By Joel Cintrón Arbasetti
Center for Investigative Journalism
The walk is led by Adrian Beales, an Australian sales director for Lifeafar, a company that offers real estate investment options for people from abroad. Behind him is a group of 20 investors.
They left El Convento hotel on Cristo Street in Old San Juan after the second day of the 2019 Lifeafar Investors Conference: three days of talks — from April 23-25 — about the advantages of investing in Puerto Rico. At 4:30 p.m. they go down Luna Street toward San Francisco Street under a clear sky.
Upon reaching Plaza Colón, they form a semicircle, some of them cover their face from the sun and contemplate building 405 on San Francisco Street. The four top floors, with balconies facing the plaza, are abandoned. The first floor, the Old San Juan Food Court, has an open bar that faces the sidewalk, with billiards and a corridor that connects to the back with the El Sazón de Abuela restaurant.
“That’s a shi**y food court,” Rich Holman told the group of investors looking at the building. Holman is the founder and president of Lifeafar.
The food court has been there for 11 years, and it continues to operate despite the fact that the upper part of the building has been abandoned since last year. In the bar they sell $2 beers and in El Sazón de Abuela, typical lunch dishes cost $8.50; a very good price for Old San Juan, where most businesses have inflated prices for tourists.
That food court with a digital jukebox playing Bob Marley will disappear soon. It is not part of the investors’ plan to transform the building into the Plaza Colón Hotel & Suites: a combination of leasing under the digital Airbnb platform with traditional seasonal rental focused on tourists.
Between the cafeteria and the bar there are around five employees, including the manager. Although they suspect about the sale of the building, none have information or know what will happen there.
But on May 1, Lifeafar’s Head of Investments, Eric Berman, closed the purchase of the 577 square-meter commercial building for $5 million, as recorded in the Puerto Rico Property Registry.
This is one of the first outcomes of the Opportunity Zones, areas where people can invest and receive tax benefits, such as putting off paying capital gains taxes until 2026 or reducing it to zero if they keep their investment in place for 10 years. It is part of the Donald Trump tax reform that came into effect in 2017.
An Opportunity Zone is supposed to be for “a community facing economic difficulties,” according to the Internal Revenue Service, and the program has been promoted by the federal and Puerto Rico governments as a way to spur economic development in “depressed areas.”
In Puerto Rico’s case, as an exception, all low-income communities were automatically designated Opportunity Zones. In addition, another 26 areas that did not qualify under the definition of a low-income community were also designated as such.
In total, approximately 95% of the island is considered a Qualified Opportunity Zone under the federal parameters, according to Puerto Rico legislation. Advisers and government officials told the Center for Investigative Journalism (CPI for its initials in Spanish) that more areas have been added, reaching 98 percent, although this change is not part of the federal law.
Investors who pay federal taxes can now take advantage of the fact that 95% of the island was designated as an Opportunity Zone. Taxpayers in Puerto Rico are still waiting for Gov. Ricardo Rosselló to sign the law that the Legislature passed on April 24 and that would give them municipal exemptions and additional tax credits, such as cutting property taxes by 25%, and another 25% exemption on construction taxes. In addition, an “expeditious procedure for the evaluation and issuance of permits” is offered.
“The governor has already received the bill approved by the Legislature. Once he finishes analyzing the approved measure, he will determine if he will sign it,” Manuel Laboy, secretary of the Department of Economic Development and Commerce (DDEC for its initials in Spanish), stated in writing.
Registering entails several steps
To receive the federal and Puerto Rico tax benefits, investors must register an “Opportunity Fund” or participate in an existing one and request a decree from the DDEC.
Those who only benefit from federal incentives must be authorized to do business in Puerto Rico, but they do not have to register an opportunity fund on the island or request a decree from the DDEC. This is the case of Lifeafar, which has incorporated the Lifeafar Property Management Puerto Rico company in the State Department but has not registered an opportunity fund.
The CPI asked Puerto Rico Treasury Secretary Raúl Maldonado about the estimated fiscal cost of the incentives, and if there is a feasibility study to support the effectiveness of the measure and how many jobs it will create. Maldonado will be chairman of the “Priority Projects in Opportunity Zones Committee,” if the bill is signed. The questions have not been answered.
Fiscal Control Board will evaluate expenses of Opportunity Zones
The tax incentives and decrees for investors represent a fiscal cost to the government’s coffers, and therefore, the Fiscal Control Board would have to evaluate the Opportunity Zones bill to determine if it complies with the Fiscal Plan.
