Real Estate in Cuba – Still no "groundbreaking" events
Posted November 30, 2010 by Publisher in Business In Cuba
Rob Sequin | Havana Journal
Over promise and under deliver should be the slogan of Leisure Canada.
Perhaps this phrase could serve as a warning to other Cuban real estate
developers looking to start projects in a timely manner on Cuban land.
Of course the Cuban government doesn't do many things quickly and I'm
sure this is partially to blame for the extremely long delay regarding
Leisure Canada's development projects in Cuba but when it comes to
hyping, perhaps even misrepresenting Leisure Canada's state of real
estate development in Cuba, the company is squarely to blame.
Cuba's Real Estate Developer – NOT
Publicly traded Leisure Canada (CVE:LCN) has been touting itself as
"Cuba's leading Real Estate Developer" for many years yet the company
has never broken ground in Cuba. That slogan was prominent on their
website until recently yet the moniker lives on as the title of the
website's home page. Now it claims to be the "A leading Cuban investment
company" and prominently features this image below.
Really? An investor's paradise?
Interim Consolidated Financial Statements for the three and nine months
ended September 30, 2010 and 2009 show total revenue of $93,680 with a
net loss of $3,139,032. That's one heck of an investment! The four
largest costs are salaries, rent paid to Cuban government agencies,
general office costs and professional services. Other significant costs
are telecommunications and travel.
Also, a severance package of $226,000 was paid to former Executive
Chairman Wally Berukoff, now with Red Lion Management.
Don't get me wrong. I am pro-Capitalist and have no problem with any
company investing in future projects or venture capital investing in a
start up business but Leisure Canada is not a start up. It's a publicly
traded company and the company is burning through stockholder value and
not just venture capital.
The recent press release titled Third Quarter Results regarding its real
estate development projects states that the architectural, engineering
and concept design plans for their hotel development project, in
Havana's Monte Barreto district, have been approved by the Cuban
However, In April 2007, almost four years ago, the company was granted
surface rights to the Havana land with a statement saying this would
lead to "groundbreaking of the 238-room Phase One by end of 2007" so
this item is not news. The press release also states that the company
has not even begun to even solicit proposals from contractors to begin
construction. This would appear to be a misrepresentation of the facts.
A positive comment about the Cuban government approving 99 year leases
in the press release is a newsworthy event for Leisure Canada yet the
stock price barely changed on this major announcement.
The release stated "This paves the way for consumers to acquire
leasehold real estate in Cuba under competitive financing conditions
similar to other offerings in Mexico and the Caribbean." I don't know
about other offerings in other countries but we all know Cuba is not
like other countries so to compare real estate in Cuba to real estate in
Mexico and other Caribbean countries also appears to be hype or at least
a misrepresentation of common sense.
Management's Discussion and Analysis for the three and nine month
periods ended September 30, 2010 as of November 25, 2010:
The Company's net loss and net loss per share for the nine month period
ended September 30, 2010 was $3,135,837 and $0.02 (per diluted share),
respectively, compared with $1,011,068 and $0.01 (per diluted share)
during the same period in 2009. The significant changes period over
period relate to the increase in consulting fees related to the hiring
of a new CEO and CFO, the recognition of stock based compensation for
new options issued in 2009 and 2010, legal fees incurred with respect to
the termination of certain agreements with the former Executive Chairman
of the Company and with companies controlled by the former Executive
Chairman, and the settlement reached with the former Executive Chairman.
Seems to me like the only people making any money from an investment in
Leisure Canada is the senior management and consultants.
New Management Team
>>>In June, long time CEO and Chairman Wally Berukoff stepped down as
Chairman of the Board early October. Apparently this was the beginning
of the transition to the new management team.
>>>Ned Goodman of Dundee Corporation was brought in as Chairman
recently in October. In January his company was retained at a cost of
$200k for consulting services.
>>>Robin Conners was named in as CEO in August 2009 but may not have
had control of the company until Mr. Berukoff resigned in June.
