Molino de Agua

We continue to be impressed with this project.

Since the developer reduced prices by up to 20% in August, units are selling at a much better pace than other projects where developers resist price reductions.

A penthouse unit is now being offered at $300,000 less than it was in January, 2007.

The project is the only Puerto Vallarta condominium being built that is on schedule.

Altazor Condominiums

Altazor (aka Altazor Blue) condominiums is a niche project in a Mexican residencial, rather than tourist, area of Puerto Vallarta.

The project was originally supposed to include 12, 2-bedroom condos with terraces.

But with prices falling in Puerto Vallarta, the developer redesigned the building to add 4 additonal smaller units with no terraces.

The building structure has been completed and one or two condominiums completed and delivered. 8 of the 16 units have now been sold and those condominiums will likely be delivered in the next 90 days.

This is a unique project because owners are able to take full possession of their units while the remaining 8 units are for sale. All of the common elements are completed

Construction risk is low, but there is some risk that some units might never get completed.

Environmental risk is lower than average for the Pacific Coast.

Prices have been reduced at this project in the past year, and other than the top floor units, this building now has very attractive pricing. A brand new 2-bedroom unit with a terrace is available for under $200,000 which works out to about $140.00 per square foot. Other than the penthouse units, financial risk is lower than average.

Title risk for condominiums can be mitigated throught the purchase of title insurance. However, since parking units are assigned as part of the common elements and are not deeded, it is not possible to mitigate the risk that a claim on a parking space might be taken by another owner. In addition, the city has not yet indicated it will take possession of the road necessary to access parking in the building. Maintenance of this road is at issue.

This building is not in a traditional toursit rental area, but it is in a central location and has its own rooftop pool. We are of the opinion that this building has slightly better than average rental income opportunities.

Operational risk should be lower than average at this project.

Recommendation: Buy for select units on the 3rd, 4th and 5th floor. Pass on higher priced units including penthouses.

Puesta del Sol

There are two condominium developments in Puerto Vallarta with the name Puesta del Sol.

One is in Marina Vallarta and is not being reviewed here. The second is in central or downtown Puerto Vallarta, about half-way up the mountain and is the subject to this review.

Puesta del Sol is an 81 unit complex of 2 bedroom and 2+1 bedroom units built between 1977-1980. It has been renovated. The complex is very stable with little turnover. It has a very central location which precludes the need for an automobile.

There is no construction, delivery or financing risk. Environmental risk lower than average for the Pacific Coast of Mexico.

Operational risk is lower than average for Puerto Vallarta. A 2-bedroom condo pays $350 per month in maintenance fees. The location of this project, part way up the mountain, will significantly reduce the requirement for air conditioning. Annual electricity costs at these condos will likely be USD5,000 lower than similar sized beachfront condos.

Rental income opportunities are higher than average for Puerto Vallarta. A 2-bedroom condo will likely generate in excess of USD20,000 in rent per year. We have access to records which show a 2- bedroom condo with USD21,000 of rental income for the period Nov 1 - April 30.

Net rental income will likely reach the minimum investment threshold to make owning desirable on an annual cash flow basis. There is a sign outside the complex that indicates it is not a rental building. That sign is there to discourage walk-in traffic.

All infrastructure in the area is complete and functioning. However, the local roads can be difficult to use in the rainy season and pedestrian access is only for the sure footed.

Units are premium priced due to the higher than average rental opportunities. However, there have been recent price reductions in the building, and sellers are offering financing to buyers. A 2-bedroom unit can be purchased for less than $370,000, making this project, financially, more desirable than Selva Romantica, Quinta Luna and Molina de Agua, buildings in the same market. The rental opportunities, and the stability of the building provide downside price protection.

Recommendation: purchase

Villas Quinta Luna

Villas Quinta Luna is the type of project we expect to be seeing more of in the next 2-3 years in Puerto Vallarta. The project is only 6 units and in an already developed area, high in the hills in downtown Puerto Vallarta. From concept to completion, this project took just over one year (in contrast The Grand Venetian project is now 4 years old and Tower 1 is not yet complete).

