Tourism has been hurt by stalled projects

PUERTO PEÑASCO - You're the mayor of a coastal city of 35,000 known for its beauty. You have some great times where a lot of building goes on and then some not-so-great times when much of the work grinds to a halt and leaves you with skyscaper skeletons. Parts of your city resemble backdrops for a movie about a nuclear disaster.

If you are Alejandro Zepeda Munro, mayor of this city, known to Americans as Rocky Point, you sigh.

"I wish I could complete them - or make them all go away," Zepeda says. "The problem is, these are private projects, with private capital, each one with its own unique set of circumstances and there's not much a municipal government can do. During the good times, who ever thought about his project coming to a stop?"

The two dozen or so buildings in question were to be condominiums for the visitors from the United States with starting sales prices at $175,000. During a rush six years ago, more than 3,000 new units sold for about $250,000. And there have been cases where units sold for $600,000 or more.

Some, such as Tessoro, a four-tower project in the Las Conchas subdivision, were new projects. Others, like Las Palomas, were expansions of existing projects. An extreme case: Esmeralda, a luxury complex, ceased work after completing just 25 of 281 planned units. (See related story.)

The blight has blemished Rocky Point in a democratic fashion. Building hulks, exposed rebar, empty pools, traffic circles leading nowhere and exposed bedrooms are distributed among luxury resorts along Sandy Beach; in the wharf area known as the Malecón; and at intervals throughout the sprawling Las Conchas subdivison. Ironically, perhaps, the only areas unaffected by unsightly structures are the commercial district and Rocky Point residential neighborhoods, a mile inland, which never made any claim to beauty.

The stalled projects haven't escaped the attention of the Sonora state government in Hermosillo, which has watched the corrosion of its tourism jewel. In a decade, state officials had marveled as sand dunes were pushed around to make way for foundations and then high-rise buildings. Every time a new building went up, a buyer from Arizona, New Mexico, California or Nevada would appear. Some 3,200 condo units were built during a five-year frenzy ending in 2008. For a period, conversations around Tucson and Phoenix dinner tables were about what size condo to buy and the home equity loan that would used to make the down payment.

But cognizance and taking action are two different matters. So far, the state government's role in a solution has been non-existent.

Javier Tapia, general coordinator of the Sonora tourism development commission - the state's tourism chief - created a task force called the rescate de inmuebles turísticos inconclusos, or unfinished tourism real estate rescue, that has now met with condo builders and city officials. The result: a half-dozen builders have requested state assistance, including use of a private industry expert, to look at how to conclude construction and what to do with a building whose end product, if offered, would be one for which there's little or no demand.

The mantra of Rocky Point, therefore, has become "conversion."

There is consensus that many, if not all, of the buildings are going to have uses other than their original purpose.

"The key is figuring out which of these projects can be converted to something that's in demand today or in the short-term," said Zepeda, the mayor, who was recently in Arizona visiting assisted-living facilities. "We think that these building shells, or floor-plans, can be converted into something useful in the short-term. The city is open to any suggestions whatsoever."

Health care facilities for aging Americans? Time-shares properties similar to those offered, successfully, down the road at Mayan Palace resorts? It is only with a touch of irony that some Sonorans propose the state, which is short on beds for an increased prison population, should examine high-rise penitentiaries.

What makes the case of Rocky Point so intriguing is just how much of a hybrid it is. Whereas other tourist regions have five or 10 hotel rooms for every condo, Rocky Point is the reverse, with one hotel room for every five condos.

Cancun on Mexico's east coast has 28,000 hotel rooms and 9,000 units of condos or time-shares. At Honolulu's Waikiki Beach there are 32,000 hotel rooms and 3,300 condos. In some places, governments are putting the brakes on allowing too many condos. In Clearwater, Fla., authorities have imposed limits on developers' plans to convert hotel rooms into condos.

In Rocky Point the sum total of hotel rooms barely reaches 700. None of them are part of brands that would be widely recognized by Americans.

Business for Rocky Point hotels has generally been good in recent months but not without issues. Tucson-based NCH Rocky Point LLC, operator of the largest hotel in the city, the 203-room Peñasco del Sol, is in the midst of U.S. Chapter 11 bankruptcy procedings.

As for the people who created the Rocky Point business model favoring condos over hotel rooms?

They are among us and can be identified by asking a single question: Who in Tucson and Phoenix would not own a beach front condo?

What made Rocky Point a condo city instead of a hotel city has more to do with financing than tourism trends. Essentially, developers collected 30 percent down on a condo - often money from Americans taken out on second mortgages - instead of using a construction loan. As a result, there was more money in short-term construction projects than in building hotels which have longer payback periods.

"It was easy to ask for $50,000 to $80,000 upfront and proceed from there," said Oscar Palacio, whose family runs the Playa Bonita and 91-room Laos Mar. "Every case is slightly different, involving different investors, different banks and different sales agreements, but what they have in common is they were speculative ventures predicated on the continuing strength of the market."