TOP VIEW As the real estate market in the United States cools, investors and developers are pursuing high-end resort projects in the Caribbean. Individual investors are attracted by the notion of finding financial opportunities within their favorite vacation spots. But hazards abound, from unpredictable weather to substandard infrastructure. Successful developers spread out their risk by backing projects with multiple revenue streams and by working with experienced partners.

Sillerman’s infatuation with Anguilla began when he and his wife first visited in 1981. The island, just north of the celebrity playground of St. Barts, had pristine beaches, friendly locals and no "scene" whatsoever. Moreover, Anguilla was accessible only by small plane or boat—no hulking cruise ships or wide-body jets could dump hard-partying sun worshipers onto its shores. Sillerman’s desire to build a golf course there, and the Anguillian government’s desire to attract affluent tourists in a way that would not spoil the island’s natural beauty, dovetailed and eventually led him and a partner to develop Temenos.

Sillerman is one of a growing group of affluent individuals who are manifesting their love of the Caribbean through long-term investments in high-end real estate. Other projects include the Ritz-Carlton–backed properties at Molasses Reef in Turks and Caicos and on Rose Island in the Bahamas. David Burden, a Colorado resort developer, has teamed up with boutique real estate investment firm SV Capital to develop a high-end resort called the Preserve at Botany Bay on St. Thomas.

Resort developers and hoteliers have invested in the region for decades, but Sillerman and other private investors are carving a new niche, developing high-end, exclusive luxury properties. These developments typically feature not only hotel rooms, but also amenities such as a golf course, spa, yacht marina and, in many cases, private villas and condominiums.

Lifestyle Investments
Risks abound for these developers, and range from devastating storms and government bureaucratic snafus to labor shortages and the lack of appropriate infrastructure. The returns on these projects are, in light of these risks, quite modest, and so their developers often see them more as a labor of love (or, in part, a gambit to get the best access to the most desirable properties) than strictly as investments.

Returns vary and performance information is scarce, according to Ilan Marcoschamer, manager of the hospitality and leisure advisory practice of PricewaterhouseCoopers, who focuses on development in the Caribbean. However, he says, "Investors expect at least a 25 percent return on their money." The price of land is now exorbitant, having quadrupled in the past decade; those who anticipated the run-up have done extremely well, he says. "Investors who got in early, 10 years ago, are probably making a killing."

Ezzat Coutry, the senior vice president of Ritz-Carlton for Florida and the Caribbean, offers a somewhat more conservative estimate. He says overall returns on investment are about 15 to 20 percent for mixed-use projects, although they vary widely and depend on the number of income streams.

One of the factors weighing on the economics of these projects is the skyrocketing cost of hurricane insurance, which Coutry says has increased by about 100 percent in the past three years. However, this is not hampering development, he adds. The insurance premiums are often rolled into the maintenance fees paid by owners of the villas.

Few would normally savor the idea of shouldering such risks for a return on investment comparable to that of a McDonald’s franchise. But these investors are often motivated by love of the locale, like Sillerman, or the desire to move to the head of the line for the best rooms or to get first pick of the finest villas in a region where truly high-end amenities are difficult to find.

"There is plenty of mass-market inventory throughout the Caribbean. The trend right now is definitely upscale," says Richard Kahn, president of Kahn Travel Communications, a marketing firm in Rockville Centre, N.Y., who has covered Caribbean tourism as a journalist and consultant for 35 years.

Of course, affluent Caribbean devotees have been buying waterfront vacation homes in the region for decades. But more recently, this type of abode has been literally overshadowed by hulking mass-market resorts, such as the 2,300-room Atlantis casino on Paradise Island in the Bahamas. This has led to a backlash, and today smaller, more exclusive developments are again in demand across the Caribbean—even in spots not normally considered high-end destinations. Some developers now consider even Haiti—best known for political upheaval and extreme poverty—a possible venue for hotels.

These new development projects are driven both by consumers’ desires for exclusivity and investors’ ambitions to escape a softening U.S. real estate market by diving into the Caribbean—a location where the supply of these properties still trails demand, according to Scott Berman, former leader of the resort practice at PricewaterhouseCoopers, who now runs its U.S. lodging and hospitality practice. "Development is not at the torrid pace it was a year ago," he adds. "But there is still plenty of activity."

Troubles in Paradise
Tropical weather tops the list of concerns in the region; a hurricane has wreaked significant damage every year since 1998. Just one large storm can cripple a resort. In 2004, Hurricane Ivan devastated the Spice Island Beach Resort, the most exclusive hotel in Grenada. But rather than retreat, its owner, Royston O. Hopkin, invested $12 million to rebuild the 64-suite property. In December 2005, Hopkin, the only Caribbean hotelier to be knighted by Queen Elizabeth, reopened the getaway with even finer amenities than existed previously. The hotel now boasts private pools and saunas, as well as other extravagances. "They saw that the way to differentiate themselves was to go up into the real luxury market," Kahn says. "It was always a pricey resort, but now its high-end suites are going for $1,500 a night."

