How reliable is Mercan's buy back guarantee?

@tkrunning’s Golden visa guide mentions Mercan as a relatively low risk option (limited downside but also limited upside) due to their buy back guarantee.

But talking to Mercan it seems the buy back isn’t guaranteed by them at all, but rather by various subsidiaries specifically created to manage their Portuguese hotels, none of which have actually opened yet. So legally if the subsidiary guaranteeing your buy back goes bankrupt, I think Mercan is under no legal obligation to fulfill the buy back guarantee at all? They can simply create a new subsidiary.

So it seems the reality might be that you’re getting limited upside but still have the possibility of losing your entire investment (except for some fractional share of a hotel building of unknown value)? Or is there some information I’m missing here?

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I had this question. Watching the online presentation gave me some peace of mind. Here’s why.

  • Each project stands alone.

  • There is no commercial mortgage, since the hotel is being funded by investment from people seeking the GV.

  • The hotels can break even with about 30% occupancy.

  • The payment to initial investors does begin for a year.

  • Cash flow above expenses is being held to pay back investors.

  • Not all investors will exercise the payback clause at the same time.

I have no connection to Mercan.

I don’t earn a commission by recommending them.

I’m just a guy trying to figure out what is the best fit for my family.

What I wrote is my current understanding of how it works.

You will have to do your own due diligence, and satisfy yourself of these items.

There is little certainty in life. No matter what you do in Portugal, there will be some kind of risk. Each has to evaluate and choose which kind of risk they can live with.

Good luck

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30% for breakeven seems awfully low. If true, then hotels must be massively profitable.

There is some amount of shared risk in that the entity that’s managing the Marriott is the same one that’s managing the other Hilton they already have running. Granted it’s an operating company and is just leasing the hotel from the holding company that owns the hotel, but if it goes *alls-up then no one’s making any money. (If you dig around, the name of the operating company is on the documents you sign with Mercan, and it’s also in the public news release for the Hilton Tapestry (Referência Arrojada SA)).

As Lagos said, there’s always risk. There is some black-swan risk here, which you’re paying for through that limited upside. That’s kind of just how these things go. Though some of the point is exactly that, you have a fractional share of a hotel. Assuming it does get built, the collective owners of the deed can get together and find someone else to run the hotel. etc etc. You don’t lose everything. But really what you’re paying for is that Mercan has done this a whole bunch of times already and this is Just Another Project for them and thus the odds of it going wrong because the project itself fails are pretty low.

(As opposed to currency risk or political risk or…)

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I can’t add much to what lagos and JB replied already, other than to agree with them and add some additional thoughts/perspective.

FWIW, DON’t invest any amount that you can’t afford to commit for 5+ years and possibly risk 100% loss with any GV investment (Mercan, any fund, RE, or otherwise). At least with RE purchase you’ll have something you can live in, but you could easily end up with a money pit that may be difficult and/or costly to unload if you make the wrong choice.

I’ve had similar concerns over the past few months, but have decided to proceed with one of Mercan’s projects. Mercan seems to be the 800-lb gorilla with a long track record, run by what appear to be competent canadians (who I tend to trust more than americans), and Portuguese (also less criminal than americans IMHO).

Any or all of my US holdings could end up worthless on any given day. Some are less risky than Portuguese real estate, some are more risky. Over the years, some of my smaller investments have evaporated. This has never caused any hardship because I’ve rigorously diversified and managed risk.

Sometimes I feel like I can’t get my ass and assets out of the US fast enough. Diversifying into Portugal is a big first step for me and will be the first serious currency hedge I’ve made. While I’m no George Soros, I think “betting” on the Euro is a prudent move. The Euro should hold up against the USD, and I think better than 50/50 will grow stronger relative to the dollar in the next 5-10 years. Portuguese citizenship and joining the EU club are just icing on the currency cake.

Another thing that is very telling about the Mercan projects is the fact that I won’t have the option to keep my money invested in the hotel after the GV holding period elapses. The fact that I can’t do this means that the big money behind all this stuff believes that the projects are safe bets and they don’t want to share the pie with any of the little guys longer than they have to.

