MCC: What is the current appetite among your U.S. clients for engaging in transactions in Latin America?
Wippler: It depends on the country. In many parts of Latin America it's declined due to economic challenges in some countries and political concerns in Mexico and others. Generally speaking, Latin America tends to react in step with economic developments in the U.S., and that’s true for both the downturns and the upswings. But of late, global economic issues are having their additional effect on what otherwise would be a rising economic outlook in the region.
Investors are still engaged in transactions, but it's definitely on a country-by-country basis. Brazil has been a strong play and, in spite of negative associations relating to drug cartels and violence, one of the most stable countries is Colombia. There is still political risk, but Colombia generally has a proAmerican government and a very solid democracy, and they've done a great job combating both the drug cartels and the rebels – the FARC. Mexico was desirable for many years. It was comfortable and close, but many investors are now leary about doing business there. Mexico’s border regions with the United States have suffered the most, with investment in those regions rapidly declining. Costa Rica continues to attract substantial investment, as does Panama, where U.S. investment is growing rapidly, in large part because of its vibrant retiree community and stable political situation.
Interest in these areas depends on the investor’s level of sophistication and tolerance for risk. For example, many Americans are comfortable with Costa Rica because it is “known”; however, doing business there is not without risk and involves considerable differences from investing in the United States. As a quick example, I know of one investor who bought a large parcel of land to build a resort only to discover that the zoning changed overnight, eliminating the possibility of developing the land. In the U.S., there would be a process to address such an issue and possibly recoup the investment, but not necessarily in Latin America. Thus, even in a country like Costa Rica, there are political and other issues that one has to consider.
MCC: Please discuss the complexities of negotiating transactions in Latin America versus in the U.S.
Wippler: I’ll identify some of the major issues. First, you have to be patient because there is more onerous government involvement with Latin American deals. For instance, in the real estate context, a buyer and seller can agree on all aspects of the transaction, have an all-cash deal, yet still take months to close a transaction. In contrast, if you decide to sell a property in the U.S. and agree to terms, you can generally record a deed the next day, no matter the size of the transaction. If you're looking into financing in Latin America, government regulations will complicate the process, whereas in the U.S., you typically aren’t required to involve lawyers in order for transaction documents to be accepted. The point is that in Latin America you must prepare for delays caused by more government involvement, more bureaucracy and more layers of required approvals.
Take as one example the different roles of a notary. U.S. notaries perform a straightforward function of authenticating signatures. In Latin America, however, notaries play a more significant and mandatory role, almost that of a government official, which causes delays even in the simplest transactions.
The next issue pertains to legal systems. The United States, like England, follows common law. Latin America, by contrast, predominantly follows civil law. In short, civil law relies more on legislative codes than it does on case law for legal precedent. As a result, civil law countries like those in Latin America are typically more dependent on government institutions for transactions than we are accustomed to in the United States.
Tax rates are another big issue because the rates in many countries considerably exceed those in the U.S. Transfer taxes, for example, could be as high as 10 or 12 percent of the transaction. The key, therefore, is to know in advance the tax costs so you can avoid unpleasant surprises.
Further, while we in the U.S. tend to take certain protections for granted, in Latin America, factors that are central to a project, such as zoning requirements, can change quickly and then change again with equal speed. One particular consideration for projects that involve construction is the pace of work. Most Latin American workers don’t enjoy many of the rights afforded to their U.S. counterparts and are not subject to the same performance obligations. Entire work crews not showing up to work is not uncommon. Also, mechanics liens are also quite different – not bad, just different.
There is also significant currency risk caused by government and other pressures that many U.S. investors are not accustomed to. Political risk, meaning the stability factor in certain countries should also be considered and certainly accounts for the limited appetite for investing in Venezuela – a favorite for Americans 20 years ago. By contrast, and as I mentioned earlier, Colombia and Panama have become very attractive due to their stability, with Colombia boasting the beautiful cities of Cartagena and Bogota, and Panama featuring many wonderful areas as well. Despite its current political climate, considerable investment is going to Brazil right now, and Argentina, Uruguay and Chile are all currently very stable.
Finally, I’ll return to my original point about timing issues. Real complexity arises from the fact that, while political and other risks often develop quickly in Latin American, deals tend to move slowly. It’s the opposite dynamic in the U.S., so you have to be wary.
MCC: How do you advise your clients in managing those risks, given how quickly external factors can change?
Wippler: I advise doing extensive due diligence and making sure that they're going in with their eyes wide open. Savvy investors will assess risks against the very real possibility of significant returns. That’s a big draw.
For instance, I did a real estate transaction in Cartagena that returned excellent results. The investor’s timing was great: it picked up a large condominium tower just as the U.S. economy was improving, but Latin America was still in recession. After extensive due diligence – which included three trips to Colombia and talks with local officials, organizations and various local attorneys – this client concluded that it was worth taking the risk in spite of the volatility and other risks, and did very well.
I should add that we never do deals without the assistance of local counsel, meaning boots on the ground who have personal connections and can walk into government offices and get things done. The very nature of these deals is that they are outside of our American comfort zone, so you simply cannot do this work on your own.
MCC: You formerly served as a vice president and general counsel for a national mortgage banking and brokerage company. I imagine that experience comes into play in the various due diligence processes.
Wippler: It does. As a general counsel, I learned the importance of retaining good local counsel, and I will tell you about one experience involving a case in a small town in a county outside Raleigh, North Carolina. I hired local counsel, but only after it was too late did I realize that what I really needed was “local local” counsel. From that point on, I understood the importance of the local counsel’s contacts and relationships, as well as the perils of operating outside my legal comfort zone.
I bring that experience to my Latin America practice, including the need to understand the local environment, not only in selecting outside counsel but also by personally experiencing that location – walking the roads, meeting people, and inspecting surrounding neighborhoods. There’s no better way to get the flavor of a transaction than by spending time in the location, and I’ve recommended that clients pass on deals based on impressions gathered from these inspections.
MCC: Let’s wrap up with some thoughts about the future.
Wippler: There is a lot of great opportunity in Latin America, even in countries like Mexico that are currently having some trouble. By and large, the Latin American economies are growing, populations are booming, the rule of law is generally followed, the people are wonderful, and there are many cultural similarities and natural ties to the United States.
Finally, I’d like to add that serving in a management role in our Los Angeles office gives me a good sense of Dykema’s strategic plan, including a strong commitment to meeting our clients’ needs in Latin America. We have the necessary experience with transactions on most of the continent, really everywhere south of the U.S. border.
Published March 18, 2015.
