Puerto Rico Residential Report – H2 2020 by Puerto Rico Sotheby's International Realty

Research

Puerto Rico Residential Report H2 2020

Welcome After enduring a fiscal crisis, an extended recession, a multitude of natural disasters, and a global pandemic, Puerto Rico has weathered through it all over the past several years. The Island’s resilience during these challenging times speaks to its people’s strength of character, its healthy business environment founded upon Puerto Rico’s status as a part of the United States, its highly competitive tax code, and its entrepreneurial spirit. During the first half of the year, the Island’s real estate market underwent a significant shift towards industrial properties, with significant efforts from both the public and private sectors to “re-shore” pharmaceutical and medical device manufacturing to Puerto Rico. The Island currently stands as the fifth largest manufacturer of pharmaceuticals in the world by volume, a figure that looks set to increase with a shift away from legacy manufacturers in Asia. JLL Puerto Rico has been honored to participate in that realignment through our research partnerships and site identification efforts. Interested parties should view the Puerto Rico Life Sciences Manufacturing Report for additional information. Conditions in other parts of the country are The changing conditions in parts of the United States are driving significant relocation and tourism to Puerto Rico. Despite the pandemic, tourists have been flooding to the Island and increasing the economy in the past few months. It will take some time for government sources to confirm this view, but airlines are adding flights, beaches are densely populated, and restaurants are open for business. The first driver of this positive shift is likely due to Puerto Rico’s status as an unincorporated territory of the United States. While other independent Caribbean Islands have closed to U.S. visitors, Puerto Rico has remained completely open to the United States and other countries thus driving pent-up tourist demand solely to the Island.

2 | Puerto Rico Residential Report • H2 2020

Other factors such as tax incentives and the digitization of the economy due to the Pandemic have driven significant relocation to Puerto Rico. This accelerating trend is seen in the increasing prices and limited availability of class A residential property. Interested parties should view the Puerto Rico Tech Relocation Guide for additional information. In addition to the expanding market, we are proud to announce that Chick-fil-A will be opening its first retail location on the Island in 2021. Unlike trends in other markets, Puerto Ricans have remained heavily oriented towards physical retail and fast food, which creates rich market for legacy retailers and fast-food chains like Chick-fil-A. We believe in Puerto Rico and its people and will continue our commitment to the Island. JLL’s vertical services integration, world class best practices, commitment to ethics, boots-on-theground expertise, and region-leading real estate data-aggregation are and will remain at the core of what enables us to achieve our client’s ambitions. Andy Carlson Market Lead - Country Manager Puerto Rico & Caribbean +1 727 403 2503 andy.carlson@am.jll.com

Summary As one of the most dynamic and competitive economies in Latin America and the Caribbean, Puerto Rico has a population of 3.2 million people (as of 2019), with approximately 1.5 million housing units spread throughout the Island. The average monthly rent for non-luxury housing in Puerto Rico was estimated to be $500 USD in 2018.The Island’s dynamic and multi-dimensional housing landscape, however, is best delineated by zip code. Puerto Rico is home to some of the most attractive and noteworthy incentives for its residents in the United States. In 2020, the government strengthened the economy by expanding the opportunities of several arenas within the corporate tax incentives code and consolidated laws 20 and 22 into a single broader and more robust law now entitled Act 60. This law established a 4% corporate income tax rate, 0% rate on dividends distribution, 75% property tax exemption, 75% construction tax exemption, and 50% exemption on other municipal taxes. Eligible industries include but are not limited to manufacturing, R&D, Finance, Advertising, Technology, Medical Tourism and general exports of

4 | Puerto Rico Residential Report • H2 2020

goods and services. To provide more information on these and other current business incentives, JLL has complied tax incentive information in JLL’s Puerto Rico Real Estate Investment Guide, 2020. Puerto Rico is a U.S territory, as it is part of the United States while having autonomy of governance. Since Puerto Rico is not a state in the union, Puerto Ricans cannot participate in federal elections and have a non-voting representative in the House. On the up-side, residents are not required to pay U.S. Federal taxes. Unlike other Caribbean, Latin American and global markets, Puerto Rico utilizes the U.S. Dollar, and its residents are U.S. citizens, its assets and businesses are under U.S. legal jurisdiction, and its GAAP accounting practices and jurisdiction are under the supervision of the Federal Bureau of Investigation. For years, Puerto Rico has drawn in new residents with its tax incentives and quality of living. COVID 19 global pandemic has only complemented this trend by substantially increasing the demand for class A residential real estate, as former city dwellers seek alternatives amidst unprecedented changes to how we work and live.

