Puerto Rico Residential Report H1, 2021 JLL | Puerto Rico Sotheby's International Realty

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Puerto Rico Residential Report H1 2021

Welcome After enduring a fiscal crisis, an extended recession, a multitude of natural disasters, and the global pandemic we are currently facing, 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.

As the end of the pandemic approaches, Puerto Rico has undertaken the opportunity to reinvent itself.

Despite the COVID-19 pandemic, this past year has been exceptionally strong for the Puerto Rican residential real estate market. This is largely due to Puerto Rico’s population and economic growth. As well, steady vaccine rollout has allowed the island to slowly reopen and bring employees back into the office and consumers back into the market.

While traffic is certainly not at the same from preCOVID levels, we feel optimistic that we will reach a new normal towards the end of the third quarter of the year, entailing a combination of in-person and remote working.

In regards to population growth, generous tax incentives have driven significant temporary and permanent relocation to Puerto Rico. This is shown through the high growth rate of Class A residential prices and limited availability. Interested parties should view the Puerto Rico Tech Relocation Guide for additional information. The main driver of this demand is Puerto Rico’s status as an unincorporated territory of the United States. Puerto Rico’s Incentives Code (Act 60), which consolidates the former Acts 20 & 22, seeks to attract new residents to the island by offering significant tax exemptions on passive income generated or accumulated once the individual becomes a bona fide resident of Puerto Rico.

In addition to population growth, Puerto Rico’s state of economic growth seems optimistic for the first time in two decades. For one, Hurricane María reconstruction funds are finally making their way to

2 | Puerto Rico Residential Report • H1 2021

Puerto Rico, and they will greatly benefit the island’s infrastructure. Moreover, various pharmaceutical and manufacturing companies are moving to Puerto Rico, creating hundreds of jobs and increasing demand for residential units. Interested parties should view the Puerto Rico Life Sciences Manufacturing Report for additional information.

Despite the challenges that have occurred in recent years, we are proud to announcethe new Altamira Reserve, a mixed-use complex in Guaynabo. This project will be completed in the first quarter of 2022.

The 80,000 square feet building will be spread across two floors, with the first floor being dedicated to retail and the second floor to corporate offices, which makes Altamira Reserve an incredible opportunity for businesses to open in the densely populated area of Guaynabo.

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

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Summary The Puerto Rican residential real estate market has proven to be strong, despite the pandemic and extended recession. The second half of 2020 was one of monumental growth for the Class A residential real estate market. While overall growth has slowed down during the first half of 2021, Class A NPV and GAR values are higher now than during the first half of 2020. These numbers are expected to continue in this direction thanks to population and economic growth.

60, 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 activities include manufacturing, R&D, Finance, Advertising, Technology, Medical Tourism and general exports of goods and services. To learn more on these and other current business incentives, interested parties should look to JLL’s Puerto Rico Real Estate Investment Guide, 2020.

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 and 1.5 million housing units spread throughout the Island. The average monthly rent for non-luxury housing in Puerto Rico is approximately $500 USD. However, this number does not acknowledge the island’s dynamic and multi-dimensional housing landscape that is best delineated by zip code.

Puerto Rico has long been known to be a U.S territory, as it is both part of the United States and an autonomous government. However, since Puerto Rico is not a state in the union, Puerto Ricans do not qualify to participate in federal elections and have a non-voting representative in the House. On the upside, residents are not required to pay U.S. federal taxes. Unlike other Caribbean, Latin American and global markets, Puerto Rico has prevalent investment advantages such as the U.S. Dollar, U.S. citizen status, assets and businesses under U.S. legal jurisdiction, and the island’s GAAP accounting practices under the supervision of the Federal Bureau of Investigation. The attractiveness of the island both esthetically and economically has been drawing new residents for years. The COVID-19 global pandemic has only increased this demand for Class A residential real estate, as former city dwellers seek alternatives amidst unprecedented changes to how we work and live.

With a favorable business environment for investors, Puerto Rico is home to some of the most attractive and noteworthy incentives for those relocating from the mainland United States. In 2020, alongside efforts to expand the benefits of Puerto Rico’s economy, the government expanded the opportunities of several arenas within the corporate tax incentives code by consolidating laws 20 and 22. These laws, which were recently combined into a single broader more robust law now entitled Act

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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 have remained close to the H2 2020 record high numbers.

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

Paris, Chicago, Washington DC New York Beijing Hong Kong

Puerto Rico

Rental Value Growing Slowing

Rental Values Falling

Rental Value Growth Accelerating

Rental Value Bottoming Out

Delhi, Sao Paulo

Shanghai Seoul Dubai

Moscow, Mumbai Mexico City

Annual Average Price per Square Foot 600 500 400 Total

300

Linear (Total) 200 100 0

2012

2013

2014

2015

2016

2017

2018

2019

2020

The Puerto Rico class A residential market has grown 2.6% annually over the past decade, a rate that has increased to 7% annually over the past three years. © 2021 Jones Lang LaSalle IP, Inc. All rights reserved. | 5

Puerto Rico Sotheby’s International Realty Pricing Trends The following charts, provided by Puerto Rico Sotheby’s International Realty, illustrates Puerto Rico’s transaction data over the past decade.

