Starwood's Deal in Cuba Encourages Would-Be Investors

Bloomberg BNA

By: Lenore T. Adkins

The agreements Starwood Hotels & Resorts secured to renovate and manage three Cuban hotels offer a blueprint for U.S. companies and prove it is indeed possible to invest there, analysts said.

At the same time, trade groups say the deals, which happened despite Starwood's unresolved $51.1 million certified claim against the Cuban government, give them renewed encouragement to push for a normalized relationship with Cuba that erases all remaining obstacles to travel and trade.

Starwood signed two management contracts and a letter of intent in March with three Cuban military enterprises that control the island's hospitality industry. The deals let Starwood operate three swank hotels in Havana, with the Cuban military serving as the owners and majority partners. Starwood will perform renovations to Hotel Inglaterra and Hotel Santa Isabel before they join the company's The Luxury Collection.

The same is true for Hotel Quinta Avenida before it becomes a Four Points by Sheraton property; Starwood owns Sheraton. Starwood officials expect the hotels to open under their new banners by the end of 2016. This would put them in line to compete with foreign hotel operators already on the island and to benefit from the explosion in U.S. travel to Cuba.

U.S. companies are using the deals as models for their own forays into business with Cuba, and they are emblematic of the goodwill and desire in both countries to repair relations, said Jodi Bond, vice president of the Americas for the international division at the U.S. Chamber of Commerce.

Myths Shattered

The deals went on to shatter several myths that Bond said U.S. corporate officials believed about investment following the historic shift with Cuba:

  • that the U.S. government wouldn't help them do business there;
  • that the decades-old U.S. embargo and unsettled certified claims would block their proposed investments on the island; and
  • that Cuban officials wouldn't welcome U.S. companies.

Industries such as telecommunications, construction and agriculture have their own routes to take. And while they cannot duplicate the Starwood deals, they are looking to replicate that success, she said. The Starwood deals show that with patience, U.S. companies will achieve business opportunities and market access in Cuba as it undergoes an economic shift, Bond noted.

“It shows you that it can be done,” Bond told Bloomberg BNA.

‘We Think Not.'

The agriculture industry in particular spots an opening, because pushing travel and tourism opens opportunities to feed travelers, said Devry Boughner Vorwerk, chairwoman of the U.S. Agriculture Coalition for Cuba and senior policy adviser for Akin Gump Strauss Hauer & Feld LLP on trade and Cuba policy.

Under the embargo, the agriculture industry cannot privately finance agriculture exports to Cuba, which means it loses ground to countries already offering competitive financing, she said. Not only have the Starwood deals galvanized the agriculture industry to urge lawmakers to pass a bill that would let Cuba buy U.S. food and agriculture products on credit, they also have demonstrated the need to provide high-quality food products to travelers, Vorwerk said.

“Who should be feeding those people, our competitors? No, we think not,” Vorwerk told Bloomberg BNA.

In 2015, 500,000 U.S. travelers visited the island, an increase over 300,000 the previous year, Jeffrey DeLaurentis, charge d'affaires of the U.S. Embassy in Havana, told reporters. Those numbers are expected to further skyrocket once regular flights from the U.S. to Cuba commence later on this year after a 50-plus-year absence.

“These signings enhance our overall offerings in Latin America and the Caribbean,” Starwood's Senior Vice President and Deputy General Counsel Keith Grossman said in an e-mail. “Cuba has enormous potential with its rich history and natural beauty.”

Genesis of Starwood's Claim

Following Fidel Castro's rise to power in 1959, he nationalized the economy by seizing property and assets from foreign corporations and individuals. The Foreign Claims Settlement Commission, an arm of the Justice Department, certified 5,913 claims against the Cuban government from U.S. citizens and corporations, adding up to nearly $1.9 billion without interest. With interest, the claims total between $7 billion and $8 billion. Starwood's $51.1 million claim represents the 10th largest of the entire haul.

Starwood's claim originally belonged to the Radio Corp. of Cuba, a subsidiary of International Telephone and Telegraph Corp. In 1968, the Castro regime confiscated two large tracts of RCC's land to expand a runway at Jose Marti International Airport, according to the certified claim. After Cuban law enforcement authorities seized the company and demanded its dissolution in 2003, the regime confiscated land from RCC east of Havana, documents show. The Cuban government went on to withdraw $70,066.95 from RCC in several banks, the claim said. Starwood acquired the claim after it purchased RCC in 1998.

Yet the unsettled claim didn't stop the company from pursuing and landing one of the most significant deals on the island since President Barack Obama announced detente with the former Cold War adversary at the end of 2014. Starwood started exploring its options and conducting market research on the island shortly after Obama announced a new Cuba policy that eased longtime travel and trade restrictions to Cuba, Grossman said. The U.S. Office of Foreign Asset Control gave Starwood special authorization under the embargo to sign the deals just before Obama's historic trip to the island nation at the end of March (55 ITD, 3/22/16).

