Mainsail VP Dishes the Dirt on Delays – Mention the construction project on Scrub Island to almost anyone and you'll hear some version of a rumour that the place is closing down, money can't be found, everyone's being laid off, it's all over. Similar descriptions can be found to fit any of the several projects waiting for completion or approval in the BVI—Raffles at Lambert Beach, the Beef Island project, Oil Nut Bay—each of which has been declared troubled at some point. Now, it may well be that these projects are facing hurdles of one sort or another and that resistance to their completion or to their initial approval is justified. Much has been said and written from all points of view regarding these issues and emotions have run high. There is much riding on the completion of these projects—workers rely on their pay checks, suppliers and contractors expect payment for goods and services supplied, buyers have committed large sums and are eager to take occupancy. We thought we might go take a look for ourselves at the state of things on Scrub Island and try to make up our own minds as to the reality of the situation.
The background to our recent visit was the reduction of activities at Scrub Island as the developers completed their bid to reconfirm financing. It is clearly not a good time to be looking for money as the US and world credit markets attempt to recover from the excesses of the past eight years of unsupervised financial debauchery.
In addition, there is a struggle within the country and the region as a whole over competing visions of what the best course might be for sustainable and environmentally sensitive development. Good people can disagree, as the politicians might say, but no matter which side of the debate one is on the reality is that property development is not for the weak of stomach. It's a tough, high-stakes game.
Pity, then, the poor developer who has a grand plan for making a wonderful something out of what he might call nothing. He assembles a team of the right people—financiers, architects, marketing gurus, a sales force, political support and bravely he puts shovel to dirt, expecting what? Riches? General approval and warm, fuzzy feelings? How about, at the very least, a decent amount of approval and some healthy sales, allowing him to escape with the shirt on his back, some money in the bank and perhaps sufficient encouragement to try and stay in the game?
Often though, the reality for the active developer in the BVI is that the reception may be harsh and discouraging. Environmentalists don't like you because you're tearing up the landscape and disturbing the natural order, nostalgists don't like you because you're changing something that used to be perfect and soon will be different. Others are upset because you are building a playground for wealthy patrons when the common man is struggling. Now, some politicians might like you because you're bringing money to the community, small business owners might like you because you're sending some of that money their way for goods and services, buyers will like your product and see prospects for themselves.
But should there be some glitches along the way—sudden spikes in the price of oil, or a shortage of plywood or cement thus slowing down your progress, and the wolves begin to howl. Somewhere in the distance can be heard the sound of knives being sharpened. Schadenfreude feeds on failure.
The islands of the BVI are scattered with failed or stalled projects—Mosquito Island being the first to come to mind, though the Branson touch will doubtless work its magic there. Just about every major island has some abandoned concrete structure or boarded-up broken dream to remind the passer-by that nothing is easy, that getting things done requires persistence, faith and, most of all, ready money. The successes are there too, hiding in plain sight. Can you imagine the BVI without Little Dix Bay or the Bitter End Yacht Club, Long Bay Resort or Nail Bay, to name a few? In their time they, too, garnered their share of approbation but time has a way of burnishing memory so that they are now just part of the landscape.
Mainsail Development, the force behind Scrub Island, was formed by a group of one-time Marriott executives and got its start in the Florida area developing and managing lodging facilities with an eye to corporate clients, offering meeting centres and training facilities on a long-term basis. Following an established Marriott formula, Mainsail builds properties, sells them on to corporate or individual owners but maintains a management relationship with the properties. This is roughly the model they intend to follow at Scrub Island, where buyers are projected to use their units just a few weeks a year and then put them into a rental pool for the remainder. In that sense, the Scrub Island property will function much like a hotel.
What has brought attention to the development recently has been the very public revelations of a refinancing effort which had James Talton, Senior VP of Mainsail Development Group, speaking to Road Town Rotary in September in an effort to allay concerns that the project was in jeopardy. Such concerns had been raised previously when the project had to undergo similar refinancing efforts in 2006 and 2007.
We met with Mr. Talton recently and our conversation covered many topics but a persistent theme was the difficulty of dealing with uninformed and negative rumour. “You sit back and you say 'Who are these guys?'”, said Talton. “I've always been a sceptic of media and I've definitely validated that since I've been down here. If you look at the blogs and message boards, these people will talk as if they know what's going on, and yet there's no information whatsoever. The irony is that we're about as transparent an organization as you can get.”
Asked why he thought there might be such a negative attitude towards the Scrub island project, Talton said “There is some legitimate concern. We've gone through about eight weeks where we had to do a trickle bill-paying exercise, so I understand the basis (of the feelings). But that money comes from the bank. The bank doesn't sit there and say 'We're not going to fund you, but what the heck, let's give you two million dollars.' They just don't do that. So I understand where it comes from but it's just not a full picture of what's going on. The reality is we started off, three or four years ago, saying this project's going to cost sixty-five million. And then it goes to eighty-five and then to ninety-five, and eventually (the bank) says, 'Wait a minute, I just need to check. We need somebody else to validate and forecast because there's a history of this not being correct.' Even if there's a million reasons why this may have happened, if you're the board of directors at a bank all you know is 'They said this, now it's gone up. We understand there's markets and cement prices and gas prices but now the loan's getting a little bit bigger.' As you start getting closer to a threshold that you don't want to lend at, it really gets crucial that you validate that number. You might take me at face value when it's at fifty per cent loan-to-value, but when it gets to sixty-five per cent you might want a little bit of validation so you send the guy from St Thomas over. But when we get to seventy-five per cent
you might say 'All right, we're bringing in the big guns because we've just got to make sure that we're all on the same page and we can validate these numbers.'”
