www.businessinpuertorico.com
The sky’s the limit. Puerto Rico is breaking with traditional economic development models to focus on a trilogy of key factors destined to propel its competitive edge: DIVERSIFICATION, INTEGRATION and GLOBALIZATION. Successful results in several socioeconomic sectors already attest to the effectiveness of this new and powerful strategy.
it’s happening in PUERTO rico There are hundreds of investors taking advantage of doing business in Puerto Rico. They relocated with their businesses to the Island and are benefiting from a world-class workforce, advanced infrastructure, global experience, generous tax incentives, and the U.S. legal framework. They are also enjoying golfing on some of the most amazing courses in the world.
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GREETINGS!
O
ur government would never miss an opportunity to promote economic development. With tools such as the Law of Economic Incentives for the Development of Puerto Rico (Law 73) and the Act to Promote the Export of Services (Law 20), this administration is committed to driving growth in Puerto Rican businesses with the goal of exporting our first-class goods and services to the world. We are in the midst of the greatest economic transformation in our history, and we have some of the best local and international entrepreneurs and investors to guide us through it. We want to enact the most sensible policies in order to ensure that we stay on a responsible fiscal path that will lead us to a full economic recovery. We are devoted to working alongside businesses in Puerto Rico, as well as investors who are seeking to expand their operations here. We must combine our efforts to further opportunities for long-term economic development, as we are all an essential part of this story. Alejandro García Padilla Governor of Puerto Rico
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ntrepreneurship sets the stage for the creation of business models, while strategic alliances help launch these models on a local and international scale. By virtue of its geographic location, its zero income tax offer, and its bilingual culture, Puerto Rico is one of the most competitive business destinations in the world. We have the necessary transportation and communication infrastructure to host any type of globalized business venture. We offer legal and financial safeguards to support the most complex operations and we have a highly-specialized and highly-experienced workforce capable of handling the most elaborate projects. Business-wise, we offer the lowest operational costs of any jurisdiction in North America, making us the perfect bridge to access a potential market of 500 million people, and we are the ideal venue for holding commercial and cultural exchanges between the U.S. and all Spanish-speaking countries. We are constantly pooling our efforts to promote Puerto Rico’s unparalleled advantages with the goal of attracting investments and generating profitable work opportunities for our human capital. We firmly believe that by pursuing a more diversified, knowledge-based economy we will achieve a true and successful transformation. To these and other ends, I want to propose the development of a regional and cooperative model that includes Puerto Rico as a strategic partner that will propel growth locally and abroad. There is much we have to offer and the time is now. Alberto Bacó Bagué Secretary of Economic Development and Commerce
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INDEX 8-17 COVER STORY
Towards a new integrated economy
18-23 INVESTMENT
Successful 2015 Investment Summit edition Frank Holder Mohnish Pabrai
24-27 FOREIGN TRADE
Spain mission expands commercial horizons Port of the Americas
28-31 TOURISM
Puerto Rico: Five-star destination
32-35 REAL ESTATE
Exclusive Paseo Caribe complex in Condado Sotheby’s International Realty
36-39 COMMERCE
New luxury shopping mecca
40-41 TESTIMONIAL
Zurixx’s founding partner Cris Cannon
42-43 IN MY OPINION
Ángela Weyne Puerto Rico Insurance Commissioner
44-45 MANUFACTURING AND BIOTECHNOLOGY Abbvie, AIA, Sanofi and Romark
46-51 INDUSTRY
Puerto Rico: Rum Capital of the Word
52-53 AEROSPACE
Important players continue to land on the Island
54-55 INFRASTRUCTURE
Clark Realty will operate Roosevelt Roads redevelopment project
56-57 PROGRESS REPORT
Great news from various sectors
58-61 SCIENCE AND TECHNOLOGY
A knowledge economy takes hold in Puerto Rico
5
www.businessinpuertorico.com
Secretary Alberto Bacó Bagué Deputy Secretary Antonio Duarte-Pino Project Coordinator Patricia de la Torre de Haro
The sky’s the limit. Puerto Rico is breaking with traditional economic development models to focus on a trilogy of key factors destined to propel its competitive edge: DIVERSIFICATION, INTEGRATION and GLOBALIZATION. Successful results in several socioeconomic sectors already attest to the effectiveness of this new and powerful strategy.
Year 2 • Vol 1 • May 2015 Official Publication of the Puerto Rico Department of Economic Development and Commerce (DEDC) International Edition www.businessinpuertorico.com
INVESTinG Puerto Rico is a production of BizNet Media, Inc. www.biznetmedia.net Director / Editor in Chief José Julio Balmaceda jbalmaceda@biznetmedia.net Project Manager / Senior Editor Ivonne Brown Ieromazzo ibrown@biznetmedia.net Senior Associate Editors Lisette Núñez Ángeles Alvarado Alex Díaz María Teresa Morón Stefan Antonmattei Associate Editors José Javier Balmaceda Ana María Ruiz Goenaga Copy Editing & Proofreading Kristen Hayashi Rodrigo López Chávez Margarita Morales Translation José Javier Balmaceda jjbalmaceda@biznetmedia.net Collaborations Alex Daley (Casey Research) Illustration Juan Álvarez O’Neill Photography María Susana Bianchi Ingrid Rivera Graphic Design Carmen Milagros Reyes Printing House Graphic Printing Distribution All Distribution Servicios Combinados
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UPCOMING EVENTS
JUNE 11-13, 2015 Puerto Rico Medical Tourism Congress
NOVEMBER 20-21, 2015 H3 Tech Conference
DECEMBER 2015
Investment IN Innovation Summit (IN3S)
MARCH 2016
Puerto Rico Investment Summit LATAM Edition
MAY 2016
Tech Summit
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COVER STORY
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s we sat for the interview, Alberto Bacó Bagué could hardly contain his excitement. He had just left a meeting with one of the world’s leading space-launch companies, “and they’re looking at a site on the eastern part of the island where they’ll be able to launch.” “I mean, this is absolutely dizzying, all the activity going on. The momentum has become unstoppable,” Bacó continued. Much like those rockets, perhaps? “Yes. Yes! This has taken off. Puerto Rico will never be the same.” From the day in January 2013 when he assumed the post of Secretary of the Puerto Rico Department of Economic Development & Commerce (DDEC by its Spanish acronym), Bacó has been assembling what he deemed at the time “the economic model for the next generation,” building on pillars inherited from previous administrations and adding twists of his own. To be sure, a new economy has been in the making since the decline of the dominant manufacturing sector, which began in earnest in the late 90s following the 1996 congressional repeal of a key federal incentive and coinciding with a rapid rise in energy costs and other operating expenses, a plague that has hit the industry in every developed market. “The elements have been there for well over a decade, but they had not been fully fleshed out and had remained largely disconnected and unarticulated,” he explained. “The result is that most people in and outside Puerto Rico have had little idea what this new economy is all about, and now that it has matured, the time has come to make sure everyone gets the message.” To that end, Bacó has commissioned a far-reaching promotion campaign for the local and global media. It’s Happening in Puerto Rico features an ensemble of incentives and industry stars designed to provoke double-takes and voluminous deals comparable only to Singapore’s jaw-dropping boom in the early and mid 2000s. “We’re thrilled that major international publications are starting to take notice and publish extremely posi-
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tive stories about Puerto Rico,” he noted, citing recent articles in such media as the New York Times and The New Yorker. “But we need more. Far more. And that’s one of our goals with this campaign.” Bacó will focus his message -- and he’s hoping the global media follows suit -- on the essence of the new model, centered as it is on the cutting-edge combination of diversification, internationalization and integration. “We must diversify everything: the sources of capital
The previous model was also highly dependent on federal-government allocations and the U.S. municipal bond market to fund growth-boosting infrastructure and public works, at a time when the island transitioned from an agrarian, low-skill economy to an advanced, knowledge-based global hub. Today, these wells have gone largely dry, and while the government’s fiscal team looks for new sources for public works, Bacó and his DDEC team are pulling out all the stops in the promotion of alternative sectors to
we can incentivize and attract from outside the island, where those companies and investors come from, the menu of investment alternatives where they can place their capital, the types of companies we attract, where our tourists come from, diversify the local economy, diversify the U.S. and foreign markets where we export -- diversify everything.” It is Puerto Rico’s new default mode, as opposed to the old economy, Bacó continued, “where we were disproportionately dependent on manufacturing as the key industry and on the U.S. Northeast as the principal source of visitors and investors.”
boost a more diversified economy. But that’s just the model’s first defining characteristic. As the economy diversifies, multiple new clusters and ecosystems emerge and intertwine to turn Puerto Rico into a single integrated destination -- again, not new to the island, which has seen multi-cluster integration within the broader manufacturing industry for decades. But with more industries developed, thousands of new Law 22 resident-investors on hand, and more global markets tapped, the integration is “vastly augmented and leads to an exponential increase in deals and opportunities,” said Bacó. “We’re going from a li-
near model of disjointed segments, to a dynamic, multidimensional model with an integrated circuitry of linkages that catapults the possibilities and turns Puerto Rico into the most amazing hub in the Americas.” Wait a minute, doesn’t that title belong to one Hispanic city in South Florida? “Anyone who confuses Puerto Rico with Miami simply doesn’t know what Puerto Rico has become. That’s why we’re losing sleep here, because Puerto Rico has changed the game, and that is a story that has to get out far more than it has to date.” It is all designed to work in sync -- diversified industry segments, tight-knit executive networks, top-notch supplier ecosystems, and now the island’s package of complementary incentives. “This is the only place in the world that is as much a part of the United States as any state, yet can offer incentives as a foreign country, which no state can do -- foreign for taxes, domestic for everything else, in a privileged location in the middle of the Hemisphere, bilingual and bicultural, with advanced infrastructure, the best workforce on the planet -- that is also less expensive than in the states -- and hungry for your business. There is no place like Puerto Rico, anywhere!”
THE PUERTO RICO TRIANGLE
Visually, it might help to think of the new model as a triangle. The tip at the top is the ensemble of investors, companies, visitors and residents who bring billions of dollars in outside capital to the island. That includes placing development of certain key strategic projects on a fast track and parading them among global investors as a menu of huge, juicy opportunities. There’s the Roosevelt Roads mega-development to turn the former U.S. Navy base in Ceiba into the sort of new city being developed in emerging markets around the world, mainly in China. The Science City in Río Piedras is being developed into a Biopolis-style R&D hub for life sciences, while
the Port of the Americas in Ponce aims to become a major transshipment hub, and as development plows on at the San Juan Convention Center District and the Bahía Urbana waterfront project. “They are all exceptional investment opportunities, and we’re making great progress attracting the private capital needed for all of them, in addition to other strategic projects around the island,” Bacó said. Among those new sources of capital are EB-5 investors, or foreigners who obtain an EB-5 visa when they place a minimum of $500,000 and create at least 10 jobs in local ventures and projects on the island. As investors deploy their capital, companies set up shop, and as a wave of new visitors and Law 22 residents spend their money, the combined result is a dramatic injection to catalyze a rapid turnaround of Puerto Rico’s vast local economy -- the bottom-right tip of the triangle, or the countless small and mid-size companies in Puerto Rico that then become suppliers, contractors, consultants, agencies, law firms, visitor-economy experience spots, restaurants, real estate operators, plus the cities and districts that become lifestyle centers, hubs of economic activity and tourist attractions in their own right. One sector counting on this spillover effect is agriculture, an industry that has certainly had its ups and downs over the years. Lately, though, it has been mostly up, as the government starts to make good on its legislated commitment to source 40% of its food purchases from local farmers, and as the industry’s own Buy Local campaign begins to cut into the island’s reliance on imports, which still account for more than 80% of all food consumed in Puerto Rico. Agriculture Secretary Myrna Comas has launched a national crusade to counter growing risks to the island’s food security, an effort opening up multiple opportunities for local and foreign agro investors and farmers who step in with timely solutions to broaden local production, distribution and export.
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“Exports represent 5-7% of our revenues, and growing. We’re exporting intellectual property and other legal services to such states as New York, Florida and California, and countries like Brazil and Panama.” —Fernando Rovira
“One powerful way this integration might materialize: the creation by Law 22 resident-investors, jointly with local investors, of a venture fund to invest in Puerto Rican companies with the potential to increase exports to the U.S. using the investors’ assistance, given their experience and connections. They can also learn about local opportunities in Puerto Rico and develop talent pools.” —Jason Borschow
“Our export growth has been exponential -- 150% from 2013 to 2014. The low tax we pay under Law 20 allows us to reinvest more in the business.” —Jorge Mejía
“This is the new El Dorado, the real treasure in the Caribbean, the new U.S. sun belt. It is happening right here, right now, as we speak. We have the opportunities, the incentives, the talent and the competitiveness. We’re taking off. The only question is: will you have your place in the rocket?” —Alberto Bacó
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COVER STORY
INVESTORS. COMPANIES. VISITORS. RESIDENTS.
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acó is the first to clarify, though, that while the model is now solidly in place, the results are just now starting to trickle in. “We’re just getting started.” The government has scored some significant wins, as have numerous private players in their own right, but the Secretary cautions against overhyping results thus far. “We have set the table for people and companies to come in, profit handsomely and hire in big numbers, but this is a process that will take a bit of time before we see the hundreds of thousands of jobs that will take Puerto Rico where we all want it to go.” The big win that has drawn the most attention thus far is the creative packaging of the island’s powerful set of tax incentives. “That has turned out to be the trigger,” said the Secretary. “Not only had they never been packaged quite this way before, but they provide a sort of map in and of themselves.” Law 22, for one, has attracted more than 550 high-net-worth resident relocations from the states just in the last two and a half years, with Bacó projecting another 600 by year-end -- soundly surpassing the first 1,000 -- and 5,000 or so by 2020. “Oh, no question, this is exponential,” said Frank Holder, a 22er since 2013 and Latin America chairman of Florida-based FTI Consulting. He spoke to Investing Puerto Rico after moderating a panel at the February 26-27 Puerto Rico Investment Summit in San Juan. “As we attract more new residents, more will come.” The Summit was attended by some 300 individuals considering the move, and they were treated to the full parade of compelling reasons why, including top schools for their children, awesome neighborhoods full of gorgeous properties and never-ending things to do, the island’s rich cultural and culinary offering, and of course, the islands -- “we’re in the Caribbean, for Christ’s sake,” asserted Law 22 extraordinaire Nicholas Prouty, who recently acquired the island’s largest marina.
