Costa Rica Real Estate Investment

Costa Rica is one of the safest and most attractive countries for foreign investment in Latin America. Costa Rica’s telecommunications and transportation infrastructure may be state controlled, but they are the best in the region, and the government is always on the lookout for foreign investment. The economy is being transformed from its long-time dependence on coffee, bananas and cattle to one centered on sectors such as microprocessors and tourism. With its investment-friendly climate and government policies, Costa Rica has become the “Silicon Valley of Latin America,” with companies such as Microsoft, GE, and Western Union making significant investments in the country.

Costa Rica’s numerous free trade zones and tax holiday opportunities are extremely enticing, offering benefits such as exemption from import duties on raw materials, capital goods, parts and components; unrestricted repatriation of profits; 100% tax exemption on profits for eight years, and 50% exemption for the next four years.

To set up operations here, a foreign company must appoint a Costa Rican resident as legal representative, with full power of attorney for all business matters related to the Costa Rican branch. A business license must be obtained from the appropriate municipality, and the company must register with the Costa Rican Revenue Administration, and be included in the Costa Rican Social Security system as an employer.

Although Costa Rica has no exchange controls as such, foreign currency received by resident corporations or individuals must be sold through a Costa Rican bank and capital imported for investment purposes must be registered in order to avoid difficulties with its eventual repatriation.

Export Free Zones are the mainstay of Costa Rica’s export and investment strategy. The Free Zones are, by definition, areas of extra-territoriality for customs and fiscal purposes. These facilities are created specifically to receive imported inputs or raw materials that are manufactured, assembled or marketed as products or services and subsequently re-exported.

Ease of operation, fiscal incentives, monetary and exchange facilities, excellent communications, reliable utilities, access to basic services, and a highly educated labor force provide a firm foundation for the dynamic development of companies set up under the Free Zone system.

Some of the advantages of operating in the Free Zones of Costa Rica are:

• 100% exemption from taxes on capital and assets
• Exemption from taxes on profits
• Independent management of foreign currency
• Streamlined processing of documentation required for installation and operations

The Export Free Zone Corporation provides investors with centralized services to carry out standard procedures. The Corporation is located in the Center of Foreign Trade.

In addition to the Free Zone system, Costa Rica beckons investors and businesses with its geographical location in the center of the Western Hemisphere, and with the productivity of its labor force. Education has always been a national priority in Costa Rica. With schooling both compulsory and free up to the high school level, the tiny nation’s 94% literacy rate is the highest in the Third World.

Forests provide us with a range of essential goods and services ranging from our most basic needs - food, shelter, clean water, and oxygen - to cultural and recreational joys. However, these ecosystem goods and services are often taken for granted. While the economic value of certain natural products such as timber is reflected through global trade, this often isn’t the case for other environmental goods and services provided by forests.

Costa Rica has created a self-financed system of fees imposed primarily on fossil fuels that help support payments to farmers and landowners who make a commitment to preserve private forest land. This program of Payments for Environmental Services (”PSA” for the Spanish Pagos por Servicios Ambientales) was established in the late 1990s. Payments are issued to qualifying owners of private tracts of land in forested areas, in recognition of the ecosystem services their land provides.

The PSA program is a major advance in ecosystem investments, and ensures that those who benefit from environmental goods and services pay those who provide these services.

For example, users of water from a river running through an upstream forest, such as bottling companies or townspeople who extract drinking water from the river, pay those who manage these upstream forests to ensure a sustainable flow of this service into the future.

Sample payments under the PSA program:

• Conservation: $210/ha ($519/acre) in equal installments over 5 years
• Reforestation: $537/ha ($1326/acre), with 50% paid the first year, 20% the second year, and 10% over the remaining 3 years
• Forest management: $327/ha in equal installments over 5 years.

“To participate, landowners must present a sustainable forest management plan prepared by a licensed forester (regente).” The plan must outline the proposed land use, and include information on land tenure and physical access, plans for preventing forest fires, illegal hunting, and illegal harvesting; and monitoring schedules. Once their plans have been approved, landowners begin adopting the specified practices, and receive payments. (PDF link)

As mentioned in a previous post, the World Economic Forum designated Costa Rica as Latin America’s most competitive tourism destination in 2007. This ranking is borne out as developments such as the Mandarin Oriental and the Cacique Resort are proposed and built in ever-growing numbers.

Costa Rica also led the rankings for Central American Countries of the Future for 2007/08, placing first in five of the seven categories - economic potential, business friendliness, human resources, quality of life, and development and investment strategy.

