Eyes of the mega-wealthy firmly focused on Puerto Rico

http://www.caribbeanbusiness.pr/prnt_ed/eyes-of-the-mega-wealthy-firmly-focused-on-puerto-rico-9677.html

Issued : Tuesday, March 25, 2014 12:00 AM

Eyes of the mega-wealthy firmly focused on Puerto Rico

By : XAVIRA NEGGERS CRESCIONI & DENNIS COSTA

xavira@caribbeanbusiness.pr; dennisc@caribbeanbusiness.pr; cbprdigital@gmail.com

Edition: March 27, 2014 | Volume: 42 | No: 11

Dozens more wealthy investors also looking at the island for opportunities

Eyes of the ultra-wealthy firmly focused on Puerto Rico

Latest moves by offshore investors are only the tip of the iceberg, could represent huge economic driver for the island

A string of significant investments in Puerto Rico by hedge-fund and private-equity investors who are mostly based in the tri-state area has intensified in recent weeks, signaling a definite, long-term interest by big-time investment titans on the island.

Total investments carried out by offshore investors so far tally around $1.5 billion. These investors are buying at bargain prices because of the present recession in Puerto Rico and will be creating close to 1,000 permanent jobs as they develop their projects in the near future.

Recent developments in this regard include the acquisition in early March of the Condado Vanderbilt Hotel, La Concha-A Renaissance Resort and the accompanying Vanderbilt towers in San Juan, by Paulson & Co., a New York-based investment firm.

The acquisition—spearheaded by billionaire hedge-fund investor John Paulson, founder & president of Paulson & Co.—will entail some $260 million in overall investment, including costs to complete construction of and furnish the Vanderbilt’s guest-room areas. The cost of the acquisition itself, as in all other recent instances, remains undisclosed.

“These two properties are the epicenter of luxury in San Juan. Once the five-star, oceanfront Vanderbilt hotel is completed, it will be the most luxurious hotel in the capital. We believe Puerto Rico is on the cusp of economic recovery and that both hotels will benefit from the island’s future growth,” Paulson stated.

He is also already a significant stockholder in Popular Inc., parent company of Banco Popular, owning about 9% of the outstanding shares.

Another recent noteworthy acquisition was made by investment fund Encanto Group, a recently incorporated firm based in San Juan and comprising New York investors, which bought the Punta Candelero Beach Resort and the Palmas del Mar Yacht Club & Marina in Humacao, on Puerto Rico’s east coast. Encanto Group announced plans to invest $200 million to renovate the properties.

The deal—which includes the Solarea Beach Resort luxury condominiums, the Yacht Club Marina and about 24 acres of oceanfront land—consists of plans to build a beachfront hotel and residences, expected to generate about 400 jobs during the construction phase, and the goal of creating a world-class beach destination and water-sports center.

Then there is Nicholas Prouty, a billionaire investor who is founder & CEO of Putnam Bridge Funding, based in Greenwich, Conn. The firm, which specializes in acquiring real-estate assets mired within the initial stages of the U.S. bankruptcy court system, first came onto the Puerto Rico landscape in September 2012, when it acquired La Ciudadela, a housing and commercial complex in the Santurce sector of San Juan.

Another of Putnam Bridge’s high-profile acquisitions has been the Puerto del Rey Marina in the eastern municipality of Fajardo, formerly owned by Dan Shelley. Putnam Bridge paid $47.5 million for the property in June under similar financial terms, with the former owners of the marina, the largest on the island, having filed for bankruptcy in early 2013.

In all, Prouty is betting at least $750 million on Puerto Rico and remains bullish on the island’s potential despite credit downgrades and a marathon economic recession. “When both investments are fully completed, we estimate the creation of 1,000 jobs—jobs up and down the value chain,” Prouty told CARIBBEAN BUSINESS.

CHAMPIONS FOR PUERTO RICO

Such developments are only the tip of the iceberg when it comes to offshore investments, several sources have told CARIBBEAN BUSINESS, with the main lure being Acts 20 (Law to Promote the Export of Services) and 22 (Law to Encourage the Transfer of Investors to Puerto Rico) of 2012, essentially the island’s main calling cards in its bid to attract offshore investment.

Law 22 establishes incentives in which outside investors who turn Puerto Rico into their primary place of residence pay only 4% of taxes on earned income, no taxes on profit distributions and dividends, and zero taxes on commercial property for the first five years, with the incentives guaranteed for at least 20 years.

