Costa Rica’s Top Economic Industries

Tourism

Costa Rica is the world's fastest-growing destination for adventure and nature travel, and travelers from all over the world are pouring in, too. The resort industry is booming in Costa Rica and has surpassed their previous leading industries in agriculture; that being bananas and coffee back in 1993. The country has recently been adopted as the darling of the ecotourist: the just reward for preserving its national parks and wildlife reserves.

At current rates of tourism expansion, the country needs to open 500 new rooms each month. It is currently difficult to get beds Nov.-April, when a severe case of room shortage afflicts many of the more popular spots.

The Beach Resort Boom

Sprawling resort complexes are beginning to sprout all along the Pacific coast shoreline. Chief among these is the Gulf of Papagayo project encompassing several beaches. The megaresort, being constructed by a host of European developers spearheaded by the Spanish developers Sol Melia, will be the largest "leisure city" in Central America, with rooms for 6,000 tourists in 2,000 rooms, 50 luxury villas, 400 family villas, and 700 apartments, replete with shopping center, golf course, and other supporting amenities.

Costa Rica stands to gain much more than cash from the current boom. Firstly, optimists suggest that the profit potential of tourism encourages private landowners to regard natural areas as long-term assets rather than a source of quick cash, and that resort developers realize that the added expense of building around rather than through a forest pays ample dividends in the end. Kalia Modern Eco-Living is a good example of this.

Other Big Business...

Intel leads the way with for Costa Rica exports. The Intel facilities in Heredia sits upon 126 acres and includes two manufacturing plants and one distribution center dedicated to the assembly, testing and distribution of the world's fastest processors: the Intel Pentium 4 processor, Intel Celeron processor and Intel Xeon processor. Intel has nearly 2,000 employees in Costa Rica and annual exports of about US$1 billion.

Another brand name Procter and Gamble has well over 1,000 employees in Costa Rica and according to Alfonso Cos, the VP for GBS (Global Business Services) North America: "The quality of education we found in Costa Rica is impressive. We have confirmed that the talent and training of the people is one of the best we have seen worldwide."

Agriculture

Agriculture dominates the Costa Rican economy. The fact is obvious everywhere you go, where a remarkable feature of the land is the almost complete cultivation, no matter how steep the slope. Nationwide, some 12% of the land area is planted in crops, 45% is given to pasture, and only 27% is forested.

Coffee and bananas are the most important crops in terms of area and export earnings. The vast banana plantations which cover the Caribbean plains produce some 50 million boxes of bananas per year, accounting for 30% of the nation's export earnings in 1992 and making Costa Rica the second-biggest exporter of bananas in the world, behind Ecuador. Sugarcane is grown by small farmers all over the country but becomes a major crop on plantations as you drop into the lowlands (particularly rapid growth in sugar production occurred in the 1960s after the U.S. reassigned Cuba's sugar import quota; production has since gone into decline--in 1981 Costa Rica had to import sugar to meet domestic demand). And cacao, once vital to the economy many years ago, is on the rise again as a major export crop.

Recent attempts to stimulate nontraditional exports are paying dividends in agriculture. Cassava, papaya, the camote (sweet potato), melons, strawberries, chayote (vegetable pear), eggplant, curraré (plantain bananas), pimento, macadamia nuts, ornamental plants, and cut flowers are all fast becoming important export items.

Bananas

Costa Rica's banana industry, currently the country's number one earner of foreign currency (outside of tourism), continues to expand to meet the demand of a growing international market. Some 32,000 hectares are currently planted, a 50% increase since 1985. Most growth is concentrated in the north Atlantic lowlands.

Coffee

Costa Rica's possesses ideal conditions for coffee production, and beans grown here are ranked among the best in the world.

The first coffee beans were brought from Jamaica in 1779. Within 50 years coffee had become firmly established; by the 1830s it was the country's prime export earner, a position it occupied until 1991, when coffee plunged overnight to third place in the wake of a precipitous 50% fall in world coffee prices after Brazil scuttled the International Coffee Agreement quota system in 1989.

Real Estate Rights in the Dominican Republic

The following information about buying real estate was provided by my attorney in the Dominican Republic, Sara V. Sicard Sanchez, partner at Sanchez Raful Sicard & Polanco.