“This is a good example of a company with a claim not letting the claim stifle opportunity that will probably yield further benefits down the road for them,” said James Williams, president of Engage Cuba, a coalition of businesses lobbying Congress to lift the embargo.

By letting Starwood in, Cuban officials also have signaled that the certified claims aren't an impediment to striking deals there, said Robert Muse, a Washington, D.C., lawyer who represents major corporations on international trade and direct foreign investment.

Meanwhile, the status of Starwood's claim remains unknown. The State Department referred questions about the claim to the company. Grossman declined to answer questions about the claim, including how it factored into negotiations with Cuba and whether the company is still pursuing it in light of its hotel deals. Treasury declined to comment on Starwood's case as well. Ruben Ramos Arrieta, minister counsel at the Cuban Embassy's Economic and Trade Office, did not respond to requests for comment.

‘A Win-Win Proposition.'

Going forward, Starwood hopes to secure similar hotel investments on the island, Grossman said. Starwood's standing as a recognized, publicly held company and its pending merger with Marriott International Inc. lend additional gravitas to the deals, said John Kavulich, president of the U.S.-Cuba Trade and Economic Council. That may help Cuba attract international brands that are skittish about investing there, and help it to renegotiate and potentially replace existing management companies from other countries, he said.

Cuba desperately needs to improve and expand its infrastructure and hotel capacity to meet surging demand from U.S. travelers, and that's what it gets out of Starwood, said Ted Piccone a senior fellow at the Brookings Institution. U.S. companies stand a better chance of landing deals there if Cuba benefits as well, he said.

“It only works as a win-win proposition,” Piccone told Bloomberg BNA. “Starwood gets its foot in as the first big American hotel company in so many years, and Cuba gets a win by upgrading its infrastructure at U.S. standards.”

Cuban officials consider whether the deals could upend the island's commercial, economic, political and social infrastructure when they weigh foreign business deals, Kavulich said. In Kavulich's view, that's why Cuba, for example, hasn't set up regulations that let U.S. companies interact with the island's 201 categories of self-employed people, he said.

“If it’s not controllable, they don’t want it,” Kavulich said. “They’re not looking to be tested and they’re not looking to welcome stress.”

Rep. Kevin Cramer (R-N.D.), a member of the congressional Cuba Working Group, said the Starwood deals boost the hospitality industry, which he said is key to encouraging the free flow of capitalism, more trade and open commerce to Cuba. Cramer, a Donald Trump supporter, says a Trump administration would expand Obama's Cuba policy.

“You don’t have to know a lot about Donald Trump to know that he understands the hospitality industry—at least he knows how to capitalize on it,” Cramer told Bloomberg BNA.

Others Want Settlement Focus

Not everyone is excited about Starwood's deals.

When he was chairman of the Foreign Claims Settlement Commission in April 2006, Mauricio Tamargo certified Starwood's claim through a second program the State Department set up to adjudicate additional claims. Tamargo, whose family fled the Castro regime in the 1960s, works as an attorney in the Washington, D.C., area and represents individuals and corporations with certified claims against Cuba. Tamargo said the U.S. government shouldn't facilitate any other business opportunities on the island until the Cuban government agrees to pay the certified claims in full.

“We've passed the point of unrestricted concessions to the Cuban government,” Tamargo, of the law firm PobleteTamargo LLP, told Bloomberg BNA. “We need to focus on a settlement of these claims, as the law calls for.”

Even so, Kavulich knows of other companies with claims that are already talking to Cuban government enterprises about re-entering the marketplace. It's more important for those companies to line up for business deals now than to wait for a larger settlement a miss out on potential opportunities, he added.

Catalyst to Resolving All Claims?

Negotiations to put the claims to bed remain in flux. The State Department and the Cuban government started talks last year to resolve them, but they haven't scheduled a second meeting, a State Department spokesman said.

At the inaugural meeting in December, the U.S. outlined the various claims for which it seeks compensation. Cuban officials presented counterclaims of their own, seeking more than $120 billion in compensation over the human and economic damages they say the island suffered under the embargo (237 ITD, 12/10/15).

Tamargo chaired the settlement commission when the Libyan government agreed to pay $1.5 billion in certified claims that compensated U.S. victims of terrorism in 2008. He's optimistic the U.S. and Cuba will resolve the certified claims before Obama leaves office, and says Starwood's landmark deals may serve as catalysts for that eventuality. Then, as now, the private claim holders started scouting settlement opportunities in Libya, and the U.S. government later followed and began talks for Libya to pay the certified claims, he said. The U.S. and Libya signed their agreement five months before President George W. Bush exited the White House.

“The pieces of a deal are in place now to make a deal, but once Obama leaves office, I think it changes and it might be a different kind of deal,” Tamargo said. “And I think the Cubans might not like the deal that may follow.”