Control Board Executive Director Natalie Jaresko told the CPI that she is looking into the cost of the local Opportunity Zones legislation.
“I’ve seen a draft [of the bill]; I don’t know what the final version is. I can’t tell you if it is consistent [with the Fiscal Plan] or not until someone really calculates the cost. Of course, we support more investments in the island and the use of Opportunity Zones. Some local support to the Opportunity Zones is necessary to be competitive with other states that do the same. The question is how competitive and how much it will cost,” she said.
“This is where I think we can have problems with the Board, because [the Opportunity Zones bill] also provides a tax credit for the investment you make…Why do I say there may be problems with the Board? Because the Board has been very uncomfortable with the issue of tax credits in Puerto Rico, because the budget spins out of control,” said Francisco Luis, certified public accountant and partner of accounting and financial advisory firm Kevane Grant Thornton.
The legislative bill offers an “investment credit” of 50%, with a ranking system that divides it into four installments: 25% when the exempt business completes construction or begins operations, and 25% of the balance in each of the three following years.
Luis sees it as “a tool to reassure the [Fiscal Control] Board that ‘this is not going to get out of control’.”
Will it be effective? the CPI asked.
“We’ve had laws that establish credit moratoriums since 2011, there have even been requirements to inform Treasury about how many credits are out there to produce a sort of inventory…Theoretically, yes, it could be effective. However, how actually are we going to control it? It’s a challenge, it’s a challenge,” said Luis.
Giovanni Méndez, a tax attorney and manager at Global Economic Optimization, said some investors believe the “Priority Projects in Opportunity Zones Committee” that the law would create may delay everything.
In the original version of the bill, the committee included: Maldonado, who is also the government’s Chief Financial Officer; Chief Investment Officer Gerardo Portela; and Christian Sobrino, executive director of the Fiscal Agency and Financial Advisory Authority, or AAFAF. Legislative amendments added four more members: Laboy; Public-Private Partnerships Authority Executive Director Omar Marrero, plus a member appointed by the Speaker of the House of Representatives and another by the President of the Senate.
The committee will publish a list of commercial activities and geographic areas that will be designated as Priority Projects in Opportunity Zones.
The Opportunity Zones boom is obvious in the different events for investors that have been held in the past months, such as Lifeafar in Old San Juan. Last week week, Portela and Laboy participated in the Opportunity Zone Expo in Las Vegas. This week the government will hold an Opportunity Zones summit under the “Puerto Rico: A paradise of Opportunities” theme, in which Rosselló and the principal advisor to the U.S. Department of the Treasury Secretary, Daniel Kowalski, will participate.
General admission costs $264. The “gold” ticket for sponsors costs $20,000. The activity is sponsored by law firm DLA Piper, financial firm JP Morgan and the real estate firm Hunt.
One of those interested in the Opportunity Zones is Brock Pierce, who leads a group of cryptocurrency entrepreneurs that moved to the island after Hurricane María. The cryptocurrencies are a digital mechanism for financial transactions that works like a currency without banking control.
In a video that the CPI had access to, Pierce is seen talking about the Opportunity Zones in a chat at the Red Monkey bar in Old San Juan. The talk took place April 22, and is part of “Crypto Mondays,” which are held every Monday in several cities in the United States.
“Puerto Rico has not yet approved the tax support for qualified opportunity zones here. The IRS has, we’re good to go from the federal government’s perspective,” Pierce said in the video.
“But down here, Puerto Rico hasn’t approved it yet meaning anything that you do down here has to pay for Puerto Rican taxes. There’s a very, very good chance that there’s going to be some people that come down here and start setting up businesses to build qualified opportunities on deals that are going to be running scams of sorts,” he continued.
“My projections previously [were] that I think $100 billion in capital is going to get funneled into qualified opportunity zones around the country. When $100 billion of capital is being unleashed. you know some of the worst possible people show up and they can screw it up for everyone,” said Pierce in the video.
Old San Juan, Santurce are magnets
Old San Juan, which is not exactly a depressed area or a low-income community like the ones the Opportunity Zones program is supposed to help, seems to have become the first focus of interest for investors seeking to reduce their tax payments. Santurce is another neighborhood that has been mentioned as one of great interest for investors and Opportunity Fund One has acquired at least one building, on Avenida Ponce de León with Duffaut Street.
