Latin America Collection

It is important to keep in mind that running a business in
Nicaragua is not like managing a business in North America or
Europe; Nicaragua has a different labor code, work ethic and
business culture.
In order for a foreigner to own a business, a Nicaraguan
corporation or Sociedad Anónima should be formed (see above).
We also recommend that you do a thorough feasibility study
before investing. Spend several months ­ at least ­ thoroughly
analyzing the potential, and getting acquainted with the country
and its culture. Don't assume that what works in the U.S. will
work in Nicaragua. Check out restrictions and the tax situation.
And most important, choose a business in which you have a vast
prior experience. It's much more difficult to familiarize yourself
with a new type of business in a foreign country.
Remember, a trustworthy partner or manager can mean the
difference in success and failure. Make sure you choose a partner
with local experience. Don't trust anyone until you know him or
her and have seen him or her perform in the work place.
You will be doomed to failure if you intend to be an absent
business owner. It is hard enough to run a successful business
while you are here and on top of the day-to-day transactions and
happenings. Doing so from abroad is near impossible.
Familiarize yourself with the labor code and your responsibilities
and obligations under the law. The law is in place whether or not
you are familiar with it. Ignorance of the law is not a valid
defense for not complying with it.


Be sure you have enough money in reserve in case of an
emergency. You should have an ample reserve of capital to fall
back on during the initial stage of your business in case things get
rough.
Talk to people, especially the "old timers," who have been
successful in business. Learn from them; there is a reason they
are still in business and they have probably committed errors that
you can learn from and avoid.
Don't rush into anything that seems too good to be true. Trust
your intuition and gut feeling at times. However, the best
strategy and rule of thumb is: "Test before you invest."
About three in ten foreigners succeed in business in Central
America. For every success story, and a lot of failures (in areas as
diverse as bars, restaurants, car-painting shops, language schools,
real estate, tourism, bed & breakfasts to name a few). Don't
assume that business success will come easily in Nicaragua, just
because there is a vast supply of labor, low operating costs and a
budding tourism market. Many businesses, even those that have
been well run, have failed. You have to be determined,
knowledgeable, sensible, patient and flexible to succeed here.
Proficient in Spanish is also a huge benefit.
If you decide to purchase an existing business make sure that it is
not over priced, or failing miserably. Investigate the reasons why
the previous owner is selling out. And make sure there aren't any
pending lawsuits, debts, unpaid creditors or liens against the
business. Don't buy someone else's problems, or passage on a
sinking ship.
Otherwise, purchasing a previously existing business can be a
good opportunity, if you can buy a business with potential and


all the required licenses and permits already in place, and a name
that brings people in off the street.
Always consult with a knowledgeable attorney. Ask other
successful businesses in the area of they can recommend an
attorney, or warn you about others to avoid.
Finally, if you plan to invest or do business in a Spanish-speaking
country you should definitely purchase Wiley's English-Spanish
Dictionary
, Barron's Talking Business in Spanish, or Passport Books
Just Enough Business Spanish
. All of these guides contain hundreds
of useful business terms and phrases.


New Opportunities for Making Money in
Nicaragua
The Nicaragua Report
by Barry Strudwick
This is a confidential communication. This summary and assessment is
only going out to a very select group of friends who asked me for my
personal comments on the Gran Pacifica project. Please do not copy this or
send it to other people without first asking me personally. I don't want
these personal observations and comments spread around. Sorry for the
delay, but I had to wait for the photos from another attendee. I think they
really help understand the project without you're having been there.
The Nicaragua Report -
I can't believe that it's been almost two years since I first wrote "The
Nicaragua Report" after visiting Nicaragua for the CAIIS conference and
learning about the investment opportunity in the Gran Pacifica Marriott
project. Since then, I have not only watched the project with a great deal
of interest as an investor, but I have also become actively involved in other
Central American real estate projects as a principal. This active involvement
(which has been primarily in Costa Rica) has sharpened my focus on the
issues pertaining to Gran Pacifica as a specific investment. In addition,
these insights and the appreciation of the large differences between the
maturity and risk/return characteristics of the different Central American
real estate markets has helped me develop a strategy of a multi-country real
estate portfolio to act as a hedge against a falling dollar and to profit from
the graying baby boom. While it is beyond the scope of this report to
discuss these strategies, please feel free to contact me about other articles
or pieces I have written on these topics.
In recent months a number of readers of the initial report have asked for
an "update", which is contained below. Where appropriate, I'll also take the
liberty to add a few new observations gained over the past several years.