Overseas companies invested US$ 1.4 billion in Costa Rica last year, equivalent to 6.4% of the Central American nation’s GDP ($320 per capita) and one of the highest levels in all of Latin America. Multinationals such as Intel, Hewlett Packard, GlaxoSmithKline and Allergan have all made recent investments in Costa Rica.

These foreign investment levels are attributable to factors such as high education levels, government support for high-tech industries and, for European investors, the favorable exchange rate between the US dollar–the currency of choice for most international business transactions in Costa Rica–and other foreign currencies such as the Canadian dollar, the British pound and the euro.

And let’s not forget the “climate” part of the title! Costa Rica is often described as Paradise, and the mild climate in the central highlands and tropical coastal areas are a huge draw for immigrants and investors alike. Highs in San Jose average in the mid 70s(F) year-round with lows around 60 degrees, while the Guanacaste region sees similar lows, with highs in the lower 90s.

The province of Puntarenas spans most of Costa Rica’s Pacific coast and is, after Guanacaste, one of the hottest regions for development in Costa Rica–which is, itself, among the world’s best investment locations. In 2007, Costa Rica was recognized by the World Economic Forum as the most competitive tourism destination in Latin America.

British property specialists David Stanley Redfern Ltd. are creating the Wyndham Garden development on Jaco Beach, located south of the provincial capital of Puntarenas. When completed, the project will include a 14-story beachfront combination condominium-hotel with 136 fully furnished one- two- and three-bedroom residential units. The resort itself includes infinity pools at three different levels; a fully equipped spa with sauna, steam and massage rooms; gym; restaurant, bar and snack bar; day-care center; jacuzzi and a host of other amenities. Construction is slated to begin later this year and conclude in early 2010.

For many years Jaco Beach has been an ideal destination for those seeking contact with Costa Rica’s natural beauty, breathtaking beaches and a surfer’s paradise, all while enjoying access to a thriving city life. However, most of the existing accommodations are at the budget to mid-range level. The Wyndham Garden at Jaco Beach is a step toward more upscale development in the area and will, no doubt, build interest in still more development in the region.

The closest beach to the Juan Santamaria International Airport, Jaco offers a wide array of retail outposts, restaurants and entertainment venues, and is a growing destination for family-friendly getaways, in addition to being a popular Spring Break destination.

Costa Rica is, of course, a small country - similar in size to the US state of West Virginia. But its position at the “waistline” between North and South America means that this slender little nation has coasts on two oceans, significant mountains along the continental divide and, consequently, an astonishing variety of natural environments packed into less than 20,000 square miles.

This wide variety of habitats houses a disproportionate percentage of the world’s biodiversity, meaning that an estimated 5% of all plant and animal species in the world can be found in Costa Rica.

Aware of the value of the treasures within its borders, Costa Rica has taken many steps to preserve its natural resources, and has reaped rewards in the form of an international reputation as a country that cares about the environment.

Today’s tourist is increasingly aware of environmental issues and, in addition to seeking destinations that provide natural beauty, many are also considering the environmental impact of their own presence.

Tourists and home owners alike are beginning to find greener options in Costa Rica’s travel and real estate offerings. A number of new high-end resorts are touting their eco-friendly construction and operations.

Solar and wind energy, solar-heated water, and rainwater catchment and purification systems are available to the investor looking to build a new home or development, and state-sponsored compensation programs can provide monetary rewards for property owners who pledge to preserve forested areas.

Given the close economic ties between the two nations, it is unsurprising that the subprime mortgage crisis and attendant economic instability in the United States is having an effect on Costa Rica’s economy and real estate market as well.

In an interview earlier this year, Central Bank president Francisco de Paula described Costa Rica’s overall economic situation in positive terms, noting that the economy grew by by 6.8% in 2007 and 8.8% the previous year. According to de Paula, a dynamic export sector and a high proportion of foreign direct investment have met the country’s need for foreign currency reserves.

The Central Bank official identified inflation as Costa Rica’s main concern, with 2007 year-end figure of 10.8% exceeding official forecasts of 8%.

Economists’ suggestions to counter the effects of the weakening US economy include increasing productivity, spending public funds on education and infrastructure, working toward regional trade agreements, and implementing the terms of CAFTA.

While foreign investment in real estate is variable, and does not correspond directly to the rise and fall of the US market, the situation is expected to affect the price of residential real estate, with a lesser effect on lots and farmland.

Foreign investment in Costa Rican real estate slowed to $103 million in the first trimester of this year, a 35% drop from the same period in 2007, signaling what some describe as a return to a buyer’s market in Costa Rica.