GLOBAL EXPORT HUB
Yes, export -- the triangle’s third tip, bottom left, where everyone expands overseas. Puerto Rico features a robust export infrastructure that facilitates the successful penetration of U.S. and foreign markets, not just by nascent local players, but by the wave of service exporters Bacó is promoting across the other segments. Are you a foreign company setting up in the Science City to export your innovation? Relocating as a 22er to invest abroad? Setting up a Law 27 or 273 or 399 company to expand to the U.S. mainland and Latin America? Or are you a locally owned restaurant franchise expanding across the region? A tech start-up in Santurce taking your killer app to the world? A tropical-fruit grower hitting the Asian market? No sweat. Puerto Rico boasts one of the 165 global offices of the U.S. Commercial Service, available only to companies on U.S. soil. The Puerto Rico Trade Company, a DDEC member agency, not only offers a broad menu of export services, but operates the World Trade Center on the island, a networking association with 330 offices around the world -- all available to open markets and arrange deals. Then there are the 120+ offices of the U.S. Chamber of Commerce -- the AmChams, or American Chambers Abroad -- easily accessible through the Puerto Rico Chamber of Commerce. A critical subset already making waves is the island’s new class of export-driven innovators and entrepreneurs, an exciting new ecosystem bent on creating products and services for the global market. “Our export growth has been exponential -- 150% from 2013 to 2014,” said Jorge Mejía, partner in charge of business development at local tech consulting and software firm Fusionworks, which has received broad recognition for its penetration of Mexico and various Central American markets. “The low tax we pay under Law 20 allows us to reinvest more in the business,” he added. Fernando Rovira, managing partner of Hato Rey law firm Ferraiuoli LLC, agreed, crediting exports with “57% of our revenues, and growing. We’re exporting intellectual property and other legal services to such states as New York, Florida and California, and countries like Brazil and Panamá.” “Part of the model is to integrate them with all the folks and capital coming in from outside, to create the linkages, relationships and funding they need to make it in the big leagues and take their products and services global,” advanced Bacó. “That’s the benefit of integration. We first integrate our segments and incentives to bring in the investors, companies, visitors and residents from the outside, and
then we integrate all of them with the local economy.” At least one local player, Jason Borschow of Abarca Health, points to one powerful way this integration might materialize: the creation by Law 22 resident-investors, jointly with local investors, of “a venture fund to invest in Puerto Rican companies with the potential to increase exports to the U.S. using the investors’ assistance, given their experience and connections. They can also learn about local opportunities in Puerto Rico and develop talent pools.” Leaders of the Puerto Rican diaspora in the states, totaling 65% more than the entire population on the island, are now organized and active making stateside connections and opening up markets in the world’s largest economy.º
“THIS IS EPIC,” SAID PROUTY AS HE MODERATED ANOTHER PANEL AT THE SUMMIT
Law 22ers are not just bringing their families to town. They’re bringing their small firms, as well, averaging 30 employees each, said Bacó, and circulating an undetermined but by-all-indications-significant amount of money in combined local spending. As their small firms become larger players on the global scene -- many, in fact, already were when they relocated -- look for that impact to grow exponentially in jobs and local spend. Three are on their way to becoming publicly traded companies, the Secretary revealed, as is the Dhandho Investment Fund by Mohnish Pabrai. The famed hedge-fund manager may not be a Law 22 resident yet -family commitments keep him in Southern California -but he has become a major new voice for Puerto Rico. “Our operation on the island is doing extremely well,” Pabrai told Investing Puerto Rico during a break from
his participation at the Summit. “Our plans are to grow the fund and take it public as soon as the moment is ripe. We are very excited.” True to the model’s value proposition, 22ers arrive on the island adopting a variety of incentive laws on the business side, mainly Law 273 if they’re financial concerns, 399 if they’re in the offshore insurance business, 27 for film and creative, and 20 for every other type of service export.
VISITOR ECONOMY
That fate also includes the island’s thriving visitor economy, otherwise referred to as tourism. “We’ve adopted the new term because the right way to look at this is to combine every category of groups or individuals who visit Puerto Rico,” Bacó said. Tourism is still used, though, when referring to traditional leisure or vacation visitors, whether they stay in hotels or drop in from a cruise ship. Other visitors come for medical treatment, to participate or view a major sports event, to attend a business or group convention, for shopping or other reasons. Whatever the purpose, the island’s visitor industry is experiencing a veritable renaissance, following a post2008 industry nosedive across the entire Caribbean as a result of the U.S. and European financial meltdown. Today’s turnaround, Bacó believes, is creating a multitude of investment and business opportunities across all visitor segments in Puerto Rico. “We’re pushing service-export incentive packages, yes, but a central component of our diversified, integrated model is the boundless ways anyone can step into our visitor economy and make a boatload of money, and we have an incentive package for that, as well, under Law 74.” The Puerto Rico Tourism Company, another DDEC
Puerto Rico’s new economic strategy entails an intense globalization process
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COVER STORY
member agency, estimates that the industry will jump from 6% of GDP to 8% within the next five years. Cruise ship arrivals are off the charts, as well, with the Tourism Co. reporting a 31% increase in cruise passengers in fiscal year 20142015 compared to the previous year. “The Tourism Co. and the government are finally giving tourism the importance it deserves, and that can only mean good things for hotels and restaurants,” said internationally renowned chef Roberto Treviño, co-owner of Budatai and Casa Lola restaurants and soon-toopen Chicharrón, in an article published recently in the local media. “The key to Puerto Rico’s future is to build it, and we will continue to build it.” City-wide conventions, the Holy Grail of the business-meetings
segment, are expected to finally become part of the local visitor landscape in the next two years, following years of frustration -- an outcome that will allow the 600,000 square-foot Puerto Rico Convention Center and the entire Convention Center District to come to life. That, in turn, will be music to the ears of legendary hedge-fund investor John Paulson, who has famously placed huge bets on Puerto Rico’s chances of becoming, as he calls it, “the Singapore of the Caribbean.”
TARGET: Large Service Multinationals
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or the moment, the early adopters have been small. But that is only the first wave. The big prize, the second phase Bacó believes is right around the bend, is the entry of the large service multinationals always on the hunt for sites that give them a decided edge over their competitors. “Those are the companies that create 300 jobs, or 1,000 or 2,000, when they set up an export operation, just like manufacturing companies did when they set up in Puerto Rico from the 50s to the 90s. Moving a large operation takes a bit longer than relocating a firm with a staff of five, but they’re coming,” including three that had already received their Law 20 decrees as this magazine was going to press. In a recent speech before the annual convention of the U.S. Site Selectors Guild, which as fate should have it was held in Puerto Rico last February, Prouty urged the audience to come now. “Puerto Rico is an arbitrage opportunity. An anomaly,” insisted the CEO of hedge fund Putnam Bridge Funding. He moved to the island in 2012 and has since acquired and developed more than $500 million worth of local real estate assets. “The incentives are in place -- now,” he told the riveted crowd. “Labor costs in Puerto Rico, while higher than in developing countries, are 30%-50% lower than in the states, and workers here are superior. That, too, is available -- now. Northbound shipping costs to the states are historically low -- now. After nearly a decade of recession, office space and real estate values are generationally low. There is a window today that may not be open in a few years. This is the time to get in and set up in Puerto Rico.” “It’s an explosive time,” Bacó agreed. “Puerto Rico is so poised, so truly unique, and so full of service opportunities.” And not just services. Manufacturing may no longer be the growth driver that once propelled Puerto Rico to international site-selection stardom, but “we’re working extremely hard defending our anchor companies in manufacturing and making
damn sure Puerto Rico remains a leading global player in that sector to attract the high-value, light-weight production and value-added services where we are as competitive as any investment site,” affirmed the Secretary. One is the aerospace industry, where the government has successfully positioned the island as a top contender. The dual promotion early last year of Lufthansa Technik’s aircraft maintenance and overhaul operation on a five-acre site in Aguadilla’s international airport, and a super-high-tech $35 million lab by fellow aerospace giant Honeywell, has triggered a torrent of interest from leading industry players from around the world. “The interest we received at the [March 23-24] Select USA event in Washington, D.C. gives us added reason to feel ecstatic about Puerto Rico’s potential to become a top site for aerospace investment,” added Antonio Medina, Executive Director of the Puerto Rico Industrial Development Co. (PRIDCO), yet another DDEC member agency. “I can tell you, as far as aerospace is concerned, Puerto Rico has everything it takes to become a leading global hub,” said Elma Lutter, head of the Lufthansa operation in Aguadilla. “That’s why we chose the island over other sites. It was an extremely competitive process, and Puerto Rico prevailed because it has significant competitive advantages.” “There is no going back on manufacturing,” Bacó reaffirmed. “We’re committed to the industry as never before. The only difference today is that we’re adding services to the mix. Where we went wrong is that we spent too many years in the 2000s focused only on maintaining our manufacturing relevance, and the time has come to combine that with an equally intense effort to build a service-export economy that can contribute as much as, if not more than manufacturing, to our employment and gross product.” Puerto Rico’s natural growth, Bacó added, is as “the leading service-export hub of the Americas -- a true bridge to and from NorAm and LatAm. That is our fate. That is our role.” n
Puerto Rico’s natural growth is as the leading service-export hub of the Americas -- a true bridge to and from NorAm and LatAm. Paulson has acquired not just several lots in the Convention Center District to build hotels and mixed-use facilities right on time for the looming wave of city-wides, but also a string of lots throughout the Condado tourist and residential zone to build the new hotels and condos Puerto Rico will need as more visitors and 22ers come calling. And that’s in addition to the billion-dollars-or-so Paulson has already acquired in office buildings and five-star hotels. Visitor shopping, or shopping tourism, received a huge shot in the arm, as well, with the March opening of the Mall of San Juan, a sprawling 650,000 square-foot luxury consumer mecca a short distance from the Luis Muñoz Marín International Airport, giving people yet another reason to come to the island. Oh, speaking of LMM, the 2012 management concession to airport operator Aerostar continues to receive rave reviews, as the Mexican-owned company makes major strides in enhancing the visitor experience and wields its extensive contact network to attract new routes and airlines to the island. “The imperative is to create an ever more amazing visitor experience in Puerto Rico, so they’re all delighted and keep coming back and referring others and our visits grow exponentially, and that, in turn, will create ever more opportunities for investors of various kinds to build and deliver those experiences,” said Bacó. “That includes hotel developers -- and we’re looking to diversify our hospitality offering -- plus unique stores, quaint shops, restaurant chains, transportation, amusement parks, tour operators, visitor services across segments, you name it. The visitor economy is open for business in Puerto Rico, and growing fast.”
STRATEGIC BETS
As are certain mega-projects Bacó calls strategic bets, those multi-billion dollar developments designed to bring certain regions and sectors into the island’s new economy. Four in particular stand out, none bigger than Roosevelt Roads. After finally obtaining ownership of former military base in the eastern municipality of Ceiba, the government selected Dallas-based Clark Realty, experts at converting former bases to magnificent developments, to do exactly that in Ceiba, in what has
become Clark’s biggest project under management. The company will spearhead a $3.2 billion, 3,250acre development to create what it calls the world’s foremost start-up city, a fully-integrated mixed-use zone with tourism, protected nature, residential units, office facilities, healthcare, schools, retail and more than its share of amenities. Over in Rio Piedras, the recently revamped and reorganized Science & Technology Trust is leading development of the island’s new Science City at the 90-acre grounds of a former prison, right next to the existing University of Puerto Rico Medical Center campus. The latter, aside from serving patients, is home to cutting-edge academic research, and the Trust is leveraging on that to create a Science City bursting with some of the world’s leading R&D players focused on life sciences, much like Singapore’s Biopolis and the North Carolina Triangle. Across the island in Ponce, development is underway to repurpose the city’s port into the Port of the Americas, poised to take its place among the leading transshipment facilities in the Caribbean. Finally, back in the metro area, the government is moving full steam ahead toward completion of the Bahía Urbana waterfront along the San Antonio Channel that connects Old San Juan with the Convention Center District. The first phase of the project was completed on the Old San Juan end using government funds, and features what has become a popular park, bayside boardwalk and event venue. Next is the final stretch parallel to the Puerta de Tierra neighborhood to complete the project using private capital. “Again, and I don’t tire in repeating this: Puerto Rico has become the new land of opportunity,” concluded Bacó. “We’re building a fully diversified economy with seamless integration across segments and positioning the island as one of the world’s great epicenters of global trade flows. It is happening in Puerto Rico. This is the new El Dorado, the real treasure in the Caribbean, the new U.S. sun belt. It is happening right here, right now, as we speak. We have the opportunities, the incentives, the talent and the competitiveness. We’re taking off. The only question is: will you have your place in the rocket?” n
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INVESTMENT
‘We invite you to be part of history’ THE AROMA OF SOMETHING BIG IN THE MAKING WAS PALPABLE AT THE 2015 PUERTO RICO INVESTMENT SUMMIT AS HUNDREDS CONVENED TO TAKE A CLOSER LOOK
I
f you thought Puerto Rico’s thriving 20/22 segment was all about hedge funds and other financial concerns, you may want to look again. As revealed by CPA Gabriel Hernández at the February 26-27, 2015 Puerto Rico Investment Summit, flashing a colorful pie chart on the big screen that drew its share of ooh’s and ah’s from the crowd jamming the hall at the Convention Center in San Juan, “20/22 has become far more diversified than I think any of us thought it was or even expected it to be.” Big words, coming from one of the original architects of the incentive combination and a principal proponent since, as partner of tax and audit firm BDO Puerto Rico. He was referring to Acts 20 and 22, two laws enacted as recently as late 2012 and today promoted as a package with four other incentives to attract companies to the island, along with the people who run them. The Summit is held annually to present the laws and the possibilities they have created to a group of interested individuals and executives, who have thus far hailed primarily from the States. Last year, the first summit attracted 200
attendants. This time around, the number ballooned by 50% to roughly 300. As the doors opened and the house began to fill, the air filled with anticipation at what has clearly become the core hope for the economic recovery and longer-term future of Puerto Rico. “I know we have caught your attention,” Puerto Rico Economic Development & Commerce Secretary Alberto Bacó Bagué told the audience during the event’s opening remarks. “That is why you’re here.” And they learned, along with Hernández, that only 14% of the more
than 550 companies and residents that have moved to Puerto Rico under 20/22 are in financial services. The biggest chunk consists of shared service centers, itself a highly diversified group, with 19%, followed by IT services with 17%. Another 12% are marketing related, 9% are in professional services, 6% are in engineering and architecture, 5% in R&D, and the remainder cover other segments. “There is room for all of you here,” Bacó said, referring to the laws as “the star products that together create a package so unique and efficient” as to make them “irresistible” -- Act 273 for offshore finance, 399 for offshore insurance, 27 for film and creative, EB-5 for investment visas (a federal program), 22 for individual relocations of families and employees, and 20 for “every sector you can imagine” -- the umbrella law, if you will. “The real magic begins,” he added, “once you start building your own star combo,” or the combination that best works for each company. Bacó then went through several examples of how various companies have mixed and matched the incentives to suit their objectives. “Tell me, where else can you get this deal? Only in Puerto Rico!” he exclaimed. “This makes the decision of investing in Puerto Rico a no-brainer.”
