Investing in the Resort & Hospitality Market in Mexico: - PowerPoint Presentation

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Investing in the Resort & Hospitality Market in Mexico:Opportunities and Challenges in Acquiring and Operating Hotels and Resorts

Fri, Nov 08, 2:30 PM  - 4:00 PM Sheraton Hacienda del Mar, Los Cabos

American Bar Association

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Conference on Legal Challenges & Opportunities of Mexico’s Increased Global IntegrationSlide2

The following report is from the office of the General Counsel of Timeshare International (“TI”)

, a global, aggressive and well-funded vacation ownership club and hospitality brand based in California. TI is looking to expand into the Mexican market. The Target:

* existing timeshare resort and a

neighboring vacant lot

in the San Jose del Cabo Fonatur tourism zone.  * both the resort and the vacant lot are essential to the acquisition * Vacant lot is approx. 2 hectares (5 acres) in size, fronts both the beach and the main Blvd., and is for sale by Fonatur, the Mexican Tourism Development Fund (subject to development covenants and restrictions)

Hypothetical Case StudySlide3

-The developer/owner/seller is a Mexican family-held corporation based in Guadalajara

-150 of the units are dedicated to timeshare and 75 are pure hotel rooms, as evidenced by a timeshare lien or “unilateral declaration” recorded against the property in the Public Registry of Los Cabos-

Title to the Resort is held in a Mexican guaranty trust, in which the

Developer

holds the beneficial rights to the real estate and use rights, subject to the use rights of the members and the rights of a Mexican bank (the “Bank”) as guaranty beneficiary/creditor, who holds a note with a current balance of US$8.5 mm.-There is no VPOA (Vacation Plan Owners’ Association) because per Mexican timeshare law, we understand this is not necessary.

The existing resort consists of 225 villas, including studios, one bedrooms and two bedrooms. Through initial due diligence, TI has confirmed that:Slide4

-The loan is secured by:

A non-possessory pledge of all remaining timeshare/club inventory An assignment of receivables,

consisting of the membership purchase contracts and promissory notes signed by members

purchasing their memberships under 10-year

installment plans. The monthly payments then go into a “lock box” managed by the trustee, who then disburses first to the Bank pursuant to the terms of the loan and trust agreement, and if anything is left over, to the Developer A mortgage on the Resort property granted by the trustee in favor of the Bank (which is subordinate to the timeshare declaration)Slide5

-The Developer, via an affiliate, also holds the management contract,

which in theory brings in around $1 million per year in fees.-The Resort has a Profeco (Mexican Consumer Protection Bureau) permit for the sale of a single-site vacation club points based membership product.

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Our

auditors have confirmed that the timeshare/vacation club inventory is roughly 80% sold out but there is a consisted flow of defaulted inventory coming back every month, which is held by the Bank.-Most buyers at the Resort purchase on credit, with 25% down and the balance over 10 years.  The bank allows the Resort to keep the whole down payment to cover its sales and marketing costs (which amount to approximately 45% of the total sales price of a membership), and then the Bank takes the vast majority of the cash flow from the receivables to apply it against the payment of principal and interest under the loan agreement/note.Slide6

-The Resort charges the Consumer a 15% fixed interest rate on these receivables; while the note with the Bank is Libor plus 8.5%, so with today’s low LIBOR, there is a fairly decent arbitrage there in favor of the Developer that is also part of the assets.

-There are also two main restaurants on property which are operated by the affiliated management company.  One is a loss leader, but the other, which is basically a beach club, does a great, profitable business, including a strong non-member local clientele, who visit the restaurant and enjoy the day on the beach, purchasing food and margaritas.

-The beach club restaurant is located primarily on the Federal Zone, the concession to which held by the Developer.Slide7

-So in sum, the main assets are:

75 hotel rooms (subject to deed of trust in favor of the bank) Beach concession title

Restaurant/beach club business

Un-sold timeshare/points inventory equal to roughly 20% of the overall points applicable to the 150 villas. Resort management contract Defaulted inventory held by the Bank Receivables from installment purchases (subject to payment obligation to Bank)Slide8

-The main liabilities are the timeshare lien on the 150 units and the $8.5 mm note.

-The Developer is currently in default with the Bank, primarily because of high rescission and default rates as well as not having enough cash sales; and therefore the down payments plus his (small) share of the monthly payments are not enough to cover the 45% in sales and marketing costs. The Bank has threatened foreclosure and thus the Developer now

wants out and is willing to sell at a good price.Slide9

Benjamin C. Rosen, Rosen Law -

Program Chair, ModeratorRaoul Chollet, Regional Delegate – Los Cabos - Loreto, FONATUR (National Tourism Development Fund) - Speaker

Nicole Evans, Ballard

Spahr

– SpeakerHoward S. Lanznar, Executive Vice President & Chief Administrative Officer, Diamond Resorts International, Las Vegas – Speaker Joaquín Tello de Meneses, Legal Director, Grupo Questro, Los Cabos – Speaker Panel Participants