Monday, July 16, 2012

Havana's historic quarter begins small-biz rentals

Posted on Monday, 07.16.12

Havana's historic quarter begins small-biz rentals
Associated Press

HAVANA -- At first blush, Mama Ines seems to be just the latest in a
long line of private restaurants that have opened in Havana as part of
President Raul Castro's fledgling free-market reforms.

But a tiny sign on the facade, easily overlooked, tells the tale:
"Tenant of the Office of the Historian."

The government's Havana historian, Eusebio Leal, has long overseen the
capital's colonial core with unusually wide latitude to call his own
shots. Now he's out in front of other state agencies again - this time
by leasing government-owned buildings as retail space to Mama Ines and a
handful of other private small businesses: here a beauty salon, there a
massage parlor, down the street a nursery specializing in bonsai.

Until now, most independent restaurateurs have been operating out of
their own homes, restricting their access to good locations and forcing
them to cannibalize their living space.

"I've never wanted to do a restaurant in my own house," said Tomas
Erasmo Hernandez, owner of Mama Ines. "You know why? Because in my house
it would throw everything out of whack. I couldn't be with my family.
You lose privacy."

Many Cubans essentially lease their homes from the state at nominal
rents. Other government entities are beginning to let small, shared
spaces for the likes of craftspeople and repair technicians. But Leal's
initiative is blazing a new trail in this communist-run country by
directly renting prime, indoor real estate to private small-business
people so they can set up long-term, compete with government shops and
joint ventures between the state and foreign companies - and truly stand
to make a buck.

For the entrepreneurs in the Old Havana trial, it's a chance to tap into
the hard-currency economy of the thriving tourism district. It's also
potentially a daring pilot program that, if expanded and rolled out on a
larger scale, could create a new revenue stream for the cash-strapped
government and upend five decades of Marxist dogma about the use of
state-owned property while giving a boost to small businesses.

"It is more than the vanguard. It is somewhat unique," said economist
Rafael Romeu of the Washington-based Association for the Study of the
Cuban Economy. "Retail space in Old Havana would be extremely valuable
for reaching tourism."

The bold project lies in stark contrast to a general slowing of the pace
of reforms since a flurry of activity at the end of 2011, when the
government legalized the sale of real estate and used cars. Promises of
other major reforms like the creation of mid-sized cooperative
companies, the lifting of travel restrictions and the broadening of the
number of jobs that can be privately held have yet to be fulfilled. The
number of people taking out new private licenses has fallen this year,
and many have turned them back in.

Many businesses have failed to catch on precisely because of a lack of
prime real estate, forcing the vast majority to base themselves out of
their homes or in makeshift setups on porches and front gardens. Cuba's
National Assembly is due to meet July 23 in one of two yearly sessions,
though there is no indication whether it is ready to approve more
changes under guidelines approved by the Communist Party last year.

"There has been a certain deceleration in the rhythm of the
implementation of the guidelines in the first half of 2012, but that
doesn't mean things are paralyzed," Omar Everleny Perez, the head of
Havana University's Center for Cuban Economic Studies, told The
Associated Press.

Those like Perez who see the glass half-full point to projects like
Leal's, and other pilot programs launched in other regions of the
country, as potential blueprints for the future - even if they are
barely mentioned in the local press and rarely talked about by
high-ranking government officials.

With zero fanfare, Leal's office has recently leased five storefronts in
5- to 10-year deals renewable by mutual consent, with an initial
three-month rent holiday while tenants are still getting off the ground.
For up to a year, business owners can deduct whatever they spend on
improving the space from their rent payments, said David Viciedo, an
economist who works for the Historian's Office.

"We're giving them the space, not just the legal but the physical
space," Viciedo said. "The office made the decision to do this
experiment with five trials even when it was not being done in the rest
of the country. We will do it with five, and propose to extend it later."

So far there has been no public bidding process or published rental
rates during the program's pilot phase. The first five Old Havana
renters have long ties to the Historian's Office and the government, and
the office will have to avoid favoritism, real or perceived, if regular
Cubans are to be included.

