Penasco Fiasco – Times Publications, November 2008

At the end of this dusty dirt road, half-built casitas bake in the sun a few miles from the beaches of Puerto Peñasco, Mexico, better known as Rocky Point to the tens of thousands of Arizona tourists who visit here each year. Paint peels from two of the vacant models, surrounded by nothing but sand dunes. A nearby “golf course” – void of any fairways or greens – is identifiable only by a rusty sign in the desert sand.

Across from the casitas, a weather-worn billboard advertises the luxurious amenities of a planned Mexican country club and golf resort. It’s one of the few remnants of the seductive deals that enticed hundreds of Arizonans to invest millions in these now-defunct Mexican condos, casitas and hotels.

Seven years ago, throngs of Mexican politicians, developers and American investors stood on this same spot celebrating the groundbreaking of the casitas, which were to be part of North Beach – then touted as Rocky Point’s largest master-planned development.

The group cheered as a project designer ceremoniously teed off for the first time on the partially completed eleventh hole of the golf course. A brass band played while developers distributed promotional materials painting a picture of paradise.

Among the crowd, Ahwatukee seniors Howard and Madeline Israel sipped margaritas and dreamed of watching sunsets from the patio of what would be their private seaside casita.

“They made a big deal of the groundbreaking,” Howard Israel recalls. “They passed out T-shirts and hats. They wined us and dined us.”

“We said, ‘Wow. This is great; aren’t we smart,’” says Madeline Israel. “Then the lies began.”

The Israels and other investors were told models would be completed in a few months and that the condos would be move-in ready by the end of the year.

Seven years later there’s been virtually no progress on the projects at North Beach, and investors who put down large cash deposits have yet to see any kind of a refund.

North Beach project officials say a series of lawsuits and land disputes have halted construction indefinitely.

Many investors, however, say after years of battling for refunds and answers, they now believe developers never really intended to build North Beach in the first place, and the models, brochures, billboards and groundbreaking ceremonies were nothing more than props in a scheme concocted to bilk American investors out of millions.

“It ain’t going to happen,” says Howard Israel, who invested tens of thousands from his retirement fund into North Beach projects. “There’s no way, no way that this is ever going to work out.”

Beyond North Beach, condo projects in central Rocky Point and well-known Sandy Beach are also being stalled by the economic downturn, with many investors unable to get refunds on their deposits. Other Rocky Point property owners are battling Mexican developers who have threatened to bulldoze their beachfront homes and use the land for high-rise projects.

The real estate debacle in Rocky Point is severe, experts say, damaging buyer confidence and having the potential to severely compromise any future growth plans in Arizona’s beach town.

Investing in Paradise

According to Mexican tourism officials, more than $550 million in foreign investments are made in Sonora, Mexico each year, most coming from Arizonans.

Since 1993, investments have been fueled mainly by the Foreign Investment Act, which permitted Americans to own property in Mexico through what is the equivalent of a bank trust.

Thousands of American buyers have used this system of ownership without any problem. The trust allows American buyers to purchase property under a renewable 50-year lease held in trust by Mexican banks.

“The bank-trust system was created to encourage foreign investment along the coastline,” says Rick Ramirez, a Rocky Point real estate broker. “It’s used all throughout Mexico, and it has been very successful.”

In fact, in just over a decade, the bank-trust system transformed Puerto Peñasco from a sleepy fishing village to one of fastest-growing resort and tourist destinations in all of Mexico.

Some investors, however, contend the bank-trust system can leave Americans vulnerable to fraudulent schemes by developers. In preconstruction projects, for instance, buyers are often promised bank trusts upon completion of the development, but if a project stalls or becomes defunct, an American investor can face extraordinary obstacles in getting contracts enforced through the thorny Mexican legal system.

Such was the case at North Beach, a 7,500-acre parcel of land about 12 miles from the center of Rocky Point. Overlooking the Gulf of California, the vacant expanse was sold to potential buyers as the largest first-class luxury beach community in Rocky Point.

