[Removed at original poster’s request]
Mercan valuations, safety of investment, buy back 'guarantee'
They do provide more analysis if you ask for it; I’ve gotten revenue/profit projections, costs, etc etc from them. Presumably they will provide it to you. Whether or not you believe those numbers is another matter.
Renovation projects can cost more than new-build. Yet sometimes you have no choice but to renovate because of existing covenants or lack of available space for new-build etc. There are several dead hotels in prime locations in Lagos that are no doubt heavily encumbered with debts from the 2008 crash that banks or others keep marked to par on their books and the only way to get the place is to take over that debt - but there is literally nowhere else in town you are going to build, either - because of all of the regs you can’t just go buy something else and knock it down and build what you want, and there really literally is nowhere else to build that matters other than one spot just south of the old town on a hill, and it’s been bought and a bunch of luxury villas are getting built on it. This is not the US. You cannot use US metrics or logic, period. It will not work. If that makes you uncomfortable, then walk away.
Of course the buy back isn’t guaranteed - they could go bankrupt for that matter. I will note that the stuff I’ve seen is that if they hold beyond year 6, the rate of return starts jumping considerably, meaning they do have a financial incentive to pay you out. It was in the fine print. Maybe that’s changed, I do not know.
Your EUR100/night number is IME suspect. Any revenue projections are going to require a curve - Lagos like most of the Algarve is primarily a summer destination, and Lagos is becoming one of the prime destinations as stuff farther east is just getting overrun. I would not be surprised to see those rooms going for 300-400/night 100% occupancy all summer… and 20%@150 all winter. That is prime, prime real estate where it is.
Do not discount the value of the asset as a whole. If you can return 2-3%/yr on an asset hard on the Lagos marina to pay the bills, you’ll get fantastic returns on cap gains of the asset. Mercan is looking at the long game here. Remember they are not in this to provide you with high return, they are in this to provide themselves high return in the long run, using your money in the short term at low interest rates, which you are giving them in exchange for the GV.
I am of the opinion that Mercan has been around for far too long, with too many projects done worldwide, to be a fraud. But that’s me. I also know zippo about the project other than the quick glossy. I have spent quality time walking around Lagos, though. And I support @lagos in that I found them perfectly willing to provide more detailed analysis on request.
There has been very little discussion of Mercan projects here for a while now AFAIK; it has mostly gone elsewhere. So this is probably not your best resource.
I’ve said this elsewhere up in the big mercan chain I’m quite sure.
You’re right. There isn’t a chance of it happening. But that’s not what is happening.
The way to think about this is that you are funding a construction loan. Construction loans are hard, and they’re expensive. This is also the theory behind Rock Capital - Artur and Pedro flat out admit that it’s a great way to get “construction loans” without paying 10%+p.a. and having to be bound by all the restrictions and covenants that would come with a bank loan. For Rock, they intend to sell to get the cash back. For Mercan, I quite imagine they will mortgage the finished property like basically everyone else anywhere in the world does to free up the capital - but it is way easier and cheaper to get a mortgage on a finished, operational property than it is on something like a reno. So really your bet is that they (a) finish the property (b) get it running (c) it makes enough operationally to fund a conventional commercial mortgage, at which point they give you your money back. And I bet if you ask them the question that way they will admit to it. But understanding that requires more knowledge of how the world works than the average investor is going to have. As to your EUR107mm build out, I don’t know anything about the property in question but they may well be paying a pretty penny to get it given the locale.
The numbers you need to achieve that are a lot, lot lower.
Unwrap all of this, and what you are looking at is a 3% Mercan corp 5 year note partially secured by the property, with an option to extend, structured in such a way as to meet GV requirements. Great deal? No. Totally off the wall? No. Mercan is a huge operational company with real track record to show. Open market for general-obligation bonds, they’d pay what, 6%?
$212/night still seems low. that feels like a covid-recovery number and it’ll be more as things recover.
In any case, I would encourage you to consider the other threads and the very, very long wait times that everyone is experiencing, and whether you want to wait 2 years to get a visa on top of your 5 years, versus your other options.
