Fiasco in Colombia

I had been looking at the potential for investing in Colombia for many years. I visited Medellin in 2016 to do an exploratory evaluation and was impressed enough with the real estate potential to try and find a good investment. In 2019, I decided to invest $25,000 with a real estate development company based in Medellin. I had previously stated this company’s name in this blog, but they threatened me with a defamation lawsuit! So, I will have to refer to them as ‘The Company’. You’ll understand why they didn’t want me to mention their name after you read what happened.

The type of investment I chose was called a ‘Packaged Real Estate Project’ (PREP). ‘The Company’ finds buildings that meet their criteria for rental and capital appreciation opportunities and then they solicit funds from investors to purchase and renovate the building. After construction is completed, they manage the property in the short term rental market. Investors participate by providing funds to ‘The Company’ for these specific projects and then get a stated return and potential for appreciation from their investment. Minimum investment is $25,000, and typically an investor can invest more than that if so desired. An investor is a partner and part owner in the project. This is different from a REIT, where you don’t own an interest directly in any property, rather, you own stock in the real estate company.

I chose to invest the minimum amount in a PREP project in the Laureles neighborhood in Medellin. This project is in a desirable area of Medellin. Being a large city, there are many areas that have their own distinctive characteristics. El Poblado is a popular neighborhood and we spent a lot of time there when I first came to Medellin. But Laureles is another great neighborhood in Medellin, with walkable streets, nightlife, and lots of business activity. Both tourists and business travelers come here, so the short term market is profitable and growing.

Investment Details:

Investment amount: $25,000

Annual Return: After all expenses and Colombian taxes, projected annual dividend payments should be 8% of my $25,000 investment.

Potential capital appreciation: projected at 17%, but they don’t specify the number of years it might take to get to this level. I am primarily interested in the 8% annual dividend. Any appreciation is icing on the cake.

Dividend payouts: Every quarter. I should receive a wire deposit to my business bank account for $500 every 3 months.

Safety: I think its a fairly safe investment because it is run by a reputable company with a track record and it’s in a country that is stable and has a growing middle class. As the Colombian Tourist Board says ‘El riesgo es que te quieras quedar’ (The only risk is that you will want to stay’). ‘Yea right’….

Liquidity: At any time, if I want to sell my interest, the company offers my interest to other investors. Of course, there is no guarantee others will buy my interest, especially if things don’t go well.  But that is a risk that is inherent in any investment. 

Currency risk: None, they pay dividends in US dollars

Tax considerations for this investment: The income is taxable to U.S. investors same as any other investment. This investment does not require FBAR. It does fall under the reporting requirements for FATCA, but I won’t meet the reporting thresholds, so I won’t have to file form 8938. It also does not fall under the reporting guidelines for Passive Foreign Investment Companies (PFIC). See my blog on US Tax Laws.

Perks: If you visit Colombia, as an investor with ‘The Compay’, you get special deals on rental rates if you stay at any of their properties. Also, if you invest enough money, you can get a residency visa. Stay a few years, you can even get a 2nd passport!

What Went Wrong

I invested in the Laurales project back in July of 2019. At that time, Colombia’s economy was doing really well, and I felt like I was getting in on a great investment. Everything seemed fine and after I made my minimum investment of $25,000, I was looking forward to a steady dividend, the first one coming up in November for the 3rd quarter.

This first dividend came in early November, although not at 8%. They said it was due to the fact that they were not operational on the new building for the full quarter. They did provide a detailed financial summary of the project, and I was impressed with that. At this point, I was actually recommending this company as they were hitting all my expectations as far as timely information, quick responses to my questions, and prompt dividend payment.

But this honeymoon period turned out to be short lived. When the next dividend payment came due in February, 2020, there was no dividend payment made and this weird lack of communication from the company: No financial information, no emails or any notifications on the upcoming dividend payment, and of course, no dividend payment. After the dividend was more than two weeks late, I started emailing the company and was not even getting any responses! I sensed things were not going well, but I had no idea how bad it was. And this is all BEFORE the Covid-19 crisis.

By early March, again BEFORE the Covid-19 crisis, we found out that the Laureles project had hit a huge problem. The owner of a restaurant on the ground floor of the building we had invested in, filed suit to stop us from doing short term rentals in the floors above him. To have not looked into this kind of situation before embarking on the project represents a huge lack of due diligence and was all the more surprising as this company touted itself as a very experienced real estate developer.

So now the entire rental income stream was halted, and consequently, there would be no dividend payment for the 4th quarter, and the likely scenario of no dividend payments for the next quarter. In addition, the company was talking about problems they had with how they calculate taxes and that there may be additional money taken out of the rental income to cover this ‘new’ way to handle these additional costs. What? Was this company for real? Oh yea, they are for real, and they were making a last ditch grab of any funds they could before skipping town.

And then, Bam! Covid-19. The short term rental market almost immediately ground to a halt, and now ‘The Company’ seemed to be struggling with costs it hadn’t planned and no revenue coming in. So what did this farce of a company do? They first tried to sell investors on a scheme giving ‘The Company’ more money for managing the properties and, of course, less money for investors. But by this time, most investors did not trust ‘The Company’ and we started talking about taking over control of the building ourselves. As things deteriorated further and none of the company’s investors took them up on their ridiculous offer, they up and sent an email stating that they are through managing any PREP properties, and all investors are on their own – EFFECTIVE IMMEDIATELY! It’s like they just packed up their bags and skipped town in the middle of the night, leaving all investors to scramble to take over legal ownership and management! This is such a breach of contract I think the company founder should be jailed.

We, the investors (about 25 of us) have taken over control of our building and will likely try and do long term rentals, which will be OK with the restaurant owner and should bring in some revenue. At a later time, we may sell, or if things return to normal, continue to rent out our apartments on a short term basis like we originally planned.

Although this investment has not turned out as planned, it does highlight the benefits of actual ownership of a tangible property, as opposed to a piece of paper. Even though our investment will not bring the anticipated income, it still has value and we will work to get the revenues back up, as the world slowly gets back to normal.