Beginning in 1998, Americans flocked to the pristine beaches to put down deposits and full cash payments on planned projects; all were convinced they were getting in on the ground floor of a spectacular real estate opportunity.

All told, North Beach developers collected an estimated $2.5 million in down payments from over four hundred American buyers. Seven years later, virtually nothing has been built, and no one knows exactly where the money has gone.

North Beach land owners Everardo and Reynaldo Grijalva and Juan Luis Martin Sr. and his son, Juan Luis Martin Jr., have told investors that lawsuits have paralyzed construction. Martin Sr. was arrested in Cabo San Lucas 13 years ago on suspicion of development fraud, according to Mexican news reports.

Neither the Grijalvas nor the Martins could be reached for comment.

Though various land disputes began in 1999, for nearly six years unwitting Americans continued to pour money into North Beach.

Finally, in 2005 a judge ordered a freeze on all sales, construction and title processing for the projects.

Now frustrated investors and developers who purchased land from the Grijalvas and the Martins say they have little hope that they will ever see a return of their investments in the projects. The last lawsuit was filed more than three years ago, but the Martins and three other key defendants haven’t even been legally served.

“I think this lawsuit was contrived just to stall it. It’s been years, and it hasn’t even started,” says Howard Israel, who has created the website rockypointexposed.com to bring attention to real estate fraud in Rocky Point. “If (this goes unresolved) I think Rocky Point will become a tiny little fishing village as it used to be known.”

A Legal Taking?

Not all of complaints from Rocky Point homeowners are related to unfinished projects. Glendale residents Buz and Cherie Turner had lived in an upscale beachfront home in Rocky Point at a development known as Playa Dorada since 1992, when the sellers threatened to take back their land.

“They said, ‘We’re going to bulldoze your property down,’” Buz Turner says. “We panicked.”

Most homes in Playa Dorada were sold in the early ‘90s before the bank-trust system was established, so residents signed up for 99-year leases and were told they would later be converted to bank trusts.

Then, in 1999, nearby land disputes emerged and developers threatened to swallow up their properties to make space for a new development. Fearing they might lose rights to their Mexican properties, the residents desperately sought legal help.

That’s when residents say Mexican attorney Raul O’Farrill got involved. The residents were told O’Farrill was an impartial mediator between North Beach and Playa Dorada and that he would assist the residents in securing bank trusts. With O’Farrill’s impressive list of credentials, the Playa Dorada residents say they had no reason not to trust him.

Not only was O’Farrill a licensed Mexican attorney, he was also a member of the Arizona-Mexico Commission and was designated by the Arizona Supreme Court as “foreign legal counsel,” authorizing him to practice law in Arizona.

What the Turners and other residents say they didn’t know at the time was that O’Farrill also had a financial interest in the proposed development. Documents show O’Farrill is a percentage partner, but representatives for O’Farrill say he did not become financially involved until after serving as an intermediary. O’Farrill declined to be interviewed for this story.

The handful of Playa Dorada residents who went to O’Farrill to get bank trusts say they were told they had a ten-day window to sign and there would be no time to translate the documents from Spanish into English.

But when the trusts were delivered in 2003, those who signed say they discovered their property line had been moved, shorting them of five meters, or about $70,000 worth of land.

By shaving off the five meters, the residents’ garages and walls were now encroaching on the developer’s property. Later, the developer blocked one of the roads in and out of Playa Dorada and has since prevented residents from using it.

Worst of all, the Playa Dorada homeowners say they can’t sell their properties due to the five-meter discrepancy.

“The real reason they did it was for control,” says Rick Havens, a Playa Dorada resident. “This was done by people with the intention to deceive.”

The developers, on the other hand, say they have repeatedly offered to return the disputed land to the homeowners. Disputing Playa Dorada residents say they have declined those offers because they came with “conditions.”

