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Government and Cayo Largo Partners in negotiations
Both sides discussing settlement in latest bid to get $118 million resort project back on track
By LORRAINE BLASOR
May 27, 2005
The fate of Fajardos Cayo Largo InterContinental Hotel may hinge on a settlement plan the partners in the project submitted to the government agency that is trying to foreclose on the property.
Javier Ramos-Luiña, executive director of the Puerto Rico Tourism Development Fund (TDF), a subsidiary of the Government Development Bank, acknowledged a settlement plan is on the negotiating table but declined to give any details. The $118.6 million, 314-room project, scheduled to open in Fajardo in fall 2001, is 95% complete yet mired in a tangle of litigation, including a lawsuit TDF filed in federal court to assume the property through foreclosure. TDF helped finance the project with a $75.3 million bond sale.
"If we reach an agreement, it is to find a solution and make the project viable," said Ramos-Luiña, adding that the goal is "a transaction that makes sense for all the parties involved."
In order to foreclose on the property, TDF first had to payoff the projects bondholders, an action the agency has resorted to on a few other tourism projects it has helped finance in recent years. When asked if this might have an impact on the success of future bond sales, Ramos-Luiña offered a qualified response.
"Yes, we have called in many bond sales, and it could have an effect on investors. Remember, when a retail or institutional investor buys bonds, it is with the expectation of receiving a yield for the life of the loan. If the investor is paid ahead of time, then he must reinvest in another instrument that might not produce the same yield. There could be an impact on [future] tourism projects, but the market will determine that in its own time."
Opening Cayo Largo will require more than $30 million in additional financing, according to Ramos-Luiña. The money is needed to pay for additional costs incurred in building the resort, plus soft costs and expenditures related to furniture, fixtures, and equipment.
However, the $30 million figure could escalate as long as the property remains shuttered and suffers inevitable deterioration. Ramos-Luiña said that for a period of six months, between November 2003 and May 2004, TDF spent an amount of money, which he didnt disclose, to pay for maintenance costs that were the responsibility of the owners. These costs included security, maintenance on the golf course, and electricity and air-conditioning costs.
Meanwhile, a source close to the negotiations told CARIBBEAN BUSINESS the settlement would give TDF clear ownership of the property and effectively terminate all the suits revolving around the project. On the other hand, he suggested any quick action is unlikely given that the settlement package is "one of the most complex ever seen in Puerto Rico in years."
The owners of Cayo Largo include Daniel Shelley, president of the Puerto del Rey Marina in Fajardo; Fuentes Construction Co. owner Gabriel Fuentes; Suárez & Co. chief executive officer Diego Suárez; Entrepreneur Manuel H. Dubón: and Resort Services International, a partnership between an affiliate of InterContinental Hotels Corp. and Buena Vista Hospitality Group. Their plan was to build a first-class plantation-style resort that included a "great house" and smaller buildings set in clusters on both sides of the main building.
The project kicked off in 1999 with the sale of $75.3 million in bonds issued by the Puerto Rico Industrial, Tourism, Educational, Medical, & Environmental Control Facilities Financing Authority. This money was then lent to Cayo Largo Hotel Associates by TDF, which was the guarantor of the bond issue.
Ramos-Luiña said, by 2002, the project was behind schedule and facing multimillion-dollar cost overruns. He said the partners tried to obtain additional TDF financing (around $10.6 million to be matched by the partners in an equal amount for a total of $22 million), but the agency determined a higher amount than that was needed to make the project viable and no agreement was reached.
Currently, the project is mired in a veritable spider web of litigation, including lawsuits by service providers and suppliers who are suing Gabriel Fuentes Jr. Construction for unpaid bills and a lawsuit by Cayo Largo Hotel Associates against Baltimore-based United States Fidelity & Guarantee Co. for breach of contract. The bonding company allegedly refused to honor the performance bond that obligated it to pay suppliers and fulfill the contractors obligation to complete the project.
This Caribbean Business article appears courtesy of Casiano Communications.