COSTA RICA By Alejandro Antillón A., LL.M. and Cristián Roberts C.

Over the past decade, Costa Rica has experienced sustained economic growth with an average annual growth rate of 4.5 percent from 1994 to 2004. The high-growth economy has fueled the need to develop business centers, malls and residential communities, all of which have been widely established within the country’s Central Valley. This new modus vivendi has generated an exodus from the small offices in the center of town to the more luxurious and newer business complexes; from the local neighborhoods to the more secure high-rises; and from the local stores to the international mega-stores found in the numerous malls surrounding the capital.

This has produced a boom in the residential and commercial real estate market, and in the absence of an official REIT-like structure, a new investment vehicle and funding source known as the real estate investment fund (REI fund) has emerged.

Real estate investment trusts, as such, do not exist in Costa Rica. However the REI fund is similar. Established in January 2000, REI funds are collective investment instruments for use in real estate and related opportunities, producing high fixed returns to their investors through long-term leases. To date, more than 2,000 high net worth individuals and organizations have allocated investments through REI funds amounting to approximately $500 million.

REI funds have important advantages such as the ability to diversify risk, optimize returns, maintain an adequate level of liquidity within the investment portfolio and facilitate the participation of individual and small investors. They are managed by an administrative corporation duly registered, licensed and supervised by the Securities Regulator. The fund’s ultimate goal is to successfully invest in real estate products for sale or rent.

REI funds in Costa Rica are closed-end funds, meaning that they can only emit a predetermined amount or value of equity stock that is guaranteed in proportion to the funds managed and the assets owned. REI funds are also attractive for the fiscal incentives applied to the capital gains tax, reducing it to an imposition of 5 percent.

Two additional factors that complement REI funds and help fuel the market even without REITs are guarantee trusts and the flexible treatment given to condominiums. Costa Rican legislation treats guarantee trusts in a very flexible manner, to the extent of allowing its inception to take place via a private contract between the parties. This private contract is undersigned by the settler and the trustee. Additionally, there are no license requirements to act as trustee, and filing of records before public entities is not required.

Guarantee trusts incorporate a guarantor function related to one or various assets. Here, the guarantor keeps in custody a certain asset and only executes its release after compliance with predetermined conditions. Guarantee trusts are used for complex real estate transactions.

As regards condominium laws, Costa Rican legislation is very open and gives the parties the flexibility to establish internal condominium regulations, leaving the task almost exclusively to their determination and with few formalities. In a broader sense, condominium legislation is very similar to that of the U.S., and has facilitated the growth of the real estate market by providing individuals, financing vehicles and financial institutions similar conditions to those already found in other more mature markets.

S N A P S H O T

CAPITAL: San José LAND AREA: 51,060 sq km POPULATION: 4.01 million (July 2005) POPULATION GROWTH RATE: 1.48% GROSS DOMESTIC PRODUCT (GDP): $17.4 billion (2003) GDP GROWTH RATE: 6.5% GDP PER CAPITA: $4,300 UNEMPLOYMENT RATE: 6.6% (2004) MAIN INDUSTRIES: Tourism, agriculture and electronic manufacturing. CURRENCY: Colón LANGUAGES: Spanish (official), English Source: CIA’s “The World Factbook” and the World Bank Group’s “World Development Indicators Database.”

What’s Next for Costa Rican REITs?

Given its strategic location in the center of the Americas, its educated and highly productive workforce, continuing political, social and economic stability, preferential access to strategic markets, its international standard business infrastructure and a superior quality of life, Costa Rica’s future seems to be in optimal condition.

The sustained growth experienced during the past decade will continue with the boost from the pending approval of the Central American Free Trade Agreement with the U.S. (CAFTA), with new fiscal reform and a continuing strong expansion of the tourism sector, which is expected to be at least 10 percent in 2005. This growth will translate into investment and will have a direct impact on real estate, creating a stronger sector, bringing better rates, a wider variety of real estate-related products and the birth of more elaborate and dynamic financing vehicles such as REITs. As a consequence of appreciation of rates that will more than likely remain the same and a more than probable economic bonanza for Costa Rica and the region in the next decade due to the institution of CAFTA, the real estate sector should continue to experience strong growth and sophistication, and is expected to perform with very positive results.