Market Insights Fueled by a steady stream of corporate relocations and incentive-based immigration, Puerto Rico has solidified its position as a gateway to Latin America. Puerto Rico’s picturesque natural environment, relative affordability, and favorable costs of doing business has attracted companies and high net worth individuals alike. As a result of a recent influx of new residents, the Island’s class A residential values soared in the second half of 2020, with an average increase of nearly 20% according to our models.

JLL Pro Pricing: Top 5 Municipalities The prices quoted below are based on a regression model with a 5,000 square foot assumption.

Class A Residential Net Present Value (USD) Municipality

H1, 2020

H2, 2020

% Change

San Juan

416.8

551.2

24%

Guaynabo

359.2

470.3

24%

Humacao

215.1

193.4

-11%

Dorado

467

627.7

26%

Rio Grande

449.6

595.7

18%

Class A Residential Gross Annual Rent, per Year (USD) Municipality

H1, 2020

H2, 2020

% Change

San Juan

45.84

63.38

28%

Guaynabo

39.52

54.08

27%

Humacao

23.66

22.24

-6%

Dorado

51.38

71.72

28%

Rio Grande

49.46

68.5

22%

Global Residential Clock

San Francisco Tokyo Sydney Singapore, Boston Stockholm, Los Angeles London Brussels Berlin, Frankfurt, Toronto Madrid Amsterdam

Puerto Rico

Delhi, Sao Paulo Moscow, Mumbai Mexico City

6 | Puerto Rico Residential Report • H2 2020

Paris, Chicago, Washington DC New York Beijing Hong Kong

Rental Value Growing Slowing

Rental Values Falling

Rental Value Growth Accelarating

Rental Value Bottoming Out Shanghai Seoul Dubai

Puerto Rico Sotheby’s International Realty LLC Pricing Trends The following chart, provided by Puerto Rico Sotheby’s International Realty LLC, illustrates Puerto Rico’s transaction data over the past decade. Puerto Rico Sotheby’s International Realty LLC Pricing Trends 60 50 40 30 20 10 0

[24,113]

[113, 202]

[202, 291]

[291, 380]

[380, 469]

[469, 558]

[558, 647]

[647, 736]

[736, 825]

Approximately 60% of property transactions charge $200 and $500 USD per SF.

Puerto Rico Sotheby’s International Realty LLC Residential Price per Square Foot Trends

February 29, 2012 September 29,… April 12, 2013 July 25, 2013 September 28,… January 31, 2014 April 22, 2014 May 31, 2014 June 21, 2014 August 11, 2014 September 3, 2014 November 1, 2014 January 15, 2015 February 2, 2015 February 13, 2015 April 20, 2015 April 30, 2015 May 18, 2015 June 9, 2015 August 20, 2015 November 25,… May 31, 2017 July 14, 2017 December 15,… March 28, 2018 April 28, 2018 May 14, 2018 August 31, 2018 October 11, 2018 December 21,… February 1, 2019 February 20, 2019 April 15, 2019 June 6, 2019 August 16, 2019 October 21, 2019 December 18,… February 4, 2020 February 28, 2020 August 26, 2020 November 9th,…

800 700 600 500 400 300 200 100

Puerto Rico Sotheby’s International Realty LLC Transaction Share by Property Size 1%

7% 12% Location

34%

Condado/Miramar Dorado

Guaynabo Ocean Park

Old San Juan Rio Grande Rio Piedras

37%

Puerto Rico Sotheby’s International Realty LLC Transaction Share by Price 0%

8% 5% 5%

33%

Location Condado/Miramar Dorado Guaynabo Ocean Park Old San Juan Rio Grande Rio Piedras

47%

8 | Puerto Rico Residential Report • H2 2020

Sector Drivers Tax incentives, new home buyer incentives (HBA), and industrial employment are driving the demand for housing in Puerto Rico. In Puerto Rico,the residential sector is largely concentrated in the San Juan Metro Area, where demand is subject to different macroeconomic trends and demographic factors. Currently, the increase of population, employment, and education on the Island are driving the productivity in the home market, and especially the demand for private housing. The residential sector is experiencing increased pricing due to new demand drivers such as the return of additional pharmaceutical manufacturing and limited availability of class A residential properties due to the pandemic.

The government of Puerto Rico also continues to play a substantial role in the housing market, and acts as the main driver for the low-income residents. As of the end of 2020, government funds have been leveraged to develop 325 public housing communities spread across the Island. These projects provide little to no cost housing for families where the average income is around $20,000. In addition, all housing projects are located near public schools, recreational centers, and religious organizations.

