Peterson Economics








A PRELIMINARY SUMMARY OF THE
LOS CABOS MARKET

PREPARED FOR SOL PACIFICO



September 26, 2006

Project Number 182
11106 Marine Drive
Anacortes, WA 98221
TEL 360.588.9801
FAX 360.588.9870

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MEMORANDUM REPORT
A PRELIMINARY SUMMARY OF THE LOS CABOS MARKET

Peterson Economics was retained by Sol Pacifico in September 2006 to complete a
market and financial analysis for a proposed new fractional resort on the Pacific Coast of Mexico
north of Cabo San Lucas and south of Todos Santos. Peterson Economics will begin this
analysis in the near future. In the meantime, Peterson Economics was asked to present a
preliminary overview of the Los Cabos real estate market, based on detailed research the firm
completed in the region in August and September 2006. This memorandum summarizes these
findings, focusing on the region’s top existing and proposed new oceanfront communities and
their sales performance over the past 12 months and in 2006 year-to-date (as of fall 2006). This
includes top communities in the Corridor, San Jose del Cabo, and Cabo San Lucas. Peterson
Economics recently gathered detailed, updated market information on the following specific
projects and communities (from east to west):

1. Puerto Los Cabos;
2. Top oceanfront condo projects in San Jose (Tortuga Bay and Las Mañanitas):
3. Querencia;
4. Palmilla (including Villas del Mar and other active projects);
5. El Dorado;
6. Chileno Bay;
7. Vista Serena (Montage);
8. Puerta del Sol;
9. Punta Ballena (including Esperanza);
10. Villa la Estancia;
11. Hacienda;
12. Pedregal; and
13. Capella at Pedregal.

In August 2006, Peterson Economics met with sales managers, brokers, and other
industry experts. Through this research, Peterson Economics sought to: identify trends in the
high-end second-home market in Los Cabos in 2006 year-to-date (sales volumes, pricing trends,
supply changes, etc.); compare year-to-date sales in 2006 with total sales volumes in prior years
(to the extent full data can be collected); and update the general characteristics of each relevant
project (including setting, services, amenities, and programs for children).
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Remaining portions of this memorandum are outlined as follows:
▪ A Summary of Market Conditions and Trends Throughout Top Resort Areas on the
West Coast of Mexico;
▪ Overview of the General Market Conditions at Relevant Projects in Los Cabos Over
the Past 12 Months;
▪ Overview of Top Relevant Resort Projects in the Corridor;
▪ Overview of Top Relevant Resort Projects in San Jose del Cabo; and
▪ Overview of Top Relevant Resort Projects in Cabo San Lucas.

[Note: in each sub-section, individual resort projects are organized from east to west.]

Peterson Economics’ full market and financial analysis will expand on this analysis, also
discussing the region’s other notable fractional projects, as well as general second-home market
conditions in Todos Santos, elsewhere along the Pacific Coast, and in other relevant areas.
A SUMMARY OF MARKET CONDITIONS AND TRENDS THROUGHOUT TOP
RESORT AREAS ON THE WEST COAST OF MEXICO
Due primarily to strong demand from affluent U.S. second-home buyers, major resort and
second-home destinations around the Sea of Cortez and along the Pacific Coast of Mexico have
seen prices, sales volumes, and overall demand surge to record levels over the past several years.
Second-home demand in these markets was only moderately strong in the early 2000s, but
market conditions then began improving in 2004 before surging dramatically in 2005. Year-to-
date, 2006 has also been a strong year in most of these markets, with prices now reaching all-
time records; however, sales volumes have remained fairly constant in most of these markets in
2006, with several even posting declines. Notably, though, market conditions in Los Cabos have
remained stronger than in most other markets, with prices, absorption, and sales volumes
continuing to increase.
Based on the results of recent assignments in Los Cabos, on the East Cape, in La Paz, in
Loreto, in Puerto Peñasco, in San Carlos, in Mazatlan, in Puerto Vallarta, and in Manzanillo,
Peterson Economics estimates that total second-home sales (excluding timeshares, but including
resales and developer-owned product) in Mexican oceanfront resort areas on this stretch of the
Pacific Coast and around the Sea of Cortez jumped from approximately $1.3 billion in 2004, to
about $1.85 billion in 2005, to about $2.03 billion over the past 12 months (September 2005 to
September 2006). The vast majority of this volume – likely more than 80 percent – comes from
U.S. buyers, with Canadians and Mexicans accounting for the remainder. The following table
illustrates the approximate volume of second-home sales in this region over these periods.

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Table 1. Estimated Sales Volume of U.S. Second-Home Purchases on the West Coast of
Mexico (excluding reservations – sales only)

Location
2004
2005
Last 12 Months
Percentage of
(late ‘05/’06
Total
YTD)
Los Cabos
$375 million
$675 million
$800 million
39%
East Cape
$20 million
$30 million
$50 million
2%
La Paz
$20 million
$25 million
$25 million
1%
Loreto
$100 million
$135 million
$135 million
7%
San Felipe
$100 million
$125 million
$110 million
6%
Puerto Peñasco
$170 million
$170 million
$150 million
7%
San Carlos
$40 million
$50 million
$80 million
4%
Mazatlan
$50 million
$60 million
$85 million
4%
Puerto Vallarta
$400 million
$550 million
$550 million
27%
Manzanillo/Costa Alegre
$30 to $50
$30 to $50
$30 to $50
2%
million
million
million
Regional Total:
$1.3 billion
$1.85 billion
$2.03 billion




Thus, not only does Los Cabos support the highest prices on the west coast of Mexico, it
also generates by far the largest sales volume and its share of the market has grown sharply over
the past several years, from about 29 percent in 2004 to roughly 39 percent over the past 12
months. In virtually all cases, the increase in sales in the various markets has derived from the
combination of: (1) growing demand; (2) attractive new resort development; and (3) effective
marketing. Outside of Los Cabos, the most remarkable jumps in sales volumes have come from
places like Loreto (where Loreto Bay has led to a ten-fold increase in sales), Puerto Peñasco and
San Felipe (where total annual sales volumes have soared to about $170 million and $125
million, respectively, as new projects have been developed), and Punta Mita (where sales
volumes have skyrocketed to nearly $150 million per year as new communities are being
developed that finally offer attractive turnkey products). Even Mazatlan is now seeing strong
growth in sales volumes due to the new marketing efforts and new products being offered by
Estrella del Mar. Other regions, such as the East Cape and La Paz, appear poised to enjoy rapid
growth in sales volumes in the future, if access shortcomings can be solved and if new resorts are
developed as proposed.
However, it also appears quite possible that the supply of new resort communities
entering the market throughout the region could grow faster than demand for new upscale
second-home products, leading to a competitive environment where price increases may be more
moderate and absorption rates more constrained. Overall, throughout the Sea of Cortez region,
there are likely more than 20 serious proposals to develop new large-scale second-home resort
communities. However, many of these projects will likely move forward slowly if at all, and
many may fail to offer attractive amenities, quality service, turnkey units, and the other attributes
necessary in order to make them competitive with new projects in Los Cabos.
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Nevertheless, it does appear likely that the regional market will become more (not less)
competitive in coming years, and it does appear that the market peaked in many ways in late
2005 and early 2006. While the strong momentum of this frothy market has carried forward into
2006, and prices have increased smartly over the past 12 months in most markets, the market’s
momentum may now be moving in the direction of a cooling market. Still, underlying demand
for second-home properties in the region remains strong, so notable decreases in pricing or sales
volumes do not appear likely at this point.
OVERVIEW OF THE GENERAL MARKET CONDITIONS AT RELEVANT
PROJECTS IN LOS CABOS OVER THE PAST 12 MONTHS
Los Cabos is clearly the largest and highest-end resort / second-home market on the west
coast of Mexico. It is home to many of Mexico’s finest golf courses, three of its finest
oceanfront boutique hotels, and over a dozen major high-end resort/second-home communities.
It also now enjoys exceptional air service. In 2005, second-home sales volumes in the region
(excluding timeshare, but including resales) may have topped $700 million (including about
$200 million in fractional sales) – up sharply from perhaps $400 million in 2004. Over the past
12 months, total sales volume may have surpassed $800 million.
In new, top-tier resort/second-home communities like El Dorado, Chileno Bay, and even
Puerto Los Cabos, oceanfront homesite prices now range from about $4 million to $10 million,
ocean-view lot prices now range from $500,000 to over $6 million, and a number of oceanfront
condo and villa communities have now achieved price points well over $1,000 per square foot
for oceanfront and ocean-view turnkey products. Top fractional products now sell 1/8th shares
for $400,000 to more than $650,000.
Historically, developers in Los Cabos failed to offer the appropriate combination of
privacy, exclusivity, service, amenities, and prestige that affluent U.S. second-home buyers
sought, which kept prices in Los Cabos well below prices in Hawaii and elsewhere, despite its
proximity to major U.S. metro areas. Over the past several years, however, several new projects
have moved forward that offer exceptional amenities, exclusivity, privacy and services, and they
have been richly rewarded with high prices and strong absorption (most notably El Dorado).
However, unlike Hawaii and certain other beach-oriented markets, Los Cabos has never
been a “kid-friendly” destination. It is appealing for affluent couples or groups of men interested
in golf, sport fishing, spa treatments, fine dining, partying, and simply relaxing with a fine ocean
view, but the area has historically offered limited appeal for families with children (due to
dangerous currents and waves, the lack of kid-oriented recreation activities, the loud party scene,
etc.). Historically, the region’s second-home communities have not catered to children in the
manner now becoming more common in many high-end resort areas. Discovery Land appears to
be addressing this with its proposed beach club, floating dock, and kid’s programs at El Dorado,
but most other resorts offer little for kids to do and place little emphasis on marketing toward
families. However, even with attractive programs for kids within a resort, due to ocean safety
issues and its overall market orientation, Los Cabos will likely remain much less attractive for
families with children going forward.
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Tables 2, 3, and 4 provide a summary of proposed unit counts, sales of developer
product, developer-product sales volumes, and pricing at the top relevant resort communities in
Los Cabos. As depicted, total developer-product whole-ownership sales volumes within the
selected 12 relevant resort communities appear to have exceeded $500 million over the past 12
months. As noted, after adding fractional sales, resales, and sales from the various other
communities in the region, the region’s total second-home sales volume appears to have
exceeded $800 million over the past 12 months – setting an all-time record for Los Cabos. As
depicted, top performing communities over the past 12 months (in terms of developer-product
sales volumes, excluding reservations) include: El Dorado ($150 million), Palmilla ($135
million), and Puerto Los Cabos ($65 million). In addition, new projects like Hacienda and
Chileno Bay are recording strong reservations volumes, which will likely be converted to sales
volumes in the near future.
Top relevant communities are discussed individually in full detail below.
OVERVIEW OF TOP RELEVANT RESORT PROJECTS IN THE CORRIDOR
From east to west, the top relevant resort communities in the Corridor include:
1. Querencia;
2. Palmilla (including Villas del Mar and others);
3. El Dorado;
4. Chileno Bay;
5. Vista Serena;
6. Puerta del Sol; and
7. Punta Ballena (including Esperanza).
Each is profiled separately below.
QUERENCIA
Querencia is a 1,740-acre private golf community situated at the eastern end of the
Corridor immediately west of San Jose del Cabo and adjacent to Palmilla (which was historically
the region’s most upscale resort community). Querencia was originally an 840-acre community
until the current owners announced the purchase of an additional 900 adjoining acres behind the
original property in November 2005. Querencia is located within several hundred yards of many
of the most expensive waterfront and water-view homes in Mexico. It is also situated within a
20-minute drive of the international airport in San Jose del Cabo, and within a short drive of the
attractive downtown area in San Jose del Cabo. However, the entire Querencia property is
situated on the inland side of the highway, though much of it enjoys unobstructed ocean views
(with no development between this stretch of highway and the ocean, which lies just to the south
of the highway). Looking to the west and southwest, Querencia also enjoys views over most of
Palmilla. Looking to the east and southeast, the property enjoys views of western portions of
San Jose del Cabo, as well as the rugged southern coast of the East Cape in the distance.
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Table 2
SUPPLY AND ABSORPTION OF HIGH-END WHOLE-OWNERSHIP RESORT REAL ESTATE IN LOS CABOS IN 2005 AND 2006
Estimated
Estimated
Estimated Total 12-
Planned
Lots Sold in
Planned
Built Units
Built Units
Built Units
Lots Sold as of Lots Sold as of
Total 12-
Total 12-
Month Sales Volume of
Property
Number of
Past 12
Number of
Sold as of Fall Sold as of Fall Sold in Past 12
Fall 2005
Fall 2006
Month Sales
Month Sales
Lots and Built Units
Lots
Months
Built Units
2005
2006
Months
Vol.
Vol.
Combined
The Corridor
Querencia
175
80
94
14
$8M
175
7
17
10
$15M
$23M
Palmilla
400 to 500
296
316
20
$45M
380
158
188
30
$90M
$135M
El Dorado
65
51
60
9
$60M
128
n/a
17
17
$90M
$150M
Chileno Bay
14 in Phase 1
13 reserved
13 reserved
0
n/a
40 in Phase 1
n/a
21 reserved
21 reserved
n/a
n/a
Puerta del Sol
0
n/a
n/a
n/a
n/a
83
73
67
6
$9M
$9M
Punta Ballena
53
44
45
1
$1M
91
37
50
13
$40M
$41M
Estimated Total
700 to 800
471
515
44
$114M
897
275
360
97
$244M
$358M
San Jose del Cabo
Puerto los Cabos
658
153
231
78
$65M
148
n/a
60 reserved
60 reserved
n/a
$65M
Tortuga Bay
0
n/a
n/a
n/a
n/a
33
0
22
22
$20 M
$20 M
Las Mañanitas
0
n/a
n/a
n/a
n/a
115
78
100
22
$15 M
$15 M
Estimated Total
658
153
231
78
$65M
296
78
182
104
$35 M
$100 M
Cabo San Lucas
La Estancia
0
n/a
n/a
n/a
n/a
158
130
138
8
$20M
$20M
400+
400+
Hacienda
0
n/a
n/a
n/a
n/a
243
n/a
n/a
n/a
reservations
reservations
Pedregal
700 to 1,000
600
630
30
$15 M
20
n/a
4 reserved
4 reserved
n/a
$15 M
Estimated Total
700 to 1,000
600
630
30
$15 M
421
130
138
8
$20M
$35M
Estimated Combined Total 2,000 to 2400
1,200
1,400
150
$190M
1,600
483
680
210
$300M
$507 M
(Corridor, CSL, and CSL)
Source: Peterson Economics and Individual Communities

