Alan Axelrod, Axelrod Capital Management
Since 1981, Axelrod has been the president of The Axelrod Company, located in Seattle, which currently operates as an asset management firm. Axelrod is also the president of Raising More Money Inc., now Benevon, an organization that trains and coaches nonprofit organizations in the United States, Canada, Spain and the United Kingdom to implement a mission-based system for raising sustainable funding from individual donors. Axelrod received his B.A. from the University of Michigan and his J.D. from the University of Michigan Law School. He is an active member of the Washington State Bar Association and lives in Seattle.
NuWire: Can you give me some background on how you got involved in real estate in Baja California, as well as your current involvement there?
Axelrod: About five years ago, a very good friend of mine, whose name is David Butterfield, a fellow that lives in Victoria, contacted me to let me know that he had spotted a wonderful piece of ground in Loreto, Mexico. And in conjunction with the Mexican government, their tourism arm, FONATUR, he had optioned 8,000 acres to build a sustainable community on the Sea of Cortez. Loreto is about 250 kilometers north of La Paz on the east coast of the Baja.
When he told me what he was going to do down there, I used it as an opportunity to become an investor in an early round private placement to form the Loreto Bay Company.
I had never been there other than as a vacationer to Cabo where I have been really going since the early 70s....I had never been to Loreto, but it sounded very intriguing.
About two years ago, I thought I would perhaps develop some spec custom homes in the Villages at Loreto Bay...and at that time David pulled me aside and asked me if I would like to, rather than do that, would I take on financing the commercial retail component of the first phase of the project, which is known as the Founders' Neighborhood.
The project is a nine phase series of seaside villages being built on three miles of waterfront, on a parcel that's about 8,000 acres large. The community will be built on 3,000 acres, leaving about 5,000 as a natural preserve.
And what attracted me to it was David's commitment to three sustainability principles. One was that the community would create more power than it uses. Second, that it would leave more biomass than it found, and the third was that it would restore the natural aquifer and estuary system.
I decided to take that on, and that's one of the things that I'm doing now is financing that commercial retail component. And to do that of course I had to do my due diligence, and I went down to Loreto to look around and fell in love with the place, and one thing led to another, and soon I was a proud owner of a custom home site and I'm currently in the middle of building a home in the Founders' Neighborhood of Loreto Bay.
In marketing the offering that we put together to raise funds for that investment, I was going down every month and meeting new homebuyers that were coming in and also looking around the area for what else was happening and became very knowledgeable...in the Loreto market in particular, a little bit less so in other areas of the Baja.
NuWire: Why should an investor be excited about the real estate market in...Baja California?
Axelrod: It's a natural place for North Americans...to go, certainly from the west coast, although with the new routes that are opened up on other airlines...people are coming into the Baja from all sorts of places.
The market in the Baja is really exploding right now. When you think about it, there's really no affordable beachfront left in southern California, and everybody's hungry for their place in the sun. The baby boomers both in the United States and Canada...are looking for their second home or retirement home...and the Baja really satisfies that need in quite a few places.
There's actually quite a few opportunities for development, but the area from about 30 miles south of Loreto to about 70 miles north of Loreto, that 100-mile stretch of coast, is really going crazy right now with potential development.
There was a Harvard University study that showed that the population of Loreto might go from anywhere from four to 10 times its current population over the next 10 or 15 years, which is obviously a huge, huge growth.
Cabo is peaked out as a market, although there's many things happening there as well, on the east cape. And La Paz is also a booming resort area. And Todos Santos, which is on the Pacific side, is a smaller area, artist community type area that's booming. And then there are these other little spots...around southern Baja like in Scorpion Bay where there's a lot of surfing action so there's less development there but many people are buying unserviced beachfront lots to put up a palapa or...small trailer or residence.
I just think investors should be excited just because it's doable. It's a little bit of a learning curve to learn how to do real estate down there, but I think there's great opportunities for appreciating property there.
NuWire: How has the market in Baja California changed over the last few years? And if you can kind of look into your crystal ball and maybe do a prediction as to how you see it changing in the next five years and beyond, that would be great as well.
Axelrod: I haven't really been in the Baja as an investor except in the last two, two and a half years, so I don't know really what was going on before that, but my sense is that it wasn't happening at the rate of acceleration and velocity that it's happening at now.
The only market that I...have always been aware of and was always sorry that I missed out on was the development of the Cabo San Lucas area. But many people are quite dissatisfied with how Cabo San Lucas turned out....It's very Americanesque.
There's a lot of people who just don't really feel that Cabo does it for them; it has no authentic feel, it's just a very pretty, warm place with a great beach. And don't get me wrong, I love going to Cabo, I still go there fairly regularly, but it's not a place where I would want to actually have a home.
So I think that one of the things that have happened is that people started looking to other places in Baja California Sur and they have found other smaller communities that are much more appealing to them.