To become eligible for the tax breaks, a person must live in Puerto Rico for at least 183 days a year and prove that a preponderance of his or her social and family connections is here. Any person who moves to the island signs a contract with the government that guarantees the tax breaks through Dec. 31, 2035. The investment tax breaks are guaranteed until 2036. Only congressional action—or granting Puerto Rico statehood—would put a stop to the tax breaks.

Another piece of legislation, Law 273 of 2012, also known as the International Financial Center Regulatory Act, seeks to broaden the scope of banking activities for international financial entities organized in Puerto Rico and establishes additional tax incentives for this sector.

The Puerto Rico government primarily through Economic Development & Commerce Department (DDEC by its Spanish initials) Secretary Alberto Bacó, has aggressively pushed these incentives and has a list of some 300 offshore investors interested and ready to move to the island, sources close to the matter said, with the number of investors growing on a daily basis.

“Get on a plane now and business class is filled with representatives from Blackstone, Goldman, D.E. Shaw and every private-equity firm I know,” said Prouty during a keynote speech at the Puerto Rico CIO & IT Leadership Conference in early February.

“The movement is pretty impressive. We get three to five new entrants every week, and I think it’s accelerating,” said the head of the 20/22 Act Society—a support group for those who have the tax decrees—who wished to remain anonymous. “There are about three or four billionaires [besides Prouty] among the group of those moving to the island.”

Under the provisions of Law 20, hedge funds have to move a significant part of their operations to Puerto Rico as well as channel assets through local banks to qualify for 0% tax on all investment income and 4% tax on service income, such as management fees.

“Currently, there are many hundreds of millions on deposit at local banks and in the future, this will become billions,” the 20/22 Act Society head said. “This is money that is legitimately coming here and staying here. For sourcing purposes, you have to have your assets here.”

In addition to funds on deposit at local banks and investments by Paulson and Prouty, others among the group are investing “around $400 million to $550 million” directly in Puerto Rico, he said.

Other sources pointed to Paulson and Prouty as not only the most high-profile representatives in this latest wave of investments, but also the most outspoken champions of Puerto Rico’s potential as a place in which to invest.

While Prouty has arguably been the public face of the investment wave, with frequent appearances in media outlets and events, Paulson has taken a more low-key approach, inviting several interested investors and showcasing some of the island’s assets. In fact, sources have reported that Paulson was planning to hold a private investment summit this past weekend at St. Regis Bahía Beach Resort, in the northeastern town of Río Grande, for that exact purpose.

Meanwhile, Prouty has turned his lobbying for a Puerto Rico resurgence into almost a full-time job in itself. “Did you know that several times a week my phone rings and on the other end are potential Law 20/22 candidates wanting to learn more about moving to Puerto Rico? In those calls, I speak of the virtues of life here in Puerto Rico, the quality of the educational system, the kindness of people and the cultural richness,” Prouty said. “I tell them that there is a lot of misinformation about Puerto Rico particularly when it comes to crime—that no, there are no shootouts on [Condado’s] Ashford Avenue—that they need to stop watching reruns of ‘Scarface.'”

BIG PLANS

When it comes to Paulson’s Condado Trio acquisition, it is but the latest big-time Puerto Rico investment by the Wall Street investor, who first achieved fame in 2007 when he successfully bet that subprime mortgages would tumble. Such a wager netted about $15 billion in profits for his hedge fund and turned him into one of the 100-richest people in the world, with an estimated wealth topping $11 billion.

In 2010, Paulson made his first incursion into the Puerto Rico business landscape when he bought about 6.7 million shares of Popular Inc., right before a consolidation process mandated by federal bank regulators prompted Banco Popular to acquire Westernbank, another financial institution. Since then, Paulson’s firm has steadily bought additional stock, eventually owning 8.8 million shares, or 9% of the company, with an overall stake valued at about $230 million.

Then in September 2013, Paulson acquired a majority stake in St. Regis Bahía Beach Resort for an undisclosed amount. Through the deal, Paulson & Co. obtained an 80% stake in the resort & luxury residential complex, while local developers Interlink Group and Muñoz Holdings share a 20% ownership.