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Table 3
SUMMARY OF TYPICAL HOMESITE PRICES AT RESORTS IN LOS CABOS IN 2005 AND 2006
Interior Lot Price
Golf-Front / Ocean-View Lot Price
Oceanfront Lot Price
Property Name
Fall 2005
Fall 2006
Fall 2005
Fall 2006
Fall 2005
Fall 2006
The Corridor
Querencia
n/a
n/a
$250,000 to $350,000
$450,000 to $650,000
n/a
n/a
Palmilla
$175,000 to $375,000
$700,000 to $1.1M
$300,000 to $600,000
$700,000 to $2M
$3M to $4M
$6M to $8M
El Dorado
n/a
n/a
$2M to $5.5M
$3M to $6.5M
$5M to $8M
$7M to $14M
Chileno Bay
n/a
n/a
n/a
n/a
$5M to $9M
$5M to $9M
Puerta del Sol
n/a
n/a
n/a
n/a
n/a
n/a
Punta Ballena
n/a
n/a
$484,000 to $800,000
$550,000 to $800,000
n/a
n/a
San Jose del Cabo
Puerto los Cabos
$300,000 to $400,000
$500,000
$400,000 to $1.8M
$600,000 to $1.26M
$3.3M
$3.3M
Tortuga Bay
n/a
n/a
n/a
n/a
n/a
n/a
Las Mañanitas
n/a
n/a
n/a
n/a
n/a
n/a
Cabo San Lucas
La Estancia
n/a
n/a
n/a
n/a
n/a
n/a
Hacienda
n/a
n/a
n/a
n/a
n/a
n/a
Pedregal
$90,000
$90,000
$350,000 to $400,000
$675,000 to $1.5M
n/a
n/a
Source: Peterson Economics and Individual Communities

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Table 4
SUMMARY OF TYPICAL BUILT-PRODUCT PRICES AT RESORTS IN LOS CABOS IN 2005 AND 2006
Interior Built-Unit Price
Golf-Front / Ocean-View Built-Unit Price
Oceanfront Built-Unit Price
Property Name
Fall 2005
Fall 2006
Fall 2005
Fall 2006
Fall 2005
Fall 2006
The Corridor
Querencia
n/a
n/a
$423 to $469 / s.f.
$500 to $620 / s.f.
n/a
n/a
Palmilla
n/a
n/a
$305 to $1,300 / s.f.
$400 to $1,400 / s.f.
$1,200 / s.f.
$1,100 to $1,600 / s.f.
El Dorado
n/a
n/a
$1,250 to $1,320 / s.f.
$1,250 to $1,320 / s.f.
n/a
$1,700 / s.f.
Chileno Bay
n/a
n/a
n/a
$760 to $920 / s.f
n/a
n/a
Puerta del Sol
$307 / s.f
360 / s.f
up to $561 / s.f
$660 to $1,040 / s.f
n/a
n/a
Punta Ballena
n/a
n/a
$660 to $770 / s.f.
$750 to $900 / s.f
n/a
$2,000 / s.f.
San Jose del Cabo
Puerto los Cabos
n/a
n/a
n/a
$350 to $950 / s.f.
n/a
n/a
Tortuga Bay
n/a
n/a
n/a
n/a
n/a
$470 to $906 / s.f.
Las Mañanitas
n/a
n/a
$290 / s.f.
$300 / s.f.
$375 / s.f.
$400 / s.f.
Cabo San Lucas
La Estancia
$425 / s.f.
$476 / s.f.
$800 to $1,000 / s.f
$952 to $1,286 / s.f
n/a
n/a
Hacienda
n/a
n/a
n/a
$680 to $1,000 / s.f
n/a
$1,400
Pedregal
n/a
n/a
n/a
$680 to $720 / s.f.
n/a
n/a
Source: Peterson Economics and Individual Communities

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In late 2004, Querencia experienced a significant change in its original development plan.
In October 2004, Querencia was sold to Rodger S. Kline, Charles D. Morgan, and James T.
Womble (reportedly existing homeowners within Querencia) for $17 million. The new owners
resurrected Querencia from bankruptcy and are developing Querencia as a relatively high-end
private golf community. However, the new ownership group at Querencia has significantly
lowered the sales prices of the development’s homesites in an effort to stimulate interest in the
private golf club and “turn Querencia around.” While this has reportedly effectively jumpstarted
sales, this may in fact depress long-term values at Querencia.
Prior to the conversion of El Dorado from a public golf course to a private club,
Querencia was Los Cabos’ only private golf club community. It includes one of the region’s
finest golf courses, designed by Tom Fazio, and offers an attractive site and an attractive
entrance off of the coastal highway. Its proximity to Palmilla and the San Jose airport are also
major advantages. The primary shortcoming of Querencia’s site is that it is situated on the
inland side of the highway, though it does enjoy expansive ocean views. For a variety of
reasons, however, the most significant of which appears to be developer mismanagement,
Querencia “derailed” shortly after opening, with essentially no further real estate sales until the
new ownership assumed control in October 2004.
History of Querencia
Development of Querencia reportedly began in 1998, when Gaylord Holdings provided a
$42 million loan to a partnership called Querencia Properties. Original plans called for the
following notable components:
▪ An attractive gated entry;
▪ An 18-hole Tom Fazio designed golf club;
▪ A large, high-end private clubhouse;
▪ A total of 150 custom homesites; and
▪ A total of 200 whole-ownership built units.
The golf club and initial residential component opened in November 2000. The entrance
gate and gatehouse, the primary roadway, utility infrastructure, and the sales center were also
completed around that time. However, the project was developed at great cost. Due to a massive
operations staff, extremely high expenditures on various project components, and a variety of
other factors, roughly $65 million had reportedly been invested in the site’s infrastructure, gate
and gatehouse, sales center, primary roads, golf course, temporary clubhouse facilities, initial
homesite area, and ancillary facilities by the time the golf course opened. Thus, $65 million had
been spent, but work had not yet started on the permanent clubhouse and no residential units had
been started.
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Querencia’s problems did not end after the facility opened. The CEO was reportedly
fired within one week of Querencia’s opening in November 2000; the new CEO reportedly
started in January 2001. An additional example of Querencia’s mismanagement is its
employment figures: at opening, Querencia reportedly had about 300 full-time employees—far
more than were necessary to maintain a golf course and have an effective sales and marketing
program.
According to on-site staff at Querencia, Mr. Gaylord visited the property in mid-2001 and
became disgruntled in a “public” setting due to these skyrocketing development costs, effectively
ordering all development on the site to cease. Word quickly spread amongst prospective buyers
that the project’s future was uncertain, and residential demand promptly evaporated.
Current Development Plan / Status

The new vision for Querencia went into effect after the new ownership group took
control in November 2004. At that time, the new owners began marketing the development.
The revised development plan is similar to the original plan but with more built units.
Furthermore, current prices for lots and projected prices for built product have been significantly
reduced in the new plan. The following is an outline of Querencia’s revised development plan
for the original 840-acre site:
▪ An attractive gated entry (complete);
▪ An 18-hole Tom Fazio designed golf course (complete);
▪ A large, high-end private clubhouse (under construction);
▪ A total of about 175 custom homesites; and
▪ A total of about 175 whole-ownership built units.
In November 2005, the developers of Querencia announced their purchase of
approximately 900 adjoining acres behind the original site. Although this land is further inland,
it boasts exceptional views because of its elevated topography. Reportedly, the developer plans
the following:
▪ A second 18-hole golf course (proposed); and
▪ A total of about 350 residential units (proposed).