The project will be delivered within the next few days. Total infrastrucutre in the immediate area is 100% complete.

This is little environmental risk relative to other projects on the west coast.

We expect operating costs to be lower than average. Most importantly, owners will have considerable leeway with respect to how they operate their units. Units come with infinity pools and air-conditioning, but the location of the project will limit the need for air conditioning. And the pools are small, and easily maintained. There is no need for on site management, conceirge etc.

This building will have high potential for rental income. The location is excellent. The product is of high quality and has the desired features of the other products we see in Puerto Vallarta that generate considerable rental interest.

Since developments have this nature are few and far between presently in Puerto Vallarta, units are commending premium prices. Three of the six units are still available from $550,000 to $840,000. Given that the developer expected to sell out prior to completion we expect price reductions. In the immediate area there are other buildings such as Quinta Luna coming on-line and we expect to see better value pricing in those projects.

Recommedation: Pass until additional inventory is available in the immediate area.

Monday, December 10, 2007


Continued Market Softness

In the real estate business there is a a very predictable statement that occurs in a falling market. Real estate agents will use that statement when asked whether a market is in decline. That statement is "sales are slow right now, compared to last year, but last year was record." This statement is considered the equivalent of the "we have confidence in [insert coach's name]" statement which precludes the firing of said coach in two weeks.

Costa Vallarta has just published its real estate trends for 2007/8. On the subject of a real estate turndown, Costa Vallarta published the following statement, "when asked if the market has slowed down, most realtors expressed that it is slower than last year, but that last year was exceptional."

We have additional information Puerto Vallarta real estate projects.

Quinta del Mar, which was pre-selling 2-bedroom units in the Fall of 2006 for $330,000 increased prices later that year to $385,000. Those prices have now been rolled back to $330,000.

Pacifica condominiums in La Cruz, just north of Puerto Vallarta have reduced the entry level prices of units from $199,000 to $185,000

Worldstar Realty is advertising condos at ICON Vallarta from $240,000. That is $60,000 less than the $300,000 that ICON advised me in October would be the introduction price for Phase 2.

Villas Colina II have been repriced down again to the mid $300s, from $385,000.

Villa Estancia has closed their central Puerto Vallarta sales office, and will market only from their Nuevo Vallarta site. It does not appear that the central office closed a sale in the year it was open.

Developers have now accepted that, with the heavy season while underway, but sales continuing to fall, they must adjust their marketing, including promotion and pricing. The developers who have niche projects, with unique selling positions, will be able to last out the longest.

Pacific Coast Decline in Prices?








I have received a number of calls since the release of HSC Financial Inc's position on the end of the speculative boom in Puerto Vallarta.


In this post, I am addressing some of the questions I was asked via telephone.


Our data does not indicate that prices are down year-over-year. Prices are down at the end of November, 2007 from January, 2007 when prices in Puerto Vallarta peaked .


We do not include the impact on inflation on price changes. As a result, the price decline, IN REAL TERMS, is greater than the 5-20% range we reported. For instance if house prices stayed the same from one year to the next, when inflation is 3%, that is a 3% decline in price in real terms.


There are some projects which may appear to show slight increases in prices over the past 10-11 months, only because recent marketing material does not disclose that parking, or appliances are now included in the price, which they were not 10 months ago. In addition, two developers raised their list prices by about 3%, then immediately added discount sweetners to their sales agreements from 5-8%


We do not follow all markets along the Pacific Coast however we are seeing anecdotel evidence of price declines in other markets. In certain cases it is near impossible to determine statistically how prices are changing because of the absence of disclosure.


