María de los Angeles Rivera: OZ Investing in Puerto Rico

María de los Angeles Rivera

Nearly the entire island of Puerto Rico lies in an opportunity zone. But what are some additional taxpayer benefits to investing in Puerto Rico, now a year and a half removed from the destruction of Hurricane Maria?

María de los Angeles Rivera is head of tax and international business center director at Kevane Grant Thornton in San Juan, Puerto Rico.

Click the play button below to listen to my conversation with María.

Episode Highlights

  • The special tax incentives (specifically Act 20/22) for Americans investing in Puerto Rico that preexist Opportunity Zones.
  • Puerto Rico’s shift from a manufacturing economy to a service-oriented economy with R&D and IP.
  • How Puerto Rico views the Opportunity Zones policy as a key component in business development on the island, post-Hurricane Maria.
  • Pending legislation in Puerto Rico that will further incentivize Opportunity Zones deals on the island that will define priority projects and conformity with the federal benefit.
  • The most common questions and biggest misconceptions about Puerto Rico’s current situation.
  • The importance of being well advised by professionals before investing in Puerto Rico, as it is defined as a foreign entity for tax purposes.

Featured on This Episode

Industry Spotlight: Kevane Grant Thornton

Kevane Grant Thornton

Kevane Grant Thornton is a full-service CPA accounting firm, providing accounting, advisory, tax, outsourcing, and audit. With over 100 employees headquartered in San Juan, they serve multinational businesses that come to Puerto Rico looking for incentives.

Learn More About Kevane Grant Thornton

About the Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

Show Transcript

Jimmy: Welcome to “The Opportunity Zones Podcast.” I’m your host, Jimmy Atkinson. And today I’m on site at the Coasis Coalition Opportunity Zones SuperConference in Dallas. And joining me in person today is María de los Angeles Rivera, a Tax Partner and International Business Center Director at Kevane Grant Thornton in San Juan, Puerto Rico. So María, thanks for joining me today and welcome to the show.

María: Absolutely. Thank you, Jimmy, for having me with you today.

Jimmy: Absolutely. It’s great to be here with you. I know we’ve spoken on the phone a couple of times. And Puerto Rico, obviously, is big in the opportunity zones space because almost the entire island of Puerto Rico is essentially one large opportunity zone, almost every single census tract, I believe 98% or so.

María: That’s correct. At the beginning, when the census tracts were at least appointed opportunity zones, it was like 94.5% but 2 more census tracts were added last December. So that raised the number to almost 98%.

Jimmy: Yeah, that’s incredible, almost the entire island. And I have a little bit of history visiting Puerto Rico. I actually got married down there. My wife is from there. Or, my wife’s family is from there I should say, and we got married in Rincón, so we go visit Rincón every once in a while. So I’m particularly interested in our conversation today about Puerto Rico and how opportunity zones investing in Puerto Rico plays out. So to start us off, can you tell me a little bit about Kevane Grant Thornton and the work that your firm is doing in the opportunity zones space and what services do you provide your clients and who are your clients typically?

María: Certainly. Kevane Grant Thornton even though the name can be a little, you know, conceptual being an American firm, we are quite 100% local Puerto Rico firm, member of the Grant Thornton International Network. Next year we’ll be 45 years old since the foundation and we are a full-service CPA accounting firm. So we provide accounting, advisory, tax, outsourcing, and of course audit of financial statements. Right now, we are close to 140, 145 employees all together. And we have one office in San Juan, Puerto Rico. We served a very diverse group of clients in our offices from local businesses to multinational companies that come to Puerto Rico to do business, retail, real estate, manufacturing, services industries, companies that come to Puerto Rico looking for incentives that we will be talking about a little bit later. So we have around 100 clients all together. Very diverse.

Jimmy: Very diverse mix of clients. Good. And you do work for an international firm. Grant Thornton has offices all over the world. But the Kevane Grant Thornton is specific to San Juan in Puerto Rico.

María: San Juan, Puerto Rico. We are part of this network, which is a global network, that we are right now…I think we are in around 135 countries around the world. So we…

Jimmy: Pretty large reach.

María: Yes, we say that we are everywhere you are and everywhere you want to be.

Jimmy: And maybe everywhere I don’t want to be too. You’re everywhere.

María: Everywhere.

Jimmy: So, María, tell me a little bit about your background and your personal areas of expertise and how did you get to where you are today?