The first phase of the clubhouse opened in November 2005 (one year after construction
began), and it is about 25,000 to 30,000 square feet in size. This first portion includes about 450
lockers, full-service spas for both men and women, a pro shop, a business center, and a reception
area. The second and final phase of the clubhouse is expected to open in December 2006, and it
will include a 350-couple capacity restaurant, bar, wine cellar, 16-person private dining area,
fitness facility, lap pool, children’s pool, yoga pavilion, two paddle courts, and two tennis courts.
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Critically, however, Querencia does not have an amenity package that provides a “tie” to
the ocean. Specifically, there are no longer any plans for an oceanfront beach club or club yacht
(as was envisioned by prior groups seeking to acquire and reposition the project). The
developers reportedly believe that a beach club or club yacht would not add significant value to
the project because buyers tend to be avid golfers, and they purchase real estate in the
community based on the high-quality golf experience and not on ocean access. Buyers
reportedly enjoy Querencia’s ocean views, but have little interest in visiting the area’s beaches.
Real Estate
On its original 840-acre site, Querencia is permitted to include a total of 350 residential
units plus the existing 18-hole private golf club and a variety of other planned amenities.
However, a large proportion of the planned homesites would occupy extremely steep sites that
could be difficult and expensive to develop (according to a partnership previously attempting to
acquire and develop the project). Current plans reportedly call for half of Querencia’s 300 to
350 planned residential units on the original site to be sold as lots and the other half to be sold as
single-family built products. Build-out is expected to occur in another ten years.
Since November 2004, Querencia has reportedly sold 82 additional lots (over and above
the 12 sold before this date), and there are another 40 lots that are registered and ready to be
released. Another sales release is reportedly planned for November 2006. Of the first 44 lots
released for sale (Sections 2 and 19), 12 sold under the original owners prior to November 2004;
since then, 28 of the remaining lots reportedly sold from November to December 2004, and the
other four lots reportedly sold from January to April 2005.
Sales representatives report that some of the lots sold were overpriced; the ultimate price
range for them was $90,000 to $970,000 (showing a huge dichotomy). All of the first 44 lots are
one acre in size. The most inexpensive lots were reportedly both audibly and visually impacted
by the busy coastal highway, whereas the most expensive lots enjoyed prime ocean views and
were further from the highway.
An additional sellable section of Querencia is Section 1, which includes 90 total custom
lots. The first phase of this section (36 lots) started in April 2005, and all but one reportedly sold
that month (the last lot finally sold in August 2005). These 36 ocean-view lots ranged in price
from about $250,000 to $350,000 (pre-construction), and they ranged in size from 0.5- to 0.75-
acres. In April 2006, developers released an additional 14 lots. These lots were reportedly about
0.75 acres, and featured attractive ocean views. They ranged in price from about $450,000 to
$650,000, and reportedly sold out in less than one hour. Therefore, a total of 94 homesites have
sold at Querencia as of June 2006 (some of which have been to spec builders). According to
Querencia’s on-site broker, the next sales release will occur in November 2006. Existing
Querencia members will reportedly be given priority to purchase the lots. Sizes and prices will
reportedly be similar to those in the April 2006 release—$450,000 to $650,000 for 0.75-acre lots.
As of June 2006, HOA fees for lots a Querencia were reportedly about $2,000 per year.
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As of June 2006, six resale lots were on the market. Four one-acre parcels ranged from
about $600,000 to $800,000. A two-acre parcel was priced at $800,000, and another was priced
at $2 million. [Note: the on-site sales staff reported that the parcel priced at $2 million had been
on the market for about two months, and she was doubtful that it would sell at this price.]
Construction costs at Querencia are reportedly typically about $200 per square foot of
conditioned space (including the cost of completing unconditioned space). As of June 2006, five
homes had been built, and all reportedly feature high-end finishes. Four homes offer about 5,500
square feet of conditioned space. However, one spec home reportedly offers about 12,000
square feet of conditioned space. In August 2006, it was reportedly the only home on the
market, and was priced at $9 million (i.e., about $750 per square foot).
Querencia also has plans in place for 39 Club Villas. The sites for these new built units
are closer to the golf course, just south of the new clubhouse (Phase I complete and Phase II
under construction as of June 2006). They are approximately 1.5 miles from the coastal
highway, with fairway views, distant ocean views, and no highway noise. Club Villas include a
3,400-square foot, three-bedroom unit (along with approximately 600 square feet of patio and
garage space), and a 4,200-square foot, four-bedroom unit (along with approximately 700 square
feet of patio and garage space). Each villa has a two-car garage, a private courtyard, and a
private pool and hot tub. They also include iron gates, fireplaces, granite counters, Viking
appliances, and other top-of-the-line features. The first ten villas were released in November
2005, and seven sold quickly after the release at prices from $1.6 to $1.8 million (or about $423
to $469 per square foot). Five of the buyers were existing members at Querencia, while the other
two were new. As of June 2006, the remaining three of the original ten Club Villas sold for $1.6
to $1.8 million. Afterward, eight additional villas were released for $2.1 million (or about $500
per square foot), and four had sold as of June 2006. At that time, 14 Club Villas had sold.
Reportedly, the first 18 Club Villas will be complete in March 2007. HOA fees are projected to
be about $3,000 per year.
In April 2006, Querencia released a small enclave of 14 attached condominium units
called Las Cabañas. These two-story, stacked flat condos are planned in six four-plex buildings,
and one duplex building. Las Cabañas units would feature a gated entry and a pool. They would
be located on the north side of the new clubhouse and feature distant ocean views. Units would
reportedly be very upscale, featuring stone counters and floors, solid wood cabinetry, and high-
end stainless steel appliances. Las Cabañas would exclusively offer three-bedroom units, with
1,450 square feet of conditioned space and an additional 1,350 square feet of terraces and garage
space. As of June 2006, units were priced at $900,000, which equates to about $620 per square
foot of conditioned space. From their initial release in April 2006 to June 2006, three Las
Cabañas units had reportedly sold.
The vast majority (about 90 percent) of buyers at Querencia are second-home buyers,
while the remaining ten percent of buyers are reportedly investors who build spec homes. The
majority of buyers are affluent, married couples between the ages of 50 and 65 years old and are
business owners and corporate professionals. About 50 percent of the buyers are “empty
nesters”, while the remaining 50 percent have kids in either high school or college. Few buyers
reportedly have young children. About 90 percent are Americans, and the majority of them
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come from California and Texas. Reportedly, very few buyers are Canadian (perhaps two
percent). Most owners plan to come and go from their home throughout the year, but a few plan
to stay from November to May.
Querencia mandates that prospective buyers put 100 percent of the purchase price down
to secure a lot or villa and that the buyer must close within 30 days. Furthermore, all owners
must start construction on their home within one year after infrastructure is installed. Querencia
does not provide owners with a list of preferred builders.
The development, as currently planned, does not include a fractional component, nor
does it appear likely to add one in the future.
Golf
Querencia’s 18-hole, Tom Fazio-designed golf course is the centerpiece for the
community. As noted, it was previously the only private golf club in Los Cabos (now joined by
El Dorado). Querencia’s course is the first that Fazio has designed outside of the United States
since the 1960s. The course features an appealing design, with holes offering attractive
mountain and ocean views; the only major negative of the course is that it is not located closer to
the ocean. It was built at a reported cost of $14 million to $15 million, excluding design fees.
GOLF Magazine has classified the Querencia facility as one of the Top 10 golf courses in Latin
America. In addition, Billionaire Magazine ranked the facility the #1 golf course in Mexico.
Apart from a well-maintained, high-quality golf course and an attractive entry, Querencia
previously included little in the way of amenities. The clubhouse was a temporary structure,
including a small pro shop and a limited-service restaurant facility which seats 12 people indoors
and 40 outdoors; however, the new 30,000-square foot clubhouse that is under construction will
significantly increase the onsite amenities at Querencia by adding such components as high-end
member’s locker rooms, a spa, and a restaurant.
As of June 2006, 230 full golf memberships have been sold at Querencia. From
September 2005 to June 2006, 55 full golf memberships had sold. Nearly half of Querencia’s
membership base (100 members) joined in November 2000 when the course opened. From
November 2000 to October 2004, Querencia sold only about 20 memberships, due primarily to
the lack of real estate sales and uncertainty surrounding Querencia. However, since the new
ownership group assumed control of Querencia in October 2004, membership sales have been
relatively strong, with Querencia adding 110 new members. This equates to about 66 new
memberships sold per year since October 2004. Given that the majority of members have
spouses that utilize the facility, the effective number of members is closer to 350 people.
Querencia currently has a membership cap of 350 full golf memberships. However, when the
proposed new golf course is complete, Querencia reportedly plans to add an additional 350
memberships.
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When Querencia began sales of non-equity full golf memberships in mid-1999,
memberships were priced at $50,000; they were then increased to $75,000, then $100,000, then
$110,000. They then increased to $121,000 in November 2004, and increased to $130,000 in
January of 2006. Reportedly, the initiation fee will increase to $150,000 in January 2007. As of
June 2006, dues were set at $500 per month, or $6,000 per year. This is an increase from $350
per month and $4,200 per year in 2005.
The director of sales commented that about 90 percent of buyers play golf. Querencia
also offers social memberships, and these were originally included in the lot sales price as an
added incentive. Now, however, new buyers must purchase social memberships for $25,000,
and dues are priced at 50 percent of the full golf dues. Social members have access to all the
community’s amenities, save the golf course.
Most members are ultra-affluent second-home owners; until recently, only a small
minority of members actually owned property at Querencia, while most others are principally
property owners within Palmilla and Cabo del Sol. The average age of members is about 51.
About 20 percent of members live in the area at least five months per year. The most common
geographical origins of members are as follows:
▪ California: about 25 percent;
▪ Texas: about 18 percent;
▪ New York Area: about eight percent;
▪ Seattle Area: about five percent;
▪ Canada: about six percent; and
▪ Mexico: about six percent.
PALMILLA
Built in the 1950s as an exclusive resort for affluent sport fishermen who would arrive by
private yacht or airplane, the 921-acre Palmilla resort was one of the first resorts in Los Cabos.
The resort is bisected by the highway, and the vast majority of development to date has occurred
on the ocean side, which is now nearly built out. The resort currently includes:
▪ The newly renovated and upgraded 172-room One&Only Palmilla Hotel, which
reopened in February 2004 following a $90 million upgrade.
▪ A 27-hole Nicklaus-designed golf course, which opened in 1992.
▪ 17 gated residential communities, offering a mix of homesites and built units (which
will include about 304 homesites and about 240 built units). Several additional
homesite phases are planned, with about 100 to 200 lots proposed on the inland side
of the highway.
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Originally developed by the Rodriguez family, Palmilla was sold to Koll Resorts
International in 1972. In 1996, the golf course and hotel were sold to Goldman Sachs, which
subsequently sold half of its interest to Kerzner International. At roughly the same time, Koll
also sold Villas del Mar to Ron Hatfield and Ken Schnitzer, who then developed this area as
Mexico’s most upscale waterfront community (though Villas del Mar now competes with El
Dorado and other new projects for this title). Remaining undeveloped portions of Palmilla are
owned by SEDCO, a Saudi Arabian company, which is slowly developing remaining parcels and
selling homesites.
Fragmented ownership at Palmilla has led to problems at the resort because the hotel and
golf course are not run with the aim of enhancing residential real estate development and sales.
In fact, it was several disgruntled members at Palmilla, upset about their lack of privileges on the
Palmilla golf course, who first formulated the idea to develop Querencia in the late 1990s.
Palmilla includes some of the most exclusive and desirable neighborhoods in Los Cabos,
including both custom homesites and built products. As noted, most areas on the oceanfront side
of the highway have now been developed, with each residential neighborhood designed as a
separate gated community with its own neighborhood association and guarded gate. While
appealing in some respects, this “distinctness” is also a result of Palmilla’s fragmented nature
and failure to provide exclusivity and service resort-wide. Instead, each community has gated
itself off and tried to create an identity and strong values separately. Historically, the fragmented
nature has resulted in more limited property values for inland parcels. However, the developer
has released a new phase of inland estate-sized homesites, which are achieving prices two to
three times higher than typical inland lots at Palmilla. This new inland homesite project is gated
and topographically elevated above much of the existing development. The community is an
exclusive enclave with expansive panoramic views of the golf course, the Sea of Cortez, and
other Palmilla communities.
The resort offers property management, rental and concierge services (provided
separately at Villas del Mar). However, while residential communities at Palmilla are considered
to be some of the most desirable in Los Cabos, with a reputation for security and exclusivity,
residents are not guaranteed special access to any resort amenities, including the hotel spa, tennis
and pool facilities, or golf.
Historically, Palmilla has also lacked a beach club or any other facility oriented toward
exclusive use by Palmilla owners. Villas del Mar recently completed a highly attractive new
beach club (the first world-class beach club developed anywhere in Mexico). Villas del Mar and
other new communities developed within Palmilla by the Villas del Mar / MSD partnership
enjoy access to this facility, but other communities in Palmilla still lack access to any similar-
type facility. Indeed, based on our experience from other markets, it appears that Palmilla was
able to establish and maintain its reputation largely due to the historic absence of other resorts in
the region seeking to maximize real estate values by providing property owners with a high level
of service, exclusivity, dedicated amenities and prestige. As such, to a certain extent, Palmilla
now appears at risk of losing its premier stature as El Dorado moves forward, developing truly
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world-class amenities and delivering a first-class lifestyle/amenity package. If Chileno Bay and
Vista Serena follow suit, Palmilla would face strong competition from cohesive, amenity-rich
resorts. However, with its premier location, attractive development, and large base of ultra-
affluent second-home owners, it will likely remain one of the region’s most prestigious resorts
(with its history, location, and reputation helping to compensate for the lack of private amenities
and cohesiveness).
Notably, the director of sales reports that all components of Palmilla have a similar
overall demographic profile (with the exception of primary-home buyers in some inland areas).
The profile of Palmilla’s existing property owners can be generally summarized as follows:
▪ Age: roughly 60 percent of buyers are 55 to 65 years old, though some are as young
as 40 years old.
▪ Net Worth: an estimated 25 percent of Palmilla owners are worth between $2
million and $5 million, about 50 percent are worth between $5 million and $10
million, and about 25 percent are worth more than $10 million.
▪ Buyer Origins: roughly 98 percent of buyers are from the United States, with
California and Texas each accounting for about thirty percent of buyers. The
remaining thirty percent of buyers derive from other areas in the United States,
including New York, Chicago, Minneapolis, Boston, Denver, and Seattle.
▪ Use Patterns: buyers typically use their homes for about two to four months per
year, though a growing group of owners is reportedly beginning to use their homes
during the entire peak season of November to June. Owners tend to make short visits,
many by private jet.
▪ Rentals: an estimated 20 percent of owners place their units in the rental program.
Owners keep 80 percent of net rental revenue. Ocean-view homes typically rent for
$1,500 to $2,500 per night in the peak season (November through mid-July), while
oceanfront homes rent for $2,000 to $4,000 per night.
▪ Golf Participation: an estimated 50 to 60 percent of Palmilla owners are golfers, but
only about 25 percent of Palmilla owners are members at the Palmilla Golf Club (due
to the unappealing structure of the membership, costs are reportedly hard to justify for
occasional golfers).
▪ Other Recreation: about thirty percent of buyers walk on the beach during their
stays, but very few actually swim in the ocean (despite the fact that Palmilla includes
one of the few "swimmable" beaches in the region). Others simply prefer to use other
hotel facilities, such as the pool or spa.
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Palmilla includes a total of nine existing single-family homesite communities and eight
existing built-product communities (six of which are part of Villas del Mar). As noted, the nine
single-family homesite enclaves include a combined total of about 304 lots, most of which have
now been sold (mostly over the past ten years). As of September 2006, typical lot prices are
summarized as follows:
▪ Traditionally, lots on the inland side of the highway with golf and distant ocean views
ranged from about $175,000 to $375,000. However, a new enclave of inland lots
(developed by Villas del Mar and MSD Capital) was priced from $700,000 to $1.1
million and is enjoying strong success to date.
▪ About $400,000 to $600,000 for golf- and ocean-view lots on the ocean side of the
highway, representing a slight increase in the price floor from September 2005.
▪ Up to about $3 million for prime ocean-view lots (in September 2005, prime ocean-
view lots were priced at about $2 million).
▪ Up to about $6 to $8 million for oceanfront lots, indicating that prices may have
doubled since September 2005.
However, to some extent, these prices reflect current asking prices, and many sellers may be
extrapolating price trends forward even though the market may be cooling (as is typical at the
end of major real estate booms).

