A Q&A with Sergio Bermudez

by Lauren Courcy

El Paso Inc. correspondent

EL PASO INC., Sep 26-Oct2, 04

El Pasoans may be more familiar with his father’s work. But Sergio Bermudez – son of Jaime Bermudez, the Juarez real-estate mogul who is often called the father of the maquila industry – is taking the family company to a new level.

As president and CEO of Bermudez International, Sergio Bermudez controls the direction of the development company. His father still manages the Bermudez industrial park inside the city. Sergio’s 9,000-acre empire is on the outskirts, where his master-planned development of more than 1,000 acres of industrial, commercial and residential property is coming to fruition. The communities are called Punta del Este one and two.

Sergio is No. 6 in a family of eight children. About 20 years ago, Jaime bequeathed a portion of the company to each of his children. Three sisters are still shareholders of the company, but Sergio’s four brothers all decided along the way to pursue independent ventures.

Bermudez International’s development plans – 18 years in the making, Sergio says – are now beginning to move from paper to reality. Lexmark recently broke ground on its manufacturing campus. Rows of closely packed houses are rising nearby. And the city just incorporated some 8,000 acres in its southeast corner, including the Bermudez developments.

Bermudez took El Paso Inc. on a tour of the new construction and spoke about real estate, financing and the future of Juarez’s urban development.

Q. How did you come to own all this property in southeast Juarez?

When my dad started the maquila industry in the late ’60s, he started basically with the Bermudez Industrial Park. He had a friend named Charlie Leavell, who has passed away. He was a very important guy in El Paso construction. Anyway, my dad invited Charlie to Juarez to see all the activity and the industrial park. He picks up Charlie in El Paso and Charlie says, “Take me to the airport.” My dad says, “Why? Where are we going?” And Charlie says, “Just take me to the airport.” They go to the airport and they talk, and Charlie says, “If you want my advice, buy all the land around here. That will be the future growth of Juarez.” My father followed his advice. At that time, there were about 9,000 hectares – about 25,000 acres.

At that time, he didn’t have all the money to buy that piece of land, because it was one big parcel. So the owner said he would give him an option – monthly payments for 10 years, and at the end of the 10 years, he could pay the balance. After 10 years, he still didn’t have all the money required to pay the balance, so he invited two other people to purchase the parcel. The three owners later on divided and each one got certain areas.

Q. How are real-estate transactions in Mexico different from real-estate deals in the States?

It’s basically the same thing, although it’s like anything else: you need to know what you’re doing. You have a title. You need to do a title search. We now have title insurance – which we didn’t have before. But now, after so many years of NAFTA, there are companies selling title insurance. A lot of the information is now being digitalized. Eight years ago, it was not as professional as it is in El Paso. We are getting there.

It’s basically more or less very similar. My recommendation to a foreign investor is always that you need to have the right people working for you. You need to have a lawyer. Or in our case – we are developers; we have been doing this for more than 30 years – we know exactly what to do. We’ll tell you to go here or go there.

Q. What about financing?

Financing is something that also has been changing a lot in recent years. The first Bermudez park was financed by Southwest National Bank, at that time in El Paso. Nobody remembers Southwest because that was a long time ago, 30 years ago. Financing – it’s not easy to get financing. Before, you were getting financing at 100 percent in Mexico – if you could even get it.

Q. Wait – what do you mean, financing “at 100 percent”?

You have financing at 10 percent or less in other countries, such as the U.S. The interest rates in Mexico years ago were 100 percent.

Q. I had the pleasure of interviewing the Peruvian economist Hernando de Soto and …

Yes, I know him.

Q. He talks about financing in the Third World, about how difficult it is to leverage assets, such as property, to gain capital – when titles are often not clean or simply do not exist. Do his ideas hold true in Mexico and in Juarez?

Absolutely. It’s very true. De Soto was mayor of Santa Fe, Colombia, when we visited. He is very knowledgeable. What he says is true. There are a lot of people here who do not have the right title. A person cannot go to the bank and say, “I have the title to this house, and I want to borrow against it.” He doesn’t have it.

What De Soto says I think is very true. If you look at title comparisons on industrial properties versus commercial or housing, there is a big difference. On the industrial, you have almost the same (records) as the United States. The reason why? You have big corporations like GE Capital, and they are lending money – GE was our lender – and they definitely do a title search and all the due diligence. They’ve been doing a lot of business in Mexico.

Q. But that is not necessarily true on the residential or commercial ends?

No, not yet. Hopefully in the future it will be. But unfortunately, I have to admit, not yet. The developments that you are going to see right now are going to be according to the standards of the U.S. because there is one owner, or very few owners. The property has a clean title. There is no problem at all. Everything is going to be in order.

