Financing Focus

Silver Lining

Developers and investors will find new opportunities in Puerto Rico.

When Hurricane Maria descended upon Puerto Rico on Sept. 20, 2017, the fate of the island and its people changed forever. In addition to the vast human toll taken by Maria, the storm demolished much of the island's infrastructure while severely damaging a wide swath of Puerto Rico's commercial buildings.

Although the well-being of affected Puerto Ricans remains paramount in the hurricane's aftermath, the tragedy of Maria will spawn opportunities for commercial real estate developers and investors that participate in its recovery and rebuilding.

Transactional Norms

Although Puerto Rico is a U.S. territory, its applicable laws and customs often differ from U.S. states. For example, the seller delivers the title to real property through a deed of sale, which is filed in the Puerto Rico Property Registry.

Transfer tax is due at closing, with the seller paying the cost of stamps on the original deed, and the buyer paying the cost of stamps on the certified copy of the deed and recording vouchers. The amount of transfer tax due is based on a tiered scale, with the percentage due increasing with the amount of the purchase price.

At closing, the seller must pay a notary fee based on the purchase price. The notary fee must equal at least 0.50 percent of the purchase price for acquisitions up to $5 million, but the fee is negotiable when the purchase price is higher than this amount.

Due Diligence

In any real estate acquisition, the buyer's due diligence centers on physical inspection of the property. In Puerto Rico, a thorough property inspection is even more critical after Hurricane Maria.

Buyers should hire qualified engineers and construction professionals to ascertain the building's structural integrity, while considering design changes to guard against future storms. Although environmental testing typically is advisable for any buyer, mold inspection is outside the scope of the standard Phase I environmental site assessment. Accordingly, prospective buyers concerned about the aftermath of flood damage may consider hiring an industrial hygienist to perform a specialized mold survey.

Major weather events can affect the financial performance of commercial properties. The purchaser should determine the financial viability of the asset and account for the residual impact of storm damage to the property.

This financial analysis is of paramount importance to the purchaser's lender while underwriting the loan and evaluating the collateral property. Likewise, the buyer should study the restoration obligations and related termination rights under the existing property leases. 

The cost and availability of insurance can vary depending on the nature and severity of recent casualty events. In addition to lender-imposed minimum insurance requirements, the buyer should consult with its insurance provider and consider increased coverage amounts to mitigate the risk of future weather-related losses.

During due diligence, the buyer should determine the flood zone designation of the property. If the property is located within a designated special flood hazard area, the buyer might consider working with the seller to obtain a letter of map revision to re-classify the flood zone designation.  

Market Outlook

Ongoing uncertainty over the restructuring of Puerto Rico's debt, coupled with the catastrophic impact of Maria, has  staggered the commercial real estate market on the island and kept some potential buyers on the sideline. However, opportunities abound.

As a U.S. territory, Puerto Rico acquisitions are free of many of the tax and logistical hurdles that often hamper real estate investment internationally. Historically among the 50 busiest U.S. ports, the volume of goods flowing into the Port of San Juan, P.R., creates an ongoing need for warehouses, distribution centers, and retail locations.

Devastation of the electrical grid, cellular towers, and roads and bridges will likely spawn opportunities for public-private partnerships and direct investment in core infrastructure. On the strength of recent legislation providing favorable tax treatment to certain financial entities, affiliates of investment banks and private equity funds continue to target distressed loans and foreclosed properties across Puerto Rico.


This article is for informational purposes only and not for the  purpose of providing legal advice and is not be acted on as such.

Andrew Maguire, Esq.

Andrew Maguire, Esq., is a real estate partner at McCausland Keen + Buckman in the greater Philadelphia area. Contact him at amaguire@mkbattorneys.com.

 

CIRE March/April 2018 Issue Cover

Recommended

Incenting Development

January.February.19

Use of the Low-Income Housing Tax Credit program continues to encourage developers to provide quality affordable housing that targets the needs of the state.

Read More

Valuing Rentals

September.October.18

A cap rate allows parties to efficiently evaluate whether the asking price for a property is justified by the income it generates. But with multifamily rental buildings in urban areas, this method makes it particularly difficult to value. Learn why.

Read More

Preserving History

July.August.18

 

Read More

Capital Rescue

May.Jun.18

Mezzanine financing rescues deals when traditional lending cannot bear the risk. With conventional lenders both restricted by regulations and wary of riskier ventures, mezzanine financing is playing a stronger role in providing equity for commercial real estate developments. For example, a builder wanted

Read More