Ricardo Alvarez-Diaz, AIA, NCARB, CAAPPR President of Puerto Rico Builders Association Builders Association of Puerto Rico 1055 Marginal JF Kennedy, Building ILA, Suite 301, San Juan PR 00920
Prepared by: Chair of Florida Liaison Committee Adam Greenfader, M.R.E.D. 305.363.8833 adamgreenfader@gmail.com
Understanding Puerto Rico Real Estate 3Q 2016
Introduction
In a time of great change and opportunity, this report has been compiled to help you better understand Puerto Rico’s real estate market.
El Morro and Old City
As the island turns a new chapter, numerous real estate opportunities continue to unfold. We hope this document provides you with some insight and creates even more questions for you to explore, invest, and ultimately become part of Puerto Rico’s rich economic fabric.
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ABOUT THE BUILDERS ASSOCIATION
The Builders Association of Puerto Rico aims to serve developers, investors and builders since 1952.
The Builders Association of Puerto Rico four main areas are : commercial, industrial, tourism and housing.
Downtown Business District
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Builder’s Association Goals
• To promote the best practices in development, planning and environmental stewardship
• Connect real estate leaders from the different real estate sectors: Housing, Commercial, Industrial and Tourism • Foster collaboration among government and non-governmental institutions responsible economic growth
• Share knowledge and provide continuous education for our members
• Provide leadership positions to a new generation of entrepreneurs and professionals
• Promote quality and sustainable land development in Puerto Rico • Provides access to opportunities in the local, national and international real estate markets
• Promote members’ products and services, both in Puerto Rico and other markets.
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Location
Puerto Rico is an island of the Greater Antilles located between the Dominican Republic and the U.S. Virgin Islands. The island has an area of approximately 8,406 square kilometers (3,245 square miles). It is 35 miles wide by 100 miles long. It takes about 4.5 hours to drive from end to end.
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United States and Puerto Rico
Puerto Ricans have been US citizens for almost 100 years. The island’s government is known as the Commonwealth of Puerto Rico. Puerto Rico enjoys all the below noted benefits of being part of the US - except for the fact that there are NO federal taxes in Puerto Rico.
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US Passport US Dollar US Federal Courts FDIC, USDA, HUD, FAA, etc. US Military and Coast Guard
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Cost of Living
The cost of living in Puerto Rico index averaged 79.11, way below the national average of 100 (ACCRA Cost of Living Index, 2013).
Age
The elderly population will be the fastest growing population cohort in Puerto Rico. The most urgent need for this population is housing in areas suitable to satisfy their recreational, health and social needs. The 2010 Census shows that over 67,000 elderly households had some kind of housing burden. During the next five years, this amount may increase to 78,000 elderly households.
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Education
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Population By Municipality
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Household Type
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The Economy
Unlike most of islands in the Caribbean, Puerto Rico’s economy (since the 1950’s), has been based on manufacturing. Manufacturing is the principal employment generator and represents - 46.3% of the GDP. The expiration in 1990’s of the 936 Manufacturing Incentive Law has led to dramatic economic consequences.
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GDP
The Gross Domestic Product (GDP) in Puerto Rico – has been in decline since the expiration of 936 and negative since 2006. This dire economic situation led the US Congress and President to enact the PROMESA Bill.
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PUERTO RICO OVERSIGHT, MANAGEMENT AND ECONOMIC STABILITY ACT OF 2016 (PROMESA)
On June 30, 2016, President Barack Obama signed into law the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), a sweeping new law designed to bring stability to the Puerto Rican economy and establish oversight of the Island’s budget and fiscal policies for at least the next five years. PROMESA is by almost any standard the broadest economic rescue package ever enacted by Congress for any American jurisdiction and will affect virtually every contract, transaction, and governmental decision in Puerto Rico for the foreseeable future.
US and Puerto Rican Flag on Capital Building
Major provisions of the bill include: Oversight board - Virtually every fiscal decision by the Government of Puerto Rico will be made or approved by a 7 member Oversight Board selected by the President. The Governor of Puerto Rico will be designated an ex-officio member without voting rights.