Private School Locations

Baldwin School of PR TASIS Dorado Academy

Academia Perpetuo Socorro Robinson School Saint John’s School Colegio Bautista Rosa de Sarón

The Palmas Academy Private Bilingual Schools 0

20 km

Outlook Puerto Rico has great growth and opportunity in its pipeline. Since COVID-19 restrictions are lifting and the cost of living elsewhere is increasing, Puerto Rico has become a premium remote work destination. In addition, federal relief funds from Hurricane Maria are beginning to be released, which should have a positive long-term impact on overall infrastructure and electrical grid durability. With the accelerated digitalization of work caused by the COVID-19 lockdowns, which forced many to temporarily or permanently work from home, workers are reassessing their needs. This shift has created a demand trend for remote workers and former residents of large U.S. cities to relocate to the Island over the next 1-5 years. As a result, class A residential prices are increasing, high-end furniture stores are selling out, and Ikea deliveries are on month-long waits. The new tax incentives are also affecting the increased class A residential property prices. Act

10 | Puerto Rico Residential Report • H2 2020

60, commonly known as the Puerto Rico Incentives Code, consolidated various tax decrees, incentives, subsidies, and benefits. Under the new law, Act 20 & 22 are consolidated, and tax benefits apply to all sectors. This Incentive Code attracts financial institutions and family offices as it provides a 4 percent fixed income tax rate and a 75 percent exemption on property taxes. These types of incentives can lead to additional privatization, increasing the demand for class A residential properties. Geopolitical alignment, tax incentives, and quality of life have made Puerto Rico an attractive place to live and work. The geographically agnostic work environment created by the Coronavirus Pandemic, combined with the aforementioned factors, could increase Puerto Rico’s attractiveness to U.S.-based white-collar workers, potentially increasing the demand for residential properties on the Island, although it is still a bit early to tell, and there is little data available.

Featured Developments Dorado Beach a Ritz-Carlton Reserve, Dorado Dorado Beach, a Ritz Carlton Reserve, is one the top residential resorts in the Caribbean. Its residential offerings include a range of price points from $3M- $40M+, with a robust span of options from condominiums to beachfront single family homes. Dorado Beach is the Island’s premier locale for luxury resort living, with both extraordinary beachfront homes and expansive golf-course view homes that offer the coveted country suburban living within a gated resort community. Residences center around country club living and feature open floor plans with premium finishes. Dorado Beach’s latest developments, the Isles, provide premium living with its contemporary architecture and waterfront views.

Condado, San Juan PR Condado is an oceanfront, tree-lined, pedestrianoriented community in Santurce, San Juan. Condado Beach is a very popular destination among tourists in San Juan craving a Caribbean beach resort experience with the vibrant life of a city just steps away. Condado is often compared to Miami Beach as the cultural experiences, nearby beaches, and world

class attractions are so similar. Condado attracts a diverse crowd, from families to famous celebrities. Beachfront resorts such as La Concha Resort and Condado Vanderbilt are loved by Puerto Rican celebrities, and they are a primary driver of the action and allure in Condado. There are a variety of water sports offered, and for visitors not staying at one of the beach resorts, beach loungers and umbrellas are available for rent.

Ponce Paradise, Ponce While San Juan has been Puerto Rico’s main tourist attraction, the Island is looking to new destinations to strengthen the tourism industry. This shift has brought developers’ attention to Ponce and a new “megaproject” called Ponce Paradise. According to AG&T, the development aims to create a world-class tourism destination, which will lead the advisory effort alongside Oceanfront International Group. The concept, designed by Michael Winstanely Architects and Land Design, includes a “town center”, a marina, a university medical center, a wellness community, and a large hotel. The 900-acre project will be located close to Ponce’s airport and is estimated to cost USD $1 billion.

Bahía Beach St. Regis, Río Grande Located on a former coconut plantation and situated between the El Yunque National Forest and the Espíritu Santo River State Preserve, the St. Regis Bahia Beach Resort is set adjacent to 2 miles of secluded beach with stunning views of the Atlantic Ocean. Situated on 483 gated acres of lush maritime forest on Puerto Rico’s idyllic Northeast coast, the Bahia Beach Resort offers an unparalleled tropical experience with multiple restaurants, pools, and athletic amenities. A destination unlike any other, where elegance and unspoiled natural beauty provide bliss and adventure in equal measure. Bahia Beach also designates over 65% of its property as green areas, including wildlife sanctuaries and nature trails.