ILLUMINATING PANELS
Left to fill in the nitty gritty, following Bacó’s rousing opener, was a tax panel by Hernández, who was joined by Pietrantoni Méndez & Alvarez tax partner Edgar Ríos, and Mayer Brown tax partner Mark Leeds. The trio shared highlights of Act 22, emphasizing the rules that establish residence and precisely the income that is exempt from federal taxation. The next panel explained how to keep that income in Puerto Rico and channel it to tax-advantaged investments on the island. It was moderated by 22er Frank Holder, chairman of FTI Consulting Latin America,
Sales
and consisted of José Arias of UBS, Fernando Rovira of law firm Ferraiuoli LLC, and David Ashe of Advent Morro Equity Partners. Arias presented financial instruments available on the island, while Ashe ran through Advent’s rigorous methodology to select winning companies in which to buy stock or invest private equity. It was left to Rovira, though, to reveal one of the Summit’s stand-out moments: the presentation of an entirely new incentive: Act 185, enacted only in November and pending issuance of the enabling regulation before being open for business. “This has been a best-kept secret up to now, but the time has come for Act 185 to join the other laws in the government’s toolkit,” said Rovira. The law will govern the creation of private-equity funds in Puerto Rico by any individual or group of investors. The list of eligible investments is nearly total, with the funds exempt from taxes on capital gains, interest and dividend income, plus license, personal and property taxes. Investors, though, will be subject to a 10% tax on interest and dividend income -- except if you’re Law 22, in which case you pay zero. The 185 panel was preceded by a key-
19%
1st Qservice tr shared centers
17% 2nd Qtr IT services
IT’S A DIVERSIFIED
MIX!
Qtr services 14% 3rd financial
relatedQtr 12% 4th marketing
9%
professional services
6%
engineering and architecture
5%
R&D
18%
other segments
19
INVESTMENT
50+ 5 nies compa ts
siden and reer Acts und /22 20
note address by former New York City mayor and Republican presidential candidate Rudy Giuliani, and followed by a lunch address by renowned motivational speaker and real estate expert Luis Ortiz and a second keynote by celebrated investor Mohnish Pabrai of Pabrai Investment Funds. Giuliani, who now directs security firm Giuliani Partners, offered solutions to reduce the crime rate in Puerto Rico -- “hire me, and we can get it done,” he said humorously -- while Pabrai exalted the island’s potential to become “one of the truly great centers of trade and finance in the hemisphere.” The first day’s afternoon session opened with a panel of Act 22 early adopters, moderated by the group’s “dean”, Nicholas Prouty, who as partner of hedge fund Putnam Bridge Funding in Santurce, is known for the firm’s sizeable local investments. He was joined by Cris Cannon of Zurixx, Fahad Ghaffar of Paulson & Co., Charles Hamilton of Caprock Partners, and Justin Sullivan of Auramet Trading. Cannon emphasized the “amazing talent” available in Puerto Rico, while Sullivan spoke glowingly of all its great people and things to do, and Hamilton said that since he and partner Toby Neugebauer moved to the island, so have another 3540 Texans from their inner circle. For his part, Ghaffar revealed Paulson’s acquisition of “just about every available empty lot in the Condado to build nice towers for all of you as you start coming down to Puerto Rico.” The first day ended with a panel on Act 399, which enabled the creation of an international insurance center in Puerto Rico. Moderated by Puerto Rico Insuran-
ce Commissioner Angela Weyne, the stage also featured Michael Consedine of Transamerica Life, Robert Schimek of AIG, Charles Murphy of Paulson & Co., Kenneth Kotch of Ryan, and Tony Phillips of the Willis Group. The group shared the segment’s “impressive growth,” in the words of the Commissioner, and agreed that Puerto Rico is on its way to becoming the leading insurance center in the region. Friday opened with an inspiring keynote by Steve Leonard, Executive Deputy Chairman of Infocomm Development Authority in Singapore. Leonard, an American who previously headed the Singapore-based Asia region for infotech giant EMC, said Puerto Rico is on target to do as Singapore did “not long ago” and become one of the world’s true financial superpowers. That was followed by a panel on public-private partnership opportunities in Puerto Rico, featuring Grace Santana Balado, Executive Director of the Puerto Rico Public-Private Partnerships Authority; Manuel Rodríguez of PMA Law; Agustín Arellano of Aerostar, the Mexican company that administers the Luis Muñoz Marín International Airport; and DJ Gribbin of Macguarie Group. The day and the event ended with breakout sessions for guests to learn more from experts in taxes, investments, insurance and government, and a final presentation by firms that offer such personal and professional services as residential real estate (Margaret Juvelier of Sotheby’s), commercial real estate (Ryan Christiansen of Christiansen Commercial), healthcare (Vanessa Marzán of Auxulio Mutuo Hospital), culture and philanthropy (consultant Janice Petrovich). Also, the heads of top bilingual schools—Tasis Dorado (Fernando González), Robinson (Sandy Rosenbaum), St. John’s (Lorraine Lago) and Baldwin (Elimari Sánchez)— presented the excellent educational offer available for those Law 22ers relocating to Puerto Rico with their families. “We have a business proposition that works,” Bacó told the audience in his opening speech, though they would have been just as applicable in closing. “Puerto Rico will become the cross-cultural service hub that will unify the Americas and set an example of a new economic model to follow. What was once imagined by forward thinkers is now closer than ever. We invite you to be part of history -- part of Puerto Rico’s history.” n
Last year, the first summit attracted 200 attendants. This time around, the number ballooned by 50% to roughly 300.
“20/22 has become far more diversified than I think any of us thought it was or even expected it to be.” —CPA Gabriel Hernández, BDO Puerto Rico
21
INVESTMENT
Frank Holder
Law 185 will transform the way capital is invested in Puerto Rico
T
he ink was still drying on Law 185 as Frank Holder moderated the panel entitled Investment Vehicles & Opportunities in Puerto Rico at the 2015 Investment Summit in San Juan, an event designed to persuade high-net-worth statesiders to relocate their families and businesses to the island.
“This is the law some of us have needed all along,” said the
Latin America chairman of FTI Consulting and Law 22er since 2014, when interviewed later by Investing Puerto Rico. Law 185, enacted in November and, at this writing, awaiting the requisite regulation before becoming effective, enables the creation of private equity funds on the island. “I’m one, along with others, who have invested on the island, and this law facilitates the process tremendously. I think the government should promote it along with the other six laws it packages for our new residents. This should be 20/22/185.” The set of laws promoted by the Department of Economic Development & Commerce includes Law 22 for individuals, 27 for film & creative industries, 273 for offshore finance, 399 for offshore insurance, the federal government’s EB-5 investor visa program, and Law 20, which serves as a sort of umbrella act for these and other service-export industries. “Anyone, local or Law 22, can launch his or her own fund, alone or with other investors, and place debt or equity in a wide range of eligible businesses, development companies and other activities,” said Fernando Rovira of law firm Ferraiuoli LLC, who presented the law at the panel. The law extends generous incentives -- similar to those available under Law 22 for investments made directly -- a feature designed to encourage participation of local, non-22 investors. Law 185 also makes multi-investment portfolios significantly more manageable for everyone, and should therefore spur more investment activity than seen on the island to date. n
“The more money that is placed in these funds, the more we will see companies and start-ups from outside Puerto Rico move to the island in search of this capital, not just for the incentives,” Holder concluded. That’s how Law 185 will transform the way capital is invested in Puerto Rico. “It’ll be our own version of Silicon Valley.”
Mohnish Pabrai
Investment guru to bring ‘major financial innovation’ through its Dhandho hedge fund
M
ohnish Pabrai is a legend in the making. The Warren Buffett disciple has all but broken out of his mentor’s shadow and is now followed as an investment guru in his own right by the likes of Bloomberg, Barron’s and the Wall Street Journal. So it is no surprise he was chosen to deliver one of the keynotes at the Puerto Rico Investment Summit held in San Juan, February 26-27, 2015. The always smiling, large-frame Mumbai native came dressed in traditional Indian business attire and dazzled the lunchtime audience with his unique take, not just on investing, but on Puerto Rico, where he recently housed the Dhandho hedge fund as a Law 20 company. From its base in Old San Juan, Pabrai expects the fund to hit its $300 million target in raised capital -- Dhandho is at roughly $200 million already -- and to go public in the coming months, as it places its capital in a select group of companies following his highly disciplined, Buffett-style value model -- few companies, big bets, long-term holds. His principal holdings in California-based Pabrai Investment Funds stand at just 11 companies and over $500 million in capital. Expect Dhandho to feature even more prominently in Pabrai’s plans. “We’re very close to rolling out a major financial innovation, and our plans are to bring it to Puerto Rico and operate it from our office here,” he told Investing Puerto Rico right before taking the stage at the Summit, anticipating “a significant number of new jobs” as a result.
“We took a look at Puerto Rico and were sold immediately. This is hard to beat. We’re on American soil, with the same
regulatory environment we’re used to, the weather is fabulous, the talent is amazing, and the tax treatment is highly advantageous. So far, it’s going extremely well for us here, and we’re looking at bringing other units to Puerto Rico.” He chose, however, not to relocate as a Law 22 resident, citing family commitments and other ties. “It hangs over us as a daily temptation. Let’s see what happens on that front. At least the weather in Southern California, where we live now, is not that bad. But Puerto Rico is always a possibility.” n
23
FOREIGN TRADE
Spain writes an exciting new chapter Puerto Rico’s Madrid mission in Spring followed by trade mission to San Juan
W
hen a delegation of ten-or-so Spanish companies lands in Puerto Rico for a three-day trade mission that begins May 11, they will be setting foot on the market that can best help them reach the 950 million people and 32 countries that compose the Americas from pole to pole. That was the principal message delivered by Puerto Rico Economic Development and Commerce Secretary Alberto Bacó Bagué during the island’s advance mission to the Iberian country last March. “The entry point to the U.S. market is not Miami. It’s Puerto Rico,” Bacó told the daily Expansión in Madrid, citing the island’s 4% income tax rate and passive-income exemptions applicable both to companies and individuals. Puerto Rico is using its fiscal autonomy within the U.S. federal system to extend tax incentives among the most generous in the world, a message delivered at every stop and media interview by the island’s delegation. Puerto Rico’s uniqueness, in fact, calls for a different sort of site-selection calculus when a company, from Spain or anywhere, crunches the numbers and figures out whether the move makes sense, Bacó explained. “You have to factor in the value to your company of being within the U.S. system as part of a strategy to penetrate the world’s largest market, but also being a Latin American society, enjoying favorable labor costs, a large and truly bilingual talent pool, an enviable location in the middle of the Hemisphere, an advanced supplier ecosystem, topnotch local companies to bring in as regional partners, a world-class infrastructure, and many other advantages Puerto Rico offers.” The Bacó-led group presented the island to companies across a wide spectrum of industries, making a strong case for Puerto Rico’s competitiveness in all of them—aerospace, biotechnology, life sciences, pharmaceuticals, agro industry, gaming, insurance, shipping, energy, film and creative segments, call centers, a wide range of services, and tourism. Sure enough, Spanish companies making the return trip in May will include multiple industries, advanced Andrés Salinero, representative in Puerto Rico of the Spanish government’s trade agency, ICEX, and chief coordinator of the mission. “Just about every one of them represents a different segment,” he said, including renewable energy, municipal services, education, biotechnology research, disposition of chemicals, info-tech, gaming and assorted services. The high services quotient, he surmised, “is a reflection of our economy in Spain, which is primarily a service economy.” It is also a perfect fit with Puerto Rico’s new strategic focus on diversification, another key message delivered in March. The island already boasts the highest concentration of high-value, high-tech, highly regulated manufacturing in the Americas, stemming from some 70 years of industrial promotion and leadership and representing more than 40% of Puerto Rico’s GDP. The slate of recently enacted incentive laws are designed to repeat the feat across a wide spectrum of service industries—Act 27 for film and creative, Act 273 for offshore finance, 399 for offshore insurance, 74 for tourism, and Act 20 for every other conceivable service. A company is free to mix and match to suit its needs and produce the greatest tax savings. The value-added tax (VAT, or IVA in Spanish) making its way through the legislature at the close of this edition would not alter the formula, since service exports would not be subject to the VAT. “Not only are taxes incredibly low,” added Salinero, “but labor costs
are lower than in the states, as well”. Yes, 30%-50% lower, to be exact. “It is a very powerful value proposition,” Bacó told Spanish newspaper La Razón—a value proposition very few business executives in Spain know, as he discovered. In addition to Expansión and La Razón, Bacó and other Puerto Rican officials were featured prominently in such Spanish media as Invertia, América Economía, Capital Madrid, EFE Tur Viajes, El Economista and Notimérica. “That was our principal challenge in March: to get the message across and create awareness of Puerto Rico and our competitive advantages, and the result exceeded our expectations,” added Juan Carlos Suárez, Puerto Rico Assistant Secretary of Economic Development & Commerce. At the close of this edition, Salinero had not yet received confirmation of a tourism-related company for the May mission, but he expressed high confidence that the exchange between both countries “will no doubt lead to further tourism investments in the years ahead.” The principal target is Globalia, Spain’s leading tourism conglomerate. The company’s airline, Air Europa, already flies direct to Puerto Rico from Madrid, and its Be Live Hotels chain “would be a great fit in Puerto Rico,” added Salinero. One set of companies sure to feature prominently in the mission and all subsequent efforts to draw fresh Spanish investment to Puerto Rico are those which already have a significant presence on the island, including Banco Santander, Mapfre Insurance, Meliá Hotels and Metropistas parent company Abertis. “We consider them natural allies in this effort,” assured the Spaniard. It is also the case of the Spanish government itself, ICEX in particular. The agency not only has an office in San Juan, but its website includes Puerto Rico on the list of target countries, enhancing its visibility. While listed separately from the United States, the Puerto Rico page is quite clear in its explanation of the island’s role as a territory of the U.S., as well as in outlining Puerto Rico’s array of incentives and advantages.
25
FOREIGN TRADE
THE SEVEN INVESTMENT WONDERS A company is free to
mix and match Puerto Rico’s top 7 service-export incentive laws to suit its needs and produce the greatest tax savings. “This is one of 100 ICEX offices that our companies use to facilitate export and investment,” Salinero explained, adding that Puerto Rican companies that ally with Spanish counterparts also stand to benefit from that global resource, in addition to Spain’s trade treaties with countries in the region. The possibilities work both ways. Puerto Rico’s place within the federal system gives local companies access to the 165 offices of the U.S. Commerce Department’s export promotion arm, the U.S. Commercial Service (USCS), which has an office on the island, as well as the 125 offices of the U.S. Chamber of Commerce’s AmChams international division, and of course, the U.S.’s own trade treaties. “That capability is a substantial advantage that only Puerto Rico, among all Latin American countries, can bring to the
ACT 273
offshore finance
ACT 399
offshore insurance
ACT 27
film and creative industries
ACT 74 ACT 22 ACT 20 EB-5
tourism individual relocations of families and employees service export for all sectors investment visas (federal)
table,” Salinero said. “Puerto Rico is singular and should definitely take its place as a significant driver not just for Spanish investment in the Hemisphere, but of European investment more broadly.” The island, he continued, “is a natural hub for the region. The principal target market is always the United States, but Latin America and Puerto Rico itself figure prominently in the plans of any company looking to set up an operation on the island.” With its $17 trillion economy—comfortably the world’s largest with China a distant second with $10 trillion—the U.S. towers as the market every export-driven company wants to penetrate. The raw magnitude, though, poses formidable challenges to foreign companies new to the American way of doing business: a 325 million consumer market marked by bewildering tastes and ethnicities, the maze of regulations, and a business-to-business and business-to-government segment as diverse, demanding and fast-paced as any in the world. “You have to know what you’re doing,” Bacó said, “and that’s where we can help.” As a territory of the U.S. for well over a century, the government and business community in Puerto Rico are as immersed in the American way as any of the 50 states since, when it comes to doing business, Puerto Rico is, in fact, exactly like a state in everything except taxation. Foreign for taxes, domestic for everything else. “That’s part of the message we’re delivering to our companies in Spain,” said Salinero. “Companies in Puerto Rico do business under the exact same regulatory and financial environment as in the states, so by partnering with a local company here, a Spanish firm can learn the ropes quickly and be better positioned to go north when the time comes.” And to go south, since Puerto Rico also feature a culture and society as Latin American as any in the region. “American business-wise, Latin American culture-wise, a combination found only here,” Bacó continued. That, in turn, is a critical advantage because, according to McKinsey & Co., Latin America has grown quite unique among the world’s fastgrowing emerging-market regions, driven mainly by its high degree of urbanization. More than 60% of Latin America’s GDP stems
from 195 of its largest cities, half of that coming from the region’s 10 largest urban zones.
