Posted in International Economies, Regulatory
On March 20, 2016, President
Obama became the first United States president in almost 90 years to visit the
island of Cuba, located a mere 90 miles from the coast of Florida—signaling not
only a renewed diplomatic relationship between the United States and the
communist country, but also, the dawning of a new commercial age which will
undoubtedly transform Cuba and its real estate industry.
In the past year and a half
since President Obama first announced that the two nations would once again
engage in a political dialogue, there have been a wide variety of changes that
have come into effect, including the re-opening of an embassy in each country,
and the loosening of travel restrictions affecting United States citizens and
their ability to visit the island. But despite all these monumental changes,
the United States embargo against Cuba, which was first imposed on October 19,
1960, still remains effective—though it appears its days may be numbered.
Last month, the Office
of Foreign Assets Control (OFAC) of the United States Department of Treasuryannounced
it had approved Starwood’s application to pursue a business transaction in
Cuba, making Starwood the first United States hotel chain to have a presence on
the island in over 60 years. Similarly, Marriott International announced that
its application was also approved and that it was currently in discussions to
develop a hospitality relationship with potential partners, though no specific
business arrangements have been announced. According to Starwood’s
announcement, Starwood is allowed to convert three existing hotels; it’s a
start.
Is this it? Is this the
beginning of one of the greatest commercial real estate feeding frenzies since,
I don’t know, the Chinese Communist party gave Adam Smith a big wet kiss? It
could be one of the great real estate plays of this new century. Loads of U.S.
real estate interests and particularly everyone in the hospitality industry has
been lusting after Cuba and waiting for the ancient regime to totter off or
otherwise go the way of the other communist dodos around the world. Look, this
wouldn’t be exciting if Cuba had the geographic advantages of Iceland (no
offense) or South Sudan, but it’s a vacation paradise and it’s only 90 miles
off our coast.
I can see the advertising campaign now: What happens in Cuba
stays in Cuba. Heaven forfend that we confuse this with the Bush-inspired
effort at democratic nation making, we just want to do deals, man. Vietnam with
a calypso beat?
As of now, American citizens
are prohibited from investing in Cuban property and are subject to criminal
charges through the Trading with the Enemy Act (which is definitely a downer),
though this presumably will go away once the embargo is lifted.
So, how is this all working?
One presumes that one doesn’t blithely violate the Trading with the Enemy Act.
So, except for deals limited to managing hotels, much else remains stalled.
The betting is that the
embargo will be raised sooner rather than later and Cuba entirely opened up to
commercial development, at least as far as the United States government is
concerned. President Obama has urged Congress that it is finally time to act
and lift the embargo and “acknowledge that
[the embargo is] not working.”
This, however, may prove to be difficult with a
Republican Congress which sometimes appears nostalgic for the Cold War. Perhaps
because of President Obama’s executive actions loosening restrictions affecting
Cuban relations, most Republicans, including our current and late lamented
Republican presidential candidates, have expressed disapproval of engaging in
diplomatic relations with the island and have stated that they would thwart
Senate confirmation of any ambassador to Cuba. So, it would appear that the
embargo is with us, at least until after the upcoming election, but next year
is looking like a good bet. Even if the Republicans remain a significant force
in the Congress, don’t underestimate the power of the doing-business-in-Cuba
lobby and the attendant donor complex; follow the money Baby!
But, of course, just because
the U.S. government will not send you to the joint for doing business in Cuba
doesn’t mean that doing business in Cuba will get done. There is that pesky
Cuban government which, while it may be in the process of transforming into
communism-light, is still an authoritarian kleptocracy. So how’s that going to
work?
Right now, all our major
trading partners across Europe and Asia are busily doing deals in Cuba and are
breaking the trail for U.S. companies that are increasingly hyperventilating
over the fact that they are losing out to the first movers who aren’t
threatened with U.S. jail time to get a deal done. But, shockingly, foreign
investments are, right now, still proving to be risky. Most investors have to
act through joint ventures with the Cuban government. Has anyone seen the Godfather?
Moreover, the Cuban government remains the sole owner of all the land.
The
state permits “surface rights” to be granted to foreign investment entities,
for terms of up to 99 years, but that is something short of a western style
lease. Long term leaseholds are fine; half of London is built on long term
ground leases. But remember, the Cuban government and the rule of law are
barely on speaking terms. Absent a broad national commitment to some notion of
the rule of law, investing in Cuba will remain done on the sufferance of a
government that is likely to be increasingly mercurial and unstable. Certainly,
there is money to be made, but the risks are real.
So the death of this 60 year
embargo is step one, but step two is the establishment of a domestic regime
that facilitates getting business done. Right now, we really don’t know the
answer to questions such as: How is title established and what rights do the
property owner and the mortgage lender have in the real estate? Can I enforce
my contracts, and where? (This could be a jurisdiction where international
arbitration looks like a swell option, but real estate is really tough to move
and ultimately real estate disputes will likely involve resolution inside the
sovereign envelope of Cuba.) Title insurance?
What licenses will be necessary
and how many times will I have to reread my dog-eared copy of the U.S. Foreign
Corrupt Practices Act. Particularly important for hospitality companies, what’s
the relationship between employer and employee? How are they paid, managed and
organized? And let’s not even get started about Cuba’s infrastructure and its
adaptability to the modern world. Only 5% of Cubans can get online, making it
one of the lowest internet-penetrated populations in the world. The electrical
grid seems dodgy and don’t even think of waste and sewage.
So there are a lot of
important and consequential questions, and the answers are all TBD. But it will
happen. Cuba will, in the near future, surrender to the overwhelming pressure
of the capitalist world gestalt (dialectic anyone?). Once that happens, the
rest is inevitable. But as my economist friends say, I’ll tell you what or
when, but I won’t tell you both. Or, as John Maynard Keynes once said, “in the
long run, we’re all dead.” Market timing here is tough. A lot needs to be
changed before Cuba can be integrated into the world economy.
If Cuba wants to
develop on an industrialized scale and encourage the flow of truly material
amounts of western capital, they are going to have to build a system that allows
that capital to protect its investment. Is it going to happen… almost
certainly. Is it going to happen soon? The jury is out.
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