Leisure Canada Summary
Perhaps the company is in transition now that Mr. Berukoff is gone. If
so, they have the burden of the past to overcome. However, they should
also have the benefit of a ten year history of project planning (not
development) in Cuba. So, breaking ground on any project in Cuba would
certainly be a victory for Leisure Canada. However, should another Cuban
real estate developer break ground on a major project before Leisure
Canada does so in Cuba, I think that would be seen as a huge failure in
the company's current management.
You can see all the Leisure Canada press releases if you want to follow
the financials and management changes.
Cuba Real Estate Development Projects
The Company and its joint venture, Bellavista Resorts SA has registered
surface rights and development rights. Complete architectural,
engineering and concept design plans have been approved by the Cuban
authorities and all three phases of this project will be built
concurrently. Specifications and project information have been compiled
in order to begin a Request for Proposal process to select a general
The Company is also studying alternatives to underground parking and is
working on detailed design components of the project and establishing a
proactive value engineering analysis. Under the development agreement
reached with the Cuban government, the Company through its subsidiary
Wilton Properties Inc. has to match in costs the value of the land
contributed by the Cuban Government of $10,350,000, after which costs on
the project will be split 50-50.
The Company is continuing discussions with the Cuban authorities and
officials in charge of tourism and foreign investment regarding the
approval of certain feasibility studies submitted to the Cuban
government and clarifying the recent announcements from the Cuban
government allowing the construction and sale of residential real estate
associated with resort and golf projects. The Company is awaiting the
formal approval from the Cuban authorities on the preliminary master
plan and development program for Jibacoa. The specific joint venture for
this property has been created and the Company is renewing its
development rights and is proceeding towards the registration of its
surface rights in light of the new 99-year residential leases recently
announced by the Cuban government.
In September 2009, the Company received the authorization from the Cuban
Government on the preliminary master plan and renewed development rights
and to proceed with the land development process on 260,000 m2 of
beachfront property and in December 2009, the Company received site
approval. We have commenced program design for an eco-resort of
approximately 400 rooms and the Company is currently engaged in economic
feasibility studies. The Company is proceeding with the creation of a
specific joint venture for this property and the registration of its
Risks and Uncertainties
Taken from same Management Discussion paper, "The Company's financial
position and its development projects may be affected by political or
economic instability. These risks include exposure to fluctuations in
currency exchange rates and high rates of inflation. While the Cuban
Government is currently seeking to encourage foreign investment by
removing certain restrictions on foreign investments and permitting
foreign entities to repatriate profits from Cuba, there can be no
assurance that this trend will continue.
Operations may be affected by varying degrees by such factors as
government regulations with respect to price controls, income taxes,
expropriation of property, environment legislation, land use, water use
and land claims of Cuban nationals. The effect of these factors cannot
be accurately predicted.
The Company is also dependent on the Cuban economy, which itself is
highly dependent on external factors such as commodity pricing of oil
and nickel, and the state of the world tourism market."
My comment – Is Cuba somewhat to blame here? Of course. There have many
news story in 2010 about the Cuban government reviewing and/or approving
a variety of new Cuban golf course and vacation resorts complemented by
Cuban villas and real estate "for sale", none have broken ground yet.
Trying to develop golf resorts in a Communist country with a centrally
controlled economy is certainly like pushing a rock up hill. Leisure
Canada should know this and not over-hype their development status. They
are a publicly traded corporation with a responsibility to their
Cuban Law and Commercial Practice
As is the case in many developing states, the commercial legal
environment in Cuba is in a formative stage and accordingly, the legal
rights of the Company and its subsidiaries may not be enforceable in
Cuba to the same extent as they would be in a fully developed
industrialized state, parliamentary democracy or market economy. The
Company's Development Agreement with Cuba provides for arbitration of
disputes in Cuba and Cuba has, in the past, properly submitted to
commercial arbitration and agreed to abide by the results thereof, but
there can be no assurance that it will do so in the future.