As for the sales side, Talton seemed to suggest that Mainsail had exhausted their early options and was having a challenge in reaching the next more-affluent level of buyer. “What used to work for the buyer in the 750,000 to 1.5 million dollar range doesn't work for the guy that needs to buy something from 2.5 to 4.2 million dollars, so now we're having to change our strategy. The real estate market has made some people jittery but remember, the affluent people aren't as affected as the less affluent.” Consequently, Mainsail has involved a German brokerage, Engel Volker, to represent the property and seek to interest European buyers. “Where we have success,” said Talton,” is with somebody who's an investor, maybe has three or four houses around the world, likes the BVI and has been down here but doesn't know there's any major development, hears about and says 'Yeah, I like the project.' We want to target China, India and Russia—there are groups of people in a high range that we haven't tapped into.”
The bank's initial requirement to finance major construction was that Mainsail have achieved eighty per cent sales in non-refundable contracts. The island itself served as collateral—in 2004, Forbes magazine reported Scrub Island to be for sale for $50 million, so its value can be estimated from that—and was used as seed financing. Buyers who chose the condominium option pay ten per cent deposit and the remainder upon completion whilst buyers who choose to purchase a lot and build a home create their own construction loans for that purpose. According to Talton, “the good thing about our company is we're nimble enough that we can negotiate and make good business decisions and we're not stuck to a standard operating procedure.”
The emphasis now is to complete the condo/resort development on “little Scrub” which would then increase the value of the estate lots on “big Scrub”. Talton estimates that there is a total of 16 total product left in inventory—4 condos and about 12 individual building lots. This represents 70-75% total transactions sold, or just over 50% in dollar value. The profit centre will be the sale of the estate lots.
“To do anything this big,” Talton said, “there's 100 challenges a day. There's a challenge on the legal side, the drawings side, the marketing side, construction. Filling up a gas tank—sometimes Marina Cay doesn't have any gas so where are we getting it from? To get a barge to move dirt—well the one we need is only available for five days. Do we need it right now? How do you make that decision? These individually might not seem like big things but they each cause you to be behind or lose time. Now, do we feel that negotiations are sometimes held up or things not done as expeditiously as they could be because we think there's a motive behind it to make more money? Unquestionably. We've gotten used to it. We've had people bid on a job and we've gone out to get a couple other bids and have come back to ask 'What were you thinking, trying to charge twice or three times what the other guys are charging?' And they'll say, 'well we didn't think you had time to get another bid.' I can't double-pay people or triple-pay people, I have to negotiate the best deal I can. It's challenging. We now know first-hand why there hasn't been a major development in the BVI in the last 20 years! It's a painful process.”
As part of the negotiations with BVI Government, the only stipulation was that Mainsail use local contractors. “Eighty per cent of our cheques have been written to local businesses,” said Talton. "We followed those rules and it's been a little bit painful for us because these builders haven't seen what we're requiring them to do. This is new for them, and that's caused delays and caused additional expenditure. But this is good for both of us—this provides jobs for people, it makes the BVI look good. Twenty years from now we'll be part of the landscape.”
In commenting on accusations, from environmental groups and others, of poor practises, Talton said “Our intention is not to monkey up the water. If I monkey up that water, who the hell wants to stay at my resort and swim around in a snorkel? No one's going to want that. Now stuff is going to happen—you can't do anything without something happening. The intention on our side has always been to do the right thing, there's no intention to skirt laws or skirt anything. A lot of these groups don't think about intent, they just see things as black or white.”
Discussing the probabilities of some of the other projects that have been mooted actually reaching completion, Talton pointed out that “we like when other people come on board. It's one thing to say 'I went to this nice hotel' but if that hotel is sitting amongst fifty crappy hotels on a crappy beach, it's nothing. Having three or four nice hotels makes the whole area nice, not just the hotel nice. To do a nice development on Beef Island, maybe have Trellis Bay upgraded a little bit, we think all of that's good. Because it's not that just one person should win, it should be the community that does well. We benefit from a Beef Island coming on board—there's nothing more I would love than to be selling our clients on being able to play golf over there or to have dinner at Marina Cay or Last Resort or pop over to Trellis. We want that stuff to happen, but we want it happen right, in that everyone has to live up to the same standards that we've had to.”
The schedule Mainsail is looking at, according to Talton is “the end of May we're hoping to have what we call the core products, the marina, the Marina Village condos, the Welcome centre which is the lobby, the meeting space and the restaurant. And there's a pool area, a beach in front of that, and a casual restaurant, so when all that's up and running you've got a functioning hotel that's earning money and that's what the bank is focused on right now. We'll be docking boats, people will be eating in the restaurants and shopping in the retail space.”
But that was then. Since our conversation the world's economies have been spinning their wheels and trying to get some traction from the billions of dollars being shovelled their way. How this will affect the short-term efforts of Mainsail in getting their financing approved and the long-term goal of selling their multi-million dollar units remains to be seen.
UPDATE: On October 31st, James Talton informed BVIYG that under the protocols agreed with the bank, the first stage of the development will open for business around June 30, 2009.