“Such a concentration of urban economic activity among the largest cities is comparable with the picture in the United States,” reads a recent McKinsey report entitled The Key to Latin American Growth. By contrast, “China’s top 10 cities contribute around 20% of the nation’s GDP,” a rather dramatic difference. Set up in Puerto Rico, in other words, and you get the best of both
Port of the Americas W
hat is Made in Puerto Rico is at once Made in U.S.A. This assurance of top quality, together with the leadership of a world-class operator, has helped the Port of the Americas (PLA, by its Spanish acronym) rise in the Puerto Rican south. PLA offers competitive advantages unparalleled in the continent, which are associated with a vast experience in value adding processes and cost-effective transshipment activities. The PLA, considered a threshold of the powerful North American market and a bridge to the lucrative Caribbean, Central American, and South American regions, has officially accumulated an investment of more than $300 million and is preparing to roll out the red carpet for international trade, entrepreneurs, and investors. The selection of Portek International Private Limited (PIPL) as PLA’s operator is the great novelty here. This decision followed a difficult process of scrutiny among various top-tier candidates (such as the PortaGes consortium and the conglomerate of Puerto Rico-Korea Container Terminal and CJ Korea Express). PIPL’s headquarters are based in Singapore and it has a workforce of more than 1600 employees. It was founded in 1988 and holds diverse port activities— many of them focused on engineering solutions and the operation of midsized terminals—in eastern destinations such as Korea, Thailand, Indonesia, Singapore, the Philippines, Taiwan, India, and Dubai; in European ones such as France, Portugal, Cologne, and Malta; and in various Caribbean nations such as Cuba (TCH), Mexico (Mazatlan and Progreso), Panama (Colon) and Colombia (Buenaventura). It
Strategic business stopover in the Caribbean
also operates on the West Coast of North America (Los Angeles, Seattle, and Dutch Harbour). Specifically speaking of terminal operations, PIPL manages eight: one in Algeria, Malta, Java, and Rwanda; and two in Jakarta and Gabon each. The corporation promotes itself as one of the few multinational companies specialized in combining three unusual “talents”—engineering of port equipment, port information technology, and management—and capable of transforming a conventional existing terminal (such as PLA) into a high-performance containers terminal in a very short time (likely, one year). Puerto Rico currently finds itself in the middle of an irreversible program of economic diversification, integration, and globalization. It boasts world-class infrastructure and highly skilled workforce in many industrial sectors, and operates under all U.S. regulations but with lower costs than in the continental states. These are unique benefits for companies that choose to complete the manufacturing of their products on the island, plus the “Made in U.S.A.” endorsement when the time comes to market them worldwide. International relations are nothing new to PLA, whose executive director is Carlos Mejías. For example, traditional Puerto Rican enterprises give accounts of the hundreds of petrochemical companies whose production outputs needed to be superseded after the great damages suffered when Hurricane Katrina devastated their southern U.S. locations in 2005. “We took advantage of our U.S. jurisdiction and joined South Korean and Colombian companies to process and complete products in Puerto Rico. We have relations of many years with Asian and South American businesses, and they understand the value of the Made in U.S.A. brand,” said Rafael Vassallo, President and CEO of Vassallo International Group. Puerto Rico has 11 airports, 13 seaports and more than 24,000 miles of highways. As a result, any point on the island is no farther than two hours away from any sea or air terminal. Luis Muñoz Marín International Airport, in San Juan, is an essential regional hub and handles some 4300 monthly cargo flights and more than 1800 weekly passenger flights by over 20 airlines with countless international destinations. Taking into account the country’s other port terminals of great commercial and touristic importance (such as San Juan’s, in the north—the biggest cruise ship hub on the eastern part of the Caribbean and home to many maritime companies), Puerto Rico is located only 3 or 4 days away from most of the U.S. East Coast ports, 10 days from West Coast terminals, and 14 days from their European counterparts. n
27
TOURISM
Five-star destination
Puerto Rico shines as a Caribbean hub of tourism investment
T
ourism has traditionally been an important industry for Puerto Rico, where it currently generates more than 60,000 jobs and accounts for 6% of the GDP. As part of its new, integrated and diversified economic plan, The All-Star Island is clear in its goal of increasing the tourism industry’s GDP contribution to 8%, which would translate to an economic increase of more than $1.1 billion and take it closer to the 9% world average. “We are focused on achieving a growth that will make it 8% of our GNP and help us reclaim our place as the tourism capital of the Caribbean,” stated Ingrid I. Rivera Rocafort, Executive Director of the Puerto Rico Tourism Company (CTPR, by its Spanish acronym). With that purpose, the agency’s five-year work plan is focused on optimizing three main areas: • Access by air: 8.5 to 10 million passengers increase. • Access by sea: 1.5 million passengers increase by season. • Hotel infrastructure: inventory increase of 20,000 rooms.
“In order to become the aerial hub of the Caribbean, we have to increase the options of airlines and cruise lines that serve Puerto Rico, as well as the routes the island already has,” said the official. The results of this work plan have come about fast. In the past year, new airlines have started to serve the Puerto Rico market, directly or indirectly connecting the island with South American, North American, and European destinations. From the excellent network of airports the island relies on, many of these companies continue to add flights to their international routes. At the same time, airlines such as United, Jet Blue, Cape Air, and Seaborne have registered a rise in routes to the U.S. Recently Seaborne moved its corporate headquarters to Puerto Rico. It is constantly expanding and could even connect the island to Europe and other places in the Caribbean, such as the Dominican Republic. A great part of this growing movement of passengers by air originates in the facilities of the Luis Muñoz Marín International Airport (LMM), which is being managed since 2013 by Aerostar Airport Holding LLC as part of a 40-year contract that includes multimillion-dollar infrastructure improvements. This airport has been listed as the biggest, most modern and cost-efficient of the Caribbean (costs per passenger have declined an average of 40%), and Aerostar CEO Agustín Arellano himself has just revealed a 3% growth of passenger traffic for 2014, which surpassed expectations. Notably satisfied, Rivera said: “Besides adding new airlines and routes, we will keep working to attract more direct flights from destinations with a high volume of cruise tourists.” That is precisely the market where Puerto Rico has grown exceedingly and expanded its horizons. “We managed
to strengthen a cruise ship industry. In just two years we took it from its lowest point, in 2012, to the highest in its history now in 2015,” pointed out the CTPR chief spokeswoman. The strategies followed by the CTPR have achieved the following: • 16.5% increase, from 2012-2013 to 2013-2014, in the number of cruise passengers. • 31% increase, from 2013-2014 to 2014-2015, in the number of cruise passengers. • 52% increase, from 2012-2013 to 2014-2015, in total economic impact, which represents $144 million.
The economic impact of the cruise industry on the country is close to the annual $185 million mark, plus the businesses and jobs it helps to create in the tourism sector. This 2014-2015 season is shaping up to be one of our most successful ones and forecasts a record number of cruise visitors.
This is the first time Puerto Rico has welcomed more than 1.5 million cruise ship passengers in one fiscal year. Our previous record, for 20072008, was 1,496,853. And the monthly record was broken in December 2014, when 206,841 were received. “We are constantly in negotiations with the main cruise lines in order to increase both homeport departures and transit visits. Puerto Rico is already the leading homeport of the Caribbean. We aim for absolute leadership— right now we are #3, after St. Maarten and St. Thomas.” Royal Caribbean’s launch in April 2013 of the Jewel of the Seas’ weekly trips during the whole year marked the beginning of the industry surge. Then came the expansion of pier 3 and, shortly after that, a mega cruise docked on the island for the first time. Since then, four new cruises have come to Puerto Rico: Disney Magic Homeport, AIDAvita, Breakaway, and Carnival Breeze. Rivera stressed that, “in order for all of that to happen, we needed a solid foundation that would allow all the industry players to come back to the island.” She is referring to the Law for the Promotion and Development of the Cruise Ship Industry on the Island, also known as Law 80, passed in July 2013. Its goal is to expand the incentives for cruise ships and include some new ones—those that encourage that cruises visit the island earlier in the year and remain docked for longer, among other things. “This fiscal year we are seeing the rewards of Law 80 and the measures that were taken so that Puerto Rico regained its competitiveness as a leading destination in the Caribbean. We have secured 40 additional transit visits, especially in summer,” added the Tourism official.
Puerto Rico boasts a powerful tool for the development of top-notch infrastructure that guarantees visitors and residents a first-rate experience. It is the Law for the Development of Tourism in Puerto Rico, or Law 74 of 2010 (originally Law 78 of 1993), the backbone of all things related to tourism investment. In terms of hard infrastructure, this legal body offers tax credits and exemptions for the creation or expansion of Puerto Rico’s tourism offering. “Although the incentives apply mainly to hotels, it expands and strengthens the whole ecosystem of businesses around this core of hotels, including restaurants, transportation, attractions, tours, cruises…,” explained Luis Daniel Muñiz Martínez, CTPR deputy director. About this correlation, Muñiz stressed that “now there are so many offerings that you can spend all day exploring different regions and doing all sorts of activities. In truth, the tourism industry covers all that
INCENTIVES FOR TOURISM INFRASTRUCTURE
29
TOURISM Puerto Rico offers. And everything depends on everything. For that reason, whatever is developed around a hotel becomes increasingly important and supportive of that core you initially fostered.”
TAX CREDITS
Muñiz is referring to discounts against tax liability up to a determined maximum amount. • They are determined based on 50% of cash investment or 10% of the project’s total cost, whichever is lower. • They are applied by the dollar. For example, if I have a 10% credit and must pay $100 in taxes, I would only pay $90 after the credit is applied. • They are applied one by one until they run out, or an amount can be applied now and the rest kept for another year. • Their expiration dates are not necessarily limited to the first year. Puerto Rico holds a tax credit market that allows for credits to be sold with a discount in order to monetize them as cash. “Traditionally, tourism is a solid market, and the credits sale price is 90 cents per dollar. When
the investor receives liquid money, he reinvests it in the project as part of its own capital structure,” Muñiz explained. Companies that buy this type of credit are generally those without any kind of tax exemption. Such is the case of supermarket chains, advertising agencies, healthcare offices, publications, or food distributors, among others. “This means that if I have a project worth $100 million and I’ve been given $10 million in credits, I can sell them on the market for $9 million (90%). Therefore, now that I have $9 million with me, I have to set out to find another $91 million.”
TAX EXEMPTIONS
This different type of incentive is more targeted to business operations and provides a discount during the tax credit lifespan. This is applied against the tax rate the exempt business would have to pay: • 90% exemption on income tax—includes dividends, bank interests, and any other kind of project-related profits • 90% exemption on property • 100% on all municipal taxes; patents, construction taxes, etc. • 100% on sales and use taxes (IVU, by its Spanish acronym) for all items used for remodeling, preparation, construction, and development of tourism facilities (from nails and wood to towels and furniture) • 11% discount on electricity bills once the project is endorsed and only if the bill is current • 90% exemption on tax charges related to real estate property transactions, such as sale and rental stamps and vouchers. Muñiz illustrated: “For example, if a business has the responsibility to yield 33% and that means $1000, the 90% exemption means the business only pays 10% of those $1000, in this case $100.” These incentives apply to the construction, management, and operation of hard infrastructure (not services) belonging to the destination’s tourism offering. That includes hotel businesses, condo hotels, timeshares, hostels, medical tourism, theme parks, and golf courses, among others. The incentives law also contemplates the use of natural resources for tourism activities, as is the case of Toro Verde and El Batey, in Utuado. These are estates whose environmental restrictions limit their commercial potential, and are thus used as tourist attractions—they have rivers for ka-
yaking, trees for zip-line, and rocks for rappelling, among other options. The same applies to the rent of a property for tourism activity. Such is the case of a hotel that decides to rent an empty lot so it can be turned into a parking facility. Because that lot is needed for the services offered, it then becomes part of the touristic infrastructure and its owner will also enjoy the tax exemption.
HOTEL DEVELOPMENT CORPORATION
The Hotel Development Corporation (HDC) is a subsidiary of the Tourism Company and is dedicated to promote the development of tourism infrastructure through investments or financing. “For the past 10 years, HDC investments have helped to create 2000 rooms in Puerto Rico, in projects that surpass $500 million in total investment,” said Muñiz. “The main criterion to decide whether to sponsor a project is how strategic it can be in terms of public policy and room creation,” he added. Currently, HDC participates as investor in hotel projects that are very important for tourism: Sheraton, at the Convention Center District; Bahía Beach, in St. Regis; Four Seasons Cayo Largo Resort, in Fajardo; Verdanza Hotel, in Isla Verde; and JW Marina, in Dorado (previously Cerromar). “JW Marina is complementary to the Ritz-Carlton Reserve, in Dorado, where we originally invested, although HDC’s investment has been liquidated,” Muñiz said. In the cases of La Concha hotel and the recently inaugurated Vanderbilt hotel, in Condado, our interviewed official specified the following: “HDC owns the land and John Paulson’s group has the hotel structures and operations. Thus he pays lease to HDC. The advantage of this is that the land value factor is taken off the project and that makes it economically feasible.”
NOT ALL ARE BIG PROJECTS
HDC is currently working on a $10 million investment in two municipalities —Coamo and Peñuelas— to develop town hotels. “These smaller, regional inns are a great choice for those who come to visit local family members and don’t want to stay in San Juan. They also support the municipality in social activities (weddings, birthdays, etc.), little league and other sports competitions that produce great traffic on weekends,” said Muñiz. The Coamo project, for instance, will be a big help to the San Blas Ma-
rathon and the Menonita Hospital. It has become a departure point to inland activities.
EDB: A STRATEGIC ORGANIZATION
The Government of Puerto Rico also has the Economic Development Bank (EDB), which offers financing to small and middle-sized businesses—such as hostels—up to $5 million. “When you combine the $5 million the EDB can loan with the Small Business Administration (SBA) federal loan component, you can develop projects worth almost up to $15 million. That is why you usually see those two loans combined,” explained Muñiz.