Paulson’s investments in the Condado Trio are by no means slated to be his last on the island, with total investment by Paulson & Co. alone expected to total as much as $2 billion by the end of 2015, DDEC’s Bacó said. “We expect to have more good news to announce soon,” he added.

Encanto Group includes the owners of the Punta Candelero Beach Resort and the Palmas del Mar Yacht Club & Marina. It is part of Encanto International LLC, a company being set up in Puerto Rico to provide asset-management, investment- banking and merchant-banking services from its headquarters in San Juan.

Very few details have been officially released about Encanto International, save for the name of a spokesperson, Alexander Lemond. CARIBBEAN BUSINESS learned that Lemond is a managing member of Grove Capital LLC, an investment firm based in the United Kingdom and launched in 2010.

Lemond has also served as a director of Encore Capital Group—a publicly traded, specialty finance company with operations spanning seven countries and based in San Diego— since March 2002. In February of this year, Encore announced it acquired a controlling stake in Grove Capital. The transaction, which is subject to regulatory approval, is expected to close early in the second quarter of 2014, at the latest.

Sources have also pointed to another name behind Encanto, that of Steven Stuart, a former vice president at Goldman Sachs who co-founded Garrison Investment Group LP, a self-billed “alternative investment and asset management firm,” back in March 2007.

When asked by CARIBBEAN BUSINESS about the investors who comprise Encanto Group, Lemond only said, “the identities of our investors are confidential.”

However, Lemond was more forthcoming about the reasons for the group’s investment. “We are excited about the opportunity to develop a world-class beach and marina community. The Yacht Club is the only 5-star resort marina on the island and one of the few in the Caribbean, while Solarea offers a luxury beach-living experience unique to Puerto Rico’s eastern coast. In addition, we have plans to develop a beach resort adjacent to Solarea in the short term.”

The Encanto Group spokesman also confirmed they are looking at other potential acquisitions on the island. “Yes, we are actively evaluating multiple opportunities in Puerto Rico. As our investment indicates, we are positive about the island’s future, and we believe Law 20/22 will spur growth in Puerto Rico’s investment community.”

With regard to Prouty, the investor has spent millions of dollars in renovations at La Ciudadela since its acquisition, which previously had faced a difficult road for years and saw one of its main developers, Miramar Realty Management, file for Chapter 11 bankruptcy in March 2011, as well as a lawsuit by Banco Popular some months afterward.

Nowadays, practically all of Ciudadela’s housing units have been sold. Although no official announcements have yet been made regarding additional investments in the area, Prouty has made no secret of the fact he wants to expand development beyond the Ciudadela grounds, with about $100 million to be spent on the project’s third phase, as well as the creation of around 3,300 construction jobs and 100 permanent jobs.

The development will include five buildings, with a total 251 apartments, 61,000 square feet of commercial space, 13,000 square feet of recreational space, 15,000 square feet of new outdoor areas, including a park area that would reportedly connect the Ciudadela complex with the art museum nearby, and 408 new parking spaces.

Plans for the Puerto del Rey Marina are no less ambitious, with Putnam Bridge planning to invest about $450 million in improvement work at the marina. The project is slated to create 200 to 400 jobs during its construction phase, and 300 to 500 permanent jobs once renovations are completed.

“There has never been a better time to acquire irreplaceable, landmark assets at these types of prices,” Prouty said. “My fellow investors share a strong conviction that beachfront property located in a country with an U.S. American fl ag in the courtroom and a Walgreens on the corner is a good bet. Couple that with a government bending over backward to attract business while enacting generational reforms and you have the recipe for a comeback. New York had its economic challenges in the 1970s, but how many of us wouldn’t kill to go back in time and buy some of those apartments that are now trading at double-digit multiples?”

FANTASY ISLAND

With Paulson and Prouty’s investments making news, scores of affluent financiers and retirees are now flocking to Puerto Rico in search of big tax savings that will enable them to substantially grow their investments.

“The interest is really brewing. There are about 5,000 people interested in taking advantage of these tax breaks,” said one person with a Law 22 tax decree.

“Before, there was no movement, but when Bloomberg published a story last year on the tax breaks, interest in Laws 20 and 22 really exploded,” said tax attorney Fernando Goyco, partner at Adsuar Muñiz Goyco Seda & Pérez-Ochoa PSC, who has 34 clients seeking tax-exempt status. “Every week, I get about four or five calls from people interested in learning more about Laws 20 or 22.”