Also, since Gran Caribe is an agency of the Cuban government, it may
make decisions with respect to the development properties which are
driven by non-commercial considerations. There can be no assurance,
therefore, that actions by Gran Caribe, in respect of the Company's
joint venture, will always be in the best interests or consistent with
the interests of the Company.
Under the Company's Development Agreement with Cuba, Wilton is
responsible for obtaining 50% of the financing of each development
project by way of third party debt financing, with the remaining 50% to
be contributed equally by way of equity from Gran Caribe and Wilton. If
Wilton is unable to obtain such debt financing on reasonable commercial
terms, Gran Caribe and Wilton must contribute equally by way of equity,
the entire amount required for such development project.
If either Gran Caribe or Wilton fails to contribute its portion of the
required equity, the other party may make a loan to the defaulting party
or may contribute the amount of the equity required directly to the
subsidiary and subsequently dilute the defaulting party's share in such
development project. There is no guarantee or assurance that the Company
will be able to arrange third-party debt financing for 50% of the cost
of each development project. There is also no guarantee or assurance
that the Company will have or be able to raise the amount it will be
required to contribute to any given development project in equity.
If Wilton is unable to contribute its equity portion to any given
development project, Gran Caribe is entitled under the Development
Agreement to dilute Wilton's interest in such development project. There
is also no guarantee or assurance that Gran Caribe will have or be able
to contribute its portion of equity required to finance any given
development project, in which case Wilton would be required to
contribute the entire amount required to finance the development
project. There is no assurance that the Company will have or be able to
obtain the equity required to any development project on its own.
The Company has made significant progress in arranging prospective
sources of financing for its development projects, but definitive terms
and conditions, and agreements reflecting these, have not been
finalized. There is no assurance that those terms, conditions and
agreements acceptable to the Company will be completed on a timely basis.
US Laws Relating to Cuba
The various U.S. laws and regulations establishing the embargo have been
amended from time to time, including the Cuban Liberty and Democratic
Solidarity (LIBERTAD) Act of 1996, also known as the Helms-Burton Act
("Helms-Burton Act"), which extended the reach of the U.S. embargo. As a
result, the Company is affected by these changing political and legal
relationships between the U.S. and Cuba. Although the Company monitors
and analyzes the potential impact of any anticipated changes and
generally prepares to capitalize on any future opportunities or mitigate
any increased risks, there is no assurance that the Company will not be
adversely affected by changes in U.S. laws.
The Company is currently prohibited from accessing U.S. capital, debt,
customers and suppliers, which limits its ability to mitigate the
financial risks described above.
We have made every effort to ensure that the Company's development
projects are located on land which will not be subject to a claim which
has been certified by the U.S. Foreign Claims Settlement Commission, the
body responsible for dealing with U.S. nationals whose Cuban properties
were confiscated by the Cuban government. However, there is no assurance
that claims will not come to the attention of the Company or the U.S.
government in the future.
The Company and its subsidiaries do not hold assets located in the U.S.
The Foreign Extraterritorial Measures Act (Canada) provides that any
judgment given under the Helms-Burton Act will not be recognized or
enforceable in any manner in Canada. It also allows a Canadian
corporation to sue and recover, in Canada, any loss or damage it may
have suffered by reason of the enforcement of a Helms-Burton Act
So, are you ready to buy some Leisure Canada stock? Are you ready to
invest in Cuban real estate development projects?
The Carbonera Club project has been offering Cuban villas for sale yet
there is no groundbreaking date for that project that I know of. To be
fair, I have not heard of ANY groundbreaking of any new golf, course,
marina or resort project in Cuba.
The biggest hotel owner/manager is Sol Melia in Cuba. I don't think any
foreign company comes close to Sol Melia with regards to a foreign
business in the tourism industry. The company will be opening yet
another Cuban hotel by the end of this year.
Since joint ventures are required for ALL development projects and since
qualified large-scale construction contractors in Cuba are selected by
the Cuban government, we may not see any ground breaking on any project
for not just months but perhaps years.