The Bottom Line:Gran Pacifica is well capitalized and remains an attractive
investment. The upside potential might actually be larger than I estimated
2 years ago and significantly lower risk than 2 years ago. The largest hurdle
remains obtaining financing for the Marriott Hotel, but the management
team is attacking this situation aggressively. Even in the worst case scenario
of the hotel project unraveling, the liquidation value of the entire project is
likely to be significantly greater than the current market capitalization of
the outstanding stock.
I would continue to recommend the purchase of Gran Pacifica equity as
part of a diversified investment strategy with holdings in international real
estate.
Caveat: Gran Pacifica remains a project for investors with a 7 to 10 year
horizon and it remains a project with significant risk. While the project has
matured in the past two years it remains, in essence, a "venture capital"
type of deal with significant risk and a lack of liquidity, making it
inappropriate for many investors.
Return to Nicaragua
While I have had frequent updates on the progress of the project from both
Mike Cobb (project general manager) and Joel Nagel (CFO and General
Counsel), last summer I thought it was time to again visit Nicaragua and
the Gran Pacifica project first hand. With my wife and children in tow, I
spent 5 days in Nicaragua with Mike Cobb and visiting Gran Pacifica.
During our stay we not only visited the project and explored the country,
but I was amazed at how quickly Nicaragua is emerging from the shadows
of the Sandinisita years. While my family loved visiting the colorful
markets and the attractions like the volcanoes, I was captivated by the
economic evolution that was clearly underway. The Road to Gran Pacifica!
Nicaragua Today
My overall impression of Nicaragua was that I was very impressed
(stunned?) by how rapidly Managua and the entire country were evolving,
even in the brief 18 months since my last visit. Without question, the
intertwined vines of democracy and capitalism have taken root and are
spreading across the country. The shadows of the Sandinistas are fading



rapidly. My kids had lunch at a Burger King in Managua and even got "the
Incredible Hulk" toys with their meals. But it's all about the franchises:
TGI Fridays, Pizza Hut, Blockbuster Video, Hertz, Avis ...... You name it,
and Nicaragua now has it. While the cultural virtues of the
McAmericanization of Nicaragua are debatable, from an economic
progress perspective it shows great strides in a short period of time and
perhaps a Big Money "seal of approval". How so? Most, if not all, franchise
operations do extensive market research on both the demographics and
purchasing power of the local market. If there wasn't a market for the
American convenience culture, they wouldn't be there in numbers. This is
also a part of the necessary infrastructure that prospective American
retirees and tourists will look for prior to making an investment in
Nicaragua, or Gran Pacifica more specifically.
Recap Update
Here is a quick recap of the major points as I see them with respect to the
potential investment in Gran Pacifica since our last report:
1) At my latest meeting with the management of Gran Pacifica in Belize
two weeks ago, they indicated that they will only be raising $2.6 million of
additional equity for the land development company, thereafter the project
will be self financing. In other words, the window is about to close on this
opportunity.
2) Gran Pacifica has also made a good deal of progress and the risk in this
project is significantly reduced from two years ago. In part this is reflected
in the higher per share price being offered by the project.
3) The share price of Gran Pacifica has risen from $10 at the time of
writing the original report, to $15 per share today. The price increase has
been based on the attainment of certain milestones in the development
process. Further increases are expected later this spring as lots start selling
and other bench marks are reached. To restate the obvious, this reflects a
50% gain for investors who entered into the project when the report was
first written.
4) My overall assessment is that the shares on a risk adjusted basis still offer
excellent upside potential. I have reviewed the original estimates I had for


the "best" and "worst" case scenarios and consider them both to be either
quite reasonable or overly conservative at this point. Even with the
increases in share price from $10 to $15 per share, I think the "worst case
scenarios" are still valid and, if anything, overly conservative.
5) On the downside, basically, I have a hard time seeing a liquidation value
of the project which would not at least return the capital invested in the
project. Further, as the project is 100% equity financed and has no debt, I
don't see a series of events that would or could force liquidation.
6) The upside of the project, in my estimation, has actually increased. My
personal experience in Costa Rica has shown the retail market is just now
beginning to take off, which is driving the value of the large developable
tracts upward. The Los Suenos Marriott project in Costa Rica (Gran
Pacifica's role model twin sister/clone in Costa Rica) recently sold 51 of 55
condo units in a "Pre- Construction Sales Party" at $350,000 per unit......
in 1 and one half hours!
7) As far as Nicaragua is concerned, in the past two years the nearby Agora
Publishing-sponsored Rancho Santana project has had exceptional progress
and is now marketing single family "ocean view" lots at $65,000 per
quarter acre ...and getting it! That's a yield of $260,000 per acre. Clearly
my old "worst case" estimate of $30,000 per acre is way below current
market value, so even doubling this at $60,000 per acre would only put us
at 1/4 the price of our nearest "comp". Using this new "worst case"
scenario of $60,000 per acre would produce a return in excess of 50% after
1) adjusting for the increase in the Gran Pacifica share price over the past
several years from $10 to $15 2) selling a total of only 500 acres out of the
total of 2,200 and 3) after returning $10,000,000 of equity to investors.
8) Objectively, I still find the Rancho Santana numbers incredible
(incredulous?) and feel the true current market in Nicaragua should be
closer to $30,000 to $40,000 for 1/4 acre lots in a gated Marriott anchored
project, or something more in the $120,000 to $160,000 per acre yield
leaving our new "worst case scenario" at 50% of the low end of our current
assessment of the actual market or about 1/4 what Rancho Santana claims
to be getting. Whatever the actual numbers are, the market will ultimately
tell us when we start selling our own lots. But in the interim, clearly the
market in Nicaragua is moving up and consumer acceptance of Nicaragua
is increasing. Surf break at the hotel site