EMERGING TOURISM NICHES
Among the strategies of Puerto Rico’s wide-ranging economic development plan we can find the fostering of emerging tourism niches: healthcare, ecology, culture, sports, gastronomy, and shopping, to name a few. Obviously, the arrival of more cruise ships multiplies these opportunities exponentially, because passengers buy tours and visit not just iconic sites like Viejo San Juan, but also the whole island. This expansion of activity keeps growing and propels a large chain of services: from taxi rides, restaurants, and tour operators, to stores, tourist attractions, traditional shopping malls, and outlets. n
31
REAL ESTATE
An exclusive mix-use development
A
nchored in one of the finest locations of Puerto Rico’s vibrant capital city, Paseo Caribe is a notable waterfront residential and commercial complex that is emerging at the crossroads of three beautiful towns –up-scale Condado, historic Old San Juan, and traditional Miramar – and the elegant Convention Center District. The main attraction of this impressive, one-million-square-foot urban development project is the shopping and entertainment center, which can accommodate around 40 specialized stores, boutiques, and restaurants. Developed by Caribbean Property Group (CPG), Paseo Caribe sports a commercial area that spans about 110,000 square feet; extends all the way to the promenade that leads to the historic San Geronimo fort; and is surrounded by a splendid terrace from which you can enjoy a spectacular view of the sea, the Condado lagoon, and the city. It’s no wonder that local franchises of successful international businesses such as Rosa Mexicano, Blue Martini, and Fogo De Chão have been the first to set up shop in this complex. “These three commercial tenants are beginning to transform Paseo Caribe into the most invigorating nightlife center in San Juan, and it won’t be long before other high-quality restaurants join our venture as well,” said Sam Kirschner, chief operations officer at CPG. This mixed-use development also includes three of the most prestigious high-rises in the city: Caribe Plaza, Laguna Plaza, and Bahía Plaza. These luxurious buildings are considered by many some of the most exclusive and sought-after addresses in San Juan, and are home to wellknown local executives and Law 22 international investors.
Recently, the distinguished Puerto Rican designer Nono Maldonado revamped the common areas of Caribe Plaza (whose lavish units start at $1.6M) and Laguna Plaza (starting at $975,000). Meanwhile, the famous set designer and lifestyle curator Aaron Stewart was responsible for the design of Bahía Plaza’s lobby, model apartments, lounge, and pool area. This complex has loft-style and flat-style apartments spanning between 700 and 2,820 square feet, with prices that begin at $400,000. Since it was founded in 1998, CPG has acquired or developed more than $4 billion in real estate across Puerto Rico, the Caribbean, and Central America. In addition to Paseo Caribe, CPG is an investor in the Ritz-Carlton Reserve Residences located in Dorado Beach, as well as other projects around the Island. In 2012, the company was awarded the Developer of the Year Prize by the Puerto Rico Home Builders Association. n
The complex hosts prestigious restaurants (Rosa Mexicano, Fogo de Chão, and Blue Martini Lounge) and three of the most luxurious high-rises in the city: Caribe Plaza, Laguna Plaza, and Bahía Plaza.
LARRY JOHNSON, CEO, FOGO DE CHÃO JULIO CANALES, PARTNER, BLUE MARTINI LOUNGE “We are very happy to offer the Blue Martini experience in the most exciting part of San Juan. It’s a concept with no equal in Puerto Rico. In Paseo Caribe, we’ve had the opportunity to set up Blue Martini right next to Rosa Mexicano, which is one of our franchise’s principal strategies. In Brickell, Miami, both concepts are ‘on top of each other’ and it has worked very well. This model will be key to promote both venues in the tourism market and Paseo Caribe is undoubtedly the ideal place to start.”
“We are very excited about the opening of our first restaurant in the Caribbean –here, in the heart of Condado– and joining the Paseo Caribe community. Like Brazil, San Juan is one of the most exquisite food destinations in the world, which is why we’re so proud to introduce the experience and tradition of our Brazilian steakhouse to this exhilarating city.”
JULIO CANALES, PARTNER, ROSA MEXICANO
“When I was getting everything ready to move the Rosa Mexicano franchise to Puerto Rico, the first element I took into consideration was location, and I thought Paseo Caribe was the perfect place to establish our operations. This area will be one the busiest with both tourists and locals and will offer a unique culinary experience along with a gorgeous scenery.” 33
REAL ESTATE
Sotheby’s International Realty Prestigious London-based auction house expands in the Caribbean $
50
million
sales projected for first year
O
n March 11, 1744, bookseller Samuel Baker auctioned the library of Sir John Stanley. Such was the beginning of a legend—the birth of Sotheby’s, the same firm that in 1823 auctioned the library so treasured by Napoleon during his exile in Saint Helena; in 1884, the edition of Dante’s Divine Comedy illustrated by Botticelli; in 1928, the original manuscript of Alice’s Adventures in Wonderland; and in 1937, the art collection of Baron de Rothschild, which was broadcast live through BBC Radio’s airwaves. Since 1917, London is home to the headquarters of this firm, which “only” accounts for 268 years of commercial chronicles within the realm of exclusive property—a period that includes almost four decades of experience with luxury real estate over a broadening map that now features Puerto Rico. Sotheby’s International Realty Affiliates LLC has just reinforced its presence in the Caribbean region with the local inclusion of Sotheby’s International Realty (SIR), a division created in 1976. SIR (a splendid acronym for a business of such class) now boasts its first business stronghold on the island at 1056 Ashford Avenue, in Condado. According to its spokespersons, the arrival of this prestigious brand in the Puerto Rican market represents the potential to reposition the country as the Pearl of the Caribbean: “The goal of SIR is to bring to the island famous personalities, influential executives, and wealthy families searching for the perfect combination of pleas-
ant weather all year long, infrastructure, political and economic stability, and a property inventory that can meet the most demanding tastes.” Obviously, its potential clients can also benefit from governmental incentives for the acquisition of available properties both new and existing, many of them showing reductions of up to 30% in their prices, compared with figures offered a few years ago. Such incentives —available for the time being, until next December 31— offer buyers a 50% tax exemption on profits if the property is not a main residence. Given the relative success of these incentives (they used to be more oriented towards moving inventory of new residences, but existing ones have also been boosted, perhaps due to lower average prices), some analysts forecast and expansion of the program. Around $110 million worth of unclaimed funds in banks will support this initiative. These incentives also anticipate discounts in payments to the Municipal Revenues Collection Center (CRIM, by its Spanish acronym) for five years, as well as in stamps and vouchers for deeds of sales and mortgages, among others. Another advantage is the possibility owners have, until 2020, of renting their properties without having to pay income taxes. The local firm is owned by Margaret Pena Juvelier, who has worked as Senior Vice-President at Sotheby’s International Realty-East Side Manhattan Brokerage, in New York, and is considered one of its main producers since 1986. The strategic plan of this executive includes the sale of luxury properties located in Puerto Rico, as well as in the natural “jewels” of Vieques and Culebra—known worldwide for their beaches—, and the opening of three to five additional offices within the next three years. “Our office is honored to promote, among local and international clients, luxurious properties that exceed the million-dollar mark, located in distinctive areas,” said Pena Juvelier. She mentioned as examples “the historic, Colonial-style houses of Old San Juan; the elegant residences in exclusive zones such as San Patricio, San Francisco, and Santa María; or the units at Trump Founders Residences at Coco Beach Resort, in Río Mar.” For his part, Michael R. Good, Executive Director at Sotheby’s International Realty Affiliates LLC, explained that SIR’s client base, mostly influential and reputable investors, is dispersed all over the world, and that “the firm’s inclusion in Puerto Rico responds to the momentum and resurgence that we are experiencing in the Caribbean region, where we recently expanded our portfolios to include properties in Aruba and the U.S. Virgin Islands.” SIR’s network presently has more than 12,000 sales associates, distributed among 620 offices in 45 countries and territories. n
The local firm is owned by Margaret Pena Juvelier, who has worked as Senior Vice-President at Sotheby’s International Realty-East Side Manhattan Brokerage, in New York, and is considered one of its main producers since 1986.
35
COMMERCE
The Mall of San Juan Latest luxury shopping destination in the Caribbean opens after a $475 million investment
W
ith the arrival of spring, a world-class shopping center has opened its doors in Puerto Rico’s vibrant capital city: The Mall of San Juan (MSJ). Boasting 650,000 square feet, the Island’s first upscale mall features a singular selection of over 100 retailers, 60% of which are unique-to-market, including the Caribbean’s only Nordstrom (138,000 sq ft) and Saks Fifth Avenue (100,000 sq ft), which comprise the mall’s anchor stores. Fashion lovers will find the most sought-after luxury brands at MSJ, including famous designer boutiques such as Versace, Louis Vuitton, Carolina Herrera, Kate Spade, Hervé Léger, Jimmy Choo, Tory Burch, and Giuseppe Zanotti. To appeal to a wider segment of the population, its diversified tenant mix includes many well-known contemporary brands already established in Puerto Rico —Coach, Ann Taylor, Chico’s, Soma, Zara, Banana Republic, Bebe, Brooks Brothers, BCBG MAX AZRRIA— as well as new stores whose arrival has been eagerly anticipated by the local public, such as Anthropologie, Agent Provocateur and Lululemon. MSJ also features a wide selection of restaurants for the most discerning tastes. Guests can enjoy gourmet fare from Kona Grill, BRIO Tuscan Grill and Burger & Beer Joint, as well as the fine eateries located within the mall’s two anchor stores: Bazille, eBar and Habitant at Nordstrom, and Sophie’s at Saks. The tasteful array of chic/top-notch stores, restaurants and entertainment creates an elegant ambiance, under an avant-garde structure with a cutting-edge glass ceiling allowing visitors to bask in the tropical sun. This is what makes MSJ an irresistible attraction both for locals and visitors alike.
TAUBMAN & NEW CENTURY
The $475 million mall was developed through a partnership between Taubman Centers and New Century Development, Inc. (NCD). “The Mall of San Juan will enhance the shopping experience in Puerto Rico by offering everything from the most exclusive and fashionable brands to incomparable dining and entertainment,” said Robert S. Taubman, Chairman, President and CEO of Taubman Centers. Taubman Centers, Inc. is an S&P MidCap 400 Real Estate Investment Trust with over 60 years of experience in the shopping center industry. Headquartered in both Michigan and Hong Kong, the company engages in the ownership, management and leasing of regional, super-regional and outlet shopping centers in the U.S. and Asia. Its U.S.-owned
37
COMMERCE
properties –located across 15 states– are considered the most lucrative in the publicly-held U.S. regional mall industry. Recently, Taubman Centers announced that it plans to sell seven of those U.S. properties to Starwood Retail Partners, a subsidiary of Starwood Capital Group (SCG). Once the $1,405 million transaction is completed, Taubman is expected to increase its sales per square foot to approximately $821, representing a $100 (+13%) rise from the $721/sq ft sales reported in 2013. Additionally, Taubman is currently developing four new properties in the U.S. and Asia totaling 4.1 million square feet. “We’re excited to welcome so many local residents and tourists to The Mall of San Juan, which has turned out to be one of the most beautiful malls in our portfolio of properties,” concluded Taubman. “It’s highly rewarding to see our vision finally come to fruition and to have such positive feedback from everyone who visits,” stated Luis Rivera Ortiz, President of the NDC, which is dedicated to real estate development in Puerto Rico. The company is now focused on maximizing
the 30-acre lot where the MSJ resides, as it soon plans to initiate the second phase of the project that includes constructing a hotel and casino, as well as an office tower.
Located on the south end of the Teodoro Moscoso Bridge, five minutes from the Luis Muñoz Marín International Airport and only a few steps away from the Hato Rey Financial District known as “The Golden Mile”, the MSJ is open from 9 a.m. to 9 p.m., Monday through Saturday, and 11 a.m. to 7 p.m. on Sundays. For more information, please visit: www.TheMallofSanJuan.com. Located on the south end of the Teodoro Moscoso Bridge, five minutes from the Luis Muñoz Marín International Airport and only a few steps away from the Hato Rey Financial District known as “The Golden Mile”, the MSJ is open from 9 a.m. to 9 p.m., Monday through Saturday, and 11 a.m. to 7 p.m. on Sundays. For more information, please visit: www.TheMallofSanJuan.com. n
Puerto Rico Governor Alejandro García Padilla alongside representatives from Taubman Centers and New Century Development –as well as other special guests— during the inaugural walk at The Mall of San Juan.
39
TESTIMONIAL
Cris Cannon Founding Partner, Zurixx Contagious Optimism
C
ris is a founding partner of Zurixx, a premier brand builder in the niche of real-estate investing. Like his partners, Cris is one of the hundreds of entrepreneurs that have moved their companies to Puerto Rico –a U.S. jurisdiction– in order to enjoy powerful tax incentives, a dollar-based economy, a highly specialized and bilingual workforce, a first-class infrastructure, and of course, all the charm of a Caribbean island.
WHY PUERTO RICO?
I grew up in California and lived in Utah for a long time. I was looking for some other places to move with my family when this opportunity came out of the blue. I was on the phone one day with one of our trade clients. He’s from Florida but I looked at his number and realized that he was calling from St. Croix so I asked him what he was doing down there and he told me that he was looking for investment opportunities in the Caribbean, especially Puerto Rico. As soon as I got off the phone I called my accountant in Salt Lake City and asked him to help me find out more about this opportunity. He soon hooked me up with Gaby Hernández at BDO Puerto Rico, a prominent business consulting firm located in San Juan. Gaby quickly convinced us. After making a trip with my partners down to Puerto Rico we decided that this was the right place for us. The incentives provided by Acts 20 and 22 lined up perfectly with us. They were essentially the catalyst, the motivation for us to be here.
HOW HAVE ACTS 20 AND 22 HELPED ZURIXX?
The driving force is taxes. We were watching taxes increase in the US and the business environment was changing. We were seeing more and more regulation come in. In Puerto Rico we found just the opposite: a very open and welcoming jurisdiction that is grateful for us coming here.
And obviously the great financial incentives, the excellent economic development team, and the abundance of resources made it an even easier and quicker choice.
WHAT IS ZURIXX?
Our company focuses on real estate education for the average consumer. So people who want to learn how to flip houses, for example, might be interested in our services. We partner with people you see on TV, like on HGTV, Bravo or Discovery Channel, that do the reality real estate flipping shows. Those kinds of shows, those are my clients. We do all their national media and drive people to live seminar events where they can come learn the principles of how to invest in real estate. We’re in ten cities every week so we have a very large staff that travels all the time. I manage the logistics side of the business from Puerto Rico and my other partner who’s also living on the Island manages the marketing team. I started a version of the business in 1998 with another partner. This company came together over the last couple of years by merging a few businesses together. And it’s grown like crazy, so the timing was right for us to make a move like this.
DID YOU MOVE THE ENTIRE OPERATION TO PUERTO RICO?
Most of it, yes. We moved our headquarters here, including our event staff, our sales management division, and our marketing management team.
HOW LONG HAVE YOU BEEN LIVING IN PUERTO RICO?
Since August, so almost nine months. The kids and my wife love it. The beach, the weather, everything’s been wonderful so far.