Good luck!

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Maybe. People can certainly make money running a successful hotel. But people can make money much faster by reselling real estate for more than they bought it.

Suppose you have 100 Golden Visa investors willing to spend €175k on a fraction of a dilapidated hotel building, and another €175k on construction to meet their €350k quota. That’s €17.5 million of purchase money and €17.5 million of construction money you have access to. If you can buy a dilapidated hotel building for say, €8 million and resell it to those investors for €17.5 million, you’ve made €9.5 million profit instantly. You also get €17.5 million in construction funds for your own construction company. At that point, you don’t really need the hotel to succeed, you’ve already made good money!

It sounds like you’re concerned that everyone involved is a crook. I doubt that’s the case, but it’s certainly a risk. If you’re not comfortable investing with Mercan or any of their partners, you shouldn’t. You don’t need a reason.

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I could not agree with your concern more. From a legal stance, they have absolutely no obligation at all. Mercan can step away and leave a bunch of gruntled investors to deal with the independent subsidiary company they formed specifically for one development.

Maybe I’m wrong, maybe not, I just would not go with them. I found the article on this site to be a bit too pushy on Mercan, it gave me the sense that their commission is too sweet not to be talked positively about.

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Actually, it isn’t an independent subsidiary formed specifically for one development.

The contract you sign is with REFERÊNCIA ARROJADA S.A… You can independently verify that this is also the entity behind and entity operating the Se Catedral Hilton Tapestry project, which can be independently verified is a viable operational hotel backed by Hilton. I imagine with some further digging you will find it’s the operating entity behind more of Mercan’s projects. It’s not unreasonable that they have a separate entity for their .pt operations. It doesn’t seem especially reasonable they’d let a viable operating entity that owns operating assets die.

I have no intention in investing in Mercan, but mostly because it isn’t right for me. I’m just suggesting that if you dig through the paperwork there is some reason to think the whole thing is quite on the up-and-up.

Now of course there’s commissions. 10% seems high, but what do I know? 5% seems common enough. It’s probably just the cost of doing biz. But that goes to a44’s point. If you can get investors to stump up EUR17mm to buy a EUR8mm hotel and pay for the renovations, then get those same people to leave the money with you for 6 years and let you operate the hotel and keep most of the money you make operating the hotel, THAT is a pretty good biz. (You think Hilton settles for a paltry 3% return on their hotels?) You’re most likely making enough money off the deal that you don’t need to screw the investors over and take the reputational hit.

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Hi @barbiego — sorry if it comes across as a bit pushy in the article. I will see if I can rephrase things.

Mercan pays the same commissions as basically any other RE developer in Portugal (nowhere near 10%), so that’s not the reason why I’ve highlighted them in the article. Since Mercan is focusing on €280,000 and €350,000 properties rather than €500,000+ the commissions are actually lower in absolute terms.

While there are other options also offering buybacks and fixed rental income, as @jb4422 said, Mercan’s buyback guarantee is offered by Referência Arrojada (RA), which (to my knowledge) is their main Portuguese entity operating all their projects in the country. Other buyback schemes I’ve seen are typically backed by an SPV operating only a single investment object, which means the parent companies are more likely to simply let the SPV fold if they run into financial troubles (leaving the investors with assets worth less than they paid for them).

This, together with the fact that Mercan has a much longer track record internationally than any other company operating these kinds of projects in Portugal, is why I highlight them in the article. While it’s true that the Canadian parent company has no legal responsibility to honor the buyback guarantees made by RA, it wouldn’t reflect well on their global business if they screwed over investors in Portugal.

Note: The users sachikosuzuki and Jeremy.b seem to be the same person, so I would be a bit careful in assessing their agenda for participating in the discussions regarding Mercan.

