Assisting Future Hotel Investors Avoid A Potential Article XII Problem

Assisting Future Hotel Investors Avoid A Potential Article XII Problem

There has been much discussion recently as to whether the Article XII controversy or the economic “slowdown” in Japan has contributed to the slow growth currently being experienced in the Commonwealth. A recent article published in Hawaii’s Pacific Business News, described a Japanese investor’s plans for the construction of a 700 room Mediterranean style, 600 slip marina in Palau.

According to the news release the $1.2 billion mega-resort is to be financed by Tokyo based, Ocean Development Company. Additionally, quite a bit of publicity has been aired on CNN describing huge amounts of Japanese investment in China, Vietnam and elsewhere in Asia. So it would appear that such investment capital is still available in Japan and elsewhere and continues to seek out sound investment locations. In recent years not much of it has flowed into the Commonwealth.

Japanese investors have all but vanished from land leasing activity. This is quite a change from the halcyon years between 1987 and 1991 when a total of 24,851 transactions were recorded and indicative of that frantic period of unprecedented development. A carpe diem atmosphere prevailed – seize the moment – eat the apple, was all many cared about.

Those days are gone and most likely will never return. With the exception of the expansion of several existing hotels and the hotel located at As Lito, no new resort type hotels have been constructed on Saipan since the Plumeria opened in 1991. As mentioned before in this column, conservative projections of visitor entries five years from now, or by the year 2000, indicate that the Commonwealth can expect to host from a low of 791,200 to a high of 1.2 million air arrivals providing the hotel rooms are available. From 1,500 to 3,500 additional rooms will be required. The question now is, do those that did not lease their land when the time was ripe still wish to do so? Potential investors seem disinclined to lease private land, at least at levels previously witnessed.

What can be done when a land owner in the Commonwealth has a parcel of prime land suitable for a hotel or another project – land that is clear of any Article XII problem – but still the owner can not interest a foreign investor in leasing the property because of the adverse publicity and confusion surrounding a number of land transactions which occurred in the past? In the findings which led to the enactment of Public Law 8-32 in 1993, the Legislature found that several Article XII cases, taken together, “have had a cumulative adverse effect on the CNMI economy in the last two or three years. These actions have led to uncertainty of title, instability of land values and financial inequities. They have caused the Commonwealth to suffer an undesirable reputation as a risky and uncertain place in which to lease land for investment or development or in which to grant leasehold mortgages”. Believe me, the one thing investors abhor the most is the impression of instability. In an attempt to restore confidence in the title of lands and property the Legislature, to their credit, enacted the following into law: They established a fee structure for attorneys. Also, when a court with jurisdiction within the Northern Marianas determines that a real property transaction is in violation of Article XII and the transaction is rendered void ab initio, then the court shall award an equitable monetary adjustment to any person directly and adversely affected by the judgment.

The Legislature provided for a six year statute of limitation for introducing potential Article XII cases for litigation and they enacted a severability of contract provision should a court determine that any provision of an agreement would, if enforced, result in acquisition of a permanent, or long term interest, in real property by a person not of Northern Marianas descent. Still, there seems to be reluctance on the part of some investors in leasing private land. If it turns out that Article XII and the adverse publicity surrounding the issue is responsible for the slow growth in the CNMI, more so than some currently believe, then policy makers might consider the feasibility of undertaking a unique, if not somewhat drastic measure, to stimulate continued foreign investment.

This would first involve conducting an inventory of all private land which would appear to offer the potential for future hotel investor interest. Once such parcels have been identified, the government could then enter into discussions with the land owners for the purpose of attempting to place the land in escrow for possible future acquisition by the government in exchange for another parcel of government land along with a possible, and eventual future adjusted cash “buy-out” to equalize a fair land exchange. The selection criteria for such a process would have to take into consideration the following: (a) the private land is, in fact clear of a potential Article XII problem, (b) the owner has determined for himself and can demonstrate that the parcel cannot otherwise be privately leased because prospective investors have expressed doubt even when the transaction would not involve an Article XII problem; (c) the site is considered by the government as “prime” and an investor would proceed with the project only when leasing from the government. Up to this point no legal transaction would have taken place, and the remaining planning pieces would have to be worked out. The land owner would have to agree to place the parcel in escrow for a specified period of time at no obligation what-so-ever to the government.

Once a potential investor was identified and the investor’s interest confirmed that, in fact, the investor will lease only from the government – then the final arrangements for the government to acquire the land through the exchange process would take place. Once the site has been acquired by the government it can then be offered to a potential developer for a previously agreed fixed annual rate together with a percentage of the future gross revenue of the business as is now done with those hotels on Saipan situated on government land. Indeed, a percentage of the lease payment accruing to the government from the hotel’s gross revenue could perhaps even be offered to the original land owner as partial compensation for the original land exchange. This type of transaction would ensure the hotel developer that an eventual Article XII problem would not arise to jeopardize the investment since the investor would be dealing with land leased from the CNMI Government which would have previously determined that no Article XII problems exist.

The original land owner will have gained by the land transaction which might have not otherwise have taken place because of concerns over a potential Article XII controversy when a private to private transaction is involved. The government gains, (when the land is leased to the predetermined developer) through lease payments to the Treasury as well as tax payments generated from the business. The foreign investor is satisfied that he has entered into an agreement with the government as land owner. The land owner is gratified as he will have achieved his objective in converting undeveloped land into an economic resource. This approach would require that the government become more aggressive in seeking out and assisting potential developers with their projects in the Commonwealth rather than rely on a “passive” approach toward generating investment interest.

As past experience has shown, delays in land exchange negotiations would have to be overcome. Certainly this would be a drastic step and could be a long and arduous process – but if it eventually turns out that this is the only acceptable method to alleviate investor concerns then it may eventually be worthwhile considering. I know this idea will not receive many accolades from those that want to preserve public land for future generations. I can understand that – and they are right for wanting to provide for their children and grandchildren. But the land is not going anywhere, it will still be there after the lease agreement expires and, remember, those of future generations will need jobs as well as land. Some tradeoffs may have to be accepted.

Undeveloped land does not generate any revenues, not for the owner and not for the government. The economic function of land as a factor of production will determine if the Commonwealth economy grows or remains near its present level. You might think of land and the concept discussed here as being placed in a “land bank”, earning interest for all those years in the form of rental payments. Payments to provide for schools, hospitals, water production, power, roads and all the other things the government provides.