WHAT ABOUT LANGUAGE BARRIERS? HAS SPANISH BEEN A PROBLEM FOR YOU?
Very rarely. Most people on the island speak a little English or a lot of English. I feel bad at times that I don’t speak more Spanish. My wife is taking classes fulltime and my kids are enrolled in SSL (Spanish as a second language) programs. I travel a lot so I try to listen to programs like Rosetta Stone.
HAVE YOU BEEN A BLE TO TRAVEL AROUND PUERTO RICO?
To be honest, very little. I spend a lot of time between Dorado and San Juan. But I’ve been to El Yunque Rainforest and Fajardo’s beaches. Oh, and I should mention that I love the food here. n
41
IN MY OPINION
Ángela Weyne PUERTO RICO INSURANCE COMMISSIONER
T
his is not my imagination speaking, nor is it my potential bias as the insurance commissioner of Puerto Rico. The numbers are there and so are the accounts of numerous experts and professionals who do business with the IICPR. The investors who participated in the second Investment Summit held last February in San Juan pointed out that in a global, competitive environment of high economic precision and dependency on financial markets, the IICPR stands out thanks to its solid and attractive legal, service, and fiscal platform. Above all, investors highlighted that this entity benefits from being the only jurisdiction overseas that is accredited by the National Association of Insurance Commissioners (NAIC), and it is also an active member of the Association of Latin American Insurance Supervisors (ASSAL). This winning combination allows the IICPR to provide a legal and regulatory framework that fosters good investment and business practices and promotes credit protection and the free flow of market forces. Investors also noted that all of these benefits wouldn’t be as valuable were it not for Puerto Rico’s other strategic advantages: its privileged, easy-to-access geographic location; its political status as a U.S. jurisdiction; a highly-specialized and professional working class; a bicultural environment; and modern infrastructure. All of these assets make Puerto Rico a perfect bridge between the U.S., the Caribbean, and Latin America, especially for multinational insurers and high-level financial and banking service providers. The IICPR’s legal platform offers a wide array of dynamic, last generation products that insurance and reinsurance companies can use to protect their overseas operations from liabilities. Our investors see the Island as an accessible business hub that links the U.S. and Latin American markets. Moreover, our local economy enjoys fiscal and tax autonomy under the U.S. Internal Revenue Code due to special provisions included under this law. Our legal framework and international advertising –which is under the responsibility of the Puerto Rico Department of Economic Development and Commerce (DEDC)– has promoted new business strategies such as Captives (also Captive Insurance Companies, CIC): a risk management tool with a global value of more than $70 billion in premiums, according to data from the NAIC. Today, there are around 5,000 CICs in the world representing a diverse set of industries. About 3,000 of these have taken up residence in the Caribbean, including over 150 CICs that have been established in Puerto Rico and many more that are in the process of being certified by the IICPR and my office. Along with Captives, I also have to highlight Protected Cells (also
Protected Cell Companies, PCC), one of the most recent and impressive developments within the finance world. PCCs are essentially separately identifiable cells created and owned by the same or distinct cell users. This financial tool allows international insurers to establish an account with assets and liabilities that are legally segregated from each other under a country’s statute; it’s precisely this model that has also helped the IICPR attract CICs. Our new legal structure also accommodates other risk protection and investment tools such as Insurance-Linked Securities (ILS): last generation products broadly
DIRECT PREMIUM VOLUME OF IICPR INSURERS
+125%
defined as financial instruments that allow transferring risks and diversifying investment portfolios, and whose values are driven by insurance loss events. Currently, the total estimated value of the ILS market is $21.4 billion. It’s worth mentioning that the IICPR was created in 2004 through Laws 399 and 400, two measures that established Chapter 61 of the Puerto Rico Insurance Code. Since their enactment, premiums written by international insurers have seen a remarkable rise. In 2012-2013 alone, premiums written by IICPR insurers jumped from $66 million to $149 million, with 50% of these stemming from PCCs. Moreover, it should be noted that Puerto Rico’s premium volume amounts to nearly $11 billion, making it the sixth largest market in Latin America, but the first in terms of Penetration Rate (premiums as a percentage of Gross Domestic Product), which currently stands at 10%. Our leadership in this industry has been a result of our continued search for new segments of the insurance industry and the passage of state-of-the-art legislation. Therefore, I would say the IICPR is a reflection of our constant desire to grow and reengineer ourselves. Given that speed is of the essence in the insurance world, I can’t sign off without recognizing the wonderful work of Rubén Gely, our deputy insurance commissioner and director of the IICPR, who has assembled a wonderful team that executes all its tasks on time in order to meet the needs of businesses and the market in general. At the same time, I must acknowledge that the formula wouldn’t be complete without the government’s support in promoting and supporting the initiatives of the IICPR, a key factor behind the rapid growth of investors and insurers in Puerto Rico. n
43
INSURANCE MARKET IN LATIN AMERICA 2013 Direct Premium Volume
$
152BILLION
BRAZIL
$64 billion
MÉXICO
$27 billion
ARGENTINA
$15 billion
COLOMBIA
$14 billion
CHILE
$12 billion
PUERTO RICO
$11 billion
OTHER
$9 billion
Source: Association of Latin American Insurance Supervisors (ASSAL)
43
MANUFACTURING AND BIOTECHNOLOGY
BIG BET ON PUERTO RICO
DYNAMIC TURNOVERS
n a nod to the high quality manufacturing currently taking place in Puerto Rico, the pharmaceutical company AbbVie has decided to invest $30 million in order to expand its operations in Barceloneta, creating 100 jobs in the next two years. The Puerto Rico Industrial Development Company (PRIDCO) will offer incentives for the creation of jobs and infrastructure in the region. AbbVie’s first manufacturing installations in Puerto Rico were established in 1969; currently, it has three manufacturing plants on the Island that provide over 1,000 direct jobs. In total, the three plants manufacture 13 products designed for the therapeutic needs of immunology, virology, and metabolic disorders. AbbVie is a global biopharmaceutical company focused on research that formed in 2013 after the dissolution of Abbott Laboratories. n
ut with the old, in with the new. The Puerto Rico Industrial Development Company (PRIDCO) has confirmed that Merck reached an agreement to sell its facilities in the municipality of Arecibo to American Industrial Acquisition (AIA). AIA has pledged to keep Merck’s workforce in Arecibo, which amounts to around 200 people. AIA is a privately owned industrial group with an annual revenue of about $1.5 billion, 60 manufacturing installations in 18 countries, and a total workforce of some 9,500 employees. In the last 18 years, AIA has acquired and operated subsidiaries of some of the world’s most prestigious companies, including United Technologies, Boeing, Siemens, Ingersoll Rand, and Lockheed Martin. The group company also does manufacturing for Dow, ABB, GE, Shell, Du Pont, and other multinational corporations. A few months ago, more good news came in the form of Sanofi, a prominent French pharmaceutical company that announced its animal healthcare enterprise, Merial, would be purchasing another Merck installation located in the municipality of Barceloneta. Like AIA, Merial also vowed to keep Merck’s workforce (around 200 people). Merck is consolidating its Puerto Rico operations in the municipality of Las Piedras. n
I
$
30
million AbbVie investment
O
$
PUERTO RICO HAS A NEW PHARMACEUTICAL COMPANY
T
110
million Romark investment
he Puerto Rico Industrial Development Company (PRIDCO) confirmed the arrival to Puerto Rico of Romark Laboratories (RL), a pharmaceutical company with headquarters in Tampa, Florida, committed to the discovery, development, and commercialization of innovative small molecules for treating infectious diseases and cancers. RL was founded in 1993 by Jean-François Rossignol, a scientist, medicinal chemist, and a physician who graduated from La Sorbonne. RL will invest $110 million over the next three years to develop an installation in the municipality of Manatí that is expected to generate some 200 jobs. Construction is underway and the facility should open during the first half of 2016. During its operational phase, the company will carry out research & development projects and manufacture worldwide requirements for its existing Alinia® product, as well as NT-300, another product for influenza that is expected to be released by 2016. Several companies played a key role in helping RL establish its operations in Puerto Rico, including PharmaBioServ, Pariter Wealth Management Group., and local companies CMA Architects & Engineers, CIC Construction Group, Bermúdez-Longo-Díaz-Massó (design and development phases), and law firm O’neill & Borges. n
200 jobs
45
INDUSTRY
A Capital Call
by the World’s Rum Capital C
heers! For the first time ever, a single voice –projected by both public and private enterprises– speaks to protect and strengthen a legendary business that is now open to the most innovative investors. The main objective? Revive an industry that used to farm and process sugarcane, honey, ethanol, and other byproducts in order to supply the local market and propel Puerto Rican rums to a global scale using their historic and exclusive seal of quality. To this end, Puerto Rico is driving substantial investments in agricultural, industrial, and commercial infrastructure, as well as a powerful advertising and marketing strategy to promote its rums abroad. According to the Puerto Rico Internal Revenue Code, these efforts will be vital to achieve the product’s integral development. The entity most responsible for carrying out these executive goals is the Puerto Rico Industrial Development Company
(PRIDCO) and its own Rums Program, currently directed by Pedro Cuéllar. “We have undertaken a forward-looking strategy that goes beyond promoting our rum domestically or in the United States,” emphasized Cuéllar. “With the goal of maintaining the essence of our rum industry and developing a value and supply chain, we are now focusing on three core areas: (1) Defense & Protection; (2) Sustainability & Recognition; and (3) Promotion & Growth.” With respect to the first segment, one particular initiative stands out: an alliance between the Puerto Rico Department of State and the Island’s largest rum producers. This collaboration has not only prevented other Caribbean countries from outcompeting the local rum industry, it has also protected the quality of one of Puerto Rico’s foremost signature products, thereby helping the Island to further the local development of rum and strengthen its business ecosystem. At least five of the top Puerto Rican rum brands have united to create this solid shield; four of them belonging to family dynasties such as Bacardí, Serrallés, Fernández, and Trigo, and a fifth one created by a new firm called Club Caribe Distillers, LLC. “It’s the first time we have managed to have all rum producers see themselves as one… to think as a business conglomerate. United we are stronger,” highlighted Cuéllar. In similar fashion, the push for Promotion & Growth has led to a successful and creative advertising campaign that has brought every rum brand together to work as a single industry for the benefit of Puerto Rico. This promotional endeavor –discussed in more detail later– has substantially increased the Island’s rum sales in the U.S. Regarding Sustainability & Recognition, the rum industry has subscribed to PRIDCO’s strategy, which essentially consists of attracting new manufacturing sectors to the Commonwealth to boost the production of raw materials and the number of gallons of rum. As confirmed by several analysts, these policies have yielded positive results, especially for companies such as Destilería Serrallés, which is celebrating its 150th birthday this year. Concurrently, several smaller-scale rum producers are also working together to grow the market. As a first goal, these small and medium-sized enterprises are looking to export an additional two to four million gallons of rum to the U.S.
What’s more, an initial $9 million joint venture between the Puerto Rico Department of Agriculture and the Land Authority promises to revitalize the sugarcane industry, attract millions of dollars in new investments, and create more than 900 direct jobs in the process.
an official ad campaign –dubbed Rum Times (www.therumtimes.com)– that has broken advertisement records and increased rum production and sales. “Just looking at social media, our Facebook page has recorded a 177% rise in ‘Likes’, our website has been visited over 1.5 million times, and our top YouTube videos have nearly 500,000 views,” said Cuéllar, who added that the ad campaign has increased rum sales and production by an average of one to two million gallons per month.
AN EFFECTIVE AND UNIFYING VISION
A SEAL OF QUALITY IS BORN
“All of our famous rum brands have now been fused into one universal brand capable of attracting investments from all around the world. It’s certainly a great opportunity for the U.S. to promote a first-class product that is continually evolving,” pointed out Cuéllar. The task hasn’t been easy, but it has ultimately been successful. 2012 saw Captain Morgan (Diageo plc) exit the local market and 2013 posted flat results. However, since 2014 the Puerto Rican rum industry has been making a comeback thanks in part to
For the first time in its long history, Puerto Rican rum will debut an international seal of quality that will be displayed on every bottle, thereby recognizing and certifying the high-quality production standards that make the Island’s rum one the most prestigious spirits in the world. As the Rum Program director puts it, “the seal of quality and identity that will soon be presented to the world represents a symbol of great pride, experience, and global recognition. It has been developed through an extensive market study and designed with great zeal to ensure it lasts a long time.” Cuéllar also explained that the seal’s launch “has taken a little longer than expected given that federal authorities in charge of intellectual property and brand registration are still reviewing the paperwork. Once we have the final approval, we will polish the rules and regulations –which have already been approved by the private sector– and make the seal official in the next 30 days.”
Rafael Alemán, Serrallés; Julio E. Abreu, Caray Corp.; Luis Mantero, Caray Corp.; Joaquín Bacardí, Bacardí Corp.; Manuel Fernández, B. Fernández Corp.; Antonio Medina Comas, Cía. Fomento Industrial; Pedro Cuéllar, Rones de Puerto Rico, Cía. Fomento Industrial; Roberto Serrallés, Serrallés Corp.; Alejandro Trigo, Trigo Corp.; Alberto de la Cruz, Coca Cola Puerto Rico Bottlers; Félix Mateo, Club Caribe Distillers.
47
INDUSTRY Government authorities are hoping to have the emblem printed on bottles starting some time between May and September, making Puerto Rico the first jurisdiction in the world to do something like this for its rums: in substance, include a copyrighted seal that is equivalent to the emblems on wines, whiskies, or champagnes used by countries such as Spain, Ireland, Argentina or France.
A SWEET GESTURE
Inescapably tied to the legendary production of rum in Puerto Rico, the Commonwealth’s sugarcane industry is poised to make a comeback as well thanks to a joint venture between the Puerto Rico Department of Agriculture, PRIDCO, and the legislature, which have pooled together an initial $9 million in funds to jumpstart the production of this crop. The plan includes using around 19,500 acres of land for the cultivation of sugarcane (the first harvest could come as soon as 2016) to produce molasses, one of the most important ingredients in rum. These operations would eventually lead to the creation of a model sugarcane factory that could develop and supply other byproducts. According to industry experts, the nearly 20,000 acres of sugarcane could produce at least 56% of all the molasses used by the rum industry in Puerto Rico, opening the doors for similar investments. Cuéllar explained that “this pilot project would be carried out on private and public lands and it would integrate the operations of several municipalities in the southeastern region of the Island. This first phase would be developed in the Coloso Sugar Cane Refinery through a $9 million investment.” The Rum Program’s director also disclosed that his agency “has already made some great strides towards finding an operator,” as they are currently in negotiations with an international firm that has “ample experience in sugar cane refining and is deeply in love with the quality of Puerto Rican sugar cane due to its high sucrose yield [meaning it has a higher capacity for producing molasses].” “Our request for proposal has so far attracted more than 16 companies dedicated to sugar cane refining. It’s worth noting that the company chosen to operate the Coloso Sugar Cane Refinery would be producing most of the molasses needed by the local rum industry, putting Puerto Rico one step closer to hosting 100% of the development process, which includes harvesting, fermenting, distilling, etc.” Cuéllar added: “There are plenty of investment opportunities in Puerto Rico. The rise of the sugar cane industry would be the catalyst for other types of industries to enter the market and supply rum producers. The government and the private sector are eager to fund and promote these types of initiatives.”
