Costa Rica Real Estate, from Coast to Coast, the Right Way!!!

Sonesta Jaco Resort files suit against lenders

By Ivo Henfling for the Easy Times

As a buyer of an apartment in Sonesta One Jaco, I received an email from the Developer, Joshua ten Brink of Riverside Developers during Eastern Week, saying that he is suing the bank who lent them the money to build the project of One Jaco Place in Jaco, later Sonesta Jaco Resort. The reason, he alleges in his email to those who bought a unit or put earnest money down against an option to purchase/sale agreement is that the bank who lent him the money (BCIE) because they are changing the rules on them and they can not afford to finish the buildings. Meanwhile, some of us closed the purchase and some others have paid the earnest money, will not close or cannot close for one reason or the other and the whole project will be tied up in court for who knows how long. I, as a owner of real title (our unit is totally finished and we furnished and equipped it) now have an apartment in an empty and unfinished building which I cannot rent or even when I use it myself, the elevators will not work half the time, or I have no hot water and a long list of other issues.

Now you will ask yourself, how come this happens to a real estate agent? And one who has been in the business for so long? And is Costa Rica so unsafe? Allow me to explain.

Before 1995, Costa Rica had very few developers large enough to build a high rise building or even a gated community. Most developers would build two houses at the time. The real estate boom, starting around 2005, was bringing in Venezuelan and Colombian developers but also many entrepreneurs of all ages, nationalities and backgrounds though they could become a developer. Costa Rica at the time, and still doesn’t, rules and regulations in place to control that these developers deliver what they promise. Most of these developers are not builders themselves. They sub-contract the people that are needed in each phase of the project. Many times they don’t own the land either. Actually, they don’t have anything, except the money needed to get through the permitting phase (if that), a marketing budget and with luck enough to build a nice gate or entrance to their project.

In most other countries, when a developer sells a unit (a lot or a house or an apartment) to a buyer, the buyer’s money goes into escrow and it stays there until the project is finished and delivered completely to all the buyers, not until then the money in escrow will be paid to the developers. With the contracts of option to purchase/sale that they sign up from pre-construction sales, the developers can get the money from the banks to finance the project. But this is not the case in Costa Rica. Banks were not used to lend money on such large projects and the developers had to either get money from foreign banks, or work with the money from the buyers. Therefore, almost all developers were charging the buyers in 3 or 5 phases and this money instead of being put in escrow, was used to build.

During the real estate boom, this was not a problem. Developers couldn’t build fast enough and buyers didn’t mind their money was used for construction. Everyone was making money and though most of us knew the bubble would burst, we though it wouldn’t happen in our time.

In the case of Sonesta One Jaco, the developer says the bank changed the rules on him, and that his supply of money dried up even after he found two hotel chains willing to buy his 2nd phase but the bank was not willing to release the property. But after it became clear that most of the pre-construction contracts were not closing because the would be buyers were walking away from their earnest money, any project would have a hard time getting finished, no matter how well you plan ahead.

My issues are the following, since we are talking now about one of the largest industries with the fastest growth in the last ten years and something will have to be done to protect the consumer:

1. The whole matter of real estate development should be regulated and should be controlled.
2. The developer, in my case, is not willing to share who the rest of the buyers are, so we can work as a team. We are co-owners and the developer should by law be obliged to share this list.

President Oscar Arias signed a new decree in August 2009 that became effective as of October 2009 that requires real estate developers to register their projects with the Ministry of Economy, Industry & Commerce. More about this in the only English document I could find online.

I’d like to insist that Government officials not only put this decree in the closet but that it will be used and the local and Costarican consumer will be protected better. If you, as a buyer, don’t want to take any risk when you invest your money, buy an existing and finished product where you will have clear rules to play by and don’t buy in pre-construction phases. Me, as an investor and real estate agent myself, I’ve learn my lesson and will never trust my and my client’s money to a developer again, unless there will be controls and regulations.