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Keep in mind that it will always be some subsidiary entity. Corporate entities only exist in one jurisdiction; Mercan being Canadian, the master corp would be in Canada. Mercan would need a Portuguese corporate entity in order to do business in Portugal. It doesn’t have to keep any real money in that entity. Cross-border legal claims get really messy. So there’s just about only so much legal guarantee you can truly expect, if you’re going to go down that path. Really it’s their reputational risk that would be the real guarantee here.

I imagine the 280k properties are in a separate subsidiary simply because it’s also the operating company and the company/staffing/structure you have to run your flagship Marriott is potentially not the same as you would have to run your small-town Garden Inn. Not that I know, just suggesting that there’s potentially a perfectly reasonable explanation.

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Interesting. When I first researched Mercan they didn’t have any €280K projects yet, so I wasn’t aware of this distinction. The only contract documents I ever saw were between investors and RA.

Like @jb4422 states it may be a perfectly reasonable explanation for this, however, it’s worth being aware of as an investor.

I agree with @barbiego

FWIW here’s the language straight from the Mercan contract for the 280k project. So basically if they don’t pay you back they are supposed to be paying your rent, but it does make it feel like they could delay paying you back for 12 months at a small cost. I’m still strongly considering them though :wink:

5.7. If LD fails to comply with its obligation to repurchase the part of the Property from the Investor within the deadline referred in clause 5.6., the Investor will be entitled to receive an income, in the amount of 3% of the invested capital (€ 280,000.00), which means a total gross amount of € 8,400,00 (eight thousand and four hundred euros).

5.8. If after 12 (twelve) months, counted after the deadline mentioned on clause 5.6., LD still hasn’t complied with the repurchase obligation, the amount of the rent due will increase to 4%, of the global investment, which means a total gross amount of € 11, 200,00 (eleven thousand and two hundred euros).

5.9. Additionally, if LD fails to comply with its obligation to repurchase the part of the Property from the Investor he/she is authorized to sell his/her part of the Property to any third party, in the terms and conditions he/she deems appropriate, being the Investor only obliged to assure that the third party takes knowledge of and undertakes to comply with the present agreement and its schedules, or to file a lawsuit in the Portuguese courts obliging LD to comply with the purchase obligation.

Well, it’s like any project. You have to be sure you have the cash. so why not build in an escape clause that lets you drag your feet?

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Hi Everyone,

Did anyone participate in the MERCAN program and actually got their money back?

I am also keen to know more about the experience you had with Henley and Partners for the Portuguese golden visa program.

Thanks.

Hi everyone.

Does anybody understand what are the business reasons for Mercan behind such a diffucul scheme to get investments for their projects? They need to spend money on acquisition of investors, servicing them, paying them interest. Why cannot they simply take a credit from a bank? If they are respective and large complany - it would be relatively easy for them to do so with reasonable rate. May be somebody knows what are the interest rates for such kind of credits in Portugal.

Thanks for the answer.

This has been discussed in the Mercan thread. Basically, GV money is cheaper and easier than bank loans. Commercial construction loans can be quite expensive, you will typically need to have performance guarantees and checkpoints, you’ve got to convince the bank that it’s a good project, etc etc, and the property itself is encumbered. Once the GV investor is in, they can’t back out for 5-7 years; the money’s locked. They’re only paying you 3-4% fixed-rate and that only once there’s planned to be actual revenue. They don’t have to checkpoint with you, there’s no risk of a loan being called, and if the project’s delayed the only risk/downside to them is paying you 3-4%.

From my POV, it’s not really that hard to acquire and service GV investors. Sure there’s a bit of marketing, but typically that means paying 5% one time to places like GCS and Magwind; nice straight upfront cost. Contracts are done in-house. How much servicing is there besides sending out a report every year and some checks? Providing some paperwork for the GV is no biggie. There’s some startup paperwork fuss to be GV compliant sure but probably not that bad, especially if you’re a large respectable company. People’s GV applications themselves are not their problem.

I think you have the option of continuing to invest in the hotel if you choose too. I asked that question to the Mercan CEO Jerry Morgan. He said that they would only start to make money after buying back investor’s shares.