Q. Where did the idea come from to switch from big-box maquila developments to a more comprehensive program that includes industrial, commercial and residential in a single plan?

Why, all of sudden, do you start looking at more of the picture? Well, because in order to have a successful industrial park, you need to have the labor force. In order to have housing and people to buy it, you need to have people employed with an income. In this area where we have a lot of acreage – Punta del Este has 600, 700 acres – we’re not going to put all industrial. We’re trying to accommodate to make a nice community. It will have not just the jobs, and not just the housing, but also the schools so people don’t have to commute. They can take their bikes. We want to have the convenience stores and supermarkets to be very near, so if you have to ride the bus, it will be no more than five or 10 minutes.

We’re looking at the whole thing as a big development. We’re going a little bit ahead of most of everybody. For example, once a worker goes into that house, the worker will have a telephone and Internet. This is a new thing we’re working on.

In Mexico City, this is being done on the high-income residential. But when a low-income housing guy – maybe he is a worker for Lexmark or Electrolux – he’s going to pay $12,000 or $13,000 for the house; it’s going to be financed in the long-term, and he will have Internet. These are the new things that we are looking at, that when you do them large-scale and take advantage of the changes in technology, it really helps. You’re going to see a big difference between the old developments and the new ones.

Q. Is this style of development a new concept in Juarez? It seems the growth of the city has been, historically speaking, more haphazard than that.

Absolutely. You’re looking at a new shopping center where you have new restaurants, shops. It’s unbelievable, the rate of growth here. Again, it’s all well planned. We’re working on getting the fire stations, the schools.

Q. What are the two Punta del Este projects worth?

I would say, in terms of investment, the two projects are probably in a range between $80 million and $100 million. You’re talking about infrastructure, developing, trees, water, sewage, communication. We’re talking about a big investment. The churches, the schools, the grocery stores – everything should be provided by the developer. Not built, but provided for.

Juarez has the national first-place for the last five years in building low-income houses. It’s been close to 20,000 houses built every year for the last five years, and that is No. 1 for the whole country of Mexico. You have a good level of employment. You have the maquiladoras.

People can buy a house, and they can pay the payments. Because they have very low defaults on the loans, they continue lending money here.

As far as I know, this year, they are already close to the 20,000 count.

Q. You have a new deal with Prudential. How is the company involved with Bermudez International?

Prudential is a big corporation. Prudential manages $545 billion in assets. They’re coming in and saying, “Hey, we want to invest in Mexico. We like Mexico. Mexico is a good place to invest. The interest rates have been kind of low. We need to give a better yield to our customers.”

So they came to us and said, “You are the experienced guy on locating maquiladoras, building maquiladoras and developing industrial parks and industrial areas, so we want to make a venture with you and join forces. We have the capital we want to invest and you have the places.”

So we’re joining forces to do what we do best. One of the projects we’re looking at right now is an area of 100 acres that we’re going to develop very, very soon. They’re going to be the investors. We have the land. With our venture with Prudential, we’re looking at buying portfolios in Tijuana, Mexicali, Monterrey, Mexico City and Chihuahua. The budget is $100 million of equity.

Q. What does the deal represent for you?

It more than doubles our equity. They bring the monies. They probably bring 80 percent to 95 percent of the capital, and we’ll bring the rest. They have certain requirements. They are investing in the industrial probably like $100 million per year. So we have $100 million per year to invest.

Q. How did you win the contract?

I know the head guy of (Prudential’s) Latin America (division). I’ve known him for many years. Now he’s managing the operation, so he asked me, “Hey, we’re looking for this. Are you interested?” I said yes. We knew each other for many years.

Q. How has the maquiladora industry matured over the years? Where is it headed?

When it started, it was family operations, very simple tasks. Now we’re talking about manufacturing and having the whole product done here. Take Electrolux. Electrolux is going to do refrigerators where they’re going to have 50 percent Mexican product. That is a lot. Before, Mexicans would contribute maybe 2 percent or 3 percent. Right now, you can make the whole product here.

And that Mexican content also brings other companies, that are going to be suppliers.

If you want to know where the maquila is, and where it’s going, we say now that it’s manufacturing. What do you need to continue growing? We need to do a lot in education. Education is the base of the continued growth for the maquila. This is something you see in other countries.

I’ll give you a very good example: There is a port town in the south of Taiwan called Kao Shun. I was there 20 years ago, and Kao Shun had 85,000 employees in maquilas, and they were producing $12 billion in output. Today, Kao Shun has 40,000 employees in maquilas, and they produce $36 billion in output – three times what they were producing. Kao Shun was probably No. 15 or 20 (in terms of busiest ports). Now they are one of the top five ports in the world. If you go there and you ask, “What did you do?” They’ll say,”We did three things. We emphasized education, education and education.” So everything in the long run will be determined by education.