Palmas del Mar, Humacao

Development Opportunities

Palmas del Mar is a gated community located on the southeast coast of Puerto Rico. Ranked as one of the top Airbnb locations in the Caribbean with a large full-time population, Palmas del Mar is one of the largest master-planned, resort-oriented residential developments in the Caribbean. Palmas del Mar has more than six miles of Caribbean Sea frontage, including three miles of continuous sandy beach and 2,750 acres of land devoted to a variety of residential, commercial, and resort uses... The remainder of the water frontage is comprised of secluded beaches and rocky outcroppings, offering sweeping views and protected coves.

The approved Master Plan for Palmas del Mar provides for flexibility in the transferability of density within the approved development. The development is divided into five primary sections. Three sections: The master infrastructure in the Resort Core (RC), Central Palmas (CP), and Palmas Plantation (PP) have essentially been completed. These three sections include 258 acres owned by the Palmas del Mar Development Company and common area improvements, including the sewage treatment plant, green areas, access roads, and a beach-front park.

The inland portion of Palmas del Mar presents a diverse topographical landscape providing an extensive array of land use designs ranging from custom hillside residences to clustered housing developments that front golf courses and other recreational amenities. Adding to the tranquility of the development, the preferred means of transportation is by golf cart, rather than automobile. Palmas has a 162 slip marina, a new world-class yacht club equipped for 142 yachts and 20 mega yachts, an equestrian center, two 18 hole golf courses designed by Rees Jones and Gary Player, a 20-court tennis center, beach clubs, a Pre-K to 12th grade English language school, a 60 acre tropical forest, and 14 restaurants - all within a golf cart ride.

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The remaining land inventory is primarily contained in two tracts. The first tract in South Palmas is referred to as Guayanez. This parcel is located on the south end of the development and is can withstand 1,960 housing units comfortably on its 416 developable acres. The second tract, the Buena Vista / El Morro parcel, is located on the northern end of Palmas and contains 339 developable acres which can withstand 1,850 units. These unit estimations follow the allowable density that has been allocated to the individual parcels; however, the Developer retains the flexibility to transfer density and the total allowable units are not reduced if a parcel is developed with less than its allocated density. Any unused density is accumulated in a land bank parcel for future distribution.

The following undeveloped parcels are available for sale or lease: At Central Palmas (CP-7) The parcel CP-7 in Central Palmas is located off of Palmas Drive to the west of the tropical rain forest and has complete infrastructure in place. Parcel CP 7 is entitled 60,000 square feet of retail or commercial space. This section of Palmas is fully developed. At Resort core (RC-1A) The Resort Core parcel is situated along the primary beachfront of Palmas and runs from the tropical forest south to the marina area. This area is mostly developed and the Company’s remaining land in the Resort Core totals 6.3 acres with all infrastructure in place. Parcel RC 1A is a prime 3-acre parcel that lies adjacent to the beach. The balance of Parcel RC 1 is under development with lodging and residential product.

At Palmas Plantation (PP-3, PP-4 and PP-5) The main entrance to Palmas del Mar is located within the Palmas Plantation section of the property. The remaining land in this section contains 213 acres and is entitled for 441 units. Excluding parcels PP9 and PP9A which lie north of the Candelero River, the major infrastructure in this area is essentially complete. Palmas Plantation also contains the site of the existing Palmas del Mar Sales Center, which is located on parcel PP 1A. Parcel PP3 is currently zoned for 80,000 square feet (12.9 acreage) of medical office development, and parcel PP 4 has been zoned for a 100,000 square foot (25.59 acreage) medical facility with 200 beds. In addition, parcel PP5 has been designated for school, church, fire station or other such institutional use (11.77 acreage).

Master Plan - Palmas del Mar

Incentives New Home Buyers Incentive (HBA) The government of Puerto Rico has approved a new relief fund administered by the “Departamento de la Vivienda”, available for first home buyers in Puerto Rico. Under the fund’s guidelines, eligible residents would be granted $25,000 towards a firsttime home purchase. Families with members that are considered “essential” to the rehabilitation of Puerto Rico, such as teachers, health professionals, and public security, would be granted up to $35,000 towards the purchase of their primary residence. This financial assistance program is meant to cover closing expenses and prompt mortgage payments, with the broader goal of increasing homeownership rates. In the long-term, this will enable the economic viability and sustainability of communities affected by Hurricanes Irma and María throughout the Island. In addition, the incentive is designed to encourage essential recovery personnel to continue to live

14 | Puerto Rico Residential Report • H2 2020

in communities, help reduce emigration, and to improve job retention and productivity. Most importantly, however, the incentive was enacted to increase housing acquisition opportunities for low and moderate-income families and families with urgent needs in Puerto Rico.