I don’t think they sell. I think they operate 'em. Think about it. You put up say $10mm. You get $90mm of basically free 5 year locked in financing, to go build a hotel. You probably even get to pay yourself reasonable costs for managing the buildout out of that 90mm. You get to get the place operational with someone else’s money. At the end of 5 years, you’re in basically nothing, and all you have to do is get a mortgage on the finished, operational hotel, and all you have to do is mortgage the property to buy out the initial investors. Why the hell would you sell it? It’s probably throwing cash like mad!
Anyway, to lagos’ original point, yes, the information is there, you just have to ask for it, and yes, most people probably aren’t sophisticated enough to understand the numbers even if it’s given to them.
As for that 400k, as I said, this is Europe, not the US. Everything costs more. And I bet they are having to pay off someone else’s bad debt. You don’t go bankrupt in Europe, you just keep your bad debt marked to par til someone gets desperate enough to pay you par, and the government takes your bad debt and shoves it into a “bad debt bank” - in Portugal it’s called Novo Banco. When you’re government-funded you can wait until inflation marks down your bad debt for you. Ask them. I bet they’re paying an insane number for the property itself. And they have no choice. As long as the income projections support it, move on.
Ok. I’m just punting anyway. I have no further explanations.
I appreciated all of your replies!
I am not qualified to comment at all on the Mercan investment. But everything both Gary and Jeff have said seems reasonable with one exception - Jeff’s view on costs and rental prices.
As someone who has been involved in recent renovations in both the US and Portugal my view is that costs in Portugal are between 50% and 66% of similar work done on the West Coast of the US. So considerably cheaper in Portugal, not more expensive.
And as someone who manages a very nice short term rental property in the best part of Cascais (I manage it on behalf of my parents who bought it in the 1980’s and if I had my way they would have sold it last year because I don’t think we will see those prices again for a very long time) short term rental prices now are at peak season rates because of UK school and uni holidays.
Pre covid a very good BnB with two bedrooms in the best location in Cascais during peak season would go for around 150 per night and about 100 off season. It is about 160 per night now, but two weeks ago it was about 120. So probably hasn’t changed much. And Lagos is normally considerably cheaper - we rented a nice AirBnB (three bedroom, swimming pool, close to the beach) in Lagos for under 100 euro per night in peak season in 2019.
Air BnB vacancy pre-Covid was also fairly high (around 10-15% in Cascais), as are maintenance costs and taxes, and I think vacancies would be a lot higher in the Algarve (a lot of weekend visitors even in winter in Cascais, a lot less in the Algarve). In winter outside UK school holidays Lagos is a bit of ghost town. So I don’t think 25% vacancy or more is an unrealistic assumption. Of course a lot depends on the property and how it is marketed and to whom, and how it is priced
But I don’t know hotel prices, apart from having stayed for a few nights last week in a 4 star downtown Lisbon hotel and having paid about 100 per night.But Jeff’s number of 300-400 with 100% occupancy in peak season does seem a fair bit higher than I would personally (with very little knowledge) expect - I would have thought something closer to his winter season numbers in peak season.
One more thing on “guarantees”. In many jurisdictions there is a strong legal definition involving recourse and balance sheet. This is not the case in Portugal, and you have to look at the underlying entity providing the guarantee and it’s balance sheet. It is not uncommon to have a man of straw behind the guarantee. So it the guarantee by Mercan or by an SPV?
But this is not to diss the Mercan investment. I just don’t know anything about it, and a lot depends on the property, who it is marketed to and how it is marketed, the legal documents and the strength of the balance sheet behind the guarantee as well as interest rates at the time they plan to refinance and return capital. For all I know the numbers are very accurate or even conservative.
So please don’t read too much into my comments and please do your own DD.
If you ask me, they’re all leaps of faith. Pretending your money is safer in a fund … I don’t know. They’re regulated, sure, but that doesn’t keep them from sinking your money into a bunch of dead-end stuff and walking away, or just bungling and losing the money. I imagine this is why a lot of people do the buy-a-house thing - you can see and touch the house, and people tend to understand houses. They might get the valuation wrong because they don’t understand the market, but the house probably isn’t going away (assuming you got a lawyer who did their job right and kept you from buying a house that had clear title and boundaries and was actually for sale, and you found a home inspector who wasn’t paid off to ignore the foundation rotting due to all the damp because the place had been closed for years without a dehumidifier and they just slapped a coat of spackle and paint over it so you couldn’t see it)…
I can’t speak to the Lagos project. The Mercan project I did look closely at didn’t seem too terribly unreasonable, and they have track record. I nearly went that way myself and if I were to do it again I might still. But things change.