Having said that...the east cape of Cabo, that is, there's a corridor between Cabo San Lucas and San Jose del Cabo [of] about 20 miles...there's a lot of development—major, major development—happening, going around the tip of the peninsula and up into the Sea of Cortez....There's a lot of development in the Cabo area that's pushing in that direction.
The Loreto area...was the fifth of five locations that the Mexican government slated for their tourist industry. FONATUR is their...trust for tourism. They put in infrastructure and work with private development to bring in resort communities. And they did Cancun and Cabo, Ixtapa Zihuatanejo and Huatulco. And now they've...moved to their fifth and last major area, which was Loreto, and that's why they found David Butterfield and chose to try a diff plan of development, which was low rise, no hotels blocking the beach, pedestrian friendly, villages with no cars, only electric engine transportation, at least throughout the village itself....working with these sustainability principles which [FONATUR] had never really paid much attention to before.
I just see a continuation over the next few years of a major tourist boom there due to its beauty and really its proximity to the United States. I mean, it really only takes an hour and a half, or two at the most, to get from southern California to the tip of the Baja.
It started just two years ago [in Loreto] with Alaska Airlines flying in two days a week. There's an international airport there...FONATUR built it 20 years ago, so it'll handle large jets into Loreto....[Alaska Airlines] went to three days a week on a guarantee that the Loreto Bay Company put up saying that they wouldn't lose any money on that third day. And as it happens, the route from L.A. to Loreto...is more profitable than the route from L.A. to Cabo....It's a higher percent, filled percentage, than the route from LAX to Cabo. So that turned out well, and then within a year they added a fourth day, so they now fly in four days a week.
Delta Airlines realized...it wanted to open up about 17 new routes to Latin America and one was to Loreto, and they fly in daily, smaller jet from Los Angeles. And then literally a couple of weeks ago, Continental Airlines opened up a route three days a week from Houston. And that really changes everything because it starts to open up the Texas market and of course a link to the east coast.
NuWire: Can you walk me through the process of what an investor...will go through if they're interested in buying property in Baja California?
Axelrod: I really haven't done anything in the areas of...office buildings and small strip centers or anything like that. My involvement has really been either in the secondary home market or in vacant land that I see is prime for future development that we will take through some measure of the entitlement process to get it...more attractive to an end user like a hotel or a developer of homes or subdivisions.
One opportunity at the...less glamorous end of the market is in affordable housing. When you start to think of these resorts coming in and the number of new people that have to come into the area...it takes a lot of people to service the tourist industry, and they have to have a place to live.
Because I've been involved somewhat with the Loreto Bay Company, I see what the...middle to upper end market is looking for in terms of homes. And there's many people who have bought in the Loreto Bay Community for example who have bought village homes—that is a production type home in the village—that's strictly for an investment.
And then there's opportunities in land...but a lot of it's very difficult terrain and a lot of it is in very complicated ownership. There's two types of ownership in Mexico. One is fee land that we're used to and another is ejido land.
Ejido, as I understand, it is more of a communal ownership....It was a land grant under the early constitution in Mexico that was really giving land to poor peasants to give them a place to farm and to live....It's under an agrarian registry rather than just your strict deeded ground, so part of the game there is to really figure out title and ownership.
You can turn ejido land back into deeded land, but it's a process that I've chosen not to deal with just because it's so complicated....I've looked for fee titled land that has a clean chain of title, and I think that's where the opportunities are....I'd say that...the major movement in appreciation is going to happen in the next few years as this [beachfront] land becomes much more desirable.
If you ask a general audience about whether Americans or whether foreigners can own property in Mexico, most people say you can't....There's some myth about Americans can't own property in Mexico. The rule is that foreigners can not own in fee title land within 50 kilometers of the beach. So if you're buying something in the interior, you can certainly own it, and if you're within 50 kilometers of the beach, there's two different conventions that people use to get around it.
One is that if you're buying a home you have to buy it through a Mexican bank trust. These are trusts that are just administered by major international banks like Deutsche Bank or Scotia Bank where they will be the trustee and the user, what we would call the homeowner, is really a beneficiary of that trust.
I'm an attorney in the state of Washington, and I had to really try to get comfortable when I first heard this that I didn't actually have title to the property and what that actually meant, but I've concluded that you really have all the burdens and benefits of ownership. You can sell it, you can gift it, you can will it....The trust is a 50-year trust that's renewable at will....It has a minimal cost and it's really just a legal convention that got created so that people would have the ability...to own a home and at least relate to it as if they...owned it in fee.
If you're not building a residence—if you're doing land—you can form a Mexican entity to own it....The partners or the investors of a Mexican entity can be all Americans. You don't even need Mexican involvement in order to create the Mexican company.
Those Mexican companies require that you have Mexican accountants and you file Mexican tax returns and...you need Mexican lawyers. And all documents are both in English and in Spanish...and Spanish...is the controlling language. They don't allow interlineations in contracts; if there's one change in a contract, you can't write it in and initial it in the margins. You have to retype the contract or the whole thing's invalid.
NuWire: What types of investments do you think will be the most successful in the future in this market?