Puerto Rico Sotheby’s International Realty Price per Square Foot Trends (2012 - 2021) $3,500.00 $3,000.00 $2,500.00 $2,000.00 $1,500.00 $1,000.00 $500.00 February, 2012 June, 2013 January, 2014 April, 2014 May, 2014 June, 2014 August, 2014 September, 2014 December, 2014 January, 2015 March, 2015 April, 2015 May, 2015 June, 2015 August, 2015 January, 2017 July, 2017 March, 2018 May, 2018 September, 2018 January, 2019 April, 2019 June, 2019 October, 2019 February, 2020 August, 2020 October, 2020 November, 2020 December, 2020 January, 2021 January, 2021 January, 2021 February, 2021 February, 2021 March, 2021 April, 2021 May, 2021

$0.00

Price per square foot for Class A residential units reached a high of USD 3,000 in the first half of 2021.

Puerto Rico Sotheby’s International Realty - Transaction Share by Location (2021) 3% 13%

Condado Beach / Miramar Dorado Beach

6%

35%

Guaynabo Ocean Park Old San Juan

10%

Río Grande San Francisco / Santa María

8% 23%

Sales in Condado Beach / Miramar and Dorado Beach make up almost 60% of total transactions for the first half of 2021.

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Puerto Rico Sotheby’s International Realty Average Sale Prices by Location (2021)

Dorado Beach Old San Juan Condado Beach / Miramar San Francisco / Santa María Ocean Park Guaynabo Río Grande $1 M

$2 M

$3 M

$4 M

$5 M

$6 M

Dorado Beach takes the lead with an average price almost USD 6 million for homes sold during the first half of 2021.

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Sector Drivers Tax incentives and industrial employment, such as Act 60 and the new Home Buyer Incentive (HBA), are driving the demand for housing in Puerto Rico. The island’s residential sector is largely concentrated in the San Juan Metro Area and its demand is subject to different macroeconomic trends and demographic factors. From an economic perspective, growth and employment rates affect the demand for private housing, and thus positive growth in these measures drive up the demand for the housing market. In addition, demographic factors such as population and education growth increase residential demand.

Since the expiration of Code 936 at the end of 2005, the island has experienced population and economic contractions that have depressed the majority of residential prices. However, the health manufacturing industry in Puerto Rico, which accounts for 34% of the island’s GDP and over $40 billion in yearly revenues, has managed to recover from the COVID-19

pandemic, recording levels of activity unseen since 2018. This industry generates 18,000 direct jobs and 60,000 indirect jobs in Puerto Rico. With the increased migration of expats and increased demand for Class A residential properties in the Island, the residential sector is poised to perform well in coming years.

The government of Puerto Rico also continues to play a substantial role in the housing market by supporting affordable housing initiatives. As of this year, government funds have been leveraged to develop 325 public housing communities throughout the island. These projects provide free housing for families where the average income is around $20,000 USD. These housing projects are all strategically located in near proximity to public schools, recreational facilities, 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

10

20 km

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Outlook The return to both in-person and remote work has been largely beneficial to the island. For one, we are finally starting to see an end to the pandemic with employees coming back to the office. Although work traffic is not completely back to its pre-COVID levels, we feel confident that the working men and women of Puerto Rico are excited to get back to work, thus reaching a new normal by the end of this third quarter. With regards to the residential real estate market, working from home has allowed the island to become a remote work destination for people elsewhere. 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.

Moreover, working from home will allow Puerto Rico to become a hub for remote workers across the world looking for a beautiful place to work. Apart from the warm weather and clear waters, Puerto Rico offers its mainland U.S. citizens a tax incentive commonly referred to as the Puerto Rico Incentives Code (Act 60), which includes consolidated tax decrees, incentives, subsidies, and benefits. Under the new law, all previous laws and incentives such as Act 20 & 22 are combined, and the tax benefits apply to all sectors. This incentive code is attractive from small to medium financial institutions and family offices as it provides a 4 percent fixed income tax rate and a 75 percent exemption on property taxes. This law will spur economic growth and drive demand for office space throughout the island. Furthermore, these types of incentives can lead to additional

privatization, increasing the demand for private office space.