Palmilla’s built product communities include two upper-mid-market condo projects –
Villas de Oro and Villas de Montaña – as well as the very upscale Villas del Mar. Units at Villas
de Oro range from about $305 to $460 per square foot. (In September 2005, they ranged from
about $260 to $430 per square foot.) Units at Villas del Mar now typically range from about
$600 to $1,400 per square foot (up a clear notch from prices several years ago, when few
products achieved much over $1,000 per square foot).
The overwhelming majority of Palmilla’s sales volumes derive from Villas del Mar,
which is clearly seen as one of the most successful resort communities ever developed in
Mexico. In recent years, the community has typically sold about 15 to 30 units per year, at
average prices of about $2.5 to $3.5 million (roughly $50 to $75 million per year in new-product
sales alone). In 2006, the developer expects to sell 40 homes, which range from about $2.5
million to $7 million. This would equate to a remarkable one-year sales volume of about $150
million within Villas del Mar alone (second only in Los Cabos – and perhaps all of Mexico -- to
the recent one-year record set by El Dorado, which appears to have sold about $200 million in its
first year of sales).
Separate summaries of each community within Palmilla are presented below.
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Villas del Mar

Villas del Mar is a highly attractive, gated, oceanfront and ocean-view residential
community situated within Palmilla, developed to the north and to the west of the One&Only
Hotel, ending just to the east of a small enclave of $5 to $10 million oceanfront homes that lie
outside of Palmilla. The current community will contain 172 homes at build-out, and about 30
homes were under construction in September 2006.

Ron Hatfield and Ken Schnitzer began developing Villas del Mar in 1997. Although
Villas del Mar is part of Palmilla, it has assumed more of its own identity. The site, land plan,
landscaping, and units are all highly attractive, but the project has historically lacked notable
community amenities; the primary amenity was limited to a 2,000 square foot fitness center.
However, in 2005, Villas del Mar completed its impressive $5.0 million beach club facility – the
first true world-class beach club in Mexico (on par with new beach clubs being developed in
Hawaii). The approximately 10,000 square foot beach club reportedly cost about $5 million to
construct (not including the underlying land value). The last homes to be sold included the
membership initiation fee in the sales price, but existing homeowners in Villas del Mar had to
pay the $30,000 fee. In addition, dues for the club total $350 per month. The beach club offers
the following services:

Restaurant & bar with indoor and outdoor dining (the only portion of the club that is
open to the public by reservation);

Direct access to a "swimmable" beach (this is a public-access beach; however, it is
seldom used by the outside public);

Climate controlled member wine cellar;

Poolside bar and grill;

Athletic club featuring state-of-the-art fitness equipment;

22-meter infinity-edge lap pool;

Free-form, ocean side infinity-edge swimming pool;

Shallow children’s pool;

Extensive deck areas for sunning & casual dining;

Heated spa;

Oceanside fire pits and seating areas;

Beach and poolside shower facilities;

Water sports palapa featuring ocean kayaks, snorkeling gear and body boards;

Poolside and ocean side spa treatments (provided by One&Only Palmilla);

Beach and pool attendants;

Signing privileges for all charges; and

Valet parking.
It is remarkable that Villas del Mar enjoyed such tremendous success given that, until
spring 2005, Villas del Mar had no notable onsite beach club amenity. However, because new
and proposed high-end developments such as El Dorado, Chileno Bay, the Vista Serena will all
have upscale beach clubs, the developer of Villas del Mar felt that a high-end beach club was
necessary to compete with these developments. Overall, the developer estimates that 75 percent
of owners will eventually join the beach club.
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Due to a very steep site and a striking location, overlooking Palmilla’s premier beach and
the One&Only Hotel, most of Villas del Mar’s homes offer spectacular ocean views (though the
most recent phase is situated farther inland near Palmilla’s main entrance road, with more distant
ocean views). They also feature high-end interior finishes, comparable to fine custom homes in
the United States, but with a distinctive Mexican/Mediterranean flair. The exteriors of the older
units follow the Palmilla style: white stucco walls with red roofs. Newer units offer beige
exteriors and more variety. Complementing this Palmilla style are Villas del Mar touches
including cantera trim and columns, large terraces, and outdoor fireplaces. Since the topography
of the Villas del Mar site features steep cliffs, many of the units require extensive foundations,
which in some cases accounted for 50 percent of the entire development cost of the unit (up to
$150 per square foot of “conditioned” space). However, because of these foundations and the
precipices they create, homeowners can enjoy very attractive panoramic views of the ocean, with
infinity-edge pools built right up to the edge.
Units at Villas del Mar include a mixture of oceanfront and ocean-view detached and
semi-attached villas and casitas. Most recent offerings have been priced up to $7 million range,
whereas larger homes in previous phases had sold for up $6 million. Moreover, a new phase of
14 high-end 5,000 square foot oceanfront homes was released in 2005, priced at roughly $6
million (or about $1,200 per square foot), and were on the market in September 2006 for $7
million (or about $1,400 per square foot).
In 2002 and 2003, Villas del Mar has typically sold about 15 to 20 new units per year,
representing a remarkable $35 to $50 million in annual sales volume. The years 2004 and 2005
were record years for Villas del Mar, during which time the development sold 30 and 35 homes,
respectively, for an estimated combined total of over $162 million. As discussed above, the
developer now reportedly expects to sell about 40 homes in 2006, which could represent an
astounding $150 million in annual sales volume (over three times historic averages). Moreover,
in recent years, actual absorption has reportedly been limited to some extent by builder
availability (i.e., demand was outstripping Villas del Mar’s ability to deliver product). Given the
strong demand for the Villas del Mar units, the development’s reported sales and marketing costs
are between seven and nine percent (six to seven percent in sales commissions and one to two
percent in other sales and marketing costs).
Villas del Mar presently includes six product types: Estate Villas, Las Villas, Las
Terrazas, Las Casitas, Haciendas, and Las Entradas. Each is profiled separately below.
Estate Villas

Estate Villas is a group of nine units located on the west side of Villas del Mar. They are
typically about 4,000 to 5,000 square feet of conditioned space, plus additional terrace space.
They typically include five bedrooms and 5.5 bathrooms. These units feel very spacious on the
inside, and feature high ceilings, stone floors, and large bathrooms with showers and soaking
tubs. Homes include formal dining areas, gourmet kitchens with high-end KitchenAid
appliances, spacious living rooms, and fireplaces. Each Estate Villa also includes a private
infinity-edge pool as well as ample outdoor terrace space. In general, the construction quality,
finishes level, and detailed craftsmanship of these units arguably place them at the top of high-
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end resort projects in Mexico and other high-end resorts. Buyers are allowed some freedom to
customize their homes; however, the developer does not allow changes to the floor plans. As of
September 2006, new ocean-view units were priced at $4 million to $4.6 million, or about $920
to $1,000 per square foot. A furnishing package is available for about $400,000 to $450,000.
Las Villas

Las Villas consists of 58 units located along the south side of Villas del Mar. Units boast
three, four, and five bedrooms, ranging from about 2,250 to 5,000 square feet. They offer high-
end interior living areas and exterior finishes and features which include a pool, an outdoor
cooking and dining area, and a garage with space for one car and a golf cart. Oceanfront villas
and ocean-view villas are available as resale units. Oceanfront villas reportedly range from
about $2.4 to $8 million, which equates to about $1,100 to $1,600 per square foot. As of
September 2006, no oceanfront villas were on the market. Ocean-view villas reportedly range
from about $1.8 million to $3.3 million, which equates to about $660 to $800 per square foot.
As of September 2006, two ocean-view villas were on the market. An ocean-view villa with
2,850 square feet of conditioned space was priced at $1.85 million, which equates to about $650
per square foot. An ocean-view villa with 3,400 square feet of conditioned space was priced at
$3.15 million, which equates to about $930 per square foot of conditioned space.
Las Terrazas

Las Terrazas is a relatively new enclave consisting of 14 attached ocean-view units
located on the south side of Villas del Mar. Each home offers an ocean-view terrace, a private
pool, an outdoor BBQ, and a patio area. The developer intends to emulate the colonial Mexican
style, with units featuring wrought-iron gates and heavy mission-style doors. The interiors of the
units feature: travertine flooring throughout, an attractive post and beam great room and master
bedroom, vaulted ceiling in the great room, Viking appliances, granite countertops, hardwood
cabinetry, a whirlpool tub in the master bathroom, and a garage designed for one car and one
golf cart. Las Terrazas units are quite large and range from 3,300 to 4,100 square feet of
conditioned space. In September 2006, a 4,100 square foot unit was listed for $4.25 million.
This equates to about $1,000 per square foot. Prices have increased since September 2005,
when these units reportedly ranged from $2.1 million to $2.9 million, equating to $640 to $730
per square foot.
Las Casitas

Las Casitas is an enclave of 49 ocean-view units located adjacent to the One and Only
Palmilla. They offer about 2,500 to 3,000 square feet of conditioned space, plus about 1,500
square feet of outdoor terrace space. They also offer a much different floor plan from other units
at Villas del Mar (with main living areas on the ground floor and separate bedrooms upstairs,
with no interior stairs connecting them) and a distinctive exterior. Casitas are available in two
floor plans, featuring three bedrooms and three bathrooms or four bedrooms and four bathrooms.
Three- and four-bedroom ocean-view Casitas are typically priced at $2.75 million to $5.2 million
(or about $1,100 to $1,500 per square foot). Like the Estate Villas, the size and quality of
Casitas has improved since the developer began sales. Casitas were initially 2,000 square feet in
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size and were initially priced at $500,000 (or about $250 per square foot of conditioned space).
As of September 2005, Casitas ranged from 2,500 to 3,000 square feet, and were priced from
about $2.5 to $3.8 million (or about $1,000 to $1,300 per square foot of conditioned space). As
of September 2006, new Casitas were 3,000 square feet. They were priced at about $3.5 million,
or about $1,200 per square foot of conditioned space.
Las Haciendas

Las Haciendas is a group of 14 units located in an ocean-view setting on the west end of
Villas del Mar. As of September 2006, these homes were under construction. Upon completion,
Las Haciendas units will average about 5,300 square feet of conditioned space, plus extensive
terraces. Units will be two stories, with multiple dining areas, large kitchens, five bedrooms, five
full bathrooms, and two powder rooms. Architecture will consist of numerous arches, domes,
and columns. Each unit at Las Haciendas will also feature an infinity-edge pool, an outdoor hot
tub, a fire pit, an outdoor cooking and dining area, and a garage with space for one car and a golf
cart. In September 2005, prices averaged about $6 million, or about $1,200 per square foot of
conditioned space. As of September 2006, most new units were priced at $7 million, or about
$1,400 per square foot of conditioned space. At that time, nine of 14 units at Las Haciendas
were under contract.
Las Entradas