Axelrod: The other things I think, besides land and homes or condos, is hotel type investments. Small boutique hotels or just watching which hotel chains are on the move.
There are subtle other...things that that market needs....It needs storage facilities. It needs places to park their cars and their boats when they leave.
It needs bars and restaurants, and that type of an investment. But all of those ancillary type services all are catering within that general category of tourism. I think that's really what's down there.
Certainly there's a lot of sportsmen down there....Loreto for example is a sports fishing capital and so there's a lot of fishing and diving and kayaking, and there's many businesses that are forming down there now to...provide ecotourism type recreation to the tourist market.
NuWire: Can you talk to me a bit about the biggest and perhaps most surprising lessons that you've learned in the process of investing in Baja California?
Axelrod: First, you have to put together a pretty good team of people because...I'm surprised about how much misinformation there is. I often tell my friends that I've seen three kinds of information in the Loreto market. There's real information, there's false information and there's misinformation.
It takes a fair amount of constant due diligence to really get underneath what's going on in many of these smaller communities....You really need to be working with somebody who understands what's really happening beyond what you just see on the surface because the way it's done down there is, it's all legitimate, it's all legal, it just has a relationship-based type of business nuance.
Another example that I...was very surprised about is that when I'm driving around looking at land, often you'll see signs like you do anywhere and it'll have a broker's listing or a phone number on it....There's a little bit of wild west going on down there and there are unscrupulous brokers who just plaster signs all over the place hoping that you'll call them because as soon as you do, you've made the relationship with them. And they definitely may not be the right person to be in relationship with, either because they have a bad reputation or because they have no relationship with the seller whatsoever. And so that's one thing that I've discovered is...don't just call the phone number on the sign.
I'm talking more about land now than I am about you know finished property because finished property usually...has a legitimate listing and a legitimate broker.
As soon as you have a piece of property, you really have to fence it and put private property signs all over it because you don't want to allow squatters to get any rights on your property. And if you think about how fast these communities are growing...people show up from other parts of Mexico, and the next thing you know, they're just living on your land. If they're living on your land long enough, you have a very, very difficult process to get them off, and so you want to make sure your ground is fenced.
There's also a game that the ejido play where they will sometimes put an improper fence line up and hope that a foreign owner doesn't notice for a long enough period of time so that they can acquire your land by adverse possession....So getting your land surveyed is a key thing to do.
I guess the last thing that I would say that has been surprising is actually how do you track title in Mexico....Several American companies have subsidiaries in Mexico that will do title insurance, and even the American parent will actually do title policies in Mexico but because they don't have the same type of title checking system that we have, as sophisticated a system, often you have to actually go to the registry and look at the deeds that have been in the chain of title.
So before an insurance company will issue you a title policy, you have to go hire an attorney or pay the title company to hire an attorney who will literally take the chain of title back as far as they can find the chain of deeds. And they say it's recommended to go back 50 or 70 years. What's odd about the title insurance of course is that this lawyer who's trained to check the chain of title will literally issue an old style abstract of title, and once you have it you wonder why you need the title insurance....But I guess the answer to that is that people are more comfortable when they see title policies.
A lot of Mexican sellers don't yet understand the nature of an escrow for closing. They're used to...getting the earnest money in cash paid to them....It takes a lot of negotiation to work through those kind of details, because they're just not used to it and they don't know why it's necessary and...they're not real happy about it. But I think the more foreign investment that comes in...I think it's starting to force them into a more Americanized method of doing business.
NuWire: Are there any other trends or important information about Baja that you think our readers should be aware of, whether they're good or bad trends?
Axelrod: There's major growth going on in many markets and...there's a concern over natural resources down there. It's dry. It only has a couple inches of rain a year.
Putting four to 10 times the population in an area that's already pretty dry has a lot of people concerned....It's going to require new power sources.
That may be another area to invest in...alternative energy down there, solar and wind situations. I know there's a lot of that there, both sun and wind.
The trends are that there's going to be a lot of people coming down there and to make, to really do it on a sustainable basis it's going to have to be done better than we've done it in the past.
There's just a big influx and we're both loved and not loved in these local markets....They've never had the kind of prosperity that they're experiencing now but at the same time they sort of love to hate you too because...these growth patterns are really changing some of these really wonderful old Mexico places.
The challenge is to have American investors come in and...make as much money as you can, but do it in a way...that makes the Baja livable, makes the Baja sustainable. And often there's just too much development that is really kind of thoughtless development, and I think it may be easy to do down there because they have less stringent...zoning requirements...although...they're getting more sophisticated. Even Loreto, a town of only 14,000 people, has a regional plan. So there's already a map—it may not be precise and it may be negotiable—but there's already a plan in place as to where the hotel district is and where the housing's supposed to go and where the commercial nodes are supposed to be and...I'm glad to see that there's some forward thinking people.
On land and at sea, there has to be an overall discipline to use sustainability principles to develop the Baja correctly, and whether that happens remains to be seen.
