News

Lessons from Trump's Baja project

By Patrick Osio
Commentary/San Diego Union-Tribune

March 15, 2009 — In October 2006, at the recently completed on-site model and sales office, the Trump Ocean Resort in Baja California was unveiled with great fanfare to the region's business elite. This is the opportunity, they were told, to invest in a project that surely would become the most valued property on Baja's north coast. This may be the only opportunity for locals to buy before sales on the three-tower, 526-unit luxury condo-hotel opened to the rest of the world was the sales pitch.

Baja Californians bought into the vision. Many plucked down the reservation deposit of $5,000 that night providing them with first opportunity to enter into the purchase agreement once the sales contracts were readied.

They were invited to attend the first grand sales day scheduled at the (Manchester) Grand Hyatt Regency San Diego to sign the purchase contract and deposit the 30 percent balance of the sales price.

Baja Californians, as many from the United States followed, fell under the Trump spell. If The Donald were involved, the project could not fail. But failed it has, and investors have lost their down payments to the tune of more than $32 million.

As the news of Trump's Baja project demise circulated, there were the usual news quotes suggesting that buying real estate in Mexico was “caveat emptor” – buyer beware – suggesting U.S. laws would have prevented such an occurrence. The fact is, these types of failures happen all over the world, including the United States, as recent times have amply demonstrated. But in this particular case, it seems that the California Department of Real Estate may need to look into the sales practices used within its own jurisdiction.

While the state of California has no jurisdiction over out-of-country developments, it does have regulations on the promotion and real estate sales activities within its borders regardless of where the property is located. The Trump project was extensively promoted in California, and sales closed in San Diego.

For starters, promotional materials, including Internet advertising, for out-of-country developments must contain a specific language disclaimer mandated by California law. And attorney Anthony Moya, a partner in the San Diego office of Lewis, Brisbois, Bisgaard & Smith, says potential buyers of such real estate must be provided with a copy of the California disclosure and must sign a “letter of interest.” Moya, who has successfully represented buyers in other developments and is discussing representing a number of Trump's Baja buyers, also notes that any sale of real estate within California must be through licensed real estate brokers/agents.

For the Trump project, escrow instructions were signed, and down payments deposited with a U.S.-based escrow company active in California, again away from Mexico's jurisdiction. So whatever took place with the deposited funds was outside of Mexico, prompting Moya to suggest that California courts may well have jurisdiction over much of what took place.

For a number of years now, Baja California has gone to great lengths in reforming real estate practices. Legislation is now pending in Baja requiring sales people to undergo studies, take an exam and be licensed in order to sell real estate. U.S. title insurance companies now issue policies, U.S. and Mexican banks provide mortgage financing. They are also working on putting a stop to what is dubbed, ATM escrows (buyers deposit, developer withdraws, as the apparent case of the Trump project). Most recently, the San Diego Association of Realtors signed a historic agreement of cooperation, code of ethics and educational exchanges with Baja's equivalent to the Realtors association.

Compare Baja's progress to an Oct. 22, 2006, San Diego Union-Tribune article. Staff writers wrote that on a telephone interview with Trump, he said, “... [T]he Trump Organization will be a “significant” equity investor in the $200 million project... ” And in 2007, Ivanka Trump told The Associated Press that her father was “the boss” and “involved in every capacity.”

But in December 2008, buyers received a letter from the Trump organization saying that Trump was not an investor; that all the deposits were used. And January's letter to buyers announced Trump had removed his name from the project.

In the case of the Trump Baja project, caveat emptor is something that Baja California buyers should have been aware.