As of Wednesday, January 18, 2006

Builders Bet on Mexico

Will U.S. Baby Boomers

Cross the Border to Retire?

By KEMBA J. DUNHAM

Staff Reporter of THE WALL STREET JOURNAL

January 18, 2006; Page B1

Loreto Bay Co. is a real-estate developer based in Scottsdale, Ariz., a magnet for retirees from all over the U.S. So you might expect the company to be working on a project nearby. Instead, this small firm has its sights trained further south, about 700 miles from the U.S. border, in Baja California.

Teaming up with FONATUR, Mexico's tourism development agency, Loreto Bay is developing a seaside town, with plans for 6,000 units ranging from $280,000 condos to $1 million custom-built beach houses. The company has taken orders for 554 homes and has 200 under construction. Most of the buyers, says James Grogan, president and chief executive, are Americans and Canadians.

The Villages of Loreto Bay, in the Mexican baja, feature shady streets with native plants. It's one of several communities being built in Mexico where developers hope to lure well-heeled retirees.

As home sales start to slow in the U.S., some builders are casting a hopeful eye on Mexico, placing bets that a growing population of North American retirees will want to buy mid- and high-end homes there, much as they have in places like Florida and the Southwest.

There are plenty of hurdles and risks. At least two major American home builders spent time in the Mexican market, then pulled out.

Still, the idea is appealing, especially to smaller developers, which are getting active encouragement from the National Association of Home Builders, the largest trade group in the U.S., with a membership of mostly small companies. At its International Builders' Show last week in Orlando, the NAHB ran an event explaining to members how to acquire land in Mexico, find partners there and finance such ventures. At an "Access Mexico" reception, U.S. home builders were invited to mingle with their Mexican peers.

"Mexico is a growing opportunity for resort and retirement communities," says Rita Feinberg, who heads NAHB's international efforts. The NAHB also sees Mexico as a place for small companies to escape increasingly aggressive competition with the U.S.'s biggest builders. Currently, the nation's 10 biggest home builders have 21% of the market for all new homes built in the U.S. and NAHB economists think that share will grow to between 35% and 40% in the next decade through growth and acquisitions. "It might be easier and more efficient for our smaller builders to go to Mexico," says Jerry Howard, NAHB chief executive.

Demographic and political trends seem favorable. According to a study conducted by Cemex SA, a Mexican cement giant, and Active Living International, which builds retirement and active-adult communities, about one million Americans currently live in Mexico, including 157,000 so-called active-adults -- buyers age 55 and over. That segment is expected to grow, according to the study. And it found that Americans of Mexican and Latin American descent are interested in retiring to Mexico. Retirees are attracted by the weather, the proximity to the U.S., an affordable cost of a living, and access to good quality health care.

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Changes made under Nafta, the North American Free Trade Agreement, have also helped. For example, there are new financial instruments that can benefit home builders, says Jeffrey Schott, a senior fellow at the Institute for International Economics, a nonpartisan, nonprofit think tank in Washington. "A decade ago, this would have been a much riskier venture because you wouldn't have had the mortgage market, you would have had an uncertain policy regime. ... There are still problems, but a lot has improved.''

Still, those problems can be daunting. For example, there is a law that forbids non-Mexicans from owning land in close proximity to the borders or the beach front. Interpreting those laws can be tricky. In the Baja peninsula a few years ago, scores of U.S. retirees learned that deeds on their beachfront property didn't meet those certain provisions of a national-security statute that, technically, permits only citizens to own land on Mexico's two coasts. A few were able to buy back their homes from legally recognized landowners, while others filed a claim against the Mexican government. But the wide majority of these retirees haven't had any resolution.

The country does allow foreign individuals to acquire property by working through a trust, known as a Fideicomiso. With this arrangement, these foreigners can obtain the beneficiary rights of ownership to property in Mexico, but the title is held by a trustee, which must be a Mexican bank. The trust operates the same way as a family trust in the U.S., but it exists for a maximum of 50 years and it must be renewed, says Jorge A. Vargas, an expert in Mexican law at the University of San Diego School of Law.

He adds that corporations don't need to work through a Fideicomiso, but can buy property outright provided that they use it for commercial purposes. Still, the extensive red tape and legal complexities prompt many American builders interested in Mexico to seek local partners. The extensive red tape and legal complexities prompt many American builders interested in Mexico to seek local partners. "I'm not saying partnering with a Mexican firm is the only way an American builder can do it, but it just makes it much easier," says Jesus Alan Elizondo Flores, an official at Sociedad Hipotecaria Federal, a federal home-mortgage institution in Mexico. "There's a huge learning curve."

Active Living, based in Corona del Mar, Calif., is developing its first Mexican venture, in the Nuevo Vallarta resort area, with several partners, including one in Mexico. The development, one of five planned by Active Living, will have 250 units, with one to three bedrooms, priced at an average of about $388,000. It is expected to be completed in late 2007 and will be marketed throughout the U.S. and Canada.

[U.S. developers hope retirees will buy $1 million custom homes in Mexico's Loreto Bay, where rooms with a view face the water.]

U.S. developers hope retirees will buy $1 million custom homes in Mexico's Loreto Bay, where rooms with a view face the water.

Some developers are hedging their bets in other ways. Bryson Garbett, president of Garbett Homes Inc., based in Salt Lake City, currently has a letter of intent on a piece of land in Queretaro, the state north of Mexico City, where he hopes to build 200 to 400 homes for middle-class Mexicans within the next year. And he's looking for other tracts of land in the coastal areas, but he's considering building second homes -- not primary homes -- for retirees.

Still, some analysts wonder why Mexico is a draw at all. "The higher returns on capital are here in the U.S.," says Alex Barron, an analyst at JMP Securities in San Francisco. Mexico, "as exciting as it might seem right now, has been historically risky."

Robert Curran, a home building analyst at Fitch Ratings in New York, points to the two big builders, KB Home and Pulte Homes Inc., that didn't find business in Mexico profitable enough. KB was there briefly in the early 1990s; Pulte pulled out of the market in December, after almost 10 years. "If Pulte couldn't do it, why would they [smaller builders] have success?" Mr. Curran asks.

But some prospective retirees have more encouraging words. Shari Cooper, a 45-year-old realtor from Dallas, and her husband, Juan Rivera, a 45-year-old Los Angeles-based photojournalist, bought a two-bedroom "casita'' priced at about $450,000 in Loreto Bay just a few months ago. They had gone to visit after hearing about the development from friends who bought a unit last year.

"We just fell in love with it,'' says Ms. Cooper. "We were looking for a place that was away from the rat race and it just makes you feel renewed because of its beauty. It's a very spiritual and the kind of place you'd want to retire to.'' The couple hopes to retire there in the next five years, but until then, they plan to make frequent visits.

Write to Kemba J. Dunham at