The Arizona Republic
Nov. 25, 2007 12:00 AM
PUERTO PEÑASCO, Sonora – U.S. investors, mostly from Arizona, have poured more than $100 million into beachfront homes, motels and land in the Sonoran vacation retreat known as Rocky Point, only to see their cash swallowed up by Mexican and U.S. developers who failed to build the projects. The real-estate debacle is raising questions about the security of Americans’ property investments south of the border, with Arizona’s two U.S. senators firing off letters of complaint to the Mexican ambassador.Known as Playa Norte, or North Beach, the development in question has a projected value in the billions of dollars and covers 7,500 acres, an area the size of Queen Creek. It lies at the end of a dirt road about 12 miles from this Mexican tourist town, where desert dwellers enjoy the glimmering Gulf of California. The attraction: Beachfront residential lots that sold for $40,000 a decade ago now rival San Diego prices at $500,000, without the house.Scores of families and retirees have mortgaged homes or risked life savings for a piece of Margaritaville. A number of American developers also bought prime seaside land, planning to build and sell vacation homes to other Arizonans.All believed literature published by government agencies, including the Arizona-Mexico Commission, stating that Mexico’s fideicomiso, or bank trust, system safely ensures property rights to Americans.The 14-year-old trust system has certainly worked for thousands of U.S. citizens who bought Sonoran properties without problems. The buyers acquired the property under renewable, 50-year leases that are held in bank trusts. But at North Beach, master developers in Mexico began raking in U.S. dollars in 1998, then hunkered down amid multiple lawsuits that have clouded title and blocked all construction. The buyers have not received ownership papers or refunds. The developers began work on some projects, but say the legal obstacles forced them to stop.
The losses have soured investors on acquiring stakes in Mexico and have shown that even U.S. buyers may face paralyzing disputes and potential fraud, along with their own mistakes.
“Put in your headline: ‘Don’t invest in Mexico,’ ” said Matt Neimeier, a 35-year-old software engineer who paid for a fourth-floor condominium overlooking the sea. “It’s not worth it. I was going to have to file bankruptcy in a few months. It’s just sucking me dry.”
Neimeier said there was a 30 percent savings for full cash payment, so in 2005 he took a second mortgage on his Phoenix house and cut a check for $250,000 to a U.S. developer in North Beach. Title papers never materialized. The half-built condo tower stands amid sand dunes with rusted rebar jutting skyward. Because of Arizona’s real-estate slump, Neimeier’s house is now worth less than the mortgage debt.
Another investor, Lowell Provancha, a retired Nebraska plumber, said he spent $750,000 on land and casitas in North Beach in 1999, persuading his children and a priest in the family also to invest.
“What is happening at the North Beach development in Puerto Peñasco is not only unethical and immoral but … illegal,” Provancha wrote in an August letter to Gov. Janet Napolitano. “The property has been paid for, and we need to be protected under the NAFTA free trade agreement.”Half-built condos With beautiful blue waters and refreshing breezes, North Beach is among the most gorgeous properties on the northern Gulf of California. It is also the last vacant expanse near Puerto Peñasco, extending along 3 1/2 miles of oceanfront, master-planned for thousands of hotel units, condos and houses. Promotional materials for just one project show a 1,000-acre lagoon with seven islands, a marina, six golf courses, equestrian trails and other amenities.Today, paint peels from model casitas left empty except for occasional squatters. Partially built residential towers bake in the sun. A golf course – without fairways, greens or flags – resembles a giant sand trap. U.S. and Mexican citizens have filed at least a half-dozen civil actions in Mexico accusing parties of fraud or breach of contract.U.S. investors have begged for help from the governors of Arizona and Sonora, members of Congress and the U.S. State Department. They’ve sought investigations by the state Department of Real Estate, the State Bar of Arizona and the Arizona-Mexico Commission.In March, U.S. Sens. John McCain and Jon Kyl became so alarmed that they sent a letter to Mexican Ambassador Antonio O. Garza Jr., noting that just one section of North Beach has a potential value of $700 million. “It does seem that if, in fact, U.S. investment in Mexico is being disrupted by illegal maneuvering, it could have important ramifications that go beyond this particular case,” the letter says.
Other than in court, no U.S. or Mexican government authority has taken responsibility or action to unravel the problems.