María: Sure. I was born and raised in Ponce, Puerto Rico, that’s south of the island. And I spent all my student years in Puerto Rico until my master’s degree. I came to Austin, Texas to do my master’s in professional accounting with a major in tax. But I was always certain that I wanted to go back to Puerto Rico and work. So since then, I’ve been working in CPA firms now for 30-something years, all of those years in tax. So the type of clients that I’ve served around all those years have been, again, diverse: manufacturing, construction, tourism. And now a lot of service providers, service companies, they are coming to Puerto Rico to establish their business here in Puerto Rico.

In addition to that, as you mentioned before, I’m the International Business Center Director for Grant Thornton International in Puerto Rico. The network has around 34, 35 IBCDs, as we call them, in 23 countries. And our main objective is to get international clients connected to different countries. So if for example I have a client in Puerto Rico that wants to go and do business in Spain, for example, I can talk to the IBC director in Spain and put them together and he will receive the same services he’s used to in Puerto Rico.

Jimmy: And so that’s the power of the Grant Thornton network.

María: That’s the power of the network. Yes.

Jimmy: Very good. So you have a lot of experience, 30-plus years you say and you mentioned earlier when we were speaking at the lunch break at the conference that we’re currently at that Puerto Rico is kind of attempting to undergo a shift from a manufacturing economy to a service economy. So talk to me a little more about that and tell me what the business case is for investing in Puerto Rico and go into some of the tax incentives that are currently available. I know there’s a lot of tax incentives and how Puerto Rico is treated and how investing is treated for U.S. citizens in Puerto Rico. Tell me a little bit about that.

María: Yes. So we need to do a little bit background on that.

Jimmy: Yes, please give me Puerto Rico investing 101.

María: Let’s do a history tour. Puerto Rico was originally colonized by Spain, and then it was won by the U.S. in one war in 1898. And since then, we have been a territory or a possession of the U.S. We are not a state. So we are not treated as a state for a lot of things, issues. People that are born in Puerto Rico, we are U.S. citizens. So we have all the rights and responsibilities of U.S. citizens. But because of our situation, political situation, for tax purposes, for U.S. tax purposes, Puerto Rico is treated as a foreign country. So that brings into the formula certain complications that we always stress that if someone is looking into doing business in Puerto Rico, you have to be looking it from an international standpoint, okay?

So that’s very important. That has allowed Puerto Rico since the 1960s to develop this very complete and uncomfortable tax incentive program. I mean, no any other country has something like we can have. And the purpose of this program was to attract investment to Puerto Rico. Back in the ’60s, it was mostly manufacturing. Combined with certain codes sections in the U.S. code, one of the most prominent one was the section 936, which provided certain tax advantages to companies in the U.S. to establish subsidiaries in Puerto Rico, mostly manufacturing pharmaceuticals, drugs. One time in that timeframe, somebody said that almost all the Tylenol that was being consumed in the world was produced in Puerto Rico and some other drugs also.

So when 936 was phased out back so many years ago, the program still remain. But it’s shifting, trying to shift its focus from a manufacturing perspective to a more service-oriented R&D intellectual property development point of view. And that’s where nowadays when you do see people talking about Puerto Rico, they talk about service exemptions and service exports and investors moving to Puerto Rico and become bona fide residents of Puerto Rico. And you will ask why someone from the U.S. would like to become a bona fide resident of Puerto Rico? Again, because of the complicated situation, a Puerto Rico bona fide resident, even being a U.S. citizen, is not taxed at the federal level on his or her Puerto Rico source income.

So for example, in my case that I live in Puerto Rico, I’ve been living in Puerto Rico all my life, I work in Puerto Rico, even though I’m a U.S. citizen, I don’t pay U.S. tax on my Puerto Rico source income. I do pay tax in any other income I receive from any other part in the world but not from Puerto Rico. So that makes this incentive a little bit more attractive, especially for individuals that are in high paying jurisdictions like probably New York, California, they look into moving to Puerto Rico to obtain, they say zero tax, but it’s really not zero tax, is zero tax in certain types of income.

Jimmy: So tell me more about the certain types of income that are exempt.

María: Under this Act, which is Act 22, and then, again, we can then later on review the different tax exemptions we have with this Act. Act 22 is for to attract investors to move to Puerto Rico. So let’s say you’re a trader, that’s your business. So what you realize is capital gains or losses and maybe small amount of dividends because not much dividend because you’re trading, okay? If you become a bona fide resident of Puerto Rico, by definition, the sourcing of income of this capital gains usually because this trading, you know, stocks or whatever in the market, it’s sourced where you’re a resident of. So for U.S. purposes if you are a bona fide resident of Puerto Rico, those gains are sourced in Puerto Rico. And I searched…

Jimmy: And then it’s at no federal tax.

