“The most important secrets of every business are almost always invisible to outsiders – especially investors.” – Michael Masterson
Just One Thing: The Economics of Overseas Resort Development in One Lesson
A colleague writes:
An associate I’ve worked with for a while and come to know and respect has developed a high-quality, eco-friendly project on the Pacific coast of Costa Rica. They are well along and are now raising equity capital to build out the central village. They are in active discussions with some boutique hotel companies as well.
They have around $1.5M committed toward the $5M raise for the village construction.
Great location, top surf break, centralized solar power system coming in, mini-farm, beach club, etc.
I can attest to the intelligence and integrity of the co-founder.
They are seeking investors, but also are keen to make deals with publishers to promote lot sales. Possibly even an exclusive. There are multiple phases so quite a bit of upside on lots ahead. They’ve sold quite a few lots on just word of mouth with no real promotion. There are houses going in.
This is a very well planned and thought out project with great people in charge.
If I were asked to write a sales letter promoting this property to investors, I’m pretty sure I could make a strong argument with these details.
But would it be a good investment?
Here’s the thing: Every business sector has its own logic. And it’s an internal logic, not visible to outsiders. Until you’ve been in the business, you can’t know how it really works. And often, the most important circuits of that internal logic run differently than you’d expect.
In this case – developing a resort community in a foreign country – having a great piece of land is not nearly as valuable as you might think. In fact, it’s more often a liability than an asset.
When my partners and I got into the business more than 20 years ago, we bought a huge swath of land on a beautiful stretch of Pacific Ocean coast. The views, the surf, the opportunities were amazing. And we paid something like $500 an acre.
Today, those acres are selling for a minimum of $100,000 each. So we must be making a fortune, right?
That’s what we thought. It turns out that in this particular business there are three things that matter much more than the cost of land. One is the cost of infrastructure. Another is the cost of money. And the third is the cost of sales.
Infrastructure: Before I got into the business, I thought infrastructure costs – electricity, running water, roads, sewage, etc. – would be the same, or even less, than they are in the states. But when the location has no running water, sewage services, or reliable electrical service, and when you have to build the roads yourself, the cost can be much more than you’d pay in the States.
Money: Development takes time. And time is money. It doesn’t matter whether you are using equity or debt, that money’s going to cost you. It’s going to eat up the profits. The longer the project takes to complete, the higher that cost of money. And it always takes longer than you think.
Marketing: Forget about the 3% to 6% sales commission you’re used to paying in the States. That won’t get your lots sold in an area that has no published listings and, more importantly, no local demand. What you need is a targeted marketing campaign to the 0.1% of Americans that are candidates for this kind of property. And the cost of that marketing is very high. If you are good, it will cost you 50% of the sale price.
So back to that $500 lot that sells for $100,000… The infrastructure costs – per lot – will be i $30,000 to $40,000. The cost of money, given the fact that the project will take at least twice the time you thought it would: another $10,000. And the marketing: as much as $50,000.
Yes, good money was made. But very little or none of it went to the investors.