In addition to this, we expect the residential real estate market to have strong growth due to a multitude of factors particular to the island. The first of them being the initial stages of privatization of the public sector, which is expected to create many new jobs and drive the demand for office and residential space. The second factor is the restructuring of the government’s debt, which will drive economic growth, demand for professional services, and demand for both office and residential spaces. Lastly, the sale of state-owned assets to restructure the debt will also be a driver of the demand for office and residential space on the island. The entry of stateowned assets being placed in the market could have a downward pressure on prices in the short term but is expected to bring long term transparency and stability to the real estate market.

In the past, the geopolitical alignment, tax incentives, and quality of life in Puerto Rico have made the island an attractive place to live and work. The geographically agnostic work environment created by the COVID-19 pandemic combined with the aforementioned factors could increase Puerto Rico’s attractiveness to U.S.-based white-collar workers. In the coming years, there will be continued exponential growth within the Puerto Rican residential real estate market, exampled in this past year.

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Featured Developments Dorado Beach a Ritz-Carlton Reserve, Dorado The Dorado Beach Ritz Carlton is one of the top residential resorts in the Caribbean. Its residential offerings include a range of price points from $1.5 million to $30 million, with a robust range 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 open, 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

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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.

Coco Beach Golf Resort, Río Grande Located between San Juan and El Yunque National Rainforest, Coco Beach Golf Resort sits on a 745acre peninsula, with two 18-hole golf championship courses designed by Tom Kite. Nestled within the resort is the newly renovated, 579-room Hyatt Regency Grand Reserve. This resort combines oceanfront views and 72 acres of lush tropical

gardens, framed against the backdrop of the Island’s El Yunque National Rainforest. The amenities offered by this resort include a lagoon-style pool featuring a swim-up bar, five different dining options, a 12,000 square feet rainforest spa, and over 30,000 square feet of total function space, perfect for weddings and large conferences.

Bahía Beach St. Regis, Río Grande Located on a former coconut plantation and situated between the El Yunque National Rainforest 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 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, included three miles of continuous sandy beach and approximately 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 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.

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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.

Development Opportunities 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. The three following sections: The master infrastructure in the Resort Core (RC), Central Palmas (CP), and Palmas Plantation (PP) have essentially been completed.

These sections include 258 acres owned by the company and common area improvements, including a sewage treatment plant, green areas, access roads and a beach-front park.

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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 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 withstand1,850 units. These unit estimations follow the allowable density that has been allocated to the individual parcels. However, the company 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 almost 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

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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 first-time 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 toward 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

14 | Puerto Rico Residential Report • H1 2021

essential recovery personnel to continue to live 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, or 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.

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Opportunity Zones

How they work:

There is a two percent import tax in addition to shipping costs in Puerto Rico, which is often 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.

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.

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 built, owned, and operated by United States citizens or permanent residents. This limits the capabilities of Puerto Rican merchants while increasing their transportation costs by an estimate of nearly USD 1.2 billion annually. The Jones Act turned 100 years old on June 5, 2020, and 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 and encourage economic development and job creation 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 • H1 2021

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 or alcohol sales

With the Opportunity Zone (OZ) designation an investor interested in investing in a business in Puerto Rico can expect a ted deferral of all capital gains invested in a Qualified Zone Fund (“QZF”).

Additionally, investing in an OZ 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 for 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

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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 • H1 2021

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

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 repairs and upgrades to Puerto Rico’s power plants and electric grid, which suffered significant damages from the hurricanes. $2 billion of the CDBG-DR funds were allocated to Puerto Rico and 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

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, help to prevent or eliminate deteriorating areas, or satisfy an urgent need.

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.

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 been measured. 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 acknowledging the allocation of$8.285 billion to Puerto Rico 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 contemplates that, in the case of Puerto Rico and the CDBG-MIT funds, their

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Macroeconomic Overview Puerto Rico has experienced GDP contractions since 2004, until 2019 when the Island experienced 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. However, due to the negative impact of the COVID-19 pandemic, the economy suffered another contraction in 2020. Fortunately, consumer spending began to rebound towards the second half of 2020, largely in part to stimulus checks and a steady reopening of businesses. This aid, along with the vaccine rollout in the last few months, has led to Puerto Rico reporting its highest GDP per capita in the last decade for the year 2021.

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 at8.5%, but as a result of the pandemic, it has risen modestly to 9%. That

being said, Puerto Ricans have been supported through multiple COVID-19 relief packages funded under the three U.S. stimulus acts. While this has led to unemployment remaining at 9%, we expect that number to drop towards the second half of 2021 once we declare an official end to the pandemic and unemployment checks.

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 an even greater advantage over its Caribbean and Latin American neighbors.