“They have passed up opportunity after opportunity (to regain their five meters),” says Doug Adams, a partner in the development. “No position they’ve taken has legal merit.”

Adams adds that the majority of Playa Dorada residents have taken no issue with the proposed development and that the land dispute lawsuit is the real issue that has caused problems for both builders and investors.

“Most of the homeowners paint a totally different picture of what’s going on,” he says.

Still, some Playa Dorada residents say that such an extensive legal battle has turned their dream of living in a Mexican paradise into a full-fledged nightmare.

“When we bought down here it was so much fun. But after spending ten years fighting this – it’s not worth it. They’ve totally ruined it,” says Judy Havens, a Playa Dorada owner. “I would hate to see one more person buy property and go through what we’ve gone through down here.”

Beachfront Exposure

Investors Lowell and Kathy Provancha are two of the investors who say they don’t believe developers ever planned to build any of the projects at North Beach.

“It was fraud from day one. They had no intention of doing anything,” says Lowell Provancha, a retired owner of a heating and air-conditioning business in Nebraska.

In 2000, the Provanchas invested more than $800,000 to purchase vacant lots on which they planned to build a 100-unit condominium project.

They commissioned blue prints, created promotional materials and hired a salesperson – all under the premise that the land titles would soon arrive and they could begin construction. But their legal ownership never materialized.

For the past eight years, the Provanchas have requested, demanded and begged to get title to the properties but say they have received nothing more than excuses and lies.

Eventually, they say, they came to believe that North Beach was all a scam and learned that the corporations listed on the North Beach contracts don’t even exist.

Additionally, no infrastructure – including electricity, water or sewer systems – were ever properly planned to support the purported massive condo projects, Lowell Provancha says.

The Times toured the sites of the North Beach projects, most of which consist of nothing more than a sales office and miles of vacant desert. A few sites have water systems which Lowell Provancha says would have the capacity to serve only a fraction of the size of a project like the one North Beach developers were planning.

“Most of this is virtually a Hollywood façade,” he says, pointing out a small domed water desalination system near the site of a planned 100-unit condo project. “It was just built to make people believe they were doing something.”

Investors in Playa Azul and Riviera Real, two other condominium projects that were to be built on land purchased from the Grijalvas and Martins, still hope the developers will fulfill their contracts.

In 2005, shortly before construction was halted on North Beach, software engineer Matt Neimeier, 36, took out a $250,000 second mortgage on his Phoenix home to pay cash for a fourth-floor condominium at Playa Azul, which was being built by several independent American developers.

For more than three years, the condominium tower, rusty rebar protruding from its unfinished shell, has stood like a mirage among the sand dunes. Developers for Playa Azul, Riviera Real and a few other projects say they are out millions as a result of the lawsuits; however, the consensus among them remains that they intend to complete the projects once the disputes have been settled.

For Neimeier, since the value on his Phoenix home has now plummeted, he owes much more on the property than it is worth and is struggling to make the payments.

“They say we’re either going to give you your money back or we’re going to complete the project,” he says. “I’m waiting for that court case to finish… but the legal system is so corrupt you can’t get good answers.”

Force Majeure

Sandy Beach, a playground for frolicking campers in the ‘70s, ‘80s and early ‘90s, was transformed during the late ‘90s and 2000s. Tents and RVs were replaced with large, high-rise luxury condominium complexes seemingly unable to keep up with the unrelenting demand. Today, for-sale signs are a common sight all over the developments, with numerous sales offices emptied and chained closed. Half-built towers, void of construction workers or equipment, dot the skyline.

The housing market downturn in Arizona has had a severe impact on Mexican real estate, experts say.

“Prices have fallen about 30 percent from what they were a year and a half ago,” says Bill Barvitski, a Rocky Point real estate agent. “Speculators are unloading. There are more sellers than buyers.”

