What follows is an harrowing tale of the dangers in investing in developing markets. Additionally, there are several telltale signs of the naive and brash personality of many American businessmen before the Great Recession many mefis will find entertaining. Unfortunately, this isn't some made-up story (though I wish it was) and the money my friend has lost is, indeed, very real. Please help!!!
Eight years ago my friend, who we'll call Ernie, was approached by a friend about a real estate opportunity in Mexico. The friend and some colleagues were in the process of forming an LLC to raise upwards of $18 million, and asked Ernie to join.
As experienced entrepreneurs and real estate businessmen, they hoped to buy a piece of prime, beach front property in a desirable part of Mexico, and turn a profit. This land, nestled between two hugely successful resorts like an unspoiled fruit waiting to be eaten, seemed like a great investment opportunity. Obviously, our greedy and oh so human protagonist couldn't resist the prospects of finally being able to pay down his outstanding debt and retire, so he joined the LLC with around 300 large of his hard earned cash.
Within the framework of an exuberant, pre-crisis mindset, there wasn't much to it. Buy, hold, sell. Or, if they got lucky: buy, partner with a resort, milk, and sell. In any case, it was supposed to be a 5-7 year investment, and then home for dinner. Of course, things didn't exactly go that way.
Soon after he invested, the LLC signed a pretty, American-made contract for 30+ acres of prime real-estate. In addition to a large loan, they also had a sweet deed of ownership.
Here's where the story begins to get messy: Given the prime location and quality of the land, their recently purchased property was unsurprisingly protected by the Mexican government. They knew this before, though, and were assured by the sellers that the permit (an MIA?) was easily obtainable. So, as planned, they bought a $450K permit to gain the rights to build improvements (like a resort) on the land, and its value instantly went up. Little did they know they just spent half a million dollars on a fake permit.
Soon after, a neighboring American resort company, which we'll call RMA, got wind of the project and wanted in. They decided to purchase 60% ownership of the venture after a fact finding mission and a long period of due-diligence. This cost a large portion of their ownership, but for 14 million USD and an experienced developer partner it was a small price to pay. Plus, this meant they didn't owe the bank anything.
Cue dramatic music as the fiasco unfolds.
Several months after this great alliance forms, it's revealed (to everyone's surprise) that the environmental building permit is phony. Clearly, the permit seller had already skipped out of town and the land became officially "unbuildable" because no one wants to put another half million dollars into "purchasing" another. Suddenly, RMA freaks out and starts threating to sue the LLC for the amount they purchased the land for, plus damages. That is, they threaten to sue for more than 14 million dollars USD.
Over the course of a couple of years, they send threatening letters to the managing director (who loosely reports back about this) threatening American and Mexican civil suits. Essentially, they argue that they would have never made the deal if they knew there was no permit, (As if the LLC new that) and that they wanted out.
Now cue financial meltdown, a huge depreciation of the land (so it's almost underwater), Ernie loses his job, and several members of the LLC lose almost their entire fortunes. As you can tell, things just became kinda difficult. Ernie is official over his head, out of his depth, in too deep, etc. Understandably, the other investors are also preoccupied with their own affairs to the extent that no one takes the allegations very seriously.
One day Ernie gets a notification in the mail. It's a summons for Mexican court by RMA. They're officially suing the LLC. Oh, and the court date is coming up really soon. Apparently, it will cost an additional 200 - 400 thousand dollars for the group to defend itself, so they laugh and say "the contract is American! Who gives a fuck what the Mexican court says?" Right? Ha. Tell that to the 26 million dollar judgement RMA is awarded for legal fees, missed opportunity costs, misc. costs, and other bogus charges. Apparently, if you can't pay for your day in court you don't get it then. The law at work!
Stunned and confused, nobody from the LLC knows what to do. Like silly children, they hide in their doll houses across the border clinging to the American legally enforced deed of ownership. The group lies wounded, sullenly licking its wounds, as the resort company comes attempts to lumber the judgment to an American court in Delaware. Thankfully, the US justice system will have none of it and the thing dies for the moment. Of the dozen, or so, investors none of them respond to RMA's bullying as they demand their portions of ownership. No one but the sole responsible guy, the managing director, who grudgingly gives his share to RMA.
Flash forward several years, we gradually exit the recession, and now land value is suddenly back to historical highs. An appraisal values the land between 25 - 40 million and everyone slowly starts to realize what a clusterf•ck they have on their hands. Huge corporation vs. some duped investors totally overextended and out of their league in international waters...
What are they to do? Who should they speak to? Can a Mexican judgment be reversed? How do $14 million in damages become $26 million simply because they didn't have the resources to defend themselves? Will the resort company be able to build on the land anyways because they own a majority? How can a contract concerning Mexican land be formulated and signed in the US?