Costa Rica has taken several measures to address rising fuel prices, with publicity campaigns and new restrictions encouraging the public to conserve energy and consume less gasoline. The government is also considering measures that seek to minimize the effect of the worldwide fuel crisis on the cost of living.

Traffic regulations put in place last week use license plate numbers to restrict 20% of the vehicles on the road from entering the San José metropolitan area at rush hour on any given weekday. The public has been advised that the intent of the restrictions is that commuters not seek alternate routes, but leave their vehicles at home and find an alternate mode of transportation once a week.

The new plan greatly expands the area covered by existing restrictions, now extending out to and including the capital city’s beltway, known as the circunvalación. Rush hour traffic was noticeably lighter by the end of last week, with over 1000 citations reportedly issued to commuters who flouted or were unaware of the new regulations.

In a parallel attempt to encourage Costa Ricans to consume less fuel and reduce the impact of rising oil prices on the cost of living, the government is also considering a change in existing fuel taxes.

Currently, diesel fuel is taxed at a rate of 16%, regular gasoline at 25%, and super at 27%. The new rates would increase the price of both super and regular, while decreasing the cost of diesel in hopes that farmers, long-haul truckers and mass-transit providers, most of whom rely on diesel fuel, will be able to keep their prices stable.

The new plan, presented to the Legislative Assembly last week, would set regular gasoline at 779 colones per liter (approximately $5.70/gal) and super at 801/liter (about $5.86/gallon), with the national oil refinery requesting another $0.43/gal hike for mid-July.

With the price of oil spiraling ever higher, the search is on for alternative fuels and energy sources. One of the many fields now being explored worldwide is the use of biofuels, including biodiesel.

Costa Rica is particularly interested in exploring the possibilities, as the country intends to replace 25 percent of its oil imports with renewable sources by 2010 and achieve carbon neutrality by 2021. According to Arnaldo Vieira de Carvalho, senior renewable energy specialist for the Inter-American Development Bank, “Central America is in a very good position to accelerate its biofuels movement.”

The Compañía Nacional de Bio Combustibles (”National Bio Fuels Company”), created early last year, has plans to build a biodiesel plant in the Pacific port town of Caldera, and Pan-Am Biofuels Inc. has acquired 1000 acres of farmland in Guanacaste to establish what the company is calling an “oil field” of Jatropha trees.

Jatropha is hardy, fast-growing, drought- and pest-resistant. The perennial plant, native to Central America, produces oil-bearing seeds within a couple of years, and can continue producing for up to 50 years.

The plant is not edible - in fact, it is toxic, and is considered invasive and undesirable in some places, since it can thrive in poor soil but does not yield food for humans or animals. However, it has potential as an alternative fuel, with an estimated cost of just $43 a barrel.

Investors and, indeed, the Costa Rican government, are proceeding with caution but the topic is a compelling one in today’s world, and over time we may begin to see Jatropha fields alongside Costa Rica’s traditional expanses of coffee, sugarcane and bananas.

See this article in Biodiesel Magazine for more information on biodiesel development in Central America.

Mandarin Oriental, the award-winning owner and operator of some of the world’s most prestigious hotels and resorts, is developing its first Central American property at Manzanillo Beach, Costa Rica.

Rancho Manzanillo will be an exclusive 538-acre gated golf and residential development including the 130-room Mandarin Oriental hotel, slated to open in 2010. The complex will feature branded Mandarin Oriental residences, beach and golf villas, and exclusive private homes, as well as an 18-hole Fred Couples Signature Championship golf course. Plans also call for 200 acres of protected tropical dry forest.

Amenities include three restaurants, three bars and a lounge, conference rooms, a 20,000 square-foot spa, a sophisticated fitness center, tennis courts, a golf pro shop and a series of multi-level outdoor swimming pools.

The development is located next to the ICT’s model tourism development project, Polo Turistico Peninsula de Papagayo, 25 minutes from the Daniel Oduber Quirós Airport in Liberia, Guanacaste.

The Rancho Manzanillo project is owned by by Corporacion Domaro, S.A. and Inversiones Costa Azul del Pacifico, S.A. It is being developed by T.F. Stone Companies of Dallas. Architecture for the resort will be provided by HKS, Inc. and landscape design by SWA Architects. Wilson & Associates is developing the hotel’s interior design, while hotel development services will be provided by Global Resort Development, Inc.

The Mandarin Oriental Hotel Group currently operates more than 10,000 hotel rooms in 23 countries.