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The Board will have ultimate authority with respect to the preparation of Puerto Rico’s budgets and the issuance of future debt by the Government of Puerto Rico and its instrumentalities, and may intervene in any litigation filed against the government. In effect, while it is in existence, the Board will control the fiscal future of the Government of Puerto Rico, the restructuring of its debt, the relationship between Puerto Rico and its creditors, and the potential enactment of local measures to grow the economy.
Debt Restructuring—The bill authorizes the Oversight Board to initiate a proceeding for debt restructuring because the Government of Puerto Rico could not avail itself of federal bankruptcy protection and the Supreme Court ruled that Puerto Rico does not have the authority to enact its own bankruptcy law, Congress in PROMESA set up a system to allow the adjustment of the Government of Puerto Rico’s debts using concepts from the federal bankruptcy code. The Oversight Board will have the primary role in applying these rules and proposing restructuring agreements. Economic Recovery Measures. Congress also created a Task Force to propose growth measures, possibly in the form of changes to the US Internal Revenue Code, that will help the economy grow by attracting greater investment, jobs, and a more robust flow of revenue to the Island.
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GDP Comparisons
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Economy: Strengths and Weakness
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Income
The Medium Household Income in Puerto Rico is $19,630. The medium income for the USA is $51,915. Source: U.S. Census Bureau, 2012 and 2013 American Community Surveys, 2012 and 2013 Puerto Rico Community Surveys.
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Employment
There are approximately 1.1 million people in the labor force. Source: U.S. Bureau of Labor Statistics
There is an additional and unknown labor force that is paid in cash and do not report their earnings. Local economists have stated that this subterranean labor force is an additional 300,000+ people.
Lufthansa Technik Plant in Aguadilla Puerto Rico (2015)
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Government Workers
Local political parties for decades have employed an excessively large number of people. The figure usually varies between 38-48% of the total work force.
Unemployment
The unemployment rate in 2015 is approximately 15.3% according to the Department of Labor and Human Resources of Puerto Rico.
Population Trends & Projections
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Political Status
As a US Commonwealth, Puerto Rico is VERY stable politically. There are no extreme political groups or movements: communists, fascists, etc.
There is also very little if any religious intolerance or hate crimes. Could Puerto Rico change? Not likely. In a 2012 referendum, a large minority of the population said Puerto Rico should continue with the status quo. Among the 54 percent who desired change in Puerto Rico's constitutional status, 60 percent said Puerto Rico should seek to become a US state. Only 5.5 percent of the 54 percent favored independence.
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Puerto Rico Debt
Puerto Rico's total debt outstanding is $72 billion, which is small relative to the overall United States economy. US bankruptcy law makes no provision for Puerto Rico (or a US state) to declare bankruptcy. Most believe that the debt will be restructured under the US guidance and possibly control.
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Emigration
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Labor Force
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Crime
Puerto Rico has an undeserved bad reputation. PR is as safe as many cities in the U.S. Like in the US, most of the crime occurs in the low income housing projects.
In fact, The FBI’s Uniform Crime Reports (updated 2013) give Puerto Rico the 12th lowest violent crime rate among the 52 jurisdictions.
Puerto Rico is also one of the safest places in Latin America.
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936 Manufacturing Tax Incentives: Repeal
Section 936 Puerto Rico’s foreign capital import strategy for the last decades was dependent on Section 936 of the Federal Internal Revenue Code. This section provided tax exemptions to American companies in Puerto Rico and the Caribbean basin. However, the income related exemption was eliminated in 1996. The full repeal of the 936 tax code resulted in the loss of many manufacturing jobs on the island as well as billions in liquidity.
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Homeownership
Homeownership has historically been very high - over 65%. This homeownership rate is one of the highest in the industrial world. This high rate is a result of a culture bias for home ownership, available financing, limited Real Estate taxes, and a large subterranean labor force. Today, this rate is estimated to be just over 50%.
Puerto Rico Planned Suburban Community
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Housing Demand by Product Up until recently, detached single family homes have been by far the most demanded product. From 1993-2013, Single family units accounted for approximately 71% of the total units sold, walk-ups units represented 10.1%, high-rise condominium units 11.5% and other types of housing (townhouses, villas, mixed) 7.3% ( Construction & Sales Activity Report, Estudios TĂŠcnicos, Inc.). Historical Demand by Product (1993-2013)
12%
7%
Single Family Walk-Ups
10%
Condominiums other 71%
Rental Market
Historically, Puerto Rico has not had a very robust rental market. This was due mainly to pro-tenant laws, ownership mentality, ease of purchasing credit, low transient population, and limited supply of rental properties. Today, improvements to rental laws, tight credit, gentrification of the city centers, more people are choosing to rent.