Financial Services Act 273-2012, also known as the “International Financial Center Regulatory Act”, regulates the organization and operation of international financial institutions authorized by the Office of the Commissioner Institutions to operate in Puerto Rico. The Incentives Code provides tax exemption decrees, among other benefits, to international financial entities (“IFE”). The export of services is an economic activity that has been identified as one of the key pieces for the economic development of Puerto Rico and financial services employ the largest number of

people per business under the tax incentives. The IFE tax incentive is primarily used by international banks, investment funds, hedge funds and family offices. IFEs are in general subject to a 4% fixed income tax rate, 50% exemption of municipal taxes and 75% exemption on property taxes.

Export Services Incentive (Formerly Act 20) The Export Services Incentive is intended to promote the exportation of services by providing great resources and opportunities for U.S. companies to bring their business to Puerto Rico and make it a service center for the World. It also promotes academic and private sectors development and research by granting exemptions and assistance with energy costs to companies willing to invest in the growth of these key areas. To become exempt, the business needs to apply for a tax concession via a tax exemption decree contract with the Office of Industrial Tax Exemption of the Government of PR. The decree will be secured during the term, 20 years with possible 10-year extension, regardless of changes in the law itself. To qualify, the business cannot have any previous connections, dealings, nor nexus with Puerto Rico.

New small and Medium Size Businesses The Incentives Code recognizes a new tax benefit afforded to new small and medium-sized businesses (“PYMES”, by its acronym in Spanish) established in Puerto Rico. PYMES are defined as businesses with an average gross revenue of three (3) million or less during the three (3) previous tax rate and a 100% exemption from property and municipal taxes during the first years of operations. After the initial five (5) years, these businesses will enjoy a 4% income tax rate and a 75% and 50% exemption for property and municipal taxes, respectively.

Individual Resident Investors (Formerly Known as Act 22) The Incentives Code encourages the relocation of individual investors to Puerto Rico and seeks to attract new residents to the Island. It offers a significant tax exemption on passive income generated or accumulated once the individual is a bona fide resident of Puerto Rico. As in Act 22, passive income, including interests, dividends, and certain capital gains are 100% exempted from Puerto Rico income taxation. © 2021 Jones Lang LaSalle IP, Inc. All rights reserved. | 15

Opportunity Zones

How they work:

There is a two percent import tax in Puerto Rico, in addition to shipping costs, which are blamed for the Island’s relatively high retail prices. The Island also imposes an 11 percent sales tax, the highest in the United States. The Puerto Rican government emphasizes that the high taxes are a major source of revenue; however, they continue to drive the cashbased economy and depress trade activity on an Island with a reliance on imports.

1. Sell an asset for a capital gain.

The Merchant Marine Act of 1920, commonly referred to as the “Jones Act,” requires goods shipped between the U.S. ports to be transported on ships that are build, owned, and operated by United States citizens or permanent residents, which limits the capabilities of Puerto Rican merchants while increasing their transportation costs by an estimate of nearly USD 1.2 billion annually. There is currently an effort led by Utah Senator Mike Lee to repeal the act. On December 22, 2017, the Opportunity Zones Program was enacted and added to the tax code by the Tax Cuts and Jobs Act to spur investment, encourage economic development and create jobs in distressed communities. The Opportunity Zones Program is designed to drive long-term capital to rural and low-income urban communities throughout the U.S. and its territories and uses tax incentives to encourage private investment in impact funds. Qualified Opportunity Zones are specific geographical areas in the United States and Puerto Rico that were designated by the Federal Government. The zones are designed to spur economic growth development by offering tax benefits to individuals and institutions that invest eligible capital into the zones.

Puerto Rico is proportionally the largest opportunity zone in the United States, with over 98 percent of the Island being designated as such by the Tax Cuts and Jobs Act of 2017.

16 | Puerto Rico Residential Report • H2 2020

2. Invest some or all of gains in a qualified opportunity fund within 180 days from the day in which the capital gain would be recognized for federal income tax purposes. Note: All incentives are linked to the duration of the qualified investment.

Opportunity Zones are designed to spur longterm investments in low-income urban and rural communities through investment via Qualified Opportunity Funds (Form 8996). There are 3 types of qualified opportunity zone properties, including businesses, which must be located in qualified zones. Qualified Zones include: 1. Qualified Opportunity Zone Stock 2. Qualified Opportunity Zone Partnership Interest 3. Qualified Opportunity Zone Business Property a. 50% of total gross income must be from active conduct of business in QOZ b. Intangible property must be used in the active conduct of the business c. Less than 5 percent of the business can be attributable to non-qualified financed property d. Principal business cannot be from gambling oralcohol sales

With the Opportunity Zone (OZ) designation an investor interested in investing in a business in Puerto Rico can expect a tax deferral of all capital gains invested in a Qualified Zone Fund (“QZF”). Additionally, investing in an OZ in Puerto Rico could potentially eliminate up to 15% of the deferred capital gains (10% if the investment is held for at least 5 years and 15% if held for at least 7 years in a QZF). Moreover, an interested investor may eliminate all taxes on all capital gains earned on the amount invested in a QZF if he or she holds such investment for at least 10 years. The Incentives Code provides a 18.5% fixed income tax rate, a 100% tax exemption on dividends and distributions to its shareholders, 25% tax exemption on municipal license tax and property tax, and up to 25% tax credits for OZ projects in Puerto Rico.