The downturn in Mexico is largely due to American buyers who, when the housing market was booming, took second mortgages out on their primary residences to invest in a Rocky Point vacation getaway. When the economy soured, many of these buyers found themselves upside down in their first mortgages and desperately began trying to unload their vacation homes.

“The developers have been hit hard by the economy; their credit has dried up,” says Ramirez. “A lot of them are struggling to deliver units that were promised a year ago.”

Many buyers who have been waiting years for their condos to be completed are now being denied refunds, despite contracts that promised firm delivery dates.

Some buyers in the Las Palomas condominium and golf resort on Sandy Beach, for instance, say they are unable get their 30-percent down payments back, despite a right-to-cancel clause in their contracts.

That’s because the Mexican government has approved what is called a “Force Majeure” for many of the developers, which frees them from timeline obligations. Force Majeure clauses are typically used in extraordinary circumstances, such as war, worker strikes or an act of God.

“It’s ridiculous,” says Greg Johnson, a Phoenix investor who has waited for nearly a year for his condominium to be completed. “What’s the point of a contract if the Mexican government says it’s not worth the paper it’s printed on?”

Representatives from Las Palomas say the economy has impacted the project, but they are expecting “capital infusions” to come through in three months.

“Through no fault of our own, if we can’t get the construction complete and we have to get alternative sources of financing, then we can’t meet delivery dates,” says Mike Ferrar, a sales consultant for Las Palomas. “The Mexican government is very sympathetic with us.”

Ferrar added that Las Palomas is currently introducing a price rollback and payment protection programs to encourage sales.

“We’re aggressively moving forward with completing units,” he says. “We’re very optimistic.”

Another delayed project for which buyers say they are being refused refunds, La Perla del Mar, is promoted as Puerto Peñasco’s first in-town high-rise condominium complex.

The Times visited the La Perla sales office in Rocky Point, where a salesperson still boasts about the project’s luxury amenities, including a palapa bar, fitness center, gated entry and underground parking (a first for Rocky Point).

Just pay $5,000 today and a 30-percent, non-refundable deposit and you’ll be living in paradise by March 2009, she explains.

The salesperson fails to mention that investors requesting refunds based on delays are receiving letters from La Perla’s Scottsdale developer, Clifton Meridian, stating “poor economic conditions constituted by an unforeseen circumstance” are responsible for the delays.

Broken Promises

Tucson seniors Thomas and Barbara Wilson thought they were making a safe investment in one of the oldest hotels in Rocky Point, Fiesta de Cortez. Today, they say their investment is sunk into a worthless condo in a defunct hotel.

“We can still go down and stay there. Of course there’s no hot water, sometimes no water at all. Maid service is next to zilch,” Barbara Wilson says. “The place, for all intents and purposes, is pretty much closed down.”

A few years ago, the Wilsons, and a dozen other Arizona investors, entered into a timeshare condo purchase agreement at the Fiesta de Cortez.

The agreement permitted buyers to use the condo several weeks per year and said owners would receive $500 each month for five years in exchange for forfeiting some of their time to renters. According to the contract, after five years, the Wilsons would own the condo free and clear.

However, two years ago the owners shut down part of the hotel, which included the Wilson’s unit, and leased out some of the units to service workers working at the Mayan Palace, a nearby resort.

Last fall, the Fiesta de Cortez Corporation was dissolved, and the new owner changed the name to the Golden Hill Boutique Resort. The complex is currently undergoing a facelift and expansion, says Josephine Work, a representative of Golden Hill. Investors at Fiesta de Cortez will be paid with proceeds from the sale of condos at the Golden Hill, she says.

However, the Wilsons say after years of broken promises, they have doubts they will ever see their money.

They say they have not received a rental payment in more than two years and that they never received a bank trust on the property, something promised in the contract.

“They’re selling you something that they can’t give you,” says Barbara Wilson. “It doesn’t matter what you pay for your property down there. If you don’t have a bank trust, you don’t own it.”