Puerto Rico’s Promise

Q&A with Agnes Rivera, CCIM

In September 2017, Category 5 Hurricane Maria devastated Puerto Rico with the worst natural disaster ever to hit the island. It reportedly caused anywhere from $90 billion to $150 billion in damage, with housing hit hardest.

Before the storm, Puerto Rico was in a 10-year economic recession. The hurricane only added to the downward trend.

How is the island recovering? To find out, CIRE spoke with Agnes Rivera, CCIM, a broker with American International Real Estate LLC in San Juan, Puerto Rico, and a past president of the Puerto Rico CCIM Chapter.

CIRE : Before the hurricane, what was the state of Puerto Rico’s economy and the commercial real estate market?

Rivera: Puerto Rico’s economy had been in recession before the hurricane. In May 2017, the governor announced that the island was going to default on its approximately $73 billion in debt. The U.S. territory’s fiscal affairs were put under direct federal control with a bipartisan bill that established the Financial Oversight and Management Board. This created uncertainty among investors, and several large real estate deals were put on hold.

To deal with the recession and promote mainland investment on the island, the Puerto Rican government established Acts 20 and 22 as tax incentives. Act 20 taxes qualified businesses at a flat 4 percent rate instead of the regular 39 percent in the mainland in addition to 100 percent exemption on property taxes, dividends, interest, and capital gains. Act 22, the Individual Investor Act, gives 100 percent tax exemption on Puerto Rico-sourced dividends, interest, and certain capital gains to investors who reside on the island a minimum of 183 days a year.

Unlike other tax havens, since Puerto Rico is a U.S. territory, U.S. citizens don’t have to give up their passports when relocating there. Puerto Rico is the only place in the U.S. where personal income from capital gains, interest, and dividends are untaxed, which has increased investment.

CIRE : What challenges did the industry face in rebuilding after the storm?

Rivera: Practically all shopping centers and office buildings were closed for weeks and even months after the hurricane because of structural damage or because of a lack of electricity and water. Employees could not get to work because of gas rationing.

Some smaller strip malls are still negotiating with insurance companies and haven’t reopened, but most shopping centers and office buildings have.

Experts estimate that 7,000 to 8,000 small businesses closed after the hurricane, and most of the commercial spaces previously occupied by these small businesses remain vacant. Main avenues in San Juan like Roosevelt and Pinero have large percentages of vacant commercial buildings. Getting tenants into these spaces has been a challenge because the market is shrinking due in part to thousands of Puerto Ricans relocating to the mainland after the hurricane.

CIRE : What’s the current state of the market?

Rivera: Class A office buildings have seen a marked increase. There are waiting lists on Class A buildings, and rents have gone up. Since the hurricane, companies are looking for buildings with full backup generators and water cisterns.

There also is currently a shortage of warehouses. Many were destroyed in the hurricane, and the few that remained were leased for relief supplies. Puerto Rico’s recent tax incentives for corporations to relocate to the island also have created demand for additional warehouses. Even though there is a high demand for Class A offices and warehouses, many investors are waiting for the local legislature to pass the opportunity zone laws to invest on the island.

CIRE : Where are the investments coming from to rebuild?

Rivera: There are large private equity and hedge fund investments in Puerto Rico as a result of Acts 20 and 22. However, the local government has not yet passed the law to regulate opportunity zones. It was approved by the local Senate but is stalled in the House.

CIRE : What opportunities do you see ahead for commercial real estate professionals?

Rivera: The commercial real estate market is improving at an accelerated pace. Opportunity zones and tax incentives are helping.

Almost the whole island is an opportunity zone. But our clients will not be able to take advantage of the opportunity zone program in Puerto Rico this year due to the holdup in the House. The Puerto Rico CCIM Chapter is actively lobbying for the approval of this law, which is essential for opportunity zone investment on the island.

Also, Puerto Rico Governor Ricardo Rossello has introduced legislation to extend opportunity zones to Puerto Rico residents. The legislation also provides expedited permitting processes that will benefit commercial real estate development.

Puerto Rico has always had a strong retail market. Historically, anchor stores like Sears, JCPenney, and Macy’s have been among the top producers, despite the island’s per capita income being near the lowest in the U.S.

Catherine Simpson Olson

Catherine Simpson Olson is a freelance editor and writer based in Chicago. 

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