Opportunity Zones in Puerto Rico and the U.S. Virgin Islands

Opportunity Zones in the San Juan Metro Area

CDBG-DR Funding Community Development Block Grant Disaster Recovery Program (CDBG-DR) Funding Allocated to Puerto Rico Due to the substantial damages to Puerto Rico’s infrastructure caused by Hurricanes Irma and María in September 2017, Congress passed the “Supplemental Appropriations for Disaster Relief Requirements, 2017” (Pub. L. 115-56, approved on September 8, 2017), as subsequently amended by Pub. L. 115-72 as well as the “Further Additional Supplemental Appropriations for Disaster for Relief Requirements Act, 2018” (Division B, Subdivision 1 of the Bipartisan Budget Act of 2018) (Pub. L. 115-123, approved on February 9, 2018) through which a total of $20 billion of CDBG-DR funds were allocated to Puerto Rico. CDBG-DR funds are subject to federal oversight and a tight fiscal control from the U.S. Department of Housing and Urban Development (HUD). HUD has appointed a Federal Financial Monitor to oversee the grant administration and disbursement process for CDBG- DR funds assigned to Puerto Rico. Locally, the Puerto Rico Department 18 | Puerto Rico Residential Report • H2 2020

of Housing (PRDOH) is the administrative agency responsible for managing the CDBG-DR program. The PRDOH works in close collaboration with the Central Office of Recovery, Reconstruction and Resilience (COR3). The COR3 is a Puerto Rico government agency organized in December 2017 as a division of the Public-Private Partnerships Authority to identify, manage, and coordinate available funding sources for infrastructure recovery projects in Puerto Rico. Generally, CDBG-DR funds cover a variety of disaster recovery activities, including housing redevelopment and rebuilding, business assistance, economic development and revitalization, infrastructure repairsand upgrades to Puerto Rico’s power plants and electric grid, which suffered significant damages as a result of the hurricanes. $2 billion of the CDBGDR funds allocated to Puerto Rico have been assigned by HUD to restore, enhance, and improve Puerto Rico’s electric power grid and systems. In order to allow the release of CDBG-DR funds through HUD, Puerto Rico has adopted a “Disaster Recovery Action Plan” that sets forth the critical areas and proposed uses for CDBG-DR funds consistent with both CDBG-DR program requirements and Puerto Rico’s Fiscal Plan.. These critical areas, per CDBG- DR program requirements, must address the

$20b of CDBG-DR funds were allocated to Puerto Rico.

general segments of housing, planning, economic development, and infrastructure. Further, they must meet at least one of the following objectives, namely, benefit low- or moderate- income population segments, to help prevent deteriorating areas, or satisfy an urgent need. On July 29, 2018, HUD approved the use by Puerto Rico of the initial $1.5 billion allocation in CDBGDR funding pursuant to the terms of the “Disaster Recovery Action Plan” filed by the PRDOH with HUD. Shortly thereafter, a grant agreement between both parties was entered in September 2018. In February 2019, HUD approved an amended “Disaster Recovery Plan” filed by the PRDOH for the use of an additional $8.22 billion of CDBG-DR funds.

During the initial phase of CDBG-DR grant program in Puerto Rico after Hurricanes Irma and María, over $2 billion of the funds have been procured by the PRDOH and expended to address the repair, reconstruction and/ or relocation of single-family homes in Puerto Rico (including title clearance issues). Due to the tight fiscal controls imposed by HUD with respect to CDBG-PR program funding in Puerto Rico, the release of program funding on the part of HUD has beenmeasured. The authorization and release of CDBG-DR and CDBG- MIT funds allocated to Puerto Rico on the part of HUD is expected during the current and following years consistent with the proposed uses included in the amended “Disaster Recovery Action Plan” adopted by the PRDOH. This funding is directed at critical areas, such as in the economic development front, tourism and business marketing programs, strategic projects and commercial redevelopment, construction and commercial development loans, small business financing, incubators and accelerators, workforce training, urban and rural agricultural programs, among others.