THE SPIRIT OF PRODUCING SPIRITS
Rum manufacturing continues to be one of Puerto Rico’s most important industrial sectors. On a global scale, the Island is the leading producer of Premium rums from classic and prominent brands such as Don Q (the iconic product line of Destilería Serrallés). For its part, the Bacardí distillery in Puerto Rico –known locally as “the cathedral of rum”
and listed as one of the Island’s top tourist attractions– is responsible for 80% of the company’s total output and is one of the busiest rum factories in the world. Bacardí is currently investing millions of dollars to expand its facilities on the Island and revamp its popular Visitor’s Center, as part of an effort to stay current with the growing trend of industrial tourism. Moreover, Bacardí (a name tied to rum since 1862) invests heavily in Research and Development (R&D) projects, including new varieties of aged rums, advances in alternative energy sources like wind and biomass, innovative equipment made of aluminum, and even the testing of “squared barrels,” a Spanish design that could take over the future.
AN AGED INDUSTRY
The sugarcane industry in Puerto Rico dates back to the first half of the 16th century with the establishment of the first refinery in 1540. A little over three centuries later –1870– sugar production on the Island had become one of the largest in the world. For the next 90 years, however, the industry experienced several ups and downs; at its peak the sugar industry made up 60% of Puerto Rico’s gross income, but by the 1960’s this powerful industry –which had given rise to opulent estates and mighty refineries– had almost entirely disappeared. Today, with the help of new technologies, a new hope is emerging for sugar cane refineries in the form of alternative energies, particularly ethanol. Slowly but surely, energy companies specializing in cogeneration are investing more and more funds in order to further develop this nascent and promising venture. The growth of this sector points to the resurrection of a more diversified sugar cane industry
in which every single part of the plant (e.g. juice, pulp, stem) will be used to generate energy and other byproducts. In fact, there are already several experimental facilities across the planet that are focused on the R&D of
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sugarcane-based goods. Some of the countries that are most invested in this business include Brazil, which has dubbed it the sucro-energetic market. Taking into account its top-notch rum and the huge potential for establishing a revitalized sugarcane industry, Puerto Rico is actively pursuing an integrated economic development model that could take its rum industry to the next level. And with good reason. The Island’s entire rum operation employs 5,200 workers; produces an average of 30 million gallons of rum per year; and receives an annual average of $350 million in cover-over subsidies (payments from the U.S. government to the U.S. Virgin Islands and Puerto Rico out of federal excise taxes). n
ARTISANAL RUMS: Defiant Spirits
or the lovers of the best-distilled spirits, Puerto Rico offers several unique rum tasting occasions throughout the year, including Rum Renaissance, Puerto Rico Open, and Saborea. March in particular offers one of the most dazzling experiences called Taste of Rum, an annual festival that gathers around 2,000 people to sample the Island’s best rums. More than tourist attractions, these events are a testament to Puerto Rico’s longstanding relationship with this world-famous spirit. In fact, rum is found in such abundance here that it has earned Puerto Rico the moniker Rum Capital of the World. The excellence of the Island’s signature spirit stems from many factors, including a law that requires all rum bottles to be aged for a minimum of one year; indeed, Puerto Rican rum is the only one in the world with this kind of regulation. Moreover, the same law dictates that the local industry must produce rum using molasses and a continuous distillation process, and it requires that the spirit be stored in barrels made of white oak. During the Taste of Rum festival, more than 15 of the Island’s top rum brands come together to give attendees a thorough and diverse taste of this liquor. While the presence of the largest producers is expected, the event also includes members of the growing artisanal rum niche. Many of these exquisite artisanal products –which are too smallscale to be considered industrial– actually have a long history; some examples include Barrilito (Edmundo B. Fernández, Inc.), Ron Trigo, and Ron Caray (the last two belonging to Trigo Corp.). Then there are other newer, artisanal rums slowly emerging from the informal market that are making their commercial debut using once-prohibited names such as Pitorro and PitoRico. These two brands are produced (respectively) by the Coquí Distillery in Mayagüez and the Cruz Distillery in Jayuya. According to Pedro Cuéllar, director of the Puerto Rico Rums Program, these micro-distilleries are a burgeoning business within the local rum industry that serves to heighten the prestige of the Made in Puerto Rico trademark. All of these small rum producers,
says Cuéllar, are the best example of how the Island’s rum industry is diversifying and creating new investment and employment opportunities. “Through ingenuity and perseverance, these true pioneers are setting up model plants across Puerto Rico that comply with all local and federal regulations,” points out the rum program director. Practically all Puerto Rican rum brands are seeking to diversify their product offering, though the most-experienced companies continue to focus on fundamentals like purity and aging. The new artisanal rums, however, are not faint of spirit when it comes to setting alternative trends, with many of them now selling flavored rums that include hints of melon, pineapple, lime, orange, pistachio, tamarind, soursop, and even coffee. With the goal of driving rum output and exports, the Puerto Rico Industrial Development Company (PRIDCO) provides manufacturing incentives for eligible businesses in the form of infrastructure investments, equipment, and employment subsidies. We also help artisanal brands meet the quality standards established by law.” Native rum is also receiving a boost from the resurgence of sugarcane, which is now being harvested in Puerto Rico as an artisanal and value-added crop. Perhaps the greatest example of this thriving sector is the firm San Juan Distillers Agro LLC headed by José R. Álvarez, an agribusiness entrepreneur who is already harvesting around 68 acres of sugarcane on the northern coast of the Island. Álvarez is aiming to process the crop, sell it to other distilleries, and develop his own artisanal rum. According to industry analysts, the next big step for these artisanal rum producers is to join the international market, a move that could further cement the rum industry as one of the key contributors to Puerto Rico’s socioeconomic development. Under the U.S. Rum Excise Tax Cover-Over Program, the federal government reimburses Puerto Rico $13.25 of every gallon of rum imported to the U.S. (approximately 20 million gallons per year). Puerto Rico’s rum cover-overs amount to some $350 million annually and are allocated to security, healthcare, education, and investment incentives for the rum industry. n 49
INDUSTRY
Puerto Rico’s rum industry continues to grow and shine around the world. The Seal of Quality reasserts the fact that the best rum is produced in Puerto Rico and it provides clients with a guarantee that they’re enjoying a fine product made with the highest industry standards. The Rum Times ad campaign will expand export horizons for Club Caribe, which is already present in 15 US States. Vanessa García Ocasio, Club Caribe Distillers LLC
Puerto Rico’s sugarcane harvest project will offer an alternative supply of molasses, the key ingredient in our rums. The Island’s climate is perfect for sugarcane… we’re excited for this crop to return to Puerto Rico. This endeavor will boost our industry, strengthen agriculture, propel economic development, substitute imports, and allow for the manufacturing of other consumer goods and even the production of energy. Furthermore, we are incredibly pleased with PRIDCO’s initiative to implement a Seal of Quality to ensure that Puerto Rican rum is produced using only the highest standards. This will undoubtedly help solidify our global image as a first-class rum producer and further drive our exports. Roberto Serrallés, Destilería Serrallés
We are honored to be part of an industry that is so important to our economy. The government continues to drive this entire sector with great initiatives that benefit all of us who produce rum in Puerto Rico. The Island has always distinguished itself for the high quality of its rum, and, in our case, quality has always been the top attribute of Ron del Barrilito. Manuel B. Fernández, Edmundo B. Fernández, Inc.
The Trigo family arrived in Puerto Rico in 1887. With a long-rooted tradition in several industries, including liquors, distilleries, and artisanal rums, the Trigos launched their Bocoy Rum 65 years ago, a spirit that sold thousands of crates in Puerto Rico and the U.S. In the ‘80s, the family rolled out their Trigo Reserva Añeja and Cañita Alambique, considered today to be some of Puerto Rico’s finest artisanal rums. We are very proud of being a part of the Island’s rum history. Promoting this signature spirit with one voice is a way of honoring our ancestors who also worked together to propel this great industry. The use of a Seal of Quality represents the consolidation of our efforts to promote Puerto Rican rum around the world. Moreover, the pilot project for the harvest of sugarcane that is taking place on the western side of the Island will offer high-grade raw ingredients –sugarcane juice, molasses, and sugar– at a competitive price. It’s certainly an initiative that merits careful consideration to ensure that it meets its economic objective, avoids the mistakes of the past, and bolsters our industry. Benigno Trigo, Trigo Corp.
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AEROSPACE
AVENGER ARRIVES
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uerto Rico’s economic development strategy focused on diversification and internationalization continues to bear good results. The latest one is Avenger Aerospace Solutions, an aerospace service provider based of South Carolina that has just established itself in the northwestern municipality of Aguadilla. Operating under the moniker of Avenger Puerto Rico, the firm moved to the Island to address local needs, as well as cater to Central and South America. Avenger focuses on aerospace engineering services tied to the maintenance, repair, overhaul, and manufacturing of aerospace equipment. Its operations include structural design, mechanical and electric systems, primary and secondary structures, and specialized analyses, though the company also helps small and medium-sized aerospace enterprises obtain certification approvals from the Federal Aviation Administration (FAA). Born a little over a decade ago, Puerto Rico’s aerospace industry has been growing constantly ever since and is poised to continue attracting other corporate giants. Experts agree that the success of the Island’s promotional campaign in piecing together a sizable aerospace conglomerate stems in part from a higher emphasis on
homeland security, which means that many manufacturing and service activities taking place outside the United States are now incentivized to come back home. Within this trend, Puerto Rico has positioned itself as a very attractive venue for aerospace activities by offering excellent incentives, lower operational costs, solid infrastructure, and high-quality professionals (especially engineers and technical personnel). Indeed, the aerospace industry is slowly but surely returning to the U.S., evidenced by a decade of fruitful aerospace endeavors that were previously concentrated in China and other emerging markets. A recent study conducted by international consulting firm ICF, which analyzed over 2,000 investor transactions in the past 14 years, found that between 2012 and 2013 some 28 aerospace projects were executed in the U.S., whereas China and Mexico each recorded eight, and Brazil reported four. These good news point to an aerospace industry that is taking flight in Puerto Rico with high-caliber firms such as Lufthansa Technik, Honeywell, Lockheed Martin, Infotech, Essig Research (a GE Aerospace subcontractor), Infosys, Florida Turbine, and Pratt & Whitney (Hamilton Sundstrand), among others. n
THE SKY’S THE LIMIT?
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uite literally… Puerto Rico is going up, up, up. The commonwealth is emerging as a powerful hub of aeronautic maintenance, while its northwestern region has become –rather spontaneously– a diverse aerospace stronghold. In pursuit of furthering Research & Development efforts, Honeywell Aerospace recently confirmed it would be investing $35 million in the construction of a new laboratory in the municipality of Moca. Honeywell Aerospace has worked closely with the Puerto Rico Industrial Development Company (PRIDCO) to develop this center for the study of electromagnetic interference. The facilities will span 73,000 square ft. and are expected to be ready by October 2015. This is Puerto Rico’s first aerospace technology laboratory. n
Puerto Rico’s economic development strategy —focused on diversification and globalization— continues to attract more and more businesses from the booming aerospace sector.
BUILD IT AND THEY WILL COME
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ood news for Puerto Rico’s supply chain and/or potential investors who are interested in forming part of the supplier network. The growing strength of the aerospace industry on the Island is helping expand the horizons of products made in Puerto Rico… without eclipsing opportunities for foreign capital. More than 200 companies, most of them small and medium-sized enterprises (SME), have begun to identify business opportunities with Lufthansa Technik, according to officials from the Puerto Rico Industrial Development Company and the Puerto Rico Trade and Export Company. Lufthansa has called on the business sector to address 24 key service needs, including human resources, facilities, production, and equipment. Of the 209 firms that said “yes”, 181 are local companies and 131 are considered SMEs. n 53
INFRASTRUCTURE
Clark & the Start-up City
Well-known master developer will invest $3.2 billion to transform former naval station Roosevelt Roads
Clark Realty Capital is Roosevelt Roads’s official Master Developer. From left to right, Alberto Bacó Bagué, Secretary of Economic Development and Commerce, Malu Blázquez Arsuaga, ARRR executive director, and Xavier Argüello, CRC executive in charge of the project.
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n many parts of the world, summer is a season best known for weddings and other memorable events. If there is one summer that will be memorable to the Roosevelt Roads Local Redevelopment Authority (LRA), it will be the summer of 2015 when the government agency is set to sign a fundamental contract that will guarantee the strategic and orderly development of the former US Navy base.
t the start of this year, Clark Realty Capital (CRC) –the company selected as master developer of the project– entered into negotiations with the LRA to define the economic terms and conditions of their contract to transform Roosevelt Roads,
which is located on the eastern coast of Puerto Rico between the municipalities of Ceiba and Naguabo. Executive director of the LRA, Malu Blázquez Arsuaga, highlights that Clark’s proposal dictates that 70% of their total investment must be used to hire Puerto Rican companies in order to boost economic development in Ceiba and the entire commonwealth.
“Once the contract with Clark gets signed this summer, we are expecting an initial investment of nearly $50 million over the first 18 months,” said Blázquez.
The LRA director explains that Clark’s development plan is consistent with the LRA’s own vision of achieving a complete transformation of Roosevelt Roads. Throughout this process, Clark will be responsible for implementing the master plan and looking for developers and/or investors to work on specific projects, as well as carrying out operational and infrastructure improvements. “It is an honor for the Clark Group of Companies to work alongside the government and people of Puerto Rico in the redevelopment of Roosevelt Roads. Our fundamental principles are improving the quality of life for those impacted by the closure of the base and developing a center of economic development for Puerto Rico,” said Xavier Argüello, Clark Realty Capital executive in charge of the project. “Our vision of creating a “start-up city” is based on job creation, providing educational opportunities, and creating a community that benefits families of different income levels. We have over 100 years of experience executing projects that have transformed cities; with the collaboration of everyone in Puerto Rico, we hope to do the same here,” added Argüello. Clark’s proposed development for Roosevelt Roads includes/features a diverse set of business and community initiatives, including hotel development, shopping centers, residential zones, light industrial area, port area for cruise ships, a marina, regional terminal for speedboats, schools, office buildings, shops, restaurants, and entertainment areas. The estimated investment by CRC over the life of the project –30 years– is approximately $3.2 billion. In addition, Clark expects to generate approximately 30,000 permanent jobs and 3,600 construction jobs throughout the project’s lifetime. Blázquez envisions the former naval station as a start-up city, a concept based on persuading firms –particularly those specialized in Research and Development– to establish their operations in Roosevelt Roads. The end goal is to develop a place geared to play, live, work, and learn that has all the necessary infrastructure elements to integrate these activities and propel a knowledge economy. For his part, Secretary of the Puerto Rico Department of Economic Development and Commerce (DEDC) Alberto Bacó Bagué emphasized that the signing of the agreement with CRC “is another example of the confidence that many companies are placing in Puerto Rico as an attractive destination for doing business. Clark is investing its capital because of the competitive advantages that Puerto Rico has to offer and the unique assets found at Roosevelt Roads.” n
Some 30,000 permanent jobs and 3,600 construction jobs will be generated
CLARK REALTY CAPITAL • Founded in 1906 and headquartered in Arlington, Virginia. • Over 100 years of experience and a sterling reputation as a Master Developer in the U.S. • Ample experience in the redevelopment of military bases that have been shut down. • Invested $1.4 billion in a residential and commercial infrastructure project, as well as other amenities, in order to revitalize a former US Navy base in San Diego, California. The base’s total size is 27 million square feet. • Clark has also developed projects in Honduras and Panama, providing the company with a higher understanding of Latin-American culture.