The acquisition of real property rights by foreigners is not subject to any special condition, falling under the same legal regime applicable to Dominican nationals.

Registration System

Law 1542 of 1947 on Land Registration establishes the Torrens system of real property registration.

Real property rights registered under this system are deemed to be known by, and thus biding on third parties. Therefore, the presentation by the seller of a Property Certificate issued on his behalf by the corresponding Registry of Titles should in principle be enough to prove that the seller is entitled to transfer the ownership rights of the property. Any mortgages or charges would also be mentioned in the certificate.

However, it is always advisable to verify the status of the property directly at the Registrar’s offices, whose records are open to any interested party, and even obtain a written confirmation on the result of these findings, before purchasing the property. This is usually achieved requesting a certification on the status of the property in question to the Registry of Titles.

The Dominican Republic registration system protects the buyer against any sale or mortgage that, although previously signed, has not yet been registered when the buyer files its purchase agreement for registration.

For these same reasons, the prompt registration of the sale is very important.

In order to do so, the buyer must file at the Registry of Titles the following documents:

a) An original of the purchase agreement, which should be legalized by a Public Notary.
b) The Property Certificate issued on behalf of the seller, which will be canceled and exchanged for a new one on behalf of the buyer.
c) Certification stating that the Tax on Luxury Real Property and Empty Urban Lots (IVSS tax) has been paid, or that the property in question is exempt from such tax payment. Article 13 of the 2004 Tax Reform amends the first three articles of Law 18-88, extending the exemption of this tax from three to five million pesos, and from no exemption to a five million pesos exemption for urban lots.
d) Proof of transfer tax payment.

If the seller in question is a legal entity, the buyer will have to file additionally:
a) Certified copies of the shareholders minutes of the seller, designating its current Board of Directors.
b) Certified copy of the minutes of the Board of Directors approving the sale of the property in question and authorizing a person to sign on it behalf.

Transfer Duties

As mentioned above, the registration of the transfer of a real estate property at the corresponding Registrar of Titles requires the payment of the following taxes and duties:

3% of the market value of the property. This tax also applies to real property transfers for a value exceeding one million pesos that have been purchased with loans of financial entities. This amount is subject to inflation adjustments; and,
Stamps under Law 80-99, calculated as follows: market value minus 20,000 and the result/ 1,000 x 13 + 232.00. This value is subject to annual inflation adjustment.

These taxes amount to approximately 4.8% of the market value of the property.

Another aspect to take into account is Law 18-88 of February 5th 1988, on Tax on Luxury Houses and Urban Lots, amended by Law 288-04 of the Tax Reform, which establishes an annual tax on houses and apartments whose value exceeds five million pesos amounting to 1% of the surplus of such sum. The amendment enlarges the scope of this tax by including commercial properties and urban lots were previously excluded. However, property owners older than 65 years who have owned the property for at least 15 years and who do not have any other property are exempted from the payments of this tax. Furthermore, rural land used in agriculture, as well as equipment, machinery, generators, goods and other personal property located in the properties, is also exempted.

Politics in the Dominican Republic

When I mention that I am invested in real estate in the Dominican Republic, the first question I am usually asked is "what is the political climate there?". I think this is one of the biggest concerns most people have about investing internationally.

Recently, I-REIF's contributing writers were discussing eminent domain, the right for a government to buy or nationalize private property for public use. We were discussing how the fear of losing property to a foreign government is one of the reasons that investors might shy away from investing in an international market, even if the profit potential is extraordinary.

Janet Fish, who is currently developing two large resort real estate projects in the Cabo San Lucas area in Mexico stated "Let's not pretend eminent domain does not exist in the United States." Good point, Janet.

Another interesting topic of discussion was whether or not title insurance provides any protection against nationalization of private property. The answer is no. Title insurance only promises clear title at the time of purchase; it does not protect against the future as home owner's or car insurance does.

With that said, we all agree that exploring the political climate is an important part of due diligence when considering any real estate investment, domestic or international.

When I started investigating the Dominican Republic, I learned that the DR is a politically stable, free and democratic nation. I discovered that most people who know the Dominican Republic, believe that the stability of the DR government, combined with its close relationship with the United States make it a pretty safe bet as far as real estate investment.