Both ICON VallartaTower 1 in Puerto Vallarta and Trump Tower 1 in Ensenada claim the record for the highest value of $ sales for a Mexican real estate pre-sell in one day. Neither project will provide any further disclosure. Although both projects claim that their initial towers sold out in one day, both projects have had second towers available for as long as 3 months, and the second towers are not yet sold out. This in spite of the fact that both projects claim their first Towers were oversubscribed by 100%. ICON Vallarta has replaced its entire marketing and sales staff.


The third tower in the Peninsula project is actually called Peninsula 1.


Prices at Horizon in Amapas are clearly down in November, 2007 from earlier in the year. Units of about 200 sq. meters, that were selling for about $550,000 last winter, are now listing for sale at $535,000 and remaining on the market unsold. A much larger than average 230 sq. meter condo did list for $620,000 and sell for less than the list price. On a $ per square meter basis the sale represents decline in prices since last winter.


The price history for a typical Bayview Grand 1-bedroom condo is as follows:

1. Presale in year 2000 = condo + furnishings = $135,000

2. Resold in 2006 = $200,000

3. Listed for resale November, 2007 = $197,500 (typicaly a condo of this nature will sell for about 94% of its list price, in this case = $186,000)


Grand Venetian marketing material listed the delivery date for Tower 1 as May, 2007. As of December 5, 2007, no units have yet been delivered.


We do not have sales volume for 2007 yet.


We cannot provide a general recommendation on whether to buy now or wait because individual investors have different objectives and portfolios. We can say that the market is very liquid presently, and there is no risk in waiting to make a purchase.

Market in Decline

Puerto Vallarta Speculative Boom Peaked in January, 2007

Using methodologies similar to the S&P/Case-Shiller® Home Price Indice published in the United States, HSC Financial is reporting that the Puerto Vallarta real estate market for recreational properties is officially in decline.

Prices are off by 5-20% since peaking in January, 2007, depending on location.

A number of projects have been pulled from the market including Monte Verde. Sales at major projects, such as Penninsula Tower III, have stalled. At least 3 years of supply of product is presently available.

The Puerto Vallarta market is following a very similar trend that we reviewed in Hong Kong SAR (1997-2003), Toronto, Canada (1989-1996) and Mont Tremblant, Quebec (1999-2007).

The absence of disclosure by developers and other stakeholders in Mexico make it very difficult to assess the potential downside in Puerto Vallarta presently nor the possible length of the decline.

Updates

Penninsula and Grand Venetian

The beaches of the Penninsula and Grand Venetian abut the Pitiall River. The Grand Venetian also abuts the beach of the Holiday Inn.

This weekend, about 40% of the Holiday Inn beach and waterfront collapsed into the Pacific Ocean. The collapse covers an area about 50 meters wide and 150 meters long. Initial assessment is that the collapse was due to the diversion of the Pitiall River recently completed in order to build the Grand Venetian and Penninsula projects. The river diversion resulted in a water table that was supporting the sand and rocks of the waterfront above it to dry up.

The collapse is yet another risk added to the Penninsula and Grand Venetian Projects.

Icon Vallarta

We were advised by Icon Vallarta that Tower 1 was sold out. We have now been advised that 36 prospective purchasers of the 112 units in Tower 1 have asked for their deposits back. We have also been advised that the sales contracts for Tower 1 were provided to purchasers with a condition that they be signed without a lawyer's review. And that the sales contract includes a provision allowing closings to be pushed out from the initial deadline of December 2009, for a full year without penalty to the developer.

We continue to recommend that any purchaser of Icon Vallarta request their deposit be returned.

Friday, November 16, 2007


Icon Vallarta

The marketing fact sheet reads "Icon Vallarta designed by Yoo by Stark another Related Group project co-developed with Grupo Chartwell."
If that marketing blurb wasn't confusing enough, so is trying to get discloure about prices, condominium budgets, delivery schedules and financing.

The Related Group is a Miami based, privately-owned, development company with several successful projects in Florida. Related has decided to expand in Latin America through Related International. Given the nature of the US housing market, particularly in Related's core market of South Florida, Related might benefit from focusing only on selling unsold inventory in South Florida.