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Rental Rates Metro Area: Rental rates for a typical two-three bedroom unit is $2,200- $4,000 unfurnished and $3,500-$5,000-furnished.
Non-Metro: Rental rates for a typical two-three bedroom unit is $500-$1,500 unfurnished and $1,800-2,200 furnished.
Puerto Rico is home to over 15 golf courses and resorts
Rental Yields Are Up
Rental yields have risen in Puerto Rico from a year earlier, according to the Global Property Guide research of February 2013. The average rental yield in San Juan is currently around 7.4%, up from last year’s 5.52% for 2-bedroom apartments. For 3-bedroom apartments, the average rental yield stood at 9.03%.
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Rental Contract Law
While most U.S. states have uniform landlord tenant codes that mandate many tenants' rights and landlord responsibilities, PR landlord tenant law is still largely a matter of contract law.
The Puerto Rico eviction process differs in that the terms of the lease agreement will dictate the steps in the eviction process regarding notice and other steps to be taken. The law does prohibit constructive eviction measures such as shutting off utility services, locking out the tenant or removing the tenant’s possessions.
San Juan Urban Train
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Property Taxes
Real property taxes are computed based on property values that date back to the fiscal year 1957-1958! The assessment by the Municipal Revenue Collection Center (“CRIM�, for its Spanish acronym) range from 8.03% to 11.83 %, of which vary depending on the municipality where the property is located.
Example: A $750,000 property in San Juan might have a 1957-1958 tax value of $175,000 pay between $2,800-$3,500 per year in property taxes.
Santa Isabel Wind Turbines
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TAX INCENTIVES
Tourism Incentive Act of 2016 Tax Credit for Tourism Investment = 50% of the eligible investment to be taken in 2 installments: ½ on the year in which the financing for the construction is obtained, and Balance on the credit on the following year. Alternate Tax Credit for Tourism Investment 40% of the eligible investment to be taken in 3 installments: i. 1/3 Yr. 2 of operations; ii. 1/3 Yr. 3; and iii. 1/3 Yr. 4; OR 30% of the eligible investment to be taken in 4 installments: i. 10% on the year in which the financing for the construction is obtained; ii. 1/3 of the remaining balance Yr. 1 (i.e., year of first paying guest); iii. 1/3 Yr. 2; and iv. 1/3 Yr. 3. The company shall select its choice of credit (1 or 2 as per this email) on the Tax Grant Application under this Act.
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Act No. 132 - residential rental income Act No. 132 enacted on September 2, 2010 provides a 100% income tax exemption (including total exemption from income tax withholding) on residential rental income derived by PR residents and non-residents and these benefits expire on December 31, 2020 (in order to claim the benefits the lessor must file a PR income tax return to declare the rental income as 100% exempt).
Condado Beach
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Act. No. 216- Newly constructed acquisitions
Act No. 216 of 2011, as amended, (“Act 216�) grants individual residents and non-residents of Puerto Rico various incentives for sale and purchase of newly constructed residential real property acquired from a developer. Some of the benefits provided: 100% tax exemption from income taxes;100% tax exemption on property taxes for 5 years after the acquisition; and 100% exemption from the stamps, fees, vouchers and other transfer costs applicable to the execution and recording of documents related to the sale and mortgage.
San Juan Convention Center
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Act 152 Rental-market stimulus program: •
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Loan to value mortgage ratios of 105%, allowing loans to be made without a down payment A 100% exemption from net rental income tax, for a 10-year period. A 100% tax exemption during a 10-month window, plus a 100% exemption from capital gains tax at the time of resale of new property, and a 100% exemption from fees, stamps and vouchers. There also is a 100% exemption on temporary property tax, and a five-year exemption from property taxes.
