Ken MacKenzie, Dalton & Finegold, LLPCuba is a country frozen in time. It has been isolated from the Western world since the United States imposed an embargo following the failed Bay of Pigs escapade in 1963. Cuba has few natural resources, nonexistent infrastructure, and a repressive and unpredictable communist government. Virtually all real estate in Cuba is owned by the government, and outright foreign ownership of real estate is prohibited. Cuba therefore sounds like the last place on earth one would want to target for hospitality business development. Why, then, are the likes of AT&T, Marriott, Starwood, Booking.com, and Airbnb already working to gain a toe-hold presence on the island?
Because there is money to be made, and savvy players in the hotel industry sense the opportunity. Cuba was once the jewel of the Caribbean and the ideal vacation spot for America’s most wealthy warm-weather connoisseurs. Tales of famous nightclubs and “exotic” frolics in Cuba fueled American desire to travel to Cuba until the late 1950’s, when revolution once again came to the island. Cuba has a well-educated and friendly populace, a creditable health-care system, and minimal crime (particularly any involving tourists). Our national sport, baseball, is Cuba’s national sport. Our ties with Cuba exist not only in memory, but in family. The U.S. has a large and affluent Cuban-American community.
Starved of foreign exchange, and short of cash, the Cuban government is now very keen to re-ignite Cuba’s tourist economy. Cuba’s potential is perhaps best captured by Hyman Roth in Godfather II: “Here we are, protected, free to make our profits … ninety miles away, in partnership with a friendly government. Ninety miles! It’s nothing! Michael, we’re bigger than U.S. Steel.” Of course, Roth is fictional, Batista is gone, and Castro is not Batista.
To date, non-U.S. business interaction with the Cuban government has not universally been a success, and in some cases, the stories surrounding ventures with the government are downright scary. No one understands the rules of play, if there are any rules, nor how to navigate the often overlapping jurisdictions of various Cuban ministries regarding any proposed hotel development. Tourism of Cuba by U.S. Citizens is still prohibited by the U.S. government. Many, varied and cumbersome are the requirements relating to such travel to Cuba as is allowed. These challenges may explain why, for the first time, the industry’s NYU Hospitality Conference being held this month in NYC will feature a break-out session on Cuba.
Travel to Cuba by persons subject to U.S. jurisdiction is regulated by the Department of Treasury’s Office of Foreign Assets Control (OFAC) and its Cuban Assets Control Regulations (CACR). While it is possible to seek specific approval for travel from OFAC for any particular intended travel, the cost and time required to obtain such approval has caused most travelers to rely on one or more of the twelve general “licenses” issued under 31 CFR 515.560 as exceptions to the travel ban if the reason for the trip falls within any of the categories described in the licenses. One out of the twelve licenses lends itself favorably to the hospitality-minded: “Support for the Cuban People.” According to the U.S. Department of Treasury’s FAQ on the subject, the support for the Cuban people license is “designed to promote a rapid, peaceful transition into democracy” and to “promote independent activity intended to strengthen civil society in Cuba.” For example, launching a hotel in Cuba offers U.S. businesses the chance not only to be one of the first entrants into this market, but also to support the Cuban people by creating jobs and providing training and career development, which arguably serves both goals of the license.
Air travel from the U.S. to Cuba is available via charter from several carriers, including American Airlines, Aeromexico, and Copa, so long as such travel is lawful. The rub is that it is up to you as the traveler to determine what license applies to you and to keep (and maintain for five years) fairly extensive records documenting what activities were conducted on the trip. The risk of being wrong, and therefore in violation of the law, is on you. While all hotels in Cuba are state-owned, the Cuban government has recently allowed the Cuban people to own what have become known to travelers as casas particulares, which are private homes where the traveler may stay with a Cuban family while renting a room, apartment or guest house. This option offers guests more opportunities to interact with the Cuban people by way of homemade meals and the inside scoop on where to visit in each city. The ease of booking nights at casas particulares has increased with Airbnb’s increased presence in Cuba.
All travel to Cuba under the general licenses requires a full-time schedule relating exclusively to the general license. That is, you cannot have “fun.” For example, if you are in Cuba for four days traveling under the authority of the Support license cited above, days one and two can center on meetings with other professionals relating to potential hotel sites, hotel-management teams, and potential business partners. Day three could include site visits. Day four could involve follow up meetings regarding future steps for the projects and fact-finding as necessary. At no time during the required full-time schedule, however, could you justify simply going to the beach to tan, having a drink at a club, or sightseeing not strictly related to your general license. While customs may not ask for every single one of your receipts and records upon reentry to the U.S., you had better be prepared to provide evidence of your fulltime schedule under a general license should any U.S. official inquire. At the outset of any proposed travel to Cuba, you must obtain a proper visa from the Cuban Embassy in Washington D.C. and non-U.S. issued medical insurance. Conveniently, Cuba sells a temporary policy to visitors. You will need two blank pages in your passport for entry/exit stamps.
After President Obama’s recent trip to Cuba, a record number of travelers have chosen to visit the island, evidencing a strong demand for hospitality accommodations, nightlife, and other tourist attractions. Marriott’s Arne Sorenson accompanied President Obama on his trip to Cuba. Recent talk of deals in Cuba has alluded to Starwood’s taking a role in three conversion properties. Travel to Cuba by U.S. citizens should increase exponentially as trade and travel embargos are gradually lifted. While the first U.S. companies to enter the market in Cuba will face huge hurdles, it seems likely they will thereafter have an easier time than will late-adopters interacting with the Cuban government, inserting themselves into the supply stream, and competing with existing state-owned hotels, private casas particulares, and foreign hotel companies.
Ken MacKenzie is partner of Dalton & Finegold, LLP and a member of the International Hospitality Consultants (ISHC).
Formerly MacKenzie was the co-leader of the hospitality and recreation group at Goulston & Storrs. MacKenzie represents institutional investors, private equity funds, investment managers, pension funds, university endowments, REITs, major lending institutions and developers in the acquisition, financing and disposition of all classes of real estate assets both nationally and internationally.
MacKenzie specializes in transactions involving hospitality assets and has significant experience in large-scale joint-ventured deals, often involving non-profit institutions such as universities or hospitals. He frequently assists clients in structuring their responses to RFPs for complex mixed-use projects.
MacKenzie received his A.B. from Dartmouth College and his J.D. from Boston University School of Law, where he graduated magna cum laude. MacKenzie is admitted to practice law in the state of Massachusetts.