Related's business model is to introduce a multi-phase project with low prices and low deposits on day 1, and then increase prices on a daily basis. Related keeps deposit requirements as low as their bank will allow in order encourage speculators and create the impression of selling out as fast as possible. The result is that Related is selling to clients for whom they know will lack the financial resources to close or simply have no intention of closing. This business model is precisely why the US housing market is now in so much trouble. Buying into a Related project is like buying a plane ticket. The guy beside you might have paid 50% what you paid, or 200%. And everyone paid with a credit card. But many of the buyers won't be able to make the monthly credit card payments. Related's target market in its key South Florida market are speculators. These are investors who hope to buy condos for as little down as possible and then sell them before they ever have to pay for closing. If prices go up, these guys flip and make money. If prices drop, they walk away from their deposit and the developer gets to sell into a declining market through an auction system. It is estimated that 50% of all condominiums in the Miami area that are completed within the next 18 months will be in Related projects. And many of these Florida condos will never be occupied. The problem is that Florida real estate prices are plummeting, down 30% in the past year in some markets. Related will be left with a large number of units where investors either walk away from their deposit or simply lack the financial resources to close. Related will have to sell those units via auction. And auction prices are typically 40% below original sale price.

Icon Vallarta was planned before the recent problems in US real estate surfaced. Icon is supposed to be a 3 tower, 336 unit project. Related used the same business model to "sell out" Phase 1 in Icon Vallarta as it used to sell its recent Florida projects. Published entry level prices were $240M to $300, but we are aware of buyers paying as little as $190M. Although Related claims to have sold out Tower 1, Related will not provide any information about the profile of the buyers or how many buyers purchased multiple units. We are of the opinion that some of the building contractors bidding on construction were required to buy units in Tower I to secure construction contracts. Usually the contractor is required only to place a small deposit and to defer all further payments until closing. This type of purchase does not have to be disclosed in Mexcio. It artificially creates demand and creates the false impression that there are many interested purchasers.

We have attempted to get full pricing disclosure from Related for Tower II. The best we can acheive is being told that buyers in Tower II will be offered units from $300,000 to $1.3 million. Related will not put anything in writing. Delivery of units in Towers I and II is expected sometime in late 2009 to middle 2010. No budgets have yet been developed. Related will say nothing about financing other than a $10,000 deposit is needed at the time a contract is signed. Related appears to require about 30% prepayment over the construction period, with 70% at closing.

Related's marketing material references a designer called Yoo by Starck who Related claims is world renowned. I asked my New York-based, self-described design-nerd expert about Yoo by Starck. He had no idea what I was talking about.

The project will likely be built, so construction risk is limited. But everyone will eventually be taking write downs on this project when it is completed in 2-3 years. Better to wait 3 years and buy for 30% less than existing rumoured prices today.

Even experienced speculators will be taking a hair cut on this project. US investors have bought into Tower I relying on their US experience as speculators They will eventually find out that when they flip/close, they are going to have to pay 8% in closing costs (compared to 3% in the US), as much as 8% in real estate sales commissions (compared to 4-6% in the US) and be liable for the new capital gains tax, only last year introduced to Mexico.

I have only ever reviewed two condominium projects more risky than Icon Vallarta. They are the Toronto Sliver project, now renamed 5 King Steet, which was built and is now under a complete financial restructuring, and the Toronto Sapphire Tower, which failed and will not be built.

Recommendations:

Existing Purchasers: Request initial deposit be returned

All Others: Pass

Sevla Romantica

Sevla Romantica is a 90 unit, series of low rise buildings in the heart of Old Town and Zona Romantica. The project can now be considered complete.

The project was pre-sold starting in 2004 with very attractive initial pricing. Studio units sold for about $109M and 1-bedroom units for $225M, unfurnished. By mid-2006, furnished studios were selling for $200M+ and 2-bedrooms for $240M. Prices have been stable for the past year, maybe up slightly for studios, down slightly for 2 bedrooms. Prices have remained high because this is a very attractive rental building. Very few listings and sales have been reported.