As of September 2006, Las Entradas was the most recent addition to Villas del Mar, with
most units under construction at that time. At build-out, the development will be comprised of
28 units. They will be located on the north side of the development and border the Nicklaus
“Ocean Nine” golf course. All of Las Entradas will enjoy expansive but distant ocean views.
They will each offer about 3,000 square feet of conditioned space, with about 1,200 square feet
of terraces. Units will be one story, with a large central living area and kitchen, four bedrooms,
four full bathrooms, and two powder rooms. All Las Entradas units will offer a central terrace
oriented outward toward an infinity-edge pool. Exteriors will feature columns, clay tile roofing,
and a smooth plaster finish. Interiors will feature hardwood doors and cabinetry, tile flooring,
and stone counters. In September 2006, units ranged from $2.3 to $2.8 million, which equates to
about $770 to $930 per square foot of conditioned space. At that time, 12 units at Las Entradas
had been released, and seven units were under contract.
HOA Fees

Basic homeowners’ association dues are about $1,000 per month. Part of the reason for
these high dues is that the HOA covers all exterior maintenance of individuals’ homes; owners
are only responsible for maintaining the interiors of their homes. In addition, these HOA fees
include insurance (Villas del Mar reportedly has an insurance policy for $60 million to $70
million). Separate from the HOA is the property management firm, Destination Marketing
International (DMI), which prepares units in the rental program for rental and also readies
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owners’ homes prior to their arrival. Owners pay $275 to $300 per month for this service. Villas
del Mar has its own concierge service, which is capable of accommodating the vast majority of
property owners’ and renters’ desires (including private chefs for in-home dining). While many
renters use this service, few owners take advantage of the service.
Buyer Profiles and Other Facts
Unlike most new ultra-high-end resort communities, Villas del Mar has not historically
attracted buyers interested in gaining access to a high-end social network and numerous club-
type activities (though this contingent is now growing). Instead, Villas del Mar has attracted an
ultra-affluent clientele interested primarily in finding a “sanctuary,” where they can spend a quiet
week in a private, upscale villa with a fantastic ocean view and a wide range of services available
(though not necessarily extensively utilized). Buyers do not typically know anyone in the
community prior to purchasing their homes; they develop these relationships as they use their
properties. The typical Villas del Mar buyer profile is further summarized in the following
points:
▪ 100 percent are second-home buyers, and the average spends about 30 days per year
onsite.
▪ All own at least three homes (their primary home, a home in the mountains, a home at
Villas del Mar, and occasionally other homes).
▪ Most are in the late 50s or early 60s, though there are some younger buyers.
▪ Approximately 25 percent are retired.
▪ Most buyers are current or former business owners; many buyers have sold their
businesses.
▪ The typical buyer reportedly has a net worth of about $25 million to $50 million; the
least wealthy buyer in the community likely has a net worth of $15 million. This
makes Villas del Mar one of the most affluent second-home enclaves anywhere.
▪ Roughly 98 percent of Villas del Mar buyers are from the United States, of which
about 30 to 35 percent are from California, about 25 percent from Texas, and the
remaining 40 to 45 percent are from other areas, including New York City and
Denver. Buyers derive from areas that generally have convenient flights to Los
Cabos. For instance, with new flights now offered from the Midwest, demand from
Midwest buyers has soared.
▪ Approximately 50 percent of Villas del Mar buyers are golfers.
▪ Only a few buyers have yachts, though most enjoy getting out on the water.
▪ Most owners cook their own meals and only hire a personal chef if they are
entertaining guests.
▪ Underscoring the appeal of turnkey products, the developer remarked about 90
percent of buyers have recently elected to purchase the furnishing package.
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The property management company at Villas del Mar is reportedly unparalleled, and
among homeowners, it “makes the project.” Property management services include insurance,
24-hour emergency medical care (similar to a 9-1-1 service for the community), a private butler,
a personal chef for breakfast and lunch, and a private golf cart. It is unknown the number of
homes in the rental program, but typical rental rates range from $2,500 to $5,000 per night, and
homes typically rent out 50 to 60 nights per year (generating about $125,000 to $250,000 per
year in gross revenues). The property management firm keeps 30 percent of rental revenue while
the property owner keeps 70 percent.
Ron Hatfield, the developer of Villas del Mar attributes its success to: (1) a superb
oceanfront location in the region’s premier resort community; (2) high quality units built to US
standards and offered on a low-hassle turn-key basis; and (3) a well-run resort offering security,
privacy and a high level of service. Exposure in high-end travel magazines has also helped
Villas del Mar’s sales. Thus, Villas del Mar now has a very strong reputation and perception
amongst high-end second-home buyers, which has built upon the project’s success as the project
has matured. Notably, Villas del Mar also benefits from a location within Palmilla, but it has
positioned itself largely as a separate resort, a step above Palmilla, with a separate gated entrance
and a separate (and dramatically nicer) sales center. It also provides its own property
management and concierge services.
La Caleta

La Caleta is a very upscale, gated, well established, 61-lot community overlooking the
ocean in the eastern portion of Palmilla. La Caleta’s homesites typically measure about 18,000-
square feet, with some as large as 24,000 square feet. The gated community features 22
oceanfront lots and 39 interior, ocean-view lots. All developer-owned products have been sold
out. As of September 2006, one resale lot and four resale homes were on the market. A 12,000
square foot oceanfront lot was listed for $7.9 million. At that time, all homes on the market were
on ocean-view lots. They ranged from about 3,000 square feet to 8,000 square feet, and were
priced from about $2.8 million to $11.2 million. This equates to about $930 to $1,400 per square
foot of conditioned space.

These asking prices represent a significant price increase from October 2005. At that
time, homes on ocean-view lots were typically priced from about $2.3 million to $6 million, or
about $540 to $860 per square foot. In October 2006, there were five resale ocean-view homes
on the market, ranging from 3,030 to 8,000 square feet. They were priced from $2.6 to $6.5
million, or about $490 to $1,070 per square foot.

Homes at La Caleta typically include features such as granite counters, Sub-Zero
refrigerators, and patio areas for the pool. Owners reportedly typically spend about $200 per
square foot to build their homes, including landscaping costs. However, owners of oceanfront
property typically spend about $300 per square foot to build their homes, due to the necessity of
constructing a retaining wall (versus $200 per square foot for comparable homes on flatter lots).
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Caleta Loma
Caleta Loma is a newer 37-lot community situated on the steep slope between La Caleta
and the coastal highway. All homesites boast ocean views, looking over the top of La Caleta,
and average about 17,500 square feet. The project borders the loud, crowded highway but is
separated and buffered by a large sound wall.
As of September 2006, six homesites were on the market. They were priced from
$915,000 to $3.25 million. Notably, the asking prices of the homesites has increased
substantially since October 2005, when prices ranged from $659,500 to $732,000. In October
2005, a local broker commented that buyers in Caleta Loma are reportedly “not scared to buy a
lot and hire a local builder to construct their home.” At that time, the construction time to build a
5,000-square foot home in Caleta Loma was about eight to 12 months.
Palmilla Norte

One of the first real estate offerings at Palmilla, this community of custom homes is
located at the center of Palmilla’s coastline, adjacent to La Caleta. In total, homes are developed
on 33 lots, which range from 0.3 to 0.5 acres. 11 homes are oceanfront and 22 homes are ocean-
view. All of the 33 lots have been sold. As of September 2006, resale homes on ocean-view lots
were typically valued from $1 to $6 million, but none were available at that time.
Palmilla Cove
Palmilla Cove is a very upscale oceanfront enclave of single-family homesites. It is
located southwest of Palmilla Norte and northeast of the One&Only Hotel. Palmilla Cove
consists of 13 lots, four of which are oceanfront and nine of which are ocean-view. Lots are
typically about 19,000 to 22,500 square feet in size, and the oceanfront lots are typically about
135 feet wide. All 13 lots have reportedly sold. As of September 2006, ocean-view lot resale
prices typically ranged from approximately $1 to $3.5 million, but oceanfront lot values are
significantly greater.
Oceano Alta and Baja

Oceano Alta and Baja are golf-front single-family homesite enclaves situated on either
side of the fifth fairway, on the ocean side of the highway along the main entrance road, but
several hundred yards inland from the beach. The communities lie between Villas Oceano and
Palmilla Norte. Alta contains 19 lots and Baja contains 21 lots, all of which are sold. As of
September 2006, there were two resale homesites were on the market. Both homesites featured
golf and ocean views. A 10,300 square foot lot was priced at $625,000, and a 14,500 square foot
lot was priced at $595,000. As of September 2006, two resale homes were on the market. Both
homes featured golf and ocean views. A home with 3,800 square feet of conditioned space was
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priced at about $2.5 million, or about $660 per square foot of conditioned space. A home with
about 5,500 square feet of conditioned space was priced at about $1.9 million, or about $350 per
square foot of conditioned space. It appears that home prices at Oceano Alta and Baja have
remained somewhat stable since October 2005. At that time, there were four resale homes
available on the market (all golf-view, with some ocean views), ranging in size from 2,800 to
5,500 square feet and in price from $975,000 to $2.6 million (or about $260 to $780 per square
foot).
Palmilla Estates

Located on the inland side of the highway, above the seventh and ninth fairways of the
Arroyo and Mountain courses, Palmilla Estates is the farthest inland of any of the communities
developed to date. The community consists of 67 lots, ranging in size from about 12,000 to
13,000 square feet. All 67 lots are situated on the golf course, and many enjoy pleasant views
over golf to the ocean in the distance.
As of September 2006, 66 developer-owned lots had sold, and the remaining lot was
under contract. In October 2005, all but several of the 67 developer-owned lots had reportedly
sold (up from only 36 sales as of February 2005 and nine sales as of 2002). Sales were quite
strong in 2005, with all remaining inventory selling or under contract by September 2006. As of
September 2006, the homesite under contract was listed for $395,000. This represents a price
increase from past years. In October 2005, two homesites were listed for $375,000. In 2004, a
homesite was listed for $195,000 (more typical of prices achieved in the community). In
September 2006, a 3,500 square foot home was listed for about $2.3 million. This equates to
about $660 per square foot. In October 2005, typical homes in the community ranged in price
from $1 to $1.6 million.
In contrast to all of the other communities profiled where Americans accounted for
virtually all buyers, Palmilla Estates has historically had a significant number of Mexican buyers
(an estimated 30 percent in October 2005). Remaining lots have been purchased by affluent
second-home buyers from the U.S., with a generally similar demographic profile to those buying
lots in oceanfront enclaves (but preferring the value and/or setting of these inland lots).
Palmilla Fairways

Palmilla Fairways is located on the inland side of the highway, just southwest of Palmilla
Estates. It consists of 12 lots, which average about 0.25 acres. All developer-owned lots have
sold. As of September 2006, a resale lot with ocean and golf views was listed for $595,000.
During that time, a 3,100 square foot home listed for about $1.3 million was under contract.
This equates to about $419 per square foot of conditioned space. This represents a significant
price increase from October 2005, when a typical 3,500 square foot home would reportedly be
priced at about $850,000 (or about $240 per square foot).
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Palmilla Canyon

Palmilla Canyon consists of six homesites (some with distant ocean views) on the inland
side of the highway overlooking the second hole of the Palmilla golf course. Lots range from
17,249 to 26,745 square feet. As of September 2006, one lot was listed for $250,000 (under
contract), indicating a significant price appreciation over the past year. In October 2005, there
were three ocean- and golf-view lots on the market for $165,000 to $181,500.
Villas de Oro

Villas de Oro, a whole-ownership project started in 1999 and located on the first and
ninth holes of Palmilla's Ocean Nine golf course, is being developed by Gerry Burchard of
Alamo, California. The community comprises over 30 acres, which includes the first three
phases of development (totaling 54 units); and the planned future phases of 140 homes, villas,
and condominiums, along with a tennis club, fitness facility, and community swimming pool.

Phase 1 (comprising 18 units in Villas Onix, Zafiro, and Esmeralda) is sold out. As of
September 2006, a golf- and ocean-view unit in Phase 1 was listed for $750,000. It offered about
2,500 square feet of conditioned space, which equates to about $300 per square foot. One year
earlier, there was one golf-view, 2,250 square foot, Phase 1 resale home on the market priced at
$419,000 (or $186 per square foot).
Phase 2 includes two- and three-bedroom condo-style residences, which are available in
seven floor plans, ranging in size from 1,380 to 1,991 square feet (conditioned space only). This
phase features wide floor plans, granite countertops, jetted tubs in the master bathroom, marble
floors, stainless steel appliances, and digital wall safes. They enjoy unobstructed ocean and golf
course views, and two lower units also include private infinity-edge pools and hot tubs. There
are three types of villas in Phase 2 (with prices including golf memberships at Palmilla):

Villas Diamante: these units are 1,600 to 1,900 square feet. As of September 2006,
available units ranged from about $650,000 to $900,000 (or about $400 to $470 per
square foot). These prices are substantially higher than prices in October 2005, when
units ranged from $525,000 to $575,000 (or about $305 to $328 per square foot).