In January 2020, HUD issued a notice in the Federal Register awknowledging the allocation of $8.285 billion to Puerto Rico of from the Community Block Grant mitigation (CDBG-MIT) funds being made under the requirements of Pub. L. 115123. CDBG-MIT funds are used with the primary purpose of strengthening the grantee’s program management capacity, financial management, and internal controls. In the case of Puerto Rico, HUD has recognized the governance and financial management challenges faced by the jurisdiction. Therefore, the HUD notice considers that, in the case of Puerto Rico, these CDBG-MIT funds, their use and the satisfaction of the program’s underlying objectives may be accomplished through reforms in land ownership records and addressing the occurrence of informal housing and contributing to enhance the safety and well-being of Puerto Rico residents. © 2021 Jones Lang LaSalle IP, Inc. All rights reserved. | 19

Macroeconomic Overview Puerto Rico has experienced GDP contractions since 2004; however, GDP in 2019 saw its first positive growth in more than a decade, a bounce back from the 5.2 percent contraction the Island experienced in 2018 which was partially caused by Hurricane María. Due to the negative impact of the global pandemic of Coronavirus it is almost certain that the economy will suffer another contraction in 2020. For the “safety of the Puerto Rican people”, much like the rest of the world, the Island was forced to lock down, which heavily impacted consumer and business spending while imposing a significant decline in tourist traffic to the Island. Puerto Rico’s GDP is expected to suffer a 3.0% decline in 2020, much better than the 8% projection presented at the end of the first half of 2020. Puerto Rico’s primary sources of GDP are Industry (51.2 percent of output), services (48.0% of output), and, to a limited extent, Agriculture (0.8 percent of output). Puerto Rico’s unemployment rate in 2019 was the lowest on record at 8.5%, as a result of the global it has risen modestly to 9%. Puerto

Rico’s government is offering support with a $1.7 billion stimulus package funded under the US Cares act, including loans and direct assistance for small businesses, health and COVID testing funds, unemployment benefits, and assistance to the tourism industry. The government is taking steps to support its citizens. Puerto Rico’s position as an unincorporated commonwealth of the United States of America is a significant strategic advantage for the Island. It provides the Island with fiscal backstop and enables the use of the United States Dollar as the local currency, while empowering the Island with local political autonomy. Puerto Rico certainly faces political and economic opportunities ahead, and the strong foundation of the dollar-based economy and the backing of the US federal resources give Puerto Rico a significant advantage over its Caribbean and Latin American neighbors. Presently, the average household income in Puerto Rico is USD $55,500 (economic impact of cash economy included). Which is 9.3% lower than the 2019 average.

Puerto Rico Real GDP and Unemployment Rate 33000

18%

32500

16%

32000

14%

31500

12%

31000

10%

30500

30000

29500 29000

28500

28000

0% 2011

Source: Oxford Economics

2012

2013

2014

2015

Real GDP per Capita

20 | Puerto Rico Residential Report • H2 2020

2016

2017

2018

2019

Unemployment Rate

2020

2021

Real GP per Capita and CPI 33000

144

32500

142

32000

140

31500 31000

138

30500 136

30000 29500

134

29000

132

28500 28000

130 2011

2012

2013

2014

2015

2016

Real GDP per Capita

2017

2018

2019

2020

2021

Consumer price index

Source: Oxford Economics

Inflation 10.00%

8.00%

6.00%

4.00%

2.00%

0.00% 2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

-2.00% LATAM Average Inﬂa�on

U.S. Inﬂa�on

Featured Article From room service to rehab, distressed assets are finding new life The skilled nursing and hotel industries, while improving, have faced pandemic-fueled challenges over the past year that resulted in empty rooms. But real estate owners selling some of the underperforming properties and streamlining their portfolios are finding plenty of buyers, with an increasing number converting distressed assets into new uses that are in high demand, like affordable housing, behavioral health facilities and student accommodation.

For example, a skilled nursing facility outside the greater Boston area is on its way to being converted to affordable housing. Developer CK Asset Holdings Ltd. is converting two Hong Kong hotels into apartments to satisfy housing demand. In London, developer Dominv changed its plans for developing two hotels, making one of them into student accommodation instead. An abandoned former fourstar hotel in Melbourne on the market is attracting attention as a re-development site. “The trend of opening up these distressed properties to a much larger buyer pool is here to stay for the foreseeable future given the demand from a wide array of users,” says Jason Skalko, Director, JLL Capital Markets, Seniors Housing and Healthcare. “We are seeing more interest in behavioral health conversions, including rehabs, and there is unlimited demand for affordable housing.”