Since the project is complete, there is no delivery risk. We have no reports of any construction deficencies. However, the final building in the project is not brand new, it is a reconstruction of an existing building and requires its own inspection before an offer is made. Maintenance fees are about $250 monthly for 2-bedroom units. Operating risk (the risk of maintenance fees rising faster than inflation) is low. Almost all common elements are outside and require low maintenance. On-site staff requirements are very low.

There is a semi-formal rental program and rental opportunities are far higher than average. Two-bedroom units are, in some cases, generating over $20M net income per year.

Parking spots are deeded. We have a report of one owner selling with the claim that buying a parking spot is not necessary since there are many "empty" spots to use. These spots may be empty but they are owned, and simply owning a condo in the building does not allow an owner access to "empty" parking spaces. Parking in the area is very limited so if a parking spot is needed, insist on it being part of the purchase with a deed provided.

We are waiting for confirmation that condo deeds have been provided with no conditions, prior to issuing a recommendation.

We expect to recommend hold/buy with a requirement that the final building have specialized inspection.

Molino de Agua

We last full reviewed Molino de Agua in January 2007 and published an update in August 2007.


A number of developments have considerably reduced the risk inherent in this project.

This project, at the mouth of the Cuale River, in Old Town Vallarta, continues to benefit from a AAA location. Physical infrastructure including roads, commerical stores, and the expanded boardwalk have already been completed. The beach location is AAA.

Berry Developments, out of the US, began construction ahead of time. The project is about 50% complete, and the first units should be delivered by December 2008, about 6 months ahead of schedule.

Berry has greatly reduced environmental risk by not building below grade. Parking and storage is inside, at ground level. This type of structure greatly reduces the risk of water damage, reduces operational risk and provides excellent views from units as low as the residences on the 3rd and 4th floor. The Cuale River has also been tested under tropical storm conditions and there should be no risk to Molino de Agua.

The developer has led the market in adjusting prices due to a weakened market. Price reductions of 15-18% were implemented. A 3-bedroom unit on the 1st residential floor, has been repriced from $605M to $505M.

Berry Developments is requiring a 35% deposit and will not finance the deposit. However, Berry is allowing the 65% balance to be paid at closing.

A formal rental program has not been established. However, due to the excellent location of the project, rental income opportunities will be well above average for the Puerto Vallarta market.

Maintenance fees are estimated to be $500-$600 per month for a 3 bedroom unit.

We are of the opinion that based on location, building schedule, pricing, financing and rental income producing opportunities, this project will outperform the market both for price appreciation and income.

Recommendation*: Hold for existing owners and/or buy (except for penthouse units)

*Recommendations are general in nature only and will be impacted by an investor's specific circumstances.

The Peninsula Phase III

The Peninsula is a three tower residential, hotel and commerical project on reclaimed land at the mouth of a river in the hotel zone of Puerto Vallarta.

Phase I and II of the projects have been sales successes. Phase I has been delivered but despite a formal request, we cannot determine if deeds have yet been provided. Phase II will be delivered shortly. Phase III is scheduled to be completed sometime in 2009, but sales contracts will allow for a 6 month delay.

There are simply too many risks with Phase III to attempt to cover in one posting. The building will be a combination of traditional condominium, fractional and hotel units. Condo and fractional units will compete for rentals with the hotel. Buildings of this nature have very high operational risk.

The reclaimed land used for this project has yet to be tested by a tropical storm. Leaks have been reported in the commerical structure that abuts the residential buildings.





This is the only project in Puerto Vallarta that has not adjusted its prices down in wake of a market slowdown. The result: only 3 of 80 units have sold in the 6 months the project has been marketed. Price risk is not acceptable. This project will have to reduce pricing in order to avoid a substantial mark down of unsold inventory at the completion of construction. An Intrawest project had a similar market and pricing profile. At completion, list prices were reduced by 25% across the board to use up unsold inventory.