Hernandez, for one, has been chef to Fidel Castro and visitors such as
Gabriel Garcia Marquez and Arnold Schwarzenegger, and he founded several
prominent state restaurants. His monthly rent of about $700 far
undercuts the $1,500-$2,000 that other independent restaurateurs say
they pay to rent space in private homes elsewhere in the city.

Viciedo acknowledged that Leal's office picked people it already knew,
but he said that was because it wanted people with an established record
of success for the program's trial phase.

He said pricing will be made public as the project expands to ensure
everyone has a fair shot, not just the well-connected.

"We intend the process to be not just for people we know, because it has
to be much more participative," Viciedo said. "It shouldn't be like
that. It won't be."

The project would seem to fly in the face of Communist Party ideals that
have reigned in Cuba since shortly after the 1959 revolution, after
which nearly all private businesses and retail space passed into state

What were an estimated 60,000 retail outlets islandwide at the time of
the revolution hit a low of 4,000 in 1993, the great majority
state-owned, said Joseph L. Scarpaci, executive director of the
Blacksburg, Virginia-based Center for the Study of Cuban Culture and
Economy. That number has since crept back up to just under 10,000.

"Everything that the island knew about retailing, generations of that
information, was lost or buried because the revolution nationalized
everything and almost everyone fell under state control," Scarpaci said.
"So the human capital loss has been great."

The state has been renting out stall space in vacant lots to people
selling handicrafts, clothing and trinkets for a while, and a longtime
artisans' market in an Old Havana port warehouse is a must-visit on any
tourist's itinerary.

Cuban media reports also say retail rentals have recently begun
elsewhere in Havana and in cities such as Pinar del Rio and the beach
resort of Varadero. However, most appear to be shared spaces for
small-time outfits such as jewelers, cobblers, barbers and watch
repairmen trading in the weaker national peso as opposed to the more
valuable convertible peso.

Details on the Old Havana project are scarce as is public awareness of
the program, which is still so much in its infancy that none of Leal's
tenants have yet signed a contract.

Viciedo said rents will vary depending on location and type of real
estate, from $1 to $13 per square foot per year. Mama Ines, set on a
quaint cobblestone street a half-block off a well-trafficked tourist
drag, will be paying around $6.60, he said.

The rates are far less than in prime U.S. retail markets such as
Manhattan ($50.32) or Miami ($27.41), though the high end is in the
ballpark of cities such as Oklahoma City ($11.11), according to figures
from the Washington-based CoStar Group, which tracks and analyzes
commercial real estate.

Scarpaci said the entrepreneurs may be getting a raw deal once you
factor in licensing fees, taxes, scarcity of resources and lack of
startup capital in a country where government salaries average $20 a month.

"You're nickel-and-diming those who can least afford to be
nickeled-and-dimed," said Scarpaci, who is also chairman of marketing at
West Liberty University in West Virginia and has written a history of
retailing in Cuba.

But Hernandez is optimistic his 40-seat restaurant, which he occupied in
April after the Historian's Office finished restoring the building, will
be able to cover the estimated $700 in monthly rent once the tourism
high season kicks in.

"That's a joke, for a place like this in the historic quarter," he said,
while cautioning that the state must do more for private businesses,
including giving access to supplies at wholesale prices.

"I think next year is going to be a very good year if they keep
expanding and if they give us the tools," Hernandez said.

Besides the five businesses already up and running in Old Havana, four
other properties are being rehabilitated for rental in the near future
and dozens more could potentially follow, Viciedo said.

The first to open was the modest but well-kept Salon de Belleza, where
customers pay $5 for a shampoo, cut and styling. Later came the plant
shop next door, with offerings from $1.50 unpotted African violets to a
$60 flowering Adenium bonsai.

"I'm very pleased so far," said Alejandro Gonzalez Aguiar, the
proprietor of the nursery. "The advantage of this place is its location.
There's a lot of traffic. The location alone sells."


Associated Press writer Andrea Rodriguez contributed to this report.

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