In a July 24, 2008 post, Mexico Law Blog questioned the viability of the ambitious 6,000-unit Loreto Bay tourist development project called Loreto Bay, located on around 8,000 acres adjacent to the hamlet of Loreto on the east coast of the Baja peninsula.  Although the project, particularly its goal of self-sustainability, is impressive, its timing is unfortunate.

The San Diego Times has reported that the project developer, TSD Loreto Partners, S. En C. por A. (”TSD“), has sold fewer than 800 units and suspended construction and operations.  The report also said that Fonatur, Mexico’s tourism development agency, was asking for “custody” of the project so that it could reopen a golf course and a hotel while TSD searches for a buyer.  The principal lender for the project is Citigroup Property Investors.  Whether TSD has breached its loan covenants is unknown, but highly probable. 

StarkSilverCreek.com reports that TSD is subject to a lawsuit in Arizona, in which Baja Developments, LLC, a New York limited liability company, alleges breach by TSD of a services agreement and seeks damages in excess of $7,000,000.  According to a detailed article about the Loreto Bay project in the Phoenix Business Journal, Baja Developments, LLC was a company formed by The Trust For Sustainable Development (note the “TSD” initials), a Canadian non-profit, federally chartered land and community development corporation, that arranged financing for the Loreto Bay project.  

Based on the above-referenced lawsuit, TSD appears to have been legally structured as a S. En C. por A., which is a limited partnership represented by shares (sociedad en comandita por acciones).  The use of this type of Mexican entity is extremely unusual and an odd choice of entity for the developer of a significant real estate project because the S. En C. por A. imposes joint and several liability on its active partners (socios comanditados) for the debts and obligations of the company.  See Article 207 of the General Corporations Law of Mexico (Ley General de Sociedades Mercantiles). 

Most businesses in Mexico, whether destined for real estate development or otherwise, are structured as S. de R.L. de C.V.s (sociedad de responsabilidad limitada), S.A. de C.V.s (sociedad anonima de capital variable), or, in certain cases, S.A.P.I.s (sociedad anonima promotora de inversion), because the shareholders of such entities are generally liable only for the amount of their capital contributions to the entity.