9) With respect to the upside potential, since I wrote the Nicaragua Report
I have been actively involved with my own real estate developments in
Costa Rica (http://www.delpacifico.net) and have a sharper awareness of
the strength of the retail market. The Marriott Los Suenos outside of Jaco
Beach is the target that Gran Pacifica is clearly trying to emulate. The
success of this project in Costa Rica has been incredible. In the past 2
years, since I wrote the last report, Los Suenos has done over
$100,000,000 in land and condo sales. Let me repeat that, $100,000,000
in land and condo sales since I wrote the last report! With this being said,
Gran Pacifica's 10 year goal of $300,000,000 in sales is not unrealistic.
10) Los Suenos is currently able to get $200,000 and higher for a single
family 1/4 acre lot. However, it should be noted that Los Suenos which
should be at a significant premium to Gran Pacifica due to 1) it's in Costa
Rica 2) which has proven retail demand 3) and a better health care system
4) and a better consumer perception of political stability, etc. 5) and very
importantly.... Los Suenos has a marina.
11) Construction has actually started at Gran Pacifica and this new bridge
onto the property was completed last summer. Currently a master
boulevard and electricity is being brought onto the property.
12) As a sign of maturity, Gran Pacifica will start selling residential lots in
May of this year, meaning investors will immediately start seeing a return
on their investment. Based on the structure of the company, 90% of all cash
will be distributed to shareholders with the remaining 10% being withheld
for additional infrastructure.
13) From the beginning, we have said to focus your analysis on the land
development company not the sexier hotel project. The rationale is quite
simple: the hotel company stock might make a nice return but the existence
of the hotel multiplies the value of the underlying land at Gran Pacifica by
a factor of 5 X or 10 X, perhaps even more, relative to the value of other
comparable land in Nicaragua. It's also a lot easier to calculate the potential
revenues and profits from "selling dirt" than it is predicting what the net
on a hotel is after guessing about occupancy rates and operating expenses.
If the deal based on the dirt is a clear winner, then the hotel stock is just
icing on the cake.


14) This raises the question of "what is the value of the land?" We could
simply do this on a per acre basis. Since the ranch was acquired for about
$2,500,000 and there have been about $7,500,000 in improvements and
expenses, the total cost basis in the property is about $10 million or $4,000
per acre. We can then dilute this for management's retained equity share,
which raises the cost basis to about $8,000 per acre.
15) With an estimate of cost established, we can now compare against a
liquidation value. Here we need to split the parcel to the value of the
beachfront and then the value of semi-improved interior acreage. With 3.6
miles of beach we have 19,000 linear feet of beach in a semi-remote area
but which also has permits and approvals for development. Prime resort
beach footage in Costa Rica or Belize might be worth $5,000 to $7,500
per foot. But more remote beach frontage might be only worth $1,000 to
$1,500. If we use the low end number of $1,000 per linear foot as a base
price until the financing of the Marriott becomes clearer, we have a value
of $19,000,000 just for the beach front. (19,000 linear feet of beachfront
@ $1,000 a foot = $19,000,000). Assuming this leaves 2,000 residual
"internal" semi improved acres at a price of $1,000 per acre we would have
an additional $2,000,000 of equity or a total project valuation of about
$21,000,000. In other words, a very modest value of $1,000 per foot for
the beach frontage and $1,000 per acre for the residual in liquidation
would recapture investors' equity. These are very low numbers reflecting a
very limited downside risk on the project.
16) After the hard asset of the land the most important asset that Gran
Pacifica has is the Marriott project. Once this project actually breaks
ground, the price of the beach property and the interior land increases by
5 X or more. In other words, once the Marriott breaks ground, I think the
value of the project is at least $100,000,000.
17) We have long maintained that the Marriott Los Suenos Resort in Costa
Rica is the exact model for the Gran Pacifica project. Three years ago when
I first visited Costa Rica I was amazed to find that Los Suenos had sold
$45 million in land and condominiums in its first 4 years and most of that
had come in the prior 12 months since the opening of the Marriott hotel
in 2000. Now as an update on this, the total land and condo sales of Los
Suenos as now over $175,000,000!!! This is the potential of Gran Pacifica.