Converting skilled nursing facilities

More than 1,600 skilled nursing facilities in the U.S. could close in 2021 — more than 10 times the number that closed last year, according to a February analysis from the American Health Care Association and National Center for Assisted Living. “Many of the properties identified for potential repositioning were not significant performers prior to COVID-19,” says Zach Rigby, Director, JLL Capital Markets.

22 | Puerto Rico Residential Report • H2 2020

“It makes sense to close the doors and focus on the more probable winners within a portfolio. Right now, there are many opportunities.” Many of these properties are being snapped up by other skilled nursing operators. “Often a large national owner looking to streamline its portfolio sells to either a regional group with an existing footprint or a group looking to enter a new market,” Rigby says. “We are currently marketing multiple properties within these parameters, all of which are receiving interest from a wide variety of conversion types as well.” Location is key for those looking to convert, Rigby says. Then, in order to make their deals pencil, buyers consider the existing layout of a facility in the hopes of keeping conversion costs low. “There continues to be a deep bench of investors looking for high performing, best-in-class assets with excellent surrounding demographics” Rigby says. “The lower performing assets are ostensibly tougher, but also attractive to many buyers because of their affordability at a time when more affordable seniors housing, student housing, workforce housing, rehabs, behavioral health centers and housing for the homeless are all in high demand.”

Hotel conversions

Investors acquiring hotels for conversion isn’t new, with condominiums, affordable housing, student housing and assisted living long-standing options. But interest in conversions has grown during the pandemic, sometimes leaving traditional hotel

investors outbid. In the U.S., alternate-use investors are pushing pricing between 25 percent and 35 percent above traditional levels. Recent activity suggests the total market value of hotels sold for conversion over the next five years will range between $25 and $30 billion, according to JLL research. “The types of investors that wish to do conversions have become more active participants in the hotel investment market, beating out other bidders in the hotel sales process not only because they are submitting the highest bids but also because they are able to more easily secure financing for acquisitions relative to traditional hotel buyers,” says Geraldine Guichardo, Global Head of Research, Hotels & Hospitality Group, JLL. “With hotel values coming under pressure as a result of the current challenged operating environment, alternative-use investor return requirements are being met or surpassed, even after taking into account capital expenditures and other conversion related costs.” In Australia, hotels have been challenged by international border restrictions during the pandemic, while, strong pre-pandemic fundamentals are bringing a lot of new hotel supply to the market, says Annabel McFarlane, Senior Director, Research, Australia, JLL. At the same time, government stimulus measures and low interest rates are driving residential demand, leading to an uptick in conversions. “An example of this is Queens Boulevard, which is an older hotel asset, which won’t be able to complete with new supply, in a cracking residential location,” McFarlane says. “It will almost certainly be redeveloped as residential, with residential unit sale prices increasing again.”

The bare necessities for conversion

There are many overlaps between the considerations for converting hotels and skilled-nursing facilities to other uses, Skalko says. These facilities are ideal for multi-housing conversions when they have in-unit bathrooms and kitchenettes, which is more common at extendedstay hotels, he says.

Senior-living conversions benefit from full-service hotels because they have conference spaces that can be turned into general-purpose rooms and industrial kitchens allow for cooking meals for residents. Low-cost conversions allow for the potential for affordable seniors housing in urban markets with high barriers to entry, which is a significant need, Skalko says. Fairstead, for example, is planning a $60 million adaptive reuse of a historic hotel on Manhattan’s Upper West Side into affordable senior housing. Conversions into student housing are popular for many hotel layouts because they are similar and sometimes require only light renovation, Guichardo says. The U.K. has seen a flurry of such conversions. The landmark former Hartlepool Hotel, most recently called the Hillcarter Hotel, for example, is being converted into studios and dorms for students. “It’s typically not a big gut job and it gets heads in beds, keeping costs down,” she says.

But wait…

There isn’t likely to be mass conversions of hotels or other distressed assets, with the economic recovery and vaccine rollout underway. This is a good thing for owners who can hold out. “High levels of vaccination have stabilized occupancy within skilled nursing facilities and we are seeing increased occupancy in seniors housing,” Skalko says. “While some took their relatives home during the height of the pandemic, a return to normalcy is giving some serious tailwinds to the asset class. These properties are needs-based, and we have an increasingly aged population.” There is optimism, too, for hotels, as pent-up demand during the pandemic is released. “It’s important to keep in mind that while hotels are the first to see demand drop, they’re also one of the first sectors to see demand come back,” Guichardo says. Source: JLL Research - https://www.us.jll.com © 2021 Jones Lang LaSalle IP, Inc. All rights reserved. | 23

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