Puerto Rico’s governor touts $120M deal,
OZs to hotel investors
Gov. Ricardo Rosselló said there’s a “perfect storm of opportunities” awaiting those investing on the island as it seeks to recover from a devastating 2017 hurricane
Puerto Rico Governor Ricardo Rosselló
(Credit: iStock and Getty Images)
Puerto Rico Gov. Ricardo Rosselló is trying to entice investors to the island’s hotel sector with a flagship $120 million deal and new tax credits.
On the second day of New York University’s International Hospitality Industry Investment Conference, Rosselló spoke to hundreds of attendees about tax credits and how private development can piggyback off of federal aid money that the island will receive as it recovers from the aftereffects of Hurricane Maria in 2017.
“We’re going to have an enormous amount of resources coming to Puerto Rico because of the rebuild,” he said. Couple that with the 30 to 40 percent tax credits the territory provides for tourism developments and the federal Opportunity Zone program, which incentivizes investors to deploy their funds by the end of 2019, and you get a “perfect storm of opportunities,” Rosselló added.
Rosselló said Puerto Rico is seeking to double its number of hotels rooms in five to seven years with a focus on luxury hotels and resorts. During his session, the governor broke down a new deal led by Miami-based developer
R. P.C. ,New York-based investment firm M. A. C. and Texas-based developer and operator A. H..
The deal by Rosselló involves the $120 million acquisition of the former 500-room Gran Meliá Puerto Rico on a peninsula known as Coco Beach, which is about a 30-minute drive from San Juan. The seller is Meliá Hotels International, a Spanish hotel chain, and the buyer is a joint venture between R.P.M. and other The individual breakdown of ownership interests was not immediately clear at the time of this story.
OZ Real Estate financed 60 percent of the deal with debt and Puerto Rico provided $37 million in tax credits. The hotel, shuttered by Hurricane Maria, is expected to reopen as a Hyatt Regency in the fall. A source with knowledge of the deal said that due to the storm and then the Zika virus outbreak in 2016, the partners had to “look back quite far to get a [borrowing] base.”
Royal Palm development associate René Bello told The Real Deal that the island’s susceptibility to hurricanes and storms was “a determining factor in why we went with private lending.” Transactions in Puerto Rico commonly involve banks as a lender, added Carla Campos, executive director of the Puerto Rico Tourism Company.
Discussion of the high burden of insurance against natural disasters was a big topic throughout the conference, but Royal Palm CEO Daniel Kodsi said extreme weather doesn’t worry him.
“We’re Miami developers. We’re not concerned. We know how to deal with hurricanes,” he said. “Hurricane Maria was a once in a 50-year occurrence. So we’ve got 50 years.”
Coco Beach, the site of the now-shuttered Gran Meliá, is also in a designated Opportunity Zone, which allows investors to avoid or delay paying capital gains taxes if they invest in certain areas. Rosselló said that the Coco Beach land wasn’t initially included within the program but he later appealed to the U.S. Department of the Treasury to include it in the program. The Treasury Department clarified its guidelines for Opportunity Zones in April.
“That area was not populated. [So] it was a hiccup within the calculation,” said Rosselló, noting that as a governor he was given the chance to suggest a list of areas for designation to take advantage of the program’s benefits and exemptions. “When there was something left out the states and territories could go and appeal, and we went and appealed it,” he added.
One of the new equity partners, Investor, had a preexisting controlling stake in 1,000 acres surrounding the Gran Meliá. Royal Palm, best known for its involvement in the Miami Worldcenter project, is working on a master plan for developing the entire parcel. The Coco Beach peninsula currently has two 18-hole golf courses, as well as St. Regis and Wyndham branded hotels nearby.
Campos, head of Puerto Rico’s tourism body, said that Monarch and Royal Palm are now searching for additional investors and development partners to build six additional hotels (or about 2,500 new rooms) on the Coco Beach peninsula, while also looking at other assets. She noted that $1.5 billion in investment dollars would be needed to complete the entire Coco Beach project.
Rosselló, a former biomedial researcher who became Puerto Rico’s governor in January 2017, added that the Gran Meliá deal is a sign of the potential awaiting investors on the island.
“This is an example of what can happen to the rest of Puerto Rico,” he said.
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New Opportunity Zones rules are
Will developer money follow?
The government’s rules give more leeway to funds and businesses
looking to invest in distressed areas nationwide
The government released its long-awaited and latest set
of Opportunity Zone regulations Wednesday, hoping to
provide investors who have been on the fence with the
clarity needed to begin developing projects in distressed
Real estate developers have become enamored with
Opportunity Zones, seeking to raise funds into the billions
But without complete certainty on the program’s rules,
many developers have held back on deploying that capital.
Industry experts said that development projects could start
pouring into the designated zones with the new
regulations from the Treasury and the IRS.
Under the new regulations, funds now get a 12-month
grace period to sell Opportunity Zones assets and then
reinvest the proceeds into an Opportunity Zone. Before,
there was concern that these funds would be penalized for
failing to reinvest the proceeds immediately.
The White House @WhiteHouse
Also, under the old guidelines, a business that operates in
a designated zone had to make at least 50 percent of its
gross income from activity in that zone.
Now, that business can also qualify if 50 percent of its
wages or hours come from revenue earned from within the
The new regulations also clarified how a leased property
could qualify for the tax benefit.
The rules should provide some “comfort to use the
incentive,” said Jill Homan. Her real estate development
firm, Javelin 19 Investments, focuses on Opportunity
Zones. Homan said the provisions mean that investors
can still qualify for tax breaks if they invest in funds that
sell off some Opportunity Zone assets.
Before the new regulations were released, President
Trump along with Housing and Urban Development
Secretary Ben Carson and Treasury Secretary Steven
Mnuchin spoke about the importance of the federal
program at the White House Opportunity Zones Council.
Trump said even he was surprised by the success of the
The federal Opportunity Zone program gives developers
and investors the ability to defer or potentially forgo paying
capital gains taxes if they invest in a designated
Opportunity Zone. The first regulationswere released in
October, but developers wanted more guidance before
they started to deploy capital.
The biggest benefit goes to investors and developers who
hold their money in an Opportunity Zone for at least 10
years. That would allow them to forgo paying all their
capital gains taxes on their Opportunity Zone investment,
a feature particularly attractive to real estate developers.
Investors who wanted to receive the maximum tax break
would also need to invest by the end of 2019, creating a
rush for Opportunity Zone investment.
The new rules did not give guidance around how to
measure the value of or report on Opportunity Zone
investments. This was a concern for critics who worried
that the program will incentivize gentrification, or benefit
wealthy developers for projects that they were already
planning to build.
Some government officials anticipate the program could
spur $100 billion in new investment into the more than
8,700 zones throughout the U.S.
Sec. Carson told The Real Deal last month that his agency
cannot mandate affordable housing in the zones. It will,
however, give preference for developers who apply for
certain federal grants to build affordable housing within
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