Recommendation*: Pass

*Recommendations are general in nature only and will be impacted by investors specific circumstances.

Punta Esmeralda

Punta Esmeralda is a 20 acre project of villas, townhouses and condominiums north of Puerto Vallarta, between Bucerias and La Cruz.

The location offers many natural attractions but is about 45 minutes from downtown Puerto Vallarta, longer during peak periods. Road and commerical infrastructure, including stores etc. is very weak in the area.

The project is mostly completed with some condominiums in 2 low rise buildings (6 stories)available along with very expensive villas and town homes. Delivery risk is low. Homes will be completed and delivered when promised.

The developer, Real del Mar, is offering both discounts from list price and financing options, usually combined. The developer may be open to flexible financing and discounts. Financing risk is normal and can be reduced to low depending on the financing package selected.

Environmental risk is lower than normal for Banderas Bay. The project is well above sea level.

The projected maintenance fees of $370 per unit for the condominiums appear to have been set very low. This project has considerable common areas and facilities.

There is no formal rental program but the developer will assist with rentals in the short term. This project will likely generate very limited rental income.

The entry level price for an 1,800 sq ft. condominium is about $345M after discounts. We believe that prices will be very soft for the entire market area north of Puerto Vallarta, and this project falls into that area. There are well over 2,000 units presently available in that market area which is a pipeline of about 4 years supply. There will be no price appreciation in the short term (out to 12 months), and it is unlikely there will be price appreciation out to 3 years.

Recommendations*

Existing Owners: Hold

*Recommendations are general in nature only and will be impacted by investors specific circumstances.

Friday, October 26, 2007

Puerto Vallarta Real Estate Trends

As the high season draws near there are number of key trends investors should consider:

Buyers market - there are 3 years of supply presently for sale, under development or in the pipeline. And pipeline is growing much faster than sales.

Softening prices - virutally every new development has either reduced price or introduced significant discounts from list. Icon Vallarta has dropped its entry level product from $240M to $190M, Grand Venetian from $220M to $190M. Villas de Colina II has been repriced from $450M to $385M. Molina de Agua is down 15% since last April. Punta Esmeralda is offering discounts of 9-15% from list as well as very flexible financing. An exception is Tower 1 at The Peninsula which has increeased prices slightly, but has pre-sold only 3 of 80 units in 6 months.

Financing options - the mortgage brokerage business has experienced slower growth than expected. Developers are much more often now offering financing options. Cash is still king.

Shakeout - projects such as Monte Verde have been pulled from the market due to slow pre-sales and the absence of full permits. At least one mortgage broker has closed. Real estate offices are closing. GMAC has indicated it will retreat from lending in Mexico. However, New Earth Capital, a very experienced California based brokerage business, is entering Mexico.

Continued absence of full disclosure - sales offices and developers continue to fail to provide full disclosure, whether it be strata (condominium) legal structures, proper deeds subsequent to closing and selling prices.

Absence of infrastructure development - despite continued promises, the governments of Puerto Vallarta and the states of Jalisco and Nayarit are hesitant to invest in infrastructure. Property owners in Amapas will not get new roads for at least 3 years and the nearly 600 new owners will have to compete with construction vehicles, on a one lane cobblestone road to reach their homes. Nayarit owners face a bigger issue. Their only fresh water source, the Ameca river, came close to drying up last winter. There are at least 10 new developments in Nayarit that are served by just one road which I can only navigate in a truck despite it being paved. In addition, Nayarit owners still must drive 10-15km to reach a drugstore or foodstore. The one jewel is the new airport which was recently privatized and expanded.

Canadian dollar parity with USD - Canadians can now afford to buy in Mexico. Many are entering the market. My lawyer has advised that his Canadian client list has grown by more in the past 3 months than it did in the past 3 years.

Molina de Agua - Price Reductions

The developers of Molina de Aqua have quietly reduced prices by about 15% across the board on all unsold units.