Villas Rubi: these units are 1,380 to 1,880 square feet. As of September 2006, one
unit was listed for $850,000, and was under contract. It offered about 1,900 square
feet of conditioned space, which equates to about $450 per square foot. This unit was
listed at a much higher price than was typical in October 2005, when they ranged
from about $595,000 to $695,000 (or about $370 to $431 per square foot).

Villas Topacio: these are 1,520 to 1,990 square feet. As of September 2006, three
villas were listed from $695,000 to $720,000. This equates to about $360 to $460 per
square foot. At that time, all three villas were under contract. In October 2005,
Villas Topacio ranged from about $595,000 to $720,000 in price (or about $390 to
$460 per square foot). Over the past year, the price floor increased, but the price
ceiling remained constant.
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As of October 2005, four of the total 12 units in Phase 2 had sold, which, when combined with
Phase 1 sales, totals about 22 units sold at that time.

Additional sales and construction are required before the community will be built out of
its first three phases of 54 units. Thereafter, the developer will begin construction on the planned
new component of 140 lots, condos, and villas, the land for which was recently acquired. The
developer plans to begin construction on the new tennis club in late 2005.
Villas de Montaña

Villas de Montaña consists of 14 dated but good-quality condo units, ranging in size from
1,850 to 2,400 square feet. The community is located on the ocean side of the highway, across
the entrance road from the One&Only Hotel and adjacent to Villas del Mar. None of the
properties are oceanfront, though the units feature ocean views.
The community sold its developer-owned product approximately seven years ago (several
years after its completion in the mid-1990s). As of September 2006, there were no resale units
on the market. However, resale units at Villas de Montaña are now reportedly typically valued
from $695,000 to $900,000, or about $390 to $400 per square foot, similar to October 2005
prices.
Oasis Palmilla

Oasis Palmilla is a new 250-acre residential development located on the inland side of the
coastal highway. It is being developed by the Villas del Mar / MSD partnership. As a result,
owners enjoy access to Villas del Mar’s high-end beach club (a major marketing advantage for
the inland project). Reportedly, the community is topographically elevated, with panoramic
views of the Sea of Cortez, the golf course, and other Palmilla communities.

Oasis Palmilla has been positioned as a high-end community with a “Mexican Coastal
Ranch” design theme. It will reportedly be gated and consist of about 100 to 200 lots upon
completion. Gage Davis Associates is in the process of completing the community’s land plan.
In June 2006, the developer released 35 homesites, which offered either golf/mountain
views or golf/ocean views. Homesites with golf/ocean views ranged from about 1.0 to 1.7 acres,
and were listed for about $875,000 to $1.1 million (remarkably high prices for an inland project,
reflecting the Villas del Mar brand premium, the benefits of beach club access, and the quality
land plan). Homesites with golf/mountain views ranged from about 0.6 to 1.0 acres, and were
listed for about $695,000 to $875,000. Outside sources indicate that about 20 homesites were
under contract by September 2006. Notably, Oasis Palmilla has achieved some of the highest
prices for lots on the inland side of the coastal highway anywhere in Los Cabos.
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EL DORADO

Discovery Land (developer of Kukio, Iron Horse, Hideaway, and other top-tier private
golf club communities in the U.S.) is partnering with the Sanchez-Navarro family (former
primary owner of El Dorado) to re-develop the El Dorado golf course and surrounding land as an
ultra-high end private golf club community. El Dorado is an 18-hole Nicklaus Signature course
occupying a dramatic oceanfront site on the eastern side of Cabo Real. It is bisected by the
highway, but roughly half the course is on the oceanfront side. Previously, four holes played
right along the beach, providing one of the most dramatic resort golf settings in North America.
Previously, El Dorado was also a very profitable daily-fee/resort course, likely generating about
$3 to $4 million per year in net operating income.

Discovery Land closed the golf course in May 2005 to remove four oceanfront holes (#8,
#9, #17, and #18) and develop the community as an upscale, private club. In addition to
changing the course’s layout, Discovery Land is in the process of meticulously thatching the
existing greens and fairways. The course opened from February 2006 to June 2006, but has
since closed for additional maintenance. It will reportedly reopen in November 2006, which is
the beginning of the region’s peak season, and the time when most of El Dorado’s prospective
buyers will begin to visit.
The golf course will be focused around a 45,000-square foot oceanfront beach club / spa
facility designed by Hart Howerton. This facility will include large men’s and women’s locker
rooms (each with their own dining areas, lounges, and spas), a large pool, a children’s activity
area, and an Outdoor Pursuits program (where staff organize recreational activities and
participate with the owners for an extra convenient and enjoyable experience). Discovery Land
plans to make this area very kid-friendly. Among other things, it plans to develop a large
floating dock several hundred feet offshore and train the Outdoor Pursuits staff to train kids (and
adults) how to swim through the dangerous current to reach the calm waters, where they can play
off the large dock. There will also be numerous kid activities and amenities at the beach club
itself; as such, in stark contrast to its earlier communities – like Iron Horse – where Discovery
Land was criticized for falling short on kid programs, El Dorado could become the most kid-
friendly second-home community in Los Cabos.
Altogether, Discovery Land and the Sanchez-Navarro family now own 520 acres at the
site. In addition to the beach club, El Dorado will reportedly be developed to include:
1. A new 18-hole private golf course (consisting of a mixture of re-routed existing holes
and new holes designed by Jack Nicklaus);
2. A new entryway (safer and more attractive);
3. A gourmet market (by the entrance catering to owners); and
4. About 200 residential properties.
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Thus, El Dorado will be smaller than most other Discovery Land projects. Although the
project is also zoned for 100 units on the inland side of the highway, only 15 to 20 lots may be
developed inland and the remainder will most likely be preserved as open space with hiking and
mountain biking trails. The relatively limited quantity of real estate will make the project more
exclusive, but it will also necessitate high dues (given the limited number of residential units
relative to the very extensive amenity package). Instead of serving as profit centers, the club’s
amenities are budgeted to break even and augment real estate prices.
The residential breakdown is likely as follows:

65 single-family homesites (including 43 oceanfront lots; lots range in size from 0.25
to about 0.75 acres, but the average lot size is about 13,000 square feet);

Approximately 92 villa units, with eight duplex units located on the beach and 84
four-plex units off of the beach; and

Approximately 36 Tuscan village-style attached casita units (about 1,200 to 6,000
square feet in size) located behind the oceanfront and ocean-view homesites.
Discovery Land does not plan to develop any fractional units but will allow individuals to
essentially create their own fractional units with friends and family (though each household will
be required to purchase and maintain a separate membership).
As with all Discovery Land communities, the community is being positioned as a truly
private club, wherein only property owners can become members (and membership is structured
such that essentially 100 percent will likely become full golf members, as buyers thus far have
done). In addition, there will be no unaccompanied play on the golf course. Initiation fees are
set at $100,000, with dues of $1,500 per month. The membership may be capped at about 200 if
no more residential units are developed beyond the planned 200 to 250. As for beach access,
although the beach must by law remain open to the public, there is reportedly no place to park in
order to use the beach at El Dorado, and the developer reportedly purchased all concessions.
Therefore, it is very secluded and essentially private.
Remarkably, although such communities are now common in Hawaii and on the U.S.
Mainland, El Dorado represents the first time that a U.S. developer has come to Mexico and
moved forward with a new high-end, truly private golf club community on an oceanfront site.
Querencia attempted a similar positioning but was located inland of the highway and essentially
killed its own sales in the first several months due to poor management decisions (including a
semi-public announcement that it would not complete the clubhouse and other amenities).
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As expected by Peterson Economics, the market response to El Dorado has been
exceptional. Prices are reportedly as follows:

Oceanfront Lots (85 feet wide): these lots were priced from $7 to $14 million in
August 2006, which is a substantial increase from $5 to $8 million in September
2005, and $4 to $8 million in April 2005.

Ocean-view Lots (Unobstructed – 30 to 50 feet above the oceanfront lots): these
lots were priced from $3 to $6.5 million in August 2006, up from $2 to $5.5 million
in September 2005.

Oceanfront Estate Villas: these 5,000 square foot units were reportedly priced at
about $8.5 million, which equates to about $1,700 per square foot. All eight
Oceanfront Estate Villas were sold in May 2006. As of August 2006, no resales were
on the market.

Ocean-View Estate Villas: these 2,500 to 4,000 square foot villas were priced from
$3.3 to $5 million, which equates to about $1,250 to $1,320 per square foot.

Ocean-View Casitas: although the ocean-view casitas have yet to be released, they
will reportedly range from about 1,200 to 6,000 square feet and may be priced from
about $2.5 to $10 million. This equates to about $1,700 to $2,100 per square foot.
From the initial sales launch in April 2005 to September 2005, 35 oceanfront lots had
reportedly sold, and 16 ocean-view lots had sold. From September 2005 to August 2006, the
remaining eight oceanfront lots had sold, and one ocean-view homesite had sold. This equates to
a total of 60 lot sales since April 2005, and an average absorption rate of about 45 lots per year,
although sales have tapered off in the past year, and five ocean-view homesites remain on the
market. However, outside sources report that Discovery Land offered substantial discounts to its
existing members from other clubs, so achieved prices from the initial release (which was
primarily focused on existing Discovery Land members) are likely well below the posted prices
listed above.
Even when factoring in substantial discounts, El Dorado’s lots have likely achieved the
highest prices ever for homesites in Mexico. Moreover, in a country where it has historically
been extremely difficult to sell high-end homesites in a resort community setting, Discovery
Land sold almost three-quarters of the community’s lots within the first few months of starting
construction, and has sold nearly all of its lots since that time. Thus, El Dorado shows that
although U.S. buyers still place some discount on lots situated within Mexico (due to title issues,
language issues, lack of services, etc.), the Discovery Land name and its high caliber of service,
amenities, and exclusivity have been able to transcend the typical price point ceilings in Mexico
and the potential concern over a non-U.S. locale.
When 22 villa units were released in May 2006, all eight Oceanfront Estate Villas sold
instantaneously. As of August 2006, nine of the Ocean-View Estate Villas sold, and five were
on the market. Casitas will reportedly be released in 2007.
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By the end of the 2005 summer, the initial sales release apparently represented about
$200 million in initial lot sales volumes, making El Dorado one of the most successful new sales
launches ever. Sales staff predict that sales volume could reach $700 million by sell-out. As of
August 2006, total lot sales volume had reportedly exceeded $250 million. With eight
oceanfront and nine ocean-view villas sold but not yet closed, there may be an additional $100
million in upcoming built-product sales volume.
Discovery Land began by opening pre-reservations to existing Discovery Land owners
from Kukio, Iron Horse, and its other communities, using word-of-mouth advertising only. A
whopping 90 percent of buyers thus far have been existing Discovery Land owners. These
buyers tend to have three or more other “second homes.” Most are 45- to 60-year-old CEOs,
business owners, and celebrities with net worth of $10 to $100 million (most around $50
million), though the average net worth of El Dorado buyers is likely lower than Kukio and Iron
Horse buyers; in addition, the majority have high household incomes (typically $300,000 to $1
million). Reportedly, about 70 percent of buyers at El Dorado are from California, and most of
the remainder are from the western U.S.
Similar to previous Discovery Land sales and marketing campaigns, Discovery Land
“hand-selected about 10 to 12 preferred founders” for El Dorado. Discovery Land flew
prospective buyers into Los Cabos on chartered/private planes, and the development’s onsite
director of sales was responsible for touring the individual around the property. At the end of the
tour, prospective buyers were only able to select five potential lots that they would want to
purchase and place a deposit on.
Discovery Land plans to provide construction management services; most buyers will opt
for this service. In addition, if requested, Discovery Land will contract with the lot owner to
build a custom home on a cost plus basis (although about 80 percent of buyers will reportedly
contract with builders independently).
The first row of oceanfront lots will have somewhat strict building CC&Rs to ensure that
the second row units will enjoy ocean views. The majority of oceanfront lots will only be able to
build single-story homes with a maximum building envelope of 5,000 square feet; however,
there are a few oceanfront lots that will permit a two-story home. The average lot size is about
13,000 square feet; although, there are several large ocean-view lots. There will reportedly be a
35-foot elevation difference between the front and second rows lots.
Annual fees and other ongoing costs for owners will be exceptionally high, and rival
those of high-end projects in Hawaii. According to El Dorado’s principal broker, property
owners will likely pay between $40,000 and $70,000 per year for club dues, taxes, and insurance.
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CHILENO BAY

Chileno Bay is a proposed new oceanfront resort located on the Corridor between Cabo
del Sol and Cabo Real. It is about 15 kilometers east of Cabo San Lucas, adjacent to the
proposed new Vista Serena resort at Santa Maria Bay. Chileno Bay occupies a 1,250-acre
parcel, which includes the site of the historic Hotel Cabo San Lucas. The setting is exceptionally
dramatic, with cliffs similar to those of Esperanza in the center and “swimmable” beaches on the
west end of the property. However, the property is bisected by the coastal highway, which
significantly reduces the value of interior land.