For example, a trader in New York would have to pay 39.6% on short-term capital gains because this, in the trader’s case, would be considered regular income; a 3.8% special tax enacted by President Barack Obama and a 12% state tax on any earnings from investments bought and sold in less than six months. Under Law 22, this person wouldn’t pay any tax on this investment, Goyco said.

“That’s 60% tax on the dollar versus no tax. That’s a powerful lure,” he stated, adding that this person, as a Puerto Rico resident, would be free from federal income taxes.

People moving to Puerto Rico are wealthy, but not all are jet-setters. Some jumping the pond hark from places such as Gainesville, Fla., and Georgia, sources said.

Contrary to popular belief, there is no net worth requirement to qualify for these tax breaks and anyone who hasn’t been a resident of Puerto Rico for the past 15 years can apply so long as they are willing to move to the island. The process is relatively quick, simple and inexpensive. It costs about $1,000 to file paperwork to receive a Law 22 tax decree; the DDEC is taking about 30 to 45 days to grant its approval and a tad longer for Law 20 tax breaks for companies, Goyco said.

While this might not be fair to local investors and financiers, the tax breaks are good “because otherwise these people wouldn’t be coming to Puerto Rico,” Goyco said. “Some of these people are going to get interested in making other investments in Puerto Rico.”

Many of the people picking up their bags and starting a new life here are traders, hedge-fund managers and other financiers in their mid-30s to early 50s—who can make the most of the elimination of taxes on dividends and capital gains—as well as affluent retirees. Most of these are opting for homes in Condado, Dorado, St. Regis Bahía Beach Resort and Palmas del Mar, Goyco said.

“I’ve also got two guys with decrees who are surfers and moved to Rincón,” the attorney said.

Among those who have changed residences is Damon Vickers, founder of Nine Points Management & Research, who moved his hedge fund and family from Seattle last year, National Public Radio (NPR) reported.

“I like making money. We want to go to a place where our money is treated the best, so we might benefit ourselves, and we might also benefit our investors,” Vickers told NPR.

If anyone is smart money, it is Vickers, based on his curriculum vitae. He was an early investor in Cisco, Applied Materials, Starbucks, Amazon.com, Outback Steakhouse, Whole Foods and Timberland. Vickers was one of the very few to call the top of the bull market in March 2000. He predicted the dot-com collapse, warned investors about Enron and went on to call the second market top in 2008.

Like Prouty, Vickers’ friends in the investment realm are watching closely to see how he fares.

“These people will spend about $500,000 a year here, and that’s before we’re talking about the purchase of real estate, etc.,” said Paco Díaz, a broker with Trillion Realty Group, the local affiliate of Christie’s. “Basically, people are renting for a year to see how it goes, and then decide if they want to buy something to set up a long-term residence here.”

Based on this rate of spending alone, the “20/22ers” will spend about $150 million or more a year in goods and services in Puerto Rico.

Trillion Realty has a portfolio of 50 individuals who have moved or are considering moving to Puerto Rico.

If all goes well, this influx of new money will push up luxury-property prices in Puerto Rico as well as the overall quality of the neighborhoods where these people move, Díaz said, adding there soon will be a shortage of top-caliber luxury properties and private schools to go around. In anticipation of this, it has been reported that Paulson has bought some Condado property to construct a luxury condominium.

“We need to create a consciousness as a country that we can do something extraordinary here. That we could have an airport full of Learjets and we could all get ahead,” Díaz said. “I want to see Puerto Rico become an exclusive island—rather than an all-inclusive island where anything goes—because then things are going to be better for all of us.”

Miguel A. Ferrer, CEO of UBS Financial Services Inc. of Puerto Rico, and Gabriel Hernández, a founding partner of Scherrer Hernández & Co., are also touting these tax breaks and Puerto Rico’s other benefits to potential new residents through a website called “Puerto Rico is the Answer”—www.puertoricoistheanswer. com.

“We are promoting the island as a result of our deep-seated belief in Puerto Rico’s economic potential. With Puerto Rico is the Answer, we hope to contribute in any way possible to an economic rebirth,” states the webpage.

Economist Elías Gutiérrez said, “It’s a positive move in the right direction,” but according to his projections, it would take an investment of $10 billion a year during the next 12 years to get Puerto Rico out of the economic doldrums it has experienced for the past decade.

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