The reduction came as a surprise since the project had been marketed as nearly sold out for 6 months. Now it appears that a good 30-40% of the units are still available.

Oversight Long Over-Due

After the partial collapse of two condominiums and damage to a third from a falling boulder in the Amapas and Conchas Chinas neighborhoods, the municipal government has taken steps to supervise construction sites. The municipality does not have the resources to post full-time supervisors. Instead, special supervision units have been set up by sharing resources of the municipal Civil Defense, Urban Planning, Environmental and Ecological departments – with the objedctive of avoiding disasters.

In essence, the municipality is treating the forecast outcome of another potential collapse to be similar in nature to a hurricane hitting the immediate local area.

This is good news from an operational risk perspective as it should improve the standard of excavation and development. However, there is potential for increased insurance risk, which not only impacts on secondary market sales but may prevent financing.

Gran Venetian Construction Site Shut Down for 5th Time


The Grand Venetian construction site was closed down for the 5th time this year, this time by the Urban Planning Department, which had already warned of the lack of safety measures for workers. Now the developers will have to pay millions of pesos in fines. Two people have already lost their lives there in 2007, falling from great heights. Despite the closure, none of the site’s 200+ workers have been given any kind of safety equipment. Although the Grand Venetian was notified by City Hall on August 14th to correct 102 matters requiring attention, only minor details changed. Some people believe the entire project should be closed down as the developer is building more floors than the permit allows.

The Gran Venetian has dropped its prices slightly reducing financing risk. There continues to be significant risk of completion within contracted time frames.

Recommendation: Pass

Villas Colina Environmental Risk - Amapas, Puerto Vallarta

The following is reprinted from the Vallarta Tribune:

Last Tuesday afternoon, April 17th, a section of four apartments located at 174 and 178 Hortensia in the hillside Amapas district on the south side of town suffered severe structural damage as it collapsed, tumbling down the hillside to the road below. The buildings are part of Tropicasa Realties’ Villas Colina projects. Thankfully, no one was injured and the only damages were material. Residents were evacuated and the buildings were sealed off pending structural studies. According to the information gathered by reporters of the Tribuna de la Bahía, the construction permits for the second phase of the project were issued by the previous administration headed by Mayor Gustavo Villaseñor, whose Director of Urban Planning was Carlos Manzano. Some claimed that the collapse was caused by the heavy machinery being used for that second phase.When other sections of the hillside a little further south on Hortensia Street came sliding down last July 24th, 2006, Sr. Manzano stated that "everything was in order… there was nothing to worry about."The condo / apartments that were damaged on the 17th were valued between U.S. $500K and $800K.

Recommendation: Pass. Existing purchasers should contact an attorney to determine any rights and obligations. As a result of the environmental risk, financing, either for purchase to to secure access to equity will likely not be possible with this project. All forms of insurance are also at risk. Resales will likely require full disclosure of the environmental risk and significantly reduce reselling price.

Grand Venetian, Hotel Zone, Puerto Vallarta,

The Grand Venetian - Bayview Grand is a 3 tower, 408 unit deeded condominium project with about 68 additional ground level houses.

This project is ambitious and has been selling for over 2 years. Initial delivery of Tower 1 promised in May, 2007 has been pushed out. We are of the opinion Towers 2 and 3 will be delayed well into 2008 or 2009. Some additional delivery delays for Tower 1 and the homes is expected.

Financing risk is considerable for this project. A 30% down payment is required upon purchase, with a further 40% in 2-5 months. A $480,000 condominium may require about $350,000 in funds to be tied up for 2 years or longer. The developer is not providing purchase financing for the balance.

The project is being built on partially reclaimed land at the foot of the Rio Pitall. This geographic area has been known to flood during the rainy season. New drainage patterns are untested. Environmental risk is high.

Operational costs will be slightly below average. Maintenance fees are expected to be about $2 per square meter. The size of the project provides considerable economies of scale.