World Class Sporting Infrastructure
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Law 20/22
The Department of Economic Development & Commerce is the agency responsible for Act 20 of 2012, known as the Law to Promote the Export of Services, as amended, and Act 22 of 2012, known as the Law to Encourage the Transfer of Individual Investors to Puerto Rico, as amended. Utilizing both laws, since 2013, one of the DDEC’s main economic development strategies has focused on making Puerto Rico a top destination for business as well as an attractive location for establishing residence, for both high-profile individuals and companies. As a result, the luxury real estate market has become very hot. Resorts like Dorado Beach East, Bahia Beach, and Palmas del Mar are showing significant price increases. Luxury supply in the city (next to the beach) in such places as Condado and Ocean Park has also dwindled dramatically as a result of the new investors.
"I think that San Juan represents one of the great investment opportunities of my generation," says Nick Prouty, CEO of Putnam Bridge Funding, who has moved his office and family from Greenwich, Connecticut, to Puerto Rico.
Public Law No. 20 of 2012 provides attractive tax incentives for companies that establish and expand eligible export services businesses on the island Benefits of Puerto Rico Act 20 • 100% Federal Tax Exemption • 3-4% Corporate Tax for up to 30 years • 100% Tax Exemption on dividends • 20-30 year Tax Decree
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The Arecibo Observatory is one of the largest in the world
Similarly, Act 20 has generated new economic activity by exporting services and increasing Puerto Rico’s participation in the global economy. Approximately 20% of Act 20 decree holders are local companies and more than 33% export to destinations beyond the U.S. market. In terms of the current economic impact a total of 7,033 direct, indirect and induced jobs are generated by the incentive program.
It is estimated that by 2024 close to 50,000 direct employment opportunities will be created. The study reveals that jobs created under this program have a salary above the Island’s average employee compensation. Finally by 2024 Act 20 companies would have accumulated over $38.5 billion in gross revenue and paid over $800 million in corporate income taxes.
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Luis Munoz Marin International Airport (2015)
Public Law No. 22 of 2012 seeks to attract new residents to the island by providing certain exemptions from local income taxes on particular gains realized or accrued after the individual becomes a resident of Puerto Rico. Benefits of Puerto Rico Act 22 • • • •
100% Federal Tax Exemption 100% Tax Exemption on dividends and interest 100% Tax Exemption on short and long-term capital gains Tax Decree valid until 2036
Currently Act 22 has added over $266 million in acquired real estate. By 2024 this number is expected to exceed $830 million.
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A positive Impact
Prepared by Estudios Tecnicos, Inc.
According to Estudios Tecnicos, Act 20 and Act 22 Investments has constituted a change in direction in the downward trend in capital investments. Due to the limited time these incentives have been in effect, aggregate change may not be reflected in the national accounts. Total investment in construction totaled $3,534 million in 2014, out of these, private construction represented $1,849 million (50% of total construction).
By importing new capital, the economy has captured capital inflows, which will add to the total investment figures in the following years. Taking into account the forecasts presented in the study, by 2020 - Act 22 grantees will have demanded close to $1,000 million in real estate investments (primarily housing) which will provide an injection of capital to the construction industry. Moreover, Act 22 grantees reported planned capital investments of $228 million up to 2015. If this trend continues, the local economy should expect a boost in total investment from the private sector in the following years.
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Law 545
The law requires the government to purchase products and services from companies located within Puerto Rico. Part of the motivation from this law is to keep government money cycling through the local economy in an effort to buoy existing businesses and incentivize the creation of new enterprises. Over 2,000 small businesses have been established on the island over the past 12 months. While the 2,000 new small businesses are not a direct result of Law 545, it should help keep these businesses running through the recovery.
Top Destination Resorts and Casinos
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FDIC and Real Estate
In 2010, the FDIC agreed to cover up to 80% of the losses of the three failed Puerto Rican banks' portfolios, most of which comprised mortgage loans. The FDIC's loss-share agreement expired on April 30, 2015.
Mortgage Delinquency
Mortgage delinquency continues to increase. Data for 2013-14 reveals a delinquency rate of 17%, more than double that of the U.S. mainland, according to the Puerto Rico Mortgage Bankers Association (MBA).
Hato Rey Business District
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Real Estate Inventory
In terms of available inventory, numbers vary by price bracket and localization. For instance, several interviewees confirmed that housing inventories in the mid- to-low price bracket, namely those valued at $150,000 or lower, are almost depleted. By the same token, high-end residences priced at $1 million or higher are similarly scarce.