Labor problems are another issue. Resort managers often need to conduct long recruiting campaigns and institute intense training programs to teach employees how to serve discriminating guests. The owners of one boutique hotel, Grace Bay Club in Turks and Caicos, created a hotel school in June 2005 to train locals in the art of hospitality, which was crucial to the success of their plans to add 22 luxury condominiums priced at more than $6 million each.

There are a host of other issues. Government red tape, even in countries that ostensibly crave affluent tourists, can cause frustrating construction delays. Fresh water is a strategic problem in many locations because rain is often the only source of drinking water. For example, Sillerman was surprised to learn that he would have to build a seawater desalinization plant for his Temenos resort.

To support the cost of dealing with these challenges, many of the projects include marinas, golf courses and residences that provide additional revenue streams. Such diversity attracted Matthew McDonald, a partner in ProNet Capital, a Denver-based private equity firm whose clients include professional athletes, to personally take an equity stake in the $400 million Molasses Reef in Turks and Caicos, slated to open in 2008. He also assembled a group of professional basketball and football players, including former NBA star Nick Van Exel, to invest. McDonald and several of his clients also purchased condominiums.

"This was our largest project to date," McDonald says. "We wanted to do more than make our money and move on. We wanted to have something down there, too. We love that market. It is a very up-and-coming area with a sound government, a good economy and the U.S. dollar as currency." McDonald refuses to reveal how much he paid for his condominium, which he purchased with his partner in ProNet. Prices for condominiums at Molasses Reef begin at about $2.5 million and range up to $5 million.

The Molasses Reef site rests on West Caicos, an island the size of Manhattan that local authorities claim will remain largely undeveloped save for the resort and its impressive facilities, which include a marina deep enough to accommodate large yachts. The resort will feature a 125-room boutique hotel, two restaurants and a full-service spa, plus beachfront condominiums and private homes. As with many such projects, condominium owners can add their property to the hotel’s rental pool to generate income.

McDonald says that less-experienced investors, such as his athlete clients, often welcome the opportunity to invest where they can literally see their money at work. "A lot of investors we have own a couple of homes and understand real estate is a tangible asset," he says. "They go down and see the project and like seeing the hotel come out of the ground. It is really exciting to them and is a learning process for life after football."

It Takes a Villa
Sillerman, however, has spent years and dollars learning firsthand the challenges of Caribbean development. When he first began visiting Anguilla, the island had no hotels. When a small hotel was finally built, the general manager and owner clashed. Sillerman joined a handful of hotel regulars to finance the general manager’s plans to build his own hotel. That property, Cap Juluca, has become a sold-out hot spot for the Caribbean cognoscenti. But Sillerman says it turned out to be an unimpressive investment, although he declines to discuss the details of its performance.

BY ANY OTHER NAME Slated to open in fall 2008, the high-end resort Molasses Reef on West Caicos will be operated by Ritz-Carlton, although the company will downplay its famous marque. "The top 1 percent of travelers don’t really patronize the chains," says Andy Wimsatt, chief development officer of Molasses Reef. "Even the Four Seasons or Ritz-Carlton is sort of pedestrian in the highest segment." Although travelers may shun brand names, they often insist on the reliable service associated with established companies, Wimsatt says. "It creates a feeling of longevity and consistency that the company is not going to go out of business." —LK

"It was like the blind leading the blind," Sillerman says, amused at the recollection. "It never really achieved what it could. It was undercapitalized and operated by people, including myself, who didn’t know what they were doing." He moved on to build a trio of white villas he still uses for family and friends—and sometimes rents out to guests.

He never planned to turn his family’s vacation refuge into a business proposition. But flush with cash from his SFX deal, Sillerman followed the advice of his financial advisor and looked into investing in high-end hotels.

His existing villas will become part of Temenos. Along with golf, the resort will feature a boutique hotel, private homes and condominiums—much more than Sillerman originally planned. Anguilla’s government, he says, has been careful about protecting its most important asset—the island’s natural beauty—by controlling growth. When he approached officials with plans for his golf course, he was told he could build it only if he also developed a luxury hotel and world-class real estate development with it.

Although Sillerman liked the proposition, he had neither the time nor inclination to manage such a Herculean project, because he was simultaneously pursuing other business opportunities. In 2005, he acquired a controlling interest in the estate of Elvis Presley, and last spring he paid Muhammad Ali $50 million for an 80 percent stake in the famed pugilist’s name, likeness and image. Sillerman also owns the company that produces the television show American Idol. So he partnered with an experienced high-end hotel developer, New York-based Flag Luxury, to design and build the property. He also partnered with Starwood Hotels & Resorts, which will operate Temenos under its St. Regis banner. Sillerman owns about 70 percent of the resort. His trio of villas, which has been highlighted in design magazines, serves as a model for the 286-acre compound.

Even while his resort takes shape, Sillerman is building elsewhere. He is developing another private estate—on Anguilla, naturally—only a chip shot away from his new golf course.

Louise Kramer is a freelance writer based in New York.