Mexican attorneys tell investors the legal system is so snarled, and so tainted with corruption, that nothing can be done. Miguel Tapia, an Hermosillo lawyer who has represented at least two groups of American buyers in North Beach, used a Spanish-language proverb to explain: “A tree that starts to grow bent will never straighten out.”
Steve Seymoure, former president of Pulte Homes in the western United States, faces big losses and outraged Arizonans who paid him $11 million for getaways. Seymoure, a Valley resident, also invested $11 million on land, planning and construction at Playa Azul, a seaside project to feature four condo high-rises. Today, only one half-built tower looms over empty sand.
“It sure as hell didn’t go the way I wanted it to,” Seymoure said.
Developers at odds
Puerto Peñasco has an especially shady history of land disputes dating to the 1940s. The main cause is a Mexican law that prohibits foreigners from owning property within 31 miles of the coast or 62 miles of the border. To circumvent that statute, Mexican dealers “sold” property to Americans with a handshake and a wink while drawing up papers as lease contracts. Years later, after homes were built, entire communities got disrupted by legal battles. Some Mexican dealers never owned the land they sold. Others decided to reclaim property based on expired leases. In some cases, the problem lingered long after 1993, when the government authorized bank trusts to allow property purchases in the restricted zone.The legal change also encouraged development at places like North Beach, where brothers Everardo and Reynaldo Grijalva owned a huge tract. In 1996, they joined forces with a father-son team of financiers from Spain, Juan Luis Martin Sr. and Jr., to create a master-planned community. The partners created a trust and started selling property through Playa Norte S.A., a development company run by the Martins.But problems arose in Playa Dorada, a subsection where Grijalva family members had sold lots to Americans years earlier. Faced with eviction by Playa Norte, the homeowners formed groups, hired lawyers and sued Playa Norte and the Grijalvas in 2001. After two years of legal wrangling, most of them negotiated settlements and wound up with bank trusts.
Meanwhile, the Grijalvas and Playa Norte were involved in other legal actions beginning in 1999. As the litigation dragged through Mexican courts, unwitting Americans continued investing in North Beach, many signing purchase contracts after a U.S. company issued title insurance.
Years elapsed, and virtually nothing got built. Americans desperately sought answers and refunds. They hounded sales agents, investigated the developers and hired lawyers.
In 2004, the Grijalvas and Martins became adversaries, with the Grijalvas suing their partners. Nearly every project in North Beach was named as a co-defendant. A judge ordered a freeze on all sales, construction and title processing.
The Grijalvas said their partners violated an agreement to develop North Beach and tried to transfer giant chunks of the land into other companies.
Vladimir Saldana, a Mexico City public-relations representative of the Martins, denied the allegations, adding that his clients have spent $100 million trying to develop North Beach. As Rocky Point real-estate values skyrocketed, he said, the Grijalvas sued because they were unhappy with the amount of money they were to receive under the trust agreement.
The Grijalvas could not be reached for comment. Their attorney, Alfredo Vergara, said the Grijalvas had been wronged by the Martins, but he did not respond in detail to questions.
Saldana and others contend that officials in the Sonoran government have joined with the Grivaljas to wrest control of the property, but they admitted there is no proof.
“The development wasn’t built. But why? Because of the legal dispute the Grijalvas created,” Saldana said. “We understand the frustration of the U.S. clients. They have a perfect right to be angry. But I can tell you that North Beach (development company) is doing everything it can.”
The two sides also challenge each other’s credibility. Saldana noted that Vergara served time in an Arizona prison for a narcotics conviction. Vergara pointed to Mexican news reports that say Juan Luis Martin Sr. was arrested in Cabo San Lucas 13 years ago on suspicion of development fraud. Saldana described the event as a kidnapping and said there was no trial, let alone any conviction. “The detention was totally illegal. He was accused of fraud, and there was nothing proved,” Saldana said. Meanwhile, most American investors, dizzied by language barriers and the legal intrigue, don’t know what to think.