María: No U.S. tax on those. And then if you’re covered by one of these Act 22, there will be no Puerto Rico tax on the gain.

Jimmy: Okay, because there is Puerto Rico tax on certain gains sourced in Puerto Rico, certain income sourced in Puerto Rico.

María: Because Puerto Rico has its own tax system. Again, remember, we’re falling jurisdiction for U.S. purposes. So we will have our own tax code, which at the beginning was formulated based on the 1939 U.S. Internal Revenue Code back in 1954. And since then, it has been amended several times. But the basics of the code are very similar to the U.S. code’s principles. So it’s easy to understand how our law work because it’s based on the U.S. law. So this individual decides to move to Puerto Rico and the IRS say, “There have been some problems with people moving not only to Puerto Rico,” mostly to the other positions like USVI where they said back in the day, “Oh, I’m a resident of the USVI, I don’t pay U.S. tax because it’s kind of the similar thing.” And they were really not living in the USVI. So back…

Jimmy: Right. They just had some mailing address there or something, right? Yeah.

María: So back some time ago, the IRS came up with some new regulations, that section 937. That in order to be, for U.S. purposes, a bona fide resident of Puerto Rico, you have to meet three important tests every year. And which are those tests? First, you have to have what is called the physical process. And that means that in general terms, you have to spend 183 days in Puerto Rico.

Jimmy: A little more than a half a year, right?

María: Almost a year.

Jimmy: The majority of the year.

María: In certain cases, there are other tests you can go to meet but the most talked about one is this one, they want 183 days. The second test is the closer connection test. You have to be closer connected to Puerto Rico rather than anywhere else in the world. And that’s very important in some cases because like, for example, if you have a family, young children and a spouse, they need to move to Puerto Rico with you because if they keep their residents in the U.S., then you have closer connection to the U.S. Okay? So that sometimes is the hardest part for these people looking into moving to Puerto Rico because they will need to move.

Jimmy: I gotta bring my kids and my wife with me. Yeah.

María: Yes. And look for schools and all that stuff in Puerto Rico, which is doable and people are doing it. And then the third one is the tax home. A substantial portion of your income has to be derived from your business in Puerto Rico or from whatever you do in Puerto Rico. So you cannot have two tax homes. Like for example, you work from Puerto Rico and from New York. So the person that moves to Puerto Rico trying to get this benefit has to comply these tests every year. So every year they need to this or they need to keep track of their flights, of their travel, and all that stuff. But once you do that and you structure correctly and you have capital gains income and maybe some small interest or dividends, you will be reducing your tax to zero.

Jimmy: You can save a lot of money and make it well worth it to track all this.

María: One important thing is that the IRS says, “Well, okay, but if you had some accrued gains while you were a resident of the U.S. and then you moved to any possession, Puerto Rico, and you dispose of that asset within 10 years, we want some of that because some of that was earned while you were a U.S. resident.” So there is this thing that gains for a period of 10 years will pay some U.S. tax depending on…

Jimmy: And that shares the same holding period as the opportunity zones policy, just coincidentally.

María: Very coincidentally. So that’s the basics of how an Act 22 guy or gal can get benefits of moving to Puerto Rico, okay? That’s for the individual. But if that individual also has a business, is like a consultant and he can consult nowadays through phone, through internet, Skype. He doesn’t have to be half an office anywhere.

Jimmy: He doesn’t necessarily have to have a physical presence in any location. Right.

María: Exactly. So he might decide to move his business to Puerto Rico and qualify it as an export service business under Act 20. And the law provides a list of all the services that could qualify for this. And basically, it’s like a laundry list: consulting, accounting, back offices, even trading companies can qualify for this export exemption. Telemedicine is something that we’re seeing a lot and now blockchain and crypto. So depending on your service you can decide to move your business to Puerto Rico and provide services anywhere in the world and that qualify for this Act 20.

And what’s the benefit? You pay only 4% income tax to Puerto Rico and zero to the U.S. because you’re sourcing that income in Puerto Rico, and of course, don’t use a U.S. company to do that because a U.S. company will be subject to U.S. tax no matter what. So you have to create your own Puerto Rico company and then some special issues will come into play if you’re transferring intellectual property or any other assets. Remember, Puerto Rico is treated as a foreign country. So all the nice things about 367, outbound transactions, and all that would come into play. So sometimes what we see is people that already has something developed and then they will keep that in the U.S. company. Where they’re planning to develop new stuff, they’ll do that in Puerto Rico, anything.