Puerto Rico Real GDP and Unemployment Rate 33000

18%

32500

16%

32000

14%

31500

12%

31000

10%

30500

8%

30000

6%

29500 29000

4%

28500

2%

28000

0% 2011

Source: Oxford Economics

2012

2013

2014

2015

Real GDP per Capita

20 | Puerto Rico Residential Report • H1 2021

2016

2017

2018

2019

Unemployment Rate

2020

2021

Real GDP 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 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2011

2012

2013

2014

2015

2016

LATAM Average Infla�on

2017

2018

2019

2020

2021

U.S. Infla�on

© 2021 Jones Lang LaSalle IP, Inc. All rights reserved. | 21

Featured Article Most Expensive Home in Puerto Rico Sells for $30 Million

“We fell in love with the Ritz Carlton Reserve hotel property, and integrated all those amenities in our house,” Mrs. Lonergan said.

A two-acre oceanfront property in Dorado Beach, Puerto Rico, that boasts a slew of amenities on par with those of the Ritz-Carlton Reserve resort it sits within, has changed hands for $30 million.

One of those amenities is a full spa suite that was completely built to replicate the famous Ritz Carlton Reserve spas, and the massage rooms used volcanic rocks from the same source, Mrs. Lonergan said.

This sale, which closed earlier this week, is the highest ever for Puerto Rico, according to the listing agent, Oriana Juvelier of Puerto Rico Sotheby’s International Realty.

The home was constructed with all-natural local materials, including hardwood floors, wood beams and sand-and-stone walls. The home’s furnishings were also created by local artists and were included in the sale.

Mansion Global could not independently confirm the price record, but the deal is several times more than even the priciest home on Puerto Rico’s Multiple Listing Service.

Ms. Juvelier listed the property about a year ago for $29 million and had multiple offers from buyers from the coastal states, she said. The buyer is a family from California, who are planning to move into it as their primary residence.

The sellers are Sean Lonergan, founder and CEO of PruGen Pharmaceuticals, and his wife, Michelle, who had the house custom built in 2014.

“I loved the formal living room, which has a custom piece of art painted by the artist in the house,” Mrs. Lonergan said. “I enjoy staring at the painting while having my morning coffee.”

The couple decided to sell the Puerto Rico property to be close to their children, who are going to colleges in their home state of Arizona, Mrs. Lonergan said.

The Dorado Beach property has a main house and a guest house, with a total of nine bedrooms and 12 bathrooms, according to the listing. The main house features 20-foot stone walls, floor-to-ceiling glass pocket doors that open to the tropical outdoor entertaining space facing the ocean and golf course.

The property is the largest among the 11 homes in the East Beach community within Dorado Beach, according to Ms. Juvelier.

She said that the most expensive home in Puerto Rico in 2012—when Sotheby’s opened offices there— was just over $2 million.“It has been increasingly developed over the last decade,” she said. “Luxury homes have seen strong demand amids Covid-19, like other markets in the States.”

Source: https://www.mansionglobal.com 22 | Puerto Rico Residential Report • H1 2021

The two-acre property is located in Dorado Beach, a Ritz-Carlton Reserve

© 2021 Jones Lang LaSalle IP, Inc. All rights reserved. | 23

JLL office Jones Lang LaSalle Puerto Rico, Inc. 27 González Giusti Ave. Suite 101, Guaynabo PR 00968 +1 787 777 5800 Andy Carlson Market Lead - Country Manager Puerto Rico & Caribbean +1 727 403 2503 andy.carlson@am.jll.com

Vanessa M. Pérez Vice President Transaction Advisor Puerto Rico & Caribbean +1 787 239 9738 vanessam.perez@am.jll.com

About JLL, (Global) JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. JLL shapes the future of real estate for a better world by using the most advanced technology to create rewarding opportunities, amazing spaces and sustainable real estate solutions for our clients, our people and our communities. JLL is a Fortune 500 company with annual revenue of $18.0 billion in 2019, operations in over 80 countries and a global workforce of nearly 93,000 as of June 30, 2020. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.

Oriana Juvelier Vice President Puerto Rico Sotheby’s International Realty +1 818 859 9932

oriana.juvelier@sothebysrealty.pr

About Puerto Rico Sotheby’s International Realty LLC Puerto Rico Sotheby’s International Realty provides home buyers with expert advice, accurate local market and property information, exclusive access to coveted properties on Island and the highest level of service and discretion. We offer skilled and authoritative assessment of real estate opportunities in Puerto Rico, as well as exclusive access to some of the best properties on the market — some of which may never be available to the public. www.sothebysrealty.com

Henry Keenan Chief Executive Officer RED Atlas +1 415 308 0120 henry.keenan@atlas.red

About RED Atlas RED Atlas provides commercial real estate information, analytics and management services in underserved and emerging markets. We conduct expansive, ongoing data scraping, standardization and storage to produce and maintain a comprehensive database to serve consumer and enterprise clients. Our suite of services leverages a single platform that enables clients to gain access to unmatched insight on commercial property values, market conditions, current availabilities, and our third-party data marketplace. www.atlas.red

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