A rental pool of units is expected, but at the time of posting has not been formalized. Rental opportunities are reduced in the absence of a formal program.

Recommendation: Pass

Villa LaEstancia, Flamingos, Nuevo Vallarta

Villa LaEstancia is structured as deeded full ownership or deeded fractional ownership (mostly quarters) condominium building, north of Puerto Vallarta and Nuevo Vallarta in the Flamingos community. The business structure is similar to the developer's successful Cabo San Lucas project. Nuevo Vallarta is being delivered in three phases, the first at any time, the second in 2008, the third does not have a delivery date.

Construction quality appears high, however a full assessment requires a review of a construction audit upon full completion of Phase 1.

The developers have a strong track record in Mexico, specifically with the Villa del Mar, Villa del Palmar and Villa del Palmar Flamingos projects. Delivery is expected very shortly for Phase 1 and Phase 2 will likely be delivered in mid 2008, only slightly behind schedule. Closings will test the business model for deeded fractional ownership which is somewhat new to Mexico. Phase 3 delivery dates cannot be assured. In addition Phase 3 borders property that has not yet been developed.

Financing risk is below average for Mexico for Phases 1 and 2. A downpayment of 25% is required upon purchase, with the balance at delivery. A 5% price reduction is available for early payment. The developer will finance the balance at 10% for 10 years, with no restrictions on prepayment. This option provides an insurance floor on potential loss of everything except for the downpayment.

There project features above-average purchase prices. Fortunately theses prices can be managed down in certain cases. The three buildings/phases have significant price premiums between the 3rd floor and the 8/9th floors, and for ocean front villas and for penthouses. We do not believe the price premiums are justified. For example, the third and fourth floors offer basically the same views as the 9th floor. The higher floors will not generate any premium rental income or longer term price appreciation.

There are opportunities for rental income. However, this is a premium-priced project, with a specific target market, in a location with limited local infrastructure such as roads and bus service. The condo units feature a very flexible, physical lock off system, which will likely be helpful in covering costs for two bedroom units. There is a promise of a guaranteed rental program within two years. The promise cannot be referenced in any condominium documents. We strongly suggest that management include rental guarantees within the condominium regime documents now.

Operational costs will likely be above average. Condominium budgets have not yet been prepared. Approximately 60% of the project includes common areas and it is expected that the number of staff to in-residence occupants will be 3:1 resulting in high personnel expenses.

Operational risk is low. There are back up systems for virtually everything and it appears the buildings could remain in operation for as long as one week in the event of an emergency.

Environmental risk is normal for the Pacific coast of Mexico.

Personal security is not an issue.

*Recommendations: Phase 1 - hold, buy recommendations except for penthouses and ocean facing villas
Phase 2 - hold, buy recommendations for lower floors
Phase 3 - pass until delivery dates are firm and more information is known about adjoining property.

*Recommendations are general in nature only and will be impacted by investors specific circumstances.

Molino de Agua Project

The Residencias Molino de Agua project (left top) was launched in November, 2006 at Trio Restaurant in Puerto Vallarta. It includes a 130 unit condominium building, immediately south of the Rio Cuale, with beachfront units and Banderas Bay views on the extended Malecon in Puerto Vallarta.

The Vallarta Tribune reported in November, 2006 that 90% of the units, including 100% of the $1 million plus penthouses sold out upon launch and that delivery was expected in Fall, 2008.

I visited the sales office this week and can confirm that NO units have been sold. About 70% of units have been reserved with $10,000 cheques which have not been cashed. Exactly 60% of the penthouse units have been reserved. There are potential buyers who have made multiple reservations as they have not decided which unit they would like to buy. Pro forma budgets for the condominium corporation have not been developed.

Although the demolition of the previous buildings and trees on the site appears complete, ground has not been broken on the new project.

Delivery is expected in Spring, 2009. Based on construction progress and pre sales activity, that delivery schedule is extremely ambitious and will not likely be met.

Recommendation: January 12, 2007 - Pass