Jimmy: Understood.

María: So it will not be subject to the outbound transactions.

Jimmy: So that was a great background on a lot of the tax incentives for moving to Puerto Rico, investing in Puerto Rico. That was helpful for me personally because I didn’t know that level of detail. What’s that?

María: There’s more.

Jimmy: Yeah, I’m sure there’s more. Would you like to continue?

María: Yeah. I talked about Act 20 and 22 because those are like, you know, the ones that are up there right now in the in the minds of everybody. But I personally see a very great deal of opportunity with all the tax incentives that we have in Puerto Rico combined with the opportunity zones legislation. It’s like we have Act 73, which mostly incentivize manufacturing and provides what we call the R&D credits. In Puerto Rico, you can get a tax grant on the Act 73 and do research and development and get credit for the expenses you incur in the R&D process.

And the best thing is you can sell those credits in the market. There is a market for credits in Puerto Rico, only in Puerto Rico. They’re not good in the U.S. but there is a good market for people that want to buy these credits to get an advantage on their tax position. Like for example, I owe $100,000 of tax just to say a number, and you have a credit for $100,000. I buy it from you at a discounted price from $88,000 to $90,000-something depending on the type of credit. So it’s a good deal for me because I satisfy my tax liability, but I don’t pay the 100% completely. And for you, it’s a good deal because you get more financing into your business.

Jimmy: Yeah. It’s win-win for the buyer and the seller.

María: So that’s Act 73. And then Act 83, which is one of the ones also we see a great deal of opportunity, it’s for green energy. Anything that deals with sustainable, renewable energy, solar, when these app will provide tax incentives. And most of the incentives along all these grants is they’re similar. You get for a personal income tax rate, no tax some dividends or distributions, no tax on capital gains on the sale of the stock of the corporation, and certain local incentives like property tax exemption and volume of business extension, which is like a license you pay to the municipality where you’re doing business. So the exemptions go across the board, the different taxes we have in Puerto Rico.

And if you’re acquiring, for example, machinery equipment to be used in the process, that’s exempt from sales and use tax also. So there is a lot. So I talked about manufacturing, I talked about green energy. And the other one is tourism. Puerto Rico is an island in the Caribbean, okay? So tourism is really important for us. It hasn’t been developed as much as you would think it would, where there is an incentive act for tourism for establishing of hotels. And they don’t have to be big hotels, they can be smaller hostels or paradores like we call them, smaller hotels.

So that also covers the construction and the operation of the property. And the incentives are the same. Therefore, in the case of their tourism is a little bit different. It’s 90% exemption on income tax, but the highest income tax rate is 38.5%. So it’s close to the 4% tax. And now casino operations are covered by the exemption. So back in the days, casinos were not covered by the tax exemption. And usually you will have a hotel with the casino. But now the casinos are also part of the exempt activity.

Jimmy: So we might see some more casinos getting put in.

María: Yeah. That concerns me with the opportunity zones because casino is a sin business. So some structure will need to be done in that area. But I’m certain it can be done.

Jimmy: Yeah, well, let’s talk about opportunity zones. That was a great background on all of the tax incentives in Puerto Rico that exist without opportunity zones.

María: Way before opportunity zones.

Jimmy: Way before. So these are these are all existing…they pre-exist opportunity zones completely. But let’s shift our focus now to opportunities zones. I want to get your high-level overview. What’s your take on the opportunity zones program? What’s your view of it?

María: Well, I think, for us in Puerto Rico is a great opportunity, especially after the storms in 2017. You know, you’re aware of most of your listeners are aware of the destruction that we had with Irma and then María. So we are now in a reconstruction, rebuilding, recovering mode. And we see the opportunity zones legislation as a key factor in that rebuilding and that recovery. The government is or has identified already the infrastructure projects they want to work with. And as I understand these projects are mostly going to be financed by the CBDG funds that are, you know, coming down to Puerto Rico for the reconstruction and recovery.

So the government should be taking care of the infrastructure, the roads, the electrical power, and any other infrastructure type of needs. And then the opportunity zones will bring that private capital for the development of the businesses in those areas, where these infrastructure should be leveled or bring up to high standards or the standards that we’re used to before the storm and