Investing in Puerto Rico is Smart Money, Not Debt
Puerto Rico's economy is in bad shape.
The government has $70 billion in unpaid debt and defaulted on $174 million of it at the beginning of 2016. In December 2015, the territory's unemployment rate of 12.2% was almost double that of New Mexico, which had the highest unemployment rate in the mainland United States. Other estimates put more than 45% of the population below the poverty line with more than a hundred Puerto Ricans moving to the mainland every day in search of better opportunities.
Unsurprisingly, bond investors are bearish on Puerto Rico's debt. They were demanding an extremely high 12% yield from Puerto Rican municipal bonds at the end of 2015.
So why are investors interested in Puerto Rico?
There are much more attractive investment opportunities in Puerto Rico than bonds.
Successful entrepreneurs and investors evaluate each business opportunity on the basis of its own merits. The macroeconomic situation surrounding the opportunity is usually a factor — but not the main factor — in the evaluation.
The dismal state of Puerto Rico's public finances makes the territory an unlikely choice for ventures in certain sectors but a prime choice in others, like service exports and real estate.
Here are some perspectives on that potential and what it can mean for other investors evaluating opportunities in Puerto Rico.
Why move in, when so many Puerto Ricans are moving out?
An opportunity that has arisen out of Puerto Rico’s money problems is real estate that is priced much lower than it would otherwise be.
"Smart money," i.e. well-informed financiers like John Paulson, a New York financier famed for betting against the US subprime lending market, who tend to be at least one step ahead of average investors, are drawn to value-building business opportunities like moths to a flame. The more aggressive the value-building, the better. And investing in Puerto Rico real estate holds tremendous potential for them.
Paulson has invested more than $1 billion into Puerto Rican commercial real estate so far, comparing Puerto Rico today to Miami in the 1980’s. While Paulson does not live on the island, he reaps the rewards from those smart investments.
Residential real estate is another prime opportunity for new investors. Home prices plunged after the recession and haven’t recovered, leaving banks to foreclose. Empty houses can be found in every neighborhood and it’s easy to find a home with beach access for $100,000.
Some investors are taking advantage of the residential real estate bloat, snapping up beachfront bargains and selling them to young professionals and people relocating to the island -- people willing to spend a little more on an updated property in the sea of neglected homes – or holding them and waiting for a resurgence of the Puerto Rican economy.
Puerto Rico's tax advantages are a magnet for "smart money" from the US.
In addition to the real estate opportunities, there are other tax incentives in Puerto Rico to entice investors.
Today, money flows around the world to jurisdictions where governments respect the rule of law and take a relatively small cut of profits via tax. While geographical borders are becoming less relevant in international business, US citizenship is like a tax border that never gets crossed.
Puerto Rico, however, enjoys special territorial status vis-a-vis the US and has implemented tax rules that "plug in" to US tax law in such a way that US citizens can achieve better tax treatment in Puerto Rico than anywhere else in the world.
By taking advantage of Puerto Rico tax incentives, businesses have a leg up on competitors elsewhere in the world. Some of the top incentives are:
- Puerto Rico Act 20, the Export Services Act, grants 4% corporate income tax on profits derived from services exported by a Puerto Rican company.
- Act 74, the Tourism Development Act, granting 90% to 100% tax exemption along with tax credits on project costs for a period of 10 years, with an option to extend an additional 10 years. Combined with lower real estate prices, this is a double whammy.
- Act 273, the International Financial Center Regulatory Act, to promote International Financial Entities (IFEs) with 4% fixed income rate, 0% property tax and other benefits.
- Act 185, the Private Equity Funds Act, allowing domestic or foreign investment vehicles to elect to be treated as a fund, and therefore obtain tax benefits including 0% on capital gains to accredited investors.
- Act 196, the Medical Tourism Act, attracts top quality doctors and state-of-the-art technology and infrastructure with tax exemptions and credits up to 90% on income tax and municipal licenses.
With such advantageous tax treatment, business owners and investors can reap the rewards whether they move or start a company in Puerto Rico to benefit directly, or if they invest in a company that qualifies and therefore has less tax burden holding it back from growth.
To get even more bang for your buck, individual investors who move to Puerto Rico and become bona fide residents can an benefit from 100% exemption on dividends, interest, and capital gains as described in Puerto Rico Act 22.
Smart Incentives are beaconing in Puerto Rico.
Those tax advantages are available to investors and business owners of any nationality but are one-of-a-kind for US citizens, especially given that Puerto Rico is a US territory and for a US citizen to take up residence there is as easy as moving to another state.
With all of the tax incentives, it may seem like Puerto Rican lawmakers are settling for a smaller piece of the tax pie, but they plan on increasing the overall size of the pie. It is a legislative recipe that has worked well in other jurisdictions, but Puerto Rico's is the only one that will work so well for US citizens.
The long-term goal is to make Puerto Rico a world-renowned center for the exportation of international services while attracting capital investment and economic development in real estate, the banking sector, agriculture, medical and other sectors. It’s no wonder investors are relocating to Puerto Rico against the tide of locals moving to the US.
Connect with professional business and legal advisors specializing in Puerto Rico tax incentives to determine whether the legislative recipe can work for you.