As to being wrong on prices, well, I make no claims to being a real estate expert.
It’s all in what makes you comfortable.
the 1/30th valuation is nothing to be concerned about, AFAIK its a common thing to value property for tax purposes much lower. Now that all of the funds are issuing annual statements it would be interested to get some idea about relative performance .
The imga fund is hardly sketchy
Which one? I googled “IMGA Portugal” they look like a fund manager of some kind, which fund are you referring to?
The one people typically invest in here is an index fund of the Portuguese stock market, imga ações Portugal
If I go that route, does IMGA handle the visa process and taxes in the same way Mercan/IAS does?
Yes, that fund. No they don’t, they’re just an index fund. Your lawyer would have to handle everything else
Hi @expatdude12321 i am in the same boat as you are. Based on whatever i have studied about Mercan, i believe the initial price is over-inflated and not all may actually be required for the hotel renovation. Having said that, in the 280K option, about 35K is used for IMT and VAT. In addition, they pay a hefty commission to seller agents (have been quoted a figure of as high as 10% ie 28K or so). Thus, this corroborates only a small % may actually be used for construction. Even after knowing all this, I am struggling to figure out any strong alternatives.
ADo you believe the buyback will actually be honored?
I am speaking to a couple of investment funds next week, lets see how that shapes up. Though, i am skeptical of investing 500K with decent upfront fees and commissions built in, across most of the funds that i have studied so far.
Pls let me know if you figure out a better alternative
Hi all, new to this group. On Mercan 280k option, one question I had which I haven’t seen being raised on the group (though it’s quite possible I’ve missed the convo, apologies in that case):
Per the sales brochure, the on-top costs in the 280k option, add up to ca. 50-60k euros. Meaning my total outlay would look like ca. 350k. Is it reasonable to pay such high costs for legal and other assistance?
You’re going to pay them to someone, unless you want to do BPI or IGMA Acores. Whether or not you’re being told about them. Cost of doing biz.
I’ll start by saying that we looked long and hard at Mercan, and almost went with them. I did about as much due diligence as an amateur can do (I’ve done lots of M&A in my career, so I know how to dig up dirt), and everything on them came back positive. What turned us in another direction is some guidance from local lawyers about Portuguese real property law. According to them, in Portugal, it is not legal to obtain “specific performance” on a real estate transaction, i.e., you can’t force them to buy you out - ever. As you note, 3% - 4% annually is pretty low, and with the way markets are going, it will be much lower than you could otherwise do with safer investments. We ended up going with a VC Fund, and I’ll be able to tell you whether or not that was a good call in about 7 years!
I have been evaluating the various options, and Mercan initially seemed like a good option. I’m less sure now (although I was previously aware that investors, particularly at the $280k level, were simply giving an interest free loan).
I’d be interest in learning more about how you evaluated the various VC options; my biggest concern with these is the fact that the commitment appears to be pretty open-ended (many have an 8 year term with unilateral options to extend the fund for 2 2-year periods).
Hi, David: what I did was read a lot of these NomadGate entries to see the varieties of funds available, and then started communicating directly with the funds, asking for copies of investor presentations. I went to each fund’s website and pored over it. What I looked for were things like “who audits the firm or fund”, “who are the other investors in a fund and what do those other investors represent (other small VCs, family office money, individuals, etc).”, what are the backgrounds of each of the individuals involved in managing the fund”, “what do the local lawyers (whom I was also interviewing) say about these funds”, etc. I also reached out privately to a couple of people on NomadGate based on comments they had made so I could dig into that a bit more. I even reached out to a family fund to see if they would discuss their investment and why they chose it, but I didn’t get past the first line of defense in that case. All of those things helped, but while I think we made the right investment for us, only time will tell.
One things I’m sorry to note is that the SEF delays are such that this hoped-for 5-year project looks more like a 7-year project at this point. I hope not, but my point in saying that is a fund with a 6-2-2 really isn’t so bad if the timing for getting permanent residence visa/citizenship is 7 years. That gives us another couple of years to find just the right spot to lay down new roots.