Chileno Bay is being developed by a partnership including Mick Humphreys, who
developed the Vintage Club in Indian Wells, California and the Canyons in Central Oregon.
Adding credibility and strong financial backing to the project, in late 2005, Jeld-Wen became a
50 percent development partner. Jeld-Wen is one of the largest window and door manufacturers
in the world and is an active investor in resort real estate, with four major resort projects
underway in the Pacific Northwest.
Like the Vintage Club and the Canyons, Chileno Bay will reportedly be positioned as an
ultra-high end resort, featuring high-end golf courses, a beach club, and other upscale amenities.
According to the project’s on-site sales staff, it will be “top of the market in Cabo.” Reportedly,
security and exclusivity will be a top priority for the resort operator.
Chileno Bay Club

Real estate owners at Chileno Bay will be eligible to join the Chileno Bay Club. The
club will reportedly offer an extensive list of amenities, including the following:
▪ Two Tom Fazio-designed championship golf courses, which will offer “core golf”
layouts (one course is scheduled for completion in 2007);
▪ Two gourmet restaurants (one restaurant will reportedly be completed in 2007);
▪ A 50-room boutique hotel, with a projected ADR of $800;
▪ A private marina (to be completed in 2008);
▪ A fleet of club boats (perhaps 20 power boats and 20 sailboats);
▪ A fleet of club SUV’s;
▪ An activity center and beach club (to be completed in 2008);
▪ A spa and fitness center with outdoor treatment rooms (to be completed in 2008);
▪ 24-hour security; and
▪ A concierge.
Like El Dorado, the club will also reportedly offer activities for children such as golf, tennis,
swimming, sailing, fishing, and snorkeling.

Chileno Bay Club will reportedly offer a Resident Golf and a Resident Sports
Membership. The Resident Golf Membership would allow access to all of the aforementioned
amenities and services. The Resident Sports Membership would allow access to all of the
aforementioned amenities with the exception of golf.
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Real Estate

Most of the proposed real estate at Chileno Bay is located ocean side of the coastal
highway. In fact, the developer reportedly paid about $8.75 million to move the highway
approximately 400 meters inland. This allows more real estate to enjoy a direct connection with
the coast, which significantly increases the land value. Historically, real estate on the inland side
of the highway has been much more difficult to sell and has sold at much lower prices. Although
construction has not commenced on the new highway, the plan is reportedly approved.
However, the developer had originally hoped to move the highway about one kilometer inland,
and compromised with the Mexican government for the current plan to move it 400 meters north.

In total, Chileno Bay will be comprised of about 600 residential units. Phase I of
development at Chileno Bay will reportedly consist of the following products, which are
arranged in a moderate-density land plan:
▪ 14 Ocean Estate Lots: these lots are reportedly about one acre, and occupy
oceanfront locations to the east and west of the existing Hotel Cabo San Lucas site.
As of August 2006, they were reportedly priced from about $5 to $9 million. At that
time, 13 were reserved. Notably, these lots were released by the developer in 2003 as
part of the project’s founders’ program.
▪ 40 Villas: these single-family detached homes occupy second- and third-row settings
behind the Ocean Estate Lots and the Hotel Cabo San Lucas. Each would reportedly
occupy a 0.4- to 0.5-acre parcel. Villas would reportedly range from about 3,900 to
4,600 square feet. As of August 2006, Villa units were priced from about $2.95 to
$4.25 million, which equates to about $760 to $920 per square foot. Reportedly, 21
of 40 Villas had been reserved as of August 2006. According to the on-site sales
staff, the developer plans to break ground on the Villas in October 2006.

In addition to real estate sales, Chileno Bay offers the Lodging Club membership. This
membership program allows the use of a two-, three-, or four-bedroom Villa for a maximum of
90 days per year. In addition, members would enjoy all of the amenities and services of
homeowners at Chileno Bay. In August 2006, Lodging Club memberships were available for a
one-time fee of $600,000. The Lodging Club membership cap is reportedly 600.
VISTA SERENA (MONTAGE)
Vista Serena is a proposed new resort on a premier oceanfront site located just west of
Chileno Bay. The oceanfront portion of the site overlooks Santa Maria Bay, which is reportedly
one of the best snorkeling/dive spots in Los Cabos. The site boasts an attractive sandy beach and
dramatic rocky points. The Montage Group, owner of the Montage Resort in Laguna Beach,
California, reportedly owns the property and will develop, own, and operate the new resort.
This new resort would be situated on about 1,300 acres. However, the majority of the
1,300 acres is currently situated on the inland side of the coastal highway. As mentioned
previously, Chileno Bay’s proposal to move the coastal highway 400 meters inland has
reportedly been approved by the local government. However, the Montage Group has not been
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through the same permitting process as Chileno Bay. Because Vista Serena is located adjacent to
Chileno Bay, it must also apply for permits regarding the relocation of the coastal highway. The
relocation would clearly benefit both communities, creating significantly more prime real estate
on the ocean side of the highway. Large-scale development on Chileno Bay and Vista Serena is
reportedly stalled until this process is complete. According to outside sources, the Montage
Group is motivated to expeditiously obtain permits, but they can do nothing more than move at
the pace of the Mexican government.
As of September 2006, development plans for Vista Serena remain uncertain. The
developer is in the early planning stages, and is waiting to obtain critical permits before moving
forward in a precise direction. Outside sources indicate that the resort may include the
following:

An ultra-high-end boutique hotel branded Montage;

A mix of villas, single-family lots, and possibly a fractional component;

At least 18 holes of signature golf; and

An upscale beach club situated on a prime oceanfront setting.
Reportedly,
construction could begin in 2008.
PUERTA DEL SOL

Puerta del Sol is a relatively new, ten-acre ocean-view / partial oceanfront community in
the center of Cabo del Sol (adjacent to the site previously envisioned for the new Ritz-Carlton),
consisting of 69 condominium units and 14 duplex villas. The condo units are dispersed among
three five-floor hacienda-style towers of 23 condos each, which are situated behind the 14
oceanfront villas. Condos look over the villas to the ocean.
Development of Puerta del Sol began in 2000, and the project is now completely built.
Each condominium building has its own infinity-edge pool and Jacuzzi, while each villa has its
own private pool, along with a two-car garage. The condo buildings also have basements for
parking and storage. Additional community amenities include a business center, a gymnasium, a
private palapa dining area, and an “intimate” spa (including two treatment rooms serviced by
outside contractors, a sauna, and a hot tub), all of which are located in the clubhouse. Owners
can also access the beach along a path beside the villas area.
Almost all condos feature ocean views; only ten units of the 69 do not have a partial
view. For the most part, they are attractively designed, including large, open kitchens, large
terraces with floor-to-ceiling sliding glass pocket doors, courtyard entries, Jacuzzis in the master
bathrooms, double sink basins, maple cabinets, and granite countertops. However, many units
feature interior bedrooms and dens that are very dark and “front” into the center courtyard area
of the building, significantly reducing their potential value. Ceilings appear to be about 8.5 feet,
and decorative beams lower the perceived ceiling height. Several outside sources also noted
problems with the quality of the construction at Puerta del Sol. Each condo features one
underground parking space and one storage unit.
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Puerta del Sol’s condominiums feature five distinct floor plans. Their characteristics and
prices (as of August 2006) are described as follows:

Plan One: this plan boasts approximately 2,088 square feet of conditioned space
with an additional 247 square feet of terrace space. It features two master bedrooms
and 2.5 baths. A ground floor unit was listed by the developer for $750,000. This
equates to about $360 per square foot of conditioned space.

Plan Two: this plan boasts approximately 2,400 square feet of conditioned space
with an additional 290 square feet of terrace space. It features two master bedrooms,
2.5 baths, and a bonus room. One unit on the fifth floor was listed by the developer
for $2.5 million, which equates to about $1,040 per square foot of conditioned space.
Two resale units were on the market on the third and fourth floors. They were listed
for $1.8 million and $2.2 million, respectively. Both resale units were furnished.
This equates to about $750 and $920 per square foot of conditioned space.

Plan Three: this plan boasts approximately 2,853 square feet of conditioned space,
with an additional 463 square feet of terrace space. It features two master bedrooms,
one kid’s bedroom, and three baths. No Plan Three units were on the market in
August 2006.

Plan Four: this plan boasts approximately 2,400 square feet of conditioned space,
with an additional 422 square feet of terrace space. It features two master bedrooms,
a bonus room, and 2.5 baths. A unit on the fourth floor was listed by the developer
for $2.2 million, which equates to about $920 per square foot of conditioned space. A
resale unit on the third floor was listed for $1.75 million (unfurnished), which equates
to about $730 per square foot of conditioned space.

Plan Five: this plan boasts approximately 2,266 square feet of conditioned space,
with an additional 328 square feet of terrace space. It features two master bedrooms
and 2.5 baths. Three units were listed by the developer: a unit on the ground floor
was listed for $780,000; a unit on the third floor was listed for $1.5 million; and a unit
on the fourth floor was listed for $1.8 million. This equates to about $340, $660, and
$790 per square foot of conditioned space, respectively.
In general, prices for developer-owned units ranged from about $360 per square foot of
conditioned space on the ground floor to $1,040 per square foot of conditioned space on the fifth
floor. These prices represent a significant increase from fall 2005, when developer-owned units
ranged from about $307 per square foot of conditioned space on the ground floor to $561 per
square foot of conditioned space on the fifth floor. As of August 2006, 63 of 69 condo units had
sold. This equates to six developer condominium sales since fall of 2005. At that time, 57 units
had sold, though virtually all of these sales reportedly occurred prior to June 2002 (during the
early sales period) and after January 2005, with very little activity in 2003 and 2004.
Puerta del Sol’s oceanfront and ocean-view villas are 3,850 to 4,000 square feet in size.
They feature high ceilings, limestone tile floors, Jacuzzis, maple cabinets, granite kitchen
countertops, Viking ranges, Viking dishwashers, and Sub-Zero refrigerators.
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The last developer-owned villa unit reportedly sold for about $3.5 million, which equates
to about $875 per square foot of conditioned space. As of August 2006, the developer had sold
ten of 14 villas, and had pulled the remaining four villas off of the market. This translates into a
very slow sales absorption of less than two units per year since sales began in 2001.
Buyers at Puerta del Sol are almost all second-home buyers (only three families are
permanent). Of the 73 buyers thus far, the vast majority are affluent Americans. About 60 to 70
percent of Americans at Puerta del Sol reportedly derive from California, with the remainder
deriving from the west and mid-west (primarily Chicago). Additionally, three Mexican families
and three Canadian families own units. Owners are generally 40 to 60 years old, and most of
them are families with children. Of the owners who are not in the rental program, almost all of
them live in their units for the peak six-month winter season. Almost all buyers are golfers, and
almost all have other “second homes.” Most buyers are retired or still working CEOs and
business owners, but a large number are also skilled professionals (doctors, lawyers, etc.). The
primary sales driver was the location of the units near the ocean.
HOA fees at Puerta del Sol cost $976 per month for the condos and $1,300 per month for
the villas (including their exterior care, even though villa owners also own the lot).
About 22 of 60 condo owners reportedly participate in the rental program, but none of the
ten villa owners reportedly participate in the program. Officially, 70 percent of rental revenue
goes to the owners, while 30 percent goes to the management company; however, in reality, the
breakdown is closer to 50-50, due to taxes and other expenses. Units rent on average about 140
nights per year, and the rack rental rates range from $560 to $790 per night. Of those who
participate in the rental program, most visit their home about three to five times per year and use
it otherwise as an investment (as the rental revenue generally covers HOA fees and expenses, as
well as provides a small profit).
PUNTA BALLENA
Punta Ballena is one of the newest, smallest, and most successful resort communities in
Los Cabos. It is located in the Corridor about three miles east of Cabo San Lucas, just west of
Cabo del Sol. At 174 acres (70 hectares), the resort is significantly smaller than other major
resorts in the Corridor such as Cabo Real or Cabo del Sol, and it does not include golf.
However, it does occupy an attractive oceanfront site, with a dramatic coastline and views of
Land’s End.
Although the resort does not include golf, Punta Ballena offers an attractive sales center,
an appealing gated entrance (with fairly restrictive entry, unlike other resorts in the area), an
attractive land plan and landscaping, and a mixture of homesites, whole-ownership units, and
fractional units. The sloping topography provides beautiful views toward the water. Grupo
Alhel is developing Punta Ballena in conjunction with Sunroad Enterprises, a real estate
development company based in San Diego, California.
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The project includes:
▪ Esperanza, an Auberge resort consisting of a 56-room boutique hotel and a fine
dining restaurant, plus a 63-villa fractional resort;
▪ Three whole-ownership residential components (homesites, villas, and attached
units); and
▪ About 40 percent open space, with walking paths.
Due to the project’s appealing characteristics and good mixture of units, Punta Ballena
apparently achieved total real estate sales volumes of about $55 million per year over the 2001-
to-2004 period. Moreover, with the exceptional performance of fractional and whole-ownership
sales at Esperanza in 2005, total sales volume in 2005 appears to have exceeded $100 million.
The 2006 sales volume is reportedly less than 2005, as remaining inventory sells out. A local
broker estimated that sales from January 2006 to June 2006 may have totaled only about $15
million. Because of its past success, Punta Ballena’s total sales volumes are surpassed only by a
few other resorts in the region (Palmilla and Cabo Real).
Punta Ballena’s individual communities (Esperanza, Las Residencias, Las Villas, and Las
Estrellas) are each discussed separately below.
Esperanza
Esperanza is a high-end oceanfront resort in Punta Ballena that consists of a 63-unit
fractional development anchored by a 56-room Auberge hotel. The 17-acre development
occupies a dramatic waterfront site, with two beautiful coves separated by rocky points. The
coves include small beaches, but they are too rough and too rocky for swimming. The central
restaurant occupies one of the most dramatic restaurant sites on earth, with private terraces built
into the rocks providing unobstructed 270-degree views of the crashing waves and sea below,
and with food prepared and served to Auberge standards. The property also includes several
highly attractive swimming pools and a new spa and fitness center. Although the overall site,
lobby area, restaurant, and pool areas are exceptionally attractive, unit exteriors are somewhat
less exciting, though palapa-style roofs add character and create desirable top-floor units.

