said Puerto Rico needs to find how it’s going to process and attract money, and building world-class resorts such as Paseo Caribe is one of the best ways to do that, as they create much-needed jobs.

"We must prepare Puerto Rico to become more competitive in terms of education and infrastructure, so we can be among the top 15% that control the remaining 85% of the world," said Stubbe. "If we don’t do it, how are we going to survive in this highly competitive world?"

Stubbe plans to meet with House Speaker Carlos Vizcarrondo, Senate President Antonio Fas Alzamora, and Chief of Staff Cesar Miranda to address these issues.

This Caribbean Business article appears courtesy of Casiano Communications.
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