‘It looked spectacular’
Howard and Maddy Israel moved into a manicured Ahwatukee neighborhood in 1980. It’s a nice getaway for retirees but hardly an ocean paradise. So the Israels, now in their 70s, were fascinated in 1999 when friends told them about incredible real-estate opportunities just outside Puerto Peñasco.In brochures, “it looked spectacular,” Howard recalls.The prices were even better. At the time, seaside lots were going for $18,000. A two-bedroom condo with a garage and golf privileges was $35,000, and the developer would manage vacant units, guaranteeing rental income for investors.
But there was a catch: The bargains were available only with a full-cash payment. Still, after meeting with a real-estate agent at plush offices in Rocky Point, the Israels paid up from their retirement fund.
Eight years later, they have no property in Rocky Point. Their money is gone. All that remains are legal fees and a determination to warn other Americans.
“They gave us every legal paper you could ask for,” Maddy said. “If these dummies . . . would have just followed up on the development, they would have made millions.”
The Israels wrote checks to a Playa Norte subsidiary that is apparently not registered in Mexico. The sales contracts were signed by a manager who cannot be found. Appeals for a refund were stonewalled by a sales agent who canceled repeated meetings using the same excuse: Her mother had just died.
Investors form group
In desperation, the Israels contacted other investors and formed North Beach Investors Action Group, hiring attorneys in Tucson and Hermosillo. The lawyers recommended negotiation because litigation would create more delays and costs. A Mexican attorney named Raul O’Farrill entered the picture, designated by Playa Norte to process bank trusts. O’Farrill, with an office in Phoenix, has tremendous bona fides: He is a member of the Arizona-Mexico Commission. He was designated by the Arizona Supreme Court as “foreign legal counsel,” authorizing him to practice Mexican law in Arizona as a member of the state Bar.O’Farrill also has had multiple roles at North Beach: He owns a percentage of one development project. He and his law firm are legal counsel for three developments. He was mediator and escrow agent in the dispute over Americans’ homes in Playa Dorada.But mediation efforts went nowhere. Maddy Israel still has no bank trust. She is one of three North Beach investors to date who have filed state Bar complaints against O’Farrill alleging conflict of interest.
In an interview, O’Farrill denied any ethical breach and said he never acted as an intermediary between Playa Norte and Israel’s group. “I was not representing anyone,” he said. “I didn’t do any kind of work . . . I was just searching the possibility to fix the problem” without being retained by either side.
The State Bar dismissed all three complaints. In a written statement, Maret Vessella, deputy chief Bar counsel, said investigators did not find clear and convincing evidence of wrongdoing.
Only dead ends
Lowell and Kathy Provancha were so thrilled with prospects for Las Gardenias development in North Beach that they got their kids to invest with them in 1999. All told, the Provanchas clan acquired 17 vacant lots and several planned casitas – an $840,000 investment.Lowell Provancha, semiretired after building a plumbing business in Lincoln, Neb., said he and a partner planned to build 99 condominiums on some of the land.He admits the initial purchase was impulsive and “stupid.” The Provanchas attended a sales presentation in Lincoln and plopped down a deposit on two oceanfront lots, sight unseen. They were flown to Rocky Point in a private jet. They cruised on a yacht, sipped margaritas, enjoyed an airplane ride over the property and partied with Mexican officials in Hermosillo.
Kathy Provancha stared out at the Gulf of California from the couple’s casita near North Beach, shaking her head: “Looking back, we see how they had total control over us. And who wouldn’t like this? We’re right on the ocean, and we’re from Nebraska.”
The first investment led to others. But the Provanchas grew more careful, hiring an attorney and accountants.
In June of 2000, the Martins visited them in Lincoln with a notario, a specialized Mexican attorney, assuring that all paperwork was copasetic. The Provanchas completed the deals. They hired an architect, engineers and construction crews. They spent $112,000 on building plans and opened a sales office in Puerto Peñas- co.
Lowell Provancha still wears one of the T-shirts he had printed with the name of his new project: Northstar.
“This is all I’ve got left right here,” he said, “the shirt on my back.”For seven years the Provanchas begged, demanded and threatened in a fruitless quest for land title. They tried to figure out who is behind the development mess, hitting dead ends. Finally, they began sending piles of documents to authorities on both sides of the border. Every official they contacted passed the buck, stonewalled or claimed to be helpless.
“I’ve written to everybody,” said Kathy Provancha, “even the president of the United States. … We’re past the money part. I just don’t want to see someone else go through this.”