The President of the Dominican Republic, Dr. Leonel Fernandez, served as President from 1996 to 2000, was elected with a large majority vote to a second term in 2004 and is up for re-election in 2008. On our last trip to the DR, I asked many Dominicans about their view of the upcoming election. Based on my casual polling, it seems Dr. Fernandez will very likely be re-elected.

Dr. Fernandez's political agenda has been one of economic and judicial reform and technological development. His administration has been recognized for its respect for human rights and civil liberties and for the economic growth that has occurred during both of his terms. A professor since 1979, Fernandez has lectured at numerous universities, including Yale, and has authored several books and numerous articles about politics, economics, communication, history and law.

Personally, I'm comfortable with the political climate in the Dominican Republic as it relates to my personal investments as well as developing real estate there in the future.

Property Ownership in Mexico

Whenever I am talking to folks about buying and owning in Mexico, I inevitably get the comment, "I heard foreigners can't own property in Mexico". While this used to be the case, the laws have definately changed.
As foreigners, coastal properties had been off limits until 1974. At that time, the Mexican government made it possible for foreigners to own property in Mexico. They accomplished this with the "Fideicomiso". A Fideicomiso gives you the right to a 50-year title perpetually RENEWABLE BY LAW!

"Fideicomiso", or bank trust, is defined for real estate purposes as a transaction entered into between a Mexican bank and foreign individual or firm investing in areas otherwise restricted to foreign investment, with the bank serving as trustee or legal owner with respect to a certain real property interest and the investor serving as the legal beneficiary of the trust. The bank holds title to the property in trust for the beneficiary who retains the exclusive right to the use and control of the property.
As trustee, the bank acts on behalf of the beneficiary in transactions involving the property held in trust. However, the beneficiary controls and makes investment decision regarding the property, including the decision to transfer, assign or otherwise dispose of this or her interest in the property.

The trust is essentially a contractual arrangement which, in most respects, is identical to the type of trust commonly used in the United States . Trusts are established for initial 50 year periods and can be renewed indefinitely.

There are actually two ways a foreigner can own land near the coast in Mexico. One option is a 50 year automatically renewable bank trust called a Fedeicomiso as dicussed above.. A fedeicomiso is secured by international known title companies, we use Stewart Title Insurance Company.

The other way to own land is through formation of a Mexican Corporation that holds title to the land. You must be doing business in Mexico in order to form a Mexican Corporation. In the scenario, title is fee simple title held by the Mexican Corporation.

Economy and Industry in the DR

The growing Dominican economy has developed primarily due to a well-managed tourist flow and flourishing agricultural industries. "The country is growing at a rate near unparalleled in its recent history" Tom Blass reports in an article appearing in The Banker April 3, 2006. The GDP growth rate is presently almost 7.9% per year.

The currency is the Dominican Peso (DOP). The exchange rate is roughly 32 pesos to the US dollar.

US companies with a presence in the Dominican Republic include Johnson & Johnson, 3M, UPS, Abbot Laboratories, Baxter, Verizon, Citibank, Marriott, Hilton, Remax and Century 21.

The July 2006 implementation of DR-CAFTA (Central America Free Trade Agreement) will stimulate trade between the United States and the Dominican Republic because $1 billion in taxes and tariffs will be removed for American companies involved in trade with the Dominican Republic,

Tourism
The significant rise in tourism is a factor in the growing Dominican economy, and it's expected to continue to reach new heights in the coming years.

The Dominican Republic attracts the most tourist visitors of all the Caribbean islands. 2005 saw growth rates in excess of 7% higher than the previous year. Travel companies in the US and Europe are highlighting the Dominican Republic as a premier vacation destination.

Tourism Minister Felix Jimenez stated that the Dominican government will be investing $5 billion in tourism infrastructure through 2008.

Hotel occupancy in the Dominican Republic is currently 74%. There are only 70,000 hotel rooms available to accommodate more than four million tourists per year. In the next 8 – 10 years, ten million tourists are expected to visit the Dominican Republic, requiring 250,000 rooms. . During the high season (12/15 – 4/30 and 7/15 – 8/31) hotel occupancy rates are currently as high as 95% in beach destinations.