Esperanza offers a wide range of onsite amenities, such as an upscale restaurant, a spa, an
art gallery, an oceanfront pool, a private beach with beach services, a resort yacht, and kayaking
trips. In addition, Esperanza’s onsite concierge service books restaurant reservations, golf tee
times, and charter fishing trips for guests.


The hotel has a critically acclaimed, upscale oceanfront restaurant that features preferred
access for hotel guests, Auberge residential owners, and other Punta Ballena real estate owners.
Esperanza also opened a seven-treatment-room spa, yoga studio, and fitness center in October
2002. About 45 percent of guests reportedly use the spa at least once during their visit, and the
majority of spa guests enjoy two spa treatments per visit. Each treatment room features a lush
private garden with an outdoor shower, covered by a canopy for shade and privacy. Several of
the treatment rooms feature a private soaking pool as well.
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Effective February 2005, Esperanza offered its guests access to its new 59-foot Nuvalari
& Lenard 2004 Marquis yacht. This three-story luxury cruise vessel is available for sunset, full-
day, half-day, and overnight private charters. Private charters range from roughly $1,950 for a
2.5-hour whale watching cruise to $5,500 for an overnight excursion (with the price covering up
to four Esperanza Resort guests).
Esperanza offers guests transportation to and from the airport for $115 per car in its fleet
of Cadillac Escalades. Due to the strong local taxi unions, Esperanza can only provide airport
transfers, and cannot take guests to local golf courses or into Cabo San Lucas or San Jose del
Cabo. The resort has also acquired several convertible Crossfire Cabriolets that it makes
available for rental by its guests.
Real Estate - The Auberge Residences at Esperanza
The Auberge Residences at Esperanza is an oceanfront resort in Punta Ballena that
currently consists of two phases of fractional development, the first of which contains 39 units,
and the second of which contains 24 units, all anchored by the Auberge hotel (described above).
It was initially developed by an individual named John Fair, but was more recently taken over by
the Timbers Company.
Hotel units are situated behind and to the east of the restaurant/lobby area, and fractional
units are situated to the west. Hotel units—especially the “super villas”—offer very attractive
interiors and superb ocean views. Fractional units offer similar views and similar exteriors, but
interiors are somewhat more basic. When the new sales team arrived, an additional $25,000 was
invested into each Esperanza unit. This relatively small cash infusion resulted in units that are
significantly more attractive than they were at the beginning of sales. Now, units are just slightly
below the quality level of Auberge units. Units feature a significant amount of indoor/outdoor
living space that allows buyers to appreciate the tropical climate. The Mexican style
architecture, including palapa roofs, stone work, and stucco walls all add to the units’ distinctive
character.
Phase 1
Phase 1 includes 36 “villas,” which are stacked two- and three-bedroom flats of 1,500 to
2,000 square feet, excluding large terraces; and three “super villas,” which are 2,500 square foot
units with the same high-quality finishes offered in the Auberge suites. One-half of units contain
two bedrooms and one-half contain three bedrooms.
Initially, Esperanza offered 1/12th shares that were priced between $100,000 to $200,000
for two-bedroom units (depending on view and floor) and $150,000 to $350,000 for three-
bedroom units. One-sixth shares in super villas were priced at $750,000.
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In 2004, in response to lackluster sales, Esperanza switched to selling one-eighth and
one-quarter shares in order to enhance perceived exclusivity; it took another 1.5 to two years, but
by late 2005, all memberships at the resort had sold out. One-eighth shares in standard villas
now resell for $395,000 (up from $380,000 in September 2005 and $335,000 in November
2004). One-quarter shares are not often available, but would generally be priced at about twice
the price of a one-eighth share. (The most recent sale of a ¼ fractional interest took place in late
2004, and it was priced at $680,000. The Timbers Company has since mostly transitioned out
the ¼ share, although buyers who are interested in this amount of fractional time simply
purchase two resale 1/8th shares.) Although owners receive deeded interests in specific units,
Esperanza sells a one-eighth interest in both the three-bedroom and two-bedroom units for
exactly the same price and with the same usage benefits in the resort. However, in order to
dissuade owners from using the three-bedroom units when they do not require the extra space,
Esperanza charges owners a $250 per week supplement for use of a three-bedroom unit
(regardless of whether they own a share in a two- or three-bedroom unit). This ingenious
structure added a great deal of flexibility to club management, simplified the sales process, and
successfully persuaded most owners to use a two-bedroom unit if that is all they need.
As noted above, as of September 2005, all but a few developer interests (including the
sales model) in Phase 1 had been sold, and by early 2006, the project was entirely sold out.
Reflecting the strength of market support, the sales price of the remaining interests was increased
from $360,000 to $380,000, and finally to $395,000, the current price as of July 2006. This price
equates to about $1,580 to $2,100 per square foot per unit. In unit equivalent terms, the sales
pace equates to average sales of about 11 units per year since sales officially began in February
2002. However, one entire building (or six villas) was sold to Private Retreats, a club that allows
members to use high-end properties in various locations around the world. Moreover, Esperanza
reportedly pre-sold about 20 percent of units (or about seven units) in early 2000 in order to
secure financing for the project. About $6 million to $7 million in presales derived from people
on Auberge’s target list.
The former developer, John Fair, reportedly initially decided to be low-key about sales
and elected to hold off beginning a large sales push until after the hotel opened. However, a
conflict between Mr. Fair and Auberge reportedly led to problems with the relationship between
the developer and Auberge. Since Auberge had no financial stake in the project (it reportedly
only had a profit participation agreement), Auberge did not promote the fractional units, and the
pace of sales slackened. This led to the unraveling of the sales program and the removal of the
original developer (thereafter replaced with the Timbers Company). A new sales team was also
hired, and sales velocities increased (though the Director of Sales ultimately defected to
Discovery Land’s new project at El Dorado).
In 2005, Esperanza enjoyed notable sales success, with the selling out of its remaining
Phase 1 inventory and entire Phase 2 inventory. Previously, in 2004, Esperanza reportedly sold
just over 100 interests, representing total revenues of more than $30 million in real estate sales.
In 2003, Esperanza sold about $20 million in real estate; however, the block sale to Private
Retreats represented about $7.5 million, or about 38 percent, of 2003 sales volume. Thus,
including 2002 sales of about $25 million, Esperanza had sold about $75 million worth of
fractional real estate through 2004.
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Remarkably, based on prices and absorption figures reported by management, it appears
that Esperanza’s total new-product sales volume surged to more than $90 million in 2005. This
was primarily due to the very successful release of the new Phase 2 units, as discussed in more
detail below.
All of the shares in the Phase 1 “super” hotel villas are sold out. Originally, all six of
these units were supposed to be part of the hotel. The developer reportedly intended to sell each
for $2.5 million to help finance the cost of hotel construction. However, after three units were
sold, sales stalled, and the developer decided to incorporate them into the fractional sales
program. Previously, Esperanza was selling one-quarter and one-eighth shares in the super
villas; after the sales management change, Esperanza began selling one-sixth interests in the
super villas. The most recent resale of a one-sixth interest was priced at $1.5 million (up from
$850,000 in 2005). Prior to Esperanza’s near sell-out in late 2005, the developer was reportedly
selling five new units to every one resale unit.
Current Phase 1 fractional prices at Esperanza are detailed below:
Table 5. Overview of Current Resale Prices and Annual Dues at Esperanza Phase 1
Product Type
Purchase Price
Annual Dues
One-Eighth Share in Villa
$395,000 $7,700
One-Quarter Share in Villa
$680,000 (est.)
$15,400
One-Sixth Share in Super Villa
$1.5 million
$18,700
Phase 2
In early 2005 Esperanza began construction of the Phase 2 fractional development, which
includes 24 villas of approximately 4,500 square feet each. Construction on the units was
completed in spring 2006. The Phase 2 units are arranged in three eight-plex buildings set on the
northern portion of the site, slightly further back from the ocean, with full ocean views across the
pool area. These villas are more upscale, featuring four bedrooms and 4.5 baths, along with
private Jacuzzis, wet bars, grills, luxury furnishings, and other features. This area also includes a
new three-tier, infinity-edge pool, roughly 1.75 times the size of the existing pool.
Esperanza pre-sold 16 of the 24 Phase 2 villas to Exclusive Resorts, an operator of luxury
residence clubs. At its initial sales offering in spring 2005, Esperanza then sold 30 one-eighth
interests for $460,000, during the span of a few days. Esperanza also sold two of the villas as
whole-ownership units for $3.6 million each. Thus, of the 24 total villas, only eight villas (or 64
interests) were placed on the open market. As of September 2005, only 18 interests remained to
be sold, at a price of $600,000 for a 1/8th share (or about $1,070 per square foot per unit). The
remainder of the interests sold out by early 2006, and as of July 2006, the price for a resale Phase
2 interest had increased to $660,000 for a 1/8th share (or about $1,173 per square foot per unit).
These figures suggest a total Phase 2 sales volume of more than $90 million by the time that
developer-owned interests had sold out in early 2006. Annual dues for a 1/8th share in a Phase 2
villa are $12,800.
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In addition to the 24 extra-large Phase 2 fractional units that were made available for sale
in 2005, the new developer, the Timbers Company, also transitioned extra time in a Phase 1 unit
into 24 two-week (1/24th) fractions. This is a fairly recent development, and as of July 2006, all
24 shares are still available for sale (equating to one whole unit). The shares range in price from
$129,000 to $225,000, or roughly about $2,100 to $2,700 per square foot per whole unit. Sales
staff estimate that these remaining units will sell out during the 2006-to-2007 season. Thereafter,
the Auberge Residences at Esperanza will be finished with developer-owned product.
Other Information
Approximately 30 percent of Esperanza buyers are in their “30s to early 40s,” about 20
percent are older than 55 (including a few in their 70s), and the remaining 50 percent are
between 45 and 55 years of age. An estimated 80 percent of buyers are business owners, though
there are a