18) Maybe the most important point in this report ..... The biggest
challenge facing Gran Pacifica is in getting the financing to build the
Marriott Hotel. A recent change in the Nicaraguan law no longer makes
using the Nicaraguan tax credit law a viable strategy to raise the funding of
the hotel. This has forced an entire change in the hotel financing strategy
and has pushed back the opening of the hotel by 1 year. However, Nagel
and Cobb have been very proactive and impressive in getting a new tax bill
passed to create in essence a special revenue bond for the hotel that will be
repaid by a room tax. I have personally sat in on meeting with the Ministry
of Finance and the IMF on issues related to this. It is clear to me that the
project has very high levels of government support and they want this to
happen.
19) Now that the legislation appears to be ready, the challenge for Cobb
and Nagle will be to find people/institutions to actually buy these bonds.
However, this deal will be a little challenging to place as $35 million is a
relatively small bond issue by Wall Street standards. This is compounded
the lack on investment banking firms working in Nicaragua at this time.
While I suspect it will take some time to find the correct underwriter/re-
seller of these bonds, eventually Cobb and Nagel will find the right major
firm or boutique.
20) The bonds will be priced attractively with a 10% to 15% coupon and
also with an "equity kicker" of ownership in the hotel. Projections show
them to be repaid in less than 5 years with even low occupancy rates on the
hotel. I have discussed the possibility of having an allocation of these high
yielding bonds for my friends and clients. If you think this might be of
interest to you, please contact me directly.
21) Mike Cobb has moved to Nicaragua to oversee the project full time. In
additional Mike has been adding members to theproject management team
such as a senior construction manager, golf course designers and a national
resort design group to work on the master plan. While we still have some
concerns over the experience of Mike in certain areas of "major" real
estatedevelopment, he has certainly proven up to the task and has made the
necessary additions to the team to keep the project moving. Here are the
answers to a couple of questions that came to mind as I was writing this
update.


Question: Where is the project?
The project is 45 miles due west of Managua as the crow flies which puts
it within 1 hour of the international airport.
Question: How do you get there?
We rented a car from Hertz ($45 a day) and drove to the project. It took
about 1 hour. Above is a picture of the Road to Gran Pacifica which is
paved with "Samosa Stones" which makes repairing pot holes very easy and
inexpensive. But there was a second reason for this unusual construction
technique ......a touch of vertical integration; the Samosa family owned
the company that made the pavers! Regardless, you'll notice it's in great
shape, straight as an arrow and nary a bump.
Question: What is the investment Opportunity today?
Gran Pacifica is raising its final $2.5 million of equity at a price of $15 per
share. Minimum investment unit is $50,000. To date the total capital
raised for the project has been about $7.5 million. There is no debt.
Question: When should I start to see a return?
I was surprised to hear that residential lot sales will start later this spring,
so there will be some small returns this year and next. The structure of the
partnership is that 90% of the net sales proceeds will be distributed, with
the remaining 10% retained for infrastructure build out. But realistically,
look for significant returns at least several years down the road.
Question: Is Nicaragua safe?
While I initially had some apprehension, I feel now perfectly safe visiting
the markets and towns within the country. My wife and children absolutely
loved it. And you'll find Nicaragua a bit more "colorful" than Costa Rica.
Question: What about the water?
Unlike Costa Rica where the water is safe to drink, you must be careful in
Nicaragua. However, this is not an issue for Gran Pacifica as it will have its
own water treatment facility and be a self contained universe for the gringo
tourist.


Question: Will there be golf?
The Gran Pacifica project will have 27 holes of golf. The course has already
been staked out and construction would start about 6 months before the
opening of the hotel.
Question: Are they sub-development opportunities, Such as to develop a
condo community, another hotel or even an entire housing community?
For experienced developers looking to develop a significant project within
Gran Pacifica, there are currently opportunities for major subdivisions
within the project. Please contact me directly to discuss these.
Question: What about a Marina?
The current focus is on the hotel, but in conversations with management I
have stressed the importance of a marina to the project. I believe that this
will happen. However, if you might be interested in putting together a
group to finance or develop a marina, please contact me directly.
Question: What's my next step?
If you want to ask a specific question or to find out how to invest, please
contact me through mailto:crbooks@racsa.co.cr


4
RED TAPE