REDEVELOPMENT OF ROOSEVELT ROADS (RRR) • $3.2 billion investment in 30 years • Will create 30,000 permanent jobs and 3,600 construction jobs • 8,720 acres of high economic and ecological value - 3,400 acres open for development - 3,600 acres for conservation (Puerto Rico Conservation Trust) • Aerial and maritime transportation infrastructure: - Airport with 11,000-foot runway and capacity for international flights - Two deep sea ports with a depth of 40 feet, a navigation channel 1,000 feet wide, and three piers • Nearby tourist attractions: - El Yunque Tropical Rainforest - Luquillo Beach - Vieques y Culebra island-municipalities • Development of: - Hotels and other accommodations (traditional and ecotourism) - Retail, restaurants, entertainment, and casinos - Cruise ship terminal - Terminal for ferries headed to Vieques and Culebra - Housing for different economic sectors - Marina - Specialized light industry - Sports and entertainment facilities - Golf courses - Equestrian activities - Schools and universities
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PROGRESS REPORT
Big incentives for small enterprises The Jobs Now Act (LEA by its Spanish acronym) provides a wide array of profitable incentives that continue to attract many companies, particularly small and medium-sized enterprises (SMEs). Two perfect examples include Vernus Group and Ambiente Escolar, two Puerto Rican companies located at a regional distribution center owned by the Puerto Rico Trade and Export Company (PRTEC) that have substantially expanded their operations and created 168 jobs. One of the most powerful incentives provided by LEA allows for properties owned by the Puerto Rico Industrial Development Company (PRIDCO) and PRTEC to be leased for a $1.00 preferential rate that is applicable during the first two years of operations. Needless to say, this powerful benefit translates into great savings for any expanding business. In light of its success, the Government has extended the life of this program through Act 62-2014 in order to continue providing these types of incentives to microenterprises and SMEs. The recently approved law defines small enterprises as any business with an annual gross income below $3 million and a workforce of 25 employees or less, while medium-sized enterprises are businesses with an annual gross income of $3 million to $10 million and a workforce of 50 employees or less. Vernus Group Corp. is a highly innovative Puerto Rican company comprised of experienced science entrepreneurs and skilled technicians seeking to generate solutions in the energy field through the development of advanced and environmentally safe technologies – particularly in oil and natural gas production processes. Ambiente Escolar, Inc. was created to address multiple and complex needs in Puerto Rico’s school system, including the lack of technical equipment. PRIDCO and PRTEC’s regional distribution center located in the southern municipality of Ponce spans over 80,000 square feet and is currently available to rent. A similar-sized center is also available in the western municipality of Mayagüez. Individuals who wish to apply for LEA benefits must count as a business owner of a microenterprise or SME; be committed to creating or maintaining a specific number of jobs; have a business plan or proposal approved by PRIDCO or PRTEC; and submit a formal proposal to the SME Support Board. For more information: 787.793.3090 or 787.294.0101
Weaving new projects As an additional boost to the Island’s longstanding textiles industry, operations at Raine de Puerto Rico’s (RPR) manufacturing location at Guanajibo Industrial Park in the western town of Mayagüez have officially begun. RPR specializes in the manufacturing of military attire; through its new operations the company will also produce custom bags, covers, and field equipment with innovative designs. The company is projecting its monthly production to jump from 2,000 to 5,000 units per contract, an increase that will surely require a workforce expansion. During the past 27 years, Raine has been ranked as one of the top suppliers for several U.S. military divisions.
A walk to remember Parallel to driving Puerto Rico’s tourism boom –which has registered a record number of visitors arriving to the Island’s shores– the Puerto Rico Tourism Company (PRTC) is throwing its full support behind the development of a beautiful promenade known locally as Paseo Puerta de Tierra (PPT). Described by PRTC director Ingrid I. Rivera Rocafort as an incredibly valuable contribution to the Commonwealth’s capital city of San Juan, this extensive, ocean-side promenade promises to offer spectacular views of the Atlantic coast, as well as leisure and cultural spaces that further heighten Puerto Rico’s prestige as the top tourist destination in the Caribbean. As a socioeconomic development project, PPT also seeks to revitalize commercial and residential areas in the notable neighborhood of Puerta de Tierra by providing a pedestrian connection between the up-scale town of Condado and the historic city of Old San Juan. PPT will include two lanes (pedestrian and cycling) running from the Dos Hermanos bridge in Condado to the Capitol building in Old San Juan. The promenade will also feature a seaside terrace serving as an oasis where visitors can stop for some light snacks and refreshments.
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SCIENCE AND TECHNOLOGY
Large steps towards a Knowledge Economy I
n tandem with the most advanced economies in the world, and through diversifying its objectives, Puerto Rico is now inevitably on a path towards state-of-the-art science and technology. In light of this international trend, in 2004 the commonwealth gave birth to the Puerto Rico Science and Technology Trust (FCTI by its Spanish acronym), an innovation-driven entity that has been pushing Puerto Rico towards a knowledge economy for over a decade. To that end, the FCTI’s primary goal is to provide strategic, academic, and economic incentives to propel important fields such as Live Sciences, Alternative Energy, Environmental & Agricultural Sciences, Computer Science & Information Technologies, Medical Devices, and Aerospace & Aeronautics, among others.
A WORLDWIDE INDUSTRIAL TURNING POINT
Local manufacturing is still Puerto Rico’s strongest economic engine, making up 48% of its Gross Domestic Product (GDP) and providing around 78,000 direct jobs with a multiplier effect of 3.3. However, this industry is no longer the single greatest driver of the commonwealth’s economy. Though Puerto Ricans often reminisce about a golden age when traditional manufacturing was the largest employer on the Island, behind this rather nostalgic veil there is deep socioeconomic transformation taking place that is slowly but surely giving rise to a powerful service industry along with a more sophisticated manufacturing operation. Experts agree that the employment hemorrhage that has been affecting traditional manufacturing during the past four decades has cost thousands of jobs. And many of these won’t be recovered, at least not in the same form, mainly because the
world –now more globalized than ever– is under the influence of new technologies that demand a more intensive and specialized workforce, while the older, more extensive manufacturing operations migrate to other places with more ease. In short, it’s not an endemic problem within Puerto Rico – it’s a new global reality. Most developed and developing countries are shedding a great deal of traditional manufacturing jobs on their journey towards a knowledge economy: a model that prioritizes the production of value and wealth via information and technology, and a system that fosters innovation and research & development (R&D) in areas as diverse as education, telecommunications, live sciences, robotics, nanotechnology, and the aerospace industry. Once a mark of progress, for instance, a Ford factory in the 1920’s with thousands of workers manning an assembly line or a funny Lucille Ball stuffing her mouth with chocolates as they speed by a conveyor belt have now become quaint images next to space shuttles, artificial intelligence, high-precision tools, and even something as commonplace as a smartphone. A 2014 study conducted by the firm Boston Consulting Group (BCG) revealed that the Unites States is the world’s second most competitive manufacturing operation despite having lost thousands of jobs in the traditional sector of this industry. In 1970, tradi-
tional manufacturing made up 25% of the nation’s entire workforce but by 2010 that figure had dwindled to 10%. BCG notes that the U.S. has maintained its edge by focusing on more advanced and efficient areas of manufacturing. Case in point, the U.S. leads the world in airplane production. Data from the Organization for Economic Co-operation and Development (OECD) shows that Australia has seen its manufacturing output fall by 33% since 1971; the United Kingdom has also recorded a one-third reduction since 2000; and Germany–long known as one of Europe’s premier manufacturers– has seen its manufacturing share of the Gross Domestic Product (GDP) decline to 22% in 2014, from 30% in 1980. Moreover, in South Korea, the number of jobs dedicated to the manufacturing industry fell from 28% in 1991 to 17% in 2014; India peaked at 13% in 2002 but has been sliding ever since; and China –Asia’s manufacturing powerhouse– reached 15% in the mid-nineties but has remained below that figure since. As Harvard economist Dani Rodrik points out, most rich countries “became what they are by traveling the well-worn path of industrialization”: from agriculture to manufacturing, and then on to services. For its part, Puerto Rico has been no exception to this trend. At least since 1990 to 2015, data from the US Bureau of Labor Statistics shows that its manufacturing sector has experienced a significant drop in employment (from 160,000 jobs > 74,000). However, the commonwealth’s service industry has witnessed large increments in professional and business services (57,000 > 112,000), education and health services (51,000 > 127,000), leisure and hospitality (35,000 > 80,000), and financial activities (31,000 > 43,000).
The Island is witnessing a boom in R&D investment; the University of Puerto Rico alone has seen a 50% rise in R&D projects.
A VISION OF EFFICIENCY
“Investing in science and technology has a higher return than investing in manufacturing or traditional businesses,” states Iván Ríos Mena, the FCTI chief operations officer. Referencing “The New Geography of Jobs” (2013), the latest book by Enrico Moretti, professor at the University of Berkley, California, Ríos explains that one job in sci-
ence, technology or computer science generates five additional indirect jobs, while a position in traditional manufacturing only produces 1.6 indirect jobs.
Perhaps like never before, says Ríos, Puerto Rico is coming together to make the Island a powerful hub of R&D, technology transfer, high-technology jobs, world-class human capital, research in biotechnology and life sciences, and aerospace endeavors. The goal is not only to steer Puerto Rico towards a knowledge econ-
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SCIENCE AND TECHNOLOGY
IN 2015, THE FCTI AWARDED ITS FIRST-EVER GRANTS FOR THE DEVELOPMENT OF 12 PROJECTS BIOTECHNOLOGY & LIFE SCIENCES
• Marketable drug against malaria • Interface and sample reduction system for powders • Photosensitized generation of nitric acid • Biosensor microchip for detection of microorganisms and cancer cells at the point-of-care • Novel ionic polymer nanocomposite membranes for advanced water purification • Regulation of the adhesion of receptors to optic nerve to treat retinoblastoma (a form of retinal cancer) • EHop-016 as an anti metastatic cancer therapeutic
AEROSPACE
• Inertial sensors for space weather and planetary research • Hybrid mechanical/electronic steerable antenna array for beyond line of sight communications for unmanned aircrafts (UAS) • Advanced unmanned aerial vehicle with vertical takeoff or landing capabilities for commercial civil markets
MEDICAL DEVICES
• NEWPUNCH: Biopsy device
INFORMATION & COMMUNICATIONS
• OBA: innovative, online learning solution for the 21st Century
omy, but also to turn the Island into a front-runner of this deep economic and social transformation that’s taking place across the globe.
HARVESTING KNOWLEDGE
The famous economist Joseph Schumpeter coined the phrase “creative destruction” to illustrate the fact that economies are cyclical and that innovative processes are –to some extent– inherently destructive. In Puerto Rico, destruction has come in the form of less manufacturing jobs, while creation has manifested itself through the birth of several large-scale projects that attest to the commonwealth’s cutting-edge economic development. With regards to high-technology investments, two words immediately come to mind: Lufthansa Technik, one of the world’s largest aerospace maintenance firms that selected Puerto Rico at the end of last year to be the host of its newest Maintenance, Repair, and Overhaul (MRO) facilities. A few months after Lufthansa’s arrival, another key aerospace service provider –Avenger Aerospace Solutions– decided to land in Puerto Rico in order to address the needs of local and international clients located in Central and South America. It’s worth noting that aerospace companies promoted since 2013 by the Puerto Rico Industrial Development Company (PRIDCO) have vowed to create 1,500 jobs, of which 400 stem from projects propelled by aerospace giants such as Honeywell, UTC Aerospace and Infosys. Other FCTI-supported initiatives can be found at the Medical Sciences Campus of the University of Puerto Rico (UPR), which earlier this year reached the highest academic circles with an investigation regarding fear memories. Funded by the National Institutes of Health (NIH), Dr. Gregory J. Quirk and research assistants Fabricio de Monte and Kelvin Quiñones discovered that fear conditioning establishes new memory in the brain as a way to overcome fear. The findings have been so groundbreaking that the investigation was featured in the prestigious science magazine Nature and reached the select 1% of Thomson Reuters’ most popular and influential investigations in the world. As if that wasn’t enough, in September of last year Puerto Rico was selected as the venue for a crucial R&D endeavor that seeks to find a vaccine against HIV. During the next five years, an alliance of government, academic, and private entities –including prominent scientists from the UPR and CDI Laboratories– will launch a noble quest to find a vaccine against this chronic disease that affects an estimated 75 million people all around the globe. Funding will be provided by the NIH, the FCTI, PRIDCO, and the National Institute of Allergies and Infectious Diseases.
A FERTILE BREEDING GROUND
As a result of Puerto Rico’s push towards a knowledge economy, the Island has been recording a notable increase in R&D investment. The UPR alone has seen a 50% rise in R&D-related activities, according to a recent study by economist Manuel Lobato. What is certain is that these growing figures are not a fleeting trend, but rather the result of a concerted effort –both legal and tangible– that is tenaciously driving R&D in Puerto Rico. On the tangible side, there is the Molecular Sciences Building, yet another structure backed by the FCTI that pays tribute, if you will, to the most diverse and complex scientific experiences, including nanotechnology, proteomics, electronic and confocal microscopy, and magnetic resonance, among many other specialized fields. The building also holds the UPR’s Office of Innovation and Technology Transfer, and functions as a research facility for 25 investigators from the Río Piedras and Medical Sciences campuses.
In terms of legal tools, Puerto Rico approved in 2008 the Law of Tax Incentives for Scientists (Law 101), described by Ríos as a “unique incentive across the world” that provides a tax exemption for any scientist or researcher earning up to $195,000 through grants or subsidies. As defined in its statement of purpose, this law seeks to preserve and grow Puerto Rico’s scientific assets while promoting the commonwealth as a leading producer of scientific enterprises. In sync with this powerful incentive, last month the FCTI awarded twelve grants –$150,000 each– for twelve scientific projects, including the development of a drug against malaria, the creation of hybrid technologies to further communications and aviation, and advances in biotechnology to purify water. “These projects demonstrate to the international scientific community that we are a jurisdiction with a wonderful capacity for R&D,” said Luz “Lucy” Crespo, the new chief executive officer of the FCTI, during the awards ceremony. These valuable contributions to the commonwealth’s scientific and technological breeding ground are “all the more proof that Puerto Rico is committed to becoming an international hub of innovation, technology transfer, and scientific development,” highlighted Crespo. n
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