The total investment that Lifeafar plans for the 405 building on San Francisco Street will be about $16.5 million, of which $10 million will be used to remodel the structure. Among the investors. are some Puerto Ricans who are taxed in the United States, but also from New Zealand, Canada and Belgium.
“We structured our first project in Old San Juan … we have a Qualified Opportunity Fund and we have a local entity in Puerto Rico that we will use to develop the project and operate the hotel,” Berman, head of investments at Lifeafar, told the CPI.
However, only 30% of the investors that participate in the “Boutique Hotel” receive the Opportunity Zones benefits. The others do not qualify because they do not have capital gains, according to Beales.
“I believe the local legislation is not as useful for someone like us [Lifeafar] or investors in the United States, who will mainly take advantage of federal legislation. We have a local real estate company in Puerto Rico, and I believe we qualify for additional benefits… But I’m not too sure about this either because I have not read a lot about the local legislation,” Berman said.
“We bought it not even knowing about the Opportunity Zones. We bought it because we think Puerto Rico will recover, there’s going to be a lot of tourism, going to be many jobs, people are going to want to come and see the real Puerto Rico and because of that we decided to do this project. The Opportunity Zone was a bonus,” said Beales.
Will Opportunity Zones be used to develop new projects or for projects that would have been done anyway? the CPI asked Luis.
“There has been a lot of criticism of that, and it’s true. Their project [Lifeafar] was already running when the Opportunity Zones were approved…I think so [it can encourage new projects,] but it is a very personal opinion. And I believe that Puerto Rico has an advantage over the United States. The entire island is an Opportunity Zone and that in itself presents an advantage over the United States,” he said.
“First, because [there are no Opportunity Zones], on the coast and second, there may be an area where there may be a swamp, an area where the economic distress is very brutal, it is not like that here. Bahía Beach Resort, have you been there? That’s an Opportunity Zone. Much of Isla Verde is an Opportunity Zone, Rincón is an Opportunity Zone. Truly, the development opportunities that you have in Puerto Rico are better,” he answered.
On several occasions, government officials, tax attorneys and investors have reiterated that the Opportunity Zones will not cause displacement or increase the cost of living due to the development of projects aimed at people with high purchasing power.
Maldonado had said he would “create a mechanism for the community to participate not in the end when the [Opportunity Zone] project is finished, but during its development.”
“And the idea is that for example, something very simple, if I’m going to develop a hotel in the southern area and we’re going to spend $300 million, we’re going to create 2,000 rooms. What do I need? That the nearby community trains in hospitality so that recruitment can be done directly…The projects that have been successful in the world involve the community from day one,” Maldonado told the CPI.
In the case of the building in Old San Juan, not even the employees who still work there know about the transaction, or what an Opportunity Zone is.
A windfall for investors
Michael Terry, president of Sanctuary Software Studio, walked next to the group of investors heading to the Plaza Colón building. He’s from Ohio, and it’s his first time in Puerto Rico. He came with his wife.
“We have invested with Lifeafar before and we wanted to see what their plans are in Puerto Rico, specifically with the Opportunity Zones that are in this place like the Plaza. I came for real estate, but I am very interested in the opportunities for startups [emerging companies] and bringing them to Puerto Rico,” he said.
Why, if investors make so much money, don’t they want to pay taxes? asked the CPI.
“Much of this [of the Opportunity Zones] focuses on capital gains taxes and frankly I’m rich enough to embrace the rules and handle that. But there are other interesting things related to the Opportunity Zones. If you want to start a new business… bring investors who invest here, start running new business, hire employees and things like that. Investors will take advantage of the situation, but everyone who gets involved will end up winning. And it’s not even necessary for them to move to Puerto Rico, it’s the money that comes to Puerto Rico, so…,” said Terry.
After talking about the Plaza Colón building, the group of investors entered the food court area. They passed by the bar, where there were a few customers, and went to the El Sazón de Abuela cafeteria, which at that time was empty.
There, Beales climbed on a chair to give instructions to the group. They went up the stairs, they saw the deteriorated rooms and meeting halls that will soon be hotel and Airbnb rooms. They reached the roof and there, amid debris and scars from Hurricane María, they drank champagne and toasted while looking at the ocean, the Castillo San Cristóbal fort and Old San Juan’s historic buildings.
Luis Valentín contributed to this story.