The majority of the tourists visiting the Dominican Republic come by air and stay for a minimum of one week. European tourists’ average stay is two weeks.

The major tourist destinations in the DR include Punta Cana, known for it’s large, upscale all-inclusive resorts; Puerto Plata, Sosua and Cabarete, tourist areas popular with wind surfers and college students; La Romana and Casa de Campo; and the focus of recent tourist attention, the Samana Peninsula.

The President-elect of the National Hotel & Restaurant Association, Luis Lopez, forecasts that Samana will become the new prime destination in the Caribbean with the opening of the El Catey International airport. The Dominican Secretary of Tourism is focused on the Samana Peninsula with the support of DR President, Leonel Fernandez, who recently signed a plan to develop and promote the area. The Samana Peninsula is the only region with a government plan in place.

A nature-lover’s haven with lush green mountains and beautiful white sand beaches, Conde Nast Traveler has called the Samana Peninsula one of the 25 best locations in the world.

Process for Buying Real Estate in the DR

The process of buying real estate in the Dominican Republic is fairly simple and somewhat similar to the process in the United States.

A Contract of Sale is signed by both the buyer and the seller, before a Dominican notary (Notaries in the DR are required to have a law degree) or may be certified through the Dominican Consulate in the US. The buyer normally posts a deposit for the property, usually not less than 10% of the total purchase price of the real estate in question. The Contract of Sale is submitted to the Dominican Internal Revenue Office for assessment and payment of the transfer taxes. Then, with financing in place, and all the conditions of the Contract of Sale met, the Contract of Sale and the Certificate of Title are submitted the Title Registry Office for the recording of the sale. A new Certificate of Title issued in the name of the buyer is supplied by the Title Registry Office.

As is the case in many markets, there is a risk of fraudulent real estate transactions. With the immense interest in Dominican real estate, there are cases of one property being sold to multiple buyers, property being sold by individuals who do not in fact hold title, and land that cannot be developed being sold to prospective developers. Caution is advised.

Real Estate Taxes, Fees, and Financing

In the Dominican Republic there is a transfer tax of 4.8% of the appraised value of property, which is due at closing. Title insurance is available through Stewart Title at 1.0 to 1.5% of purchase price as one-time charge.

The property tax rate in the Dominican Republic is very attractive. Property valued under RD$ 5,000,000 pesos (approximately $165,000 US) are not subject to property tax. Property valued in excess of $165,000 (US) are taxed at a rate of one percent of the value above $165,000: A property valued at $265,000 will be assessed a tax of one percent of $100,000––$1000 annually).

The Dominican capital gains and income tax rate is 25%. Holding real estate in a corporation offers the advantage of allowing related expenses to be deducted.

Property may be held as an individual, a Dominican SA (Dominican corporation), an off-shore company, or a US LLC. For all real estate held in a corporation, documentation must be submitted in Spanish to the Mercantile Registration in the Dominican Republic.

In terms of financing, 90% LTV is available from both US and Dominican banks. The origination fees range from 0 – 1% with Dominican banks to 3.5% with some US lenders. US lenders generally require cross collateralization of US property equity. Dominican Banks generally loan for a maximum of 20 years, where 30 year loans are available through US lenders. Some lenders will finance the transfer tax, and possibly furniture and appliances as well.

Dominican Republic attracts wave of U.S. investors

This is the transcription of one of several news stories about investing in the Dominican Republic that aired on television last summer.

Dominican Republic awash in investors
Caribbean's pristine Dominican Republic attracts wave of U.S. investors

By Kerry Sanders
Correspondent, CNBC
Updated: 3:21 p.m. PT July 21, 2006

The Caribbean's Dominican Republic is a land of colors with its red, white and tropical blues. But it's all about the green that has people buzzing these days.

The island nation may have been an undiscovered country to Americans just three or four years ago, but today it is paradise found. Real estate projects in this Spanish-speaking country are sprouting like palm trees.

“The United States market is now beginning to identify the values and the opportunities that lie here in the Dominican Republic, particularly in a project like Cap Cana, which is aiming to the highest end of the world market,” said Ellis Perez, president of Cap Cana.

Cap Cana, a project hugging the island's southeast coast, will be the country's largest private community — a mammoth 30,000 acres — with plans for five hotels, five golf courses and thousands of homes. It's just beginning to take shape with hundreds of millions in foreign dollars, 33 percent of which is American.

Real estate in the Dominican Republic is so hot that even before they broke ground at the project Roko Ki they had sold $100 million in properties, 90 percent to Americans — that too, all in one day.

Roko Ki's natural beauty is undeniable. Investors are banking on another seaside jaw dropper, with jungle bungalows for the rich and famous, signature golf courses and fancy villas, signaling even more American interest. The hotel chain Starwood Resort Worldwide is building a Westin.

“In between 10 and 15 years we expect Roko Ki to have 8,000 residences and about 6 to 7 high end, five-star hotels,” said Nick Tawil Fernandez, president of the Roko Ki Westin.

Factors responsible for the recent Dominican Republic fever are varied. They range from a series of Dominican baseball stars, a democratic government encouraging foreign dollars, a number of new direct flights from the United States and a lot of recent good press. These reasons coupled with bargain land prices and cheap labor have helped put the Dominican on the map like never before.

“It's just very welcoming, very hospitable and once you've come here you want to come back,” said Tawil Fernandez of the Roko Ki Westin.

Many Americans fall in love with the Dominican while on vacation. A record number of tourists visited this past season after Hurricane Wilma pummeled Cancun, Mexico.

Even Hollywood is taking notice. Recently Brad Pitt was flying about the island looking for his piece of paradise. Fellow actor Vin Diesel is planning on building in Boca Chica and Robert Deniro is also actively looking.

Nestled between Cuba and Puerto Rico on Hispaniola, the Dominican shares this 29,000-square mile island with Haiti.

Poverty remains harsh reality
Islanders like to say Christopher Columbus was the first tourist here. Historians believe Columbus landed on Hispaniola before making it to the new world. Today well-paid tourism-related employees earn between $100 and $140 a month. Nonetheless, the poverty is undeniable — the poorest being an estimated 1 million Haitians who work in sugarcane farms or construction.

Dominican Secretary of Tourism Felix Jimenez recognizes that low wages are part of the draw but also says foreign money is raising the standard of living.

“My country is a poor country, but we are working and investing a lot of money in new roads, electrical supplies, water supply to help build a modern country,” says Jimenez.

That progress is increasingly visible and is encouraging investments from around the world.

Recently a German businessman sank $50 million into a marine adventure park on the north coast, Ocean World, which has been drawing tourists from all over the country.

Wall Street money manager Boykin Curry and a group of investors recently took the plunge on the island's breathtaking north coast and bought up to 2,000 acres to develop in Playa Grande at a bargain $55 million — golf course included.

“He has seen not only the cooperation of the government, but also of key individuals and key development partners in the country that can help us,” said Carl Carlson, CEO of Playa Grande Holdings.

“We have seen a lot of interest from golfers and from people in the industry and everybody is expecting a lot from us,” he added.

Down the road from Playa Grande is picturesque Cabarete beach —a water sports mecca for world-class wind and kite surfers — that has made a splash with Americans.

“Valero is 5 years old, and at the beginning we had a base of international owners, almost 10 percent were American,” said Mario Magnan, general manager of Valero Beach.

“But recently we're seeing a big flux in American owners. Today, Valero Beach is 70 percent American-owned,” he points out.

Retirees drawn to service factor
American retiree Phyllis Berney from Wisconsin discovered the Dominican Republic was a bargain a long time ago, but it's the Dominican people that sold her on staying.

“My mom is going to be 98 in November, and she said, 'Where else could I be that someone could be so kind they actually help me put on my shoes, that I have someone with me all the time?'” said Berney. “'I don't need a walker because when I want to walk someone walks with me.'”

Five years ago Jason and Michelle Matthews from Philadelphia discovered the Dominican Republic while on vacation. They now live part-time on a farm on the north coast. They also own a 15,000 square foot beachfront villa that cost them $2 million dollars and that they rent out to other Americans.

“I think most Americans have discovered what Columbus discovered a long time ago, particularly on the north coast, it's still an unspoiled pristine paradise. It's not over-invested, not over-developed,” said Matthews.

The trick will be keeping it that way.