Dorado Beach Home
• Dorado Beach East has had price increases of 10-15% over the last several years • Other resort properties such as Bahia Beach and Palmas del Mar are starting to see the limited inventories of its more expensive units – 2 Million+. • Condado – No inventory of luxury Condos • Ocean Park – Sale of beach front land and high end residential units at $300-500 SF.
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Available Inventory – residential There are approximately 35,000 single family units available of which approximately 7,000 are bank owned (Reo).
1,000+/- units are new construction.
Oldest Historic District in Western Hemisphere
New Housing Units - Sales Sales of new-housing properties during 2014 dropped to less than 1,000 units, from its ten year average of 10,000 units, according to a leading local research firm, Estudios TĂŠcnicos. The majority of units sold were priced less than $150,000.
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Housing Prices – Non-Luxury After a 5-7% annual house price increases for nearly two decades (1990-2000s), the housing market started to decline in 2005. The medium housing price is 35% down from 2010 according to point 2 homes chart below.
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Housing Prices – Luxury
Housing prices for luxury product - $750,000+ has increased in Puerto Rico approximately 7-15% per year. This is a direct result of the law 20 / 22 tax incentive. Resorts such as Dorado Beach East has seen year over year increases of 15% since 2012. New Construction
Construction permits fell by 20.8% y-o-y from July to April of 2014 to only 3,005 permits (-11.8% by value). Permits have declined 63.6% from the 2004 peak, according to Puerto Rico Planning Board.
Construction methods and codes are amongst the best in world
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Cement Sales Cement sales, a key indicator of Puerto Rico construction activity, dropped by more than 13 percent during the first quarter of fiscal 2015. Sales totaled 3.42 million 94-pound bags between July and September, a 13.2 percent slide form the 3.94 million sold during the same three-month period last year.
Modern Cement Factories
Housing Demand
Gross housing needs among low and moderate income households (up to 125% of the median income) will increase by nearly 17,000 households during the next five years. The housing needs of very low income households, or those with incomes below 30% of the applicable HUD median income limit, will increase the most. Estimates show that 8,914 additional low income households may form during the next five years and, in addition, 9,814 units are needed for those who are on the public housing waiting list. This brings the total gross need for very low income households to nearly 18,000 units.
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Entitlements (Permits)
Permits have been decreasing since 2005.
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Energy Costs
According to the Energy Information Administration, about 55 percent of Puerto Rico's electricity came from petroleum in 2013, making the delivery of power considerably more expensive than if it came from coal (where most of U.S. electricity comes from) or natural gas.
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Tourism
The tourism industry is strong however, unlike other Caribbean islands and nations, Puerto Rico’s economy is diversified and not heavily dependent on tourism.
Old San Juan – One of the Top Caribbean Cruise Destinations
In total, tourism contributes to 7.0 percent of the Commonwealth’s GDP (2013), compared with 25.6 percent and 15.3 percent for Jamaica and the Dominican Republic, respectively. This is lower than both the world average (9.5 percent) and the average for the Americas (8.5 percent).
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There are currently over 60 projects in various stages and the government’s goal is to increase the amount of hotel rooms from 15,000 to 20,000 over the next three years. There are 900 rooms being built this year.
Wyndham Rio Mar Resort
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There were an estimated 3.2 million tourists in 2013, and a 7% of the Island's GNP, the tourism industry employees over 63,500 people.
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Conclusion
Understanding Puerto Rico real estate might initially seem like a daunting task. Information is scarce, property values vary dramatically, and the current economic crisis has created a level of pessimism never before seen on the island.
Like in all crises, however, careful examination of Puerto Rico’s – its relationship with the United States and the real estate market history - will reveal pockets of opportunities and areas of great growth.
Sectors such as tourism, luxury residential, senior housing, and agriculture, to name a few, are poised for significant expansion. We at the Builders Association of Puerto Rico have been actively helping our members seek opportunities in all market conditions since 1952. We hope that this paper has shed some light on the island’s real estate opportunities and generated even more questions for you to begin to explore.
For More Information Contact: Adam Greenfader, M.R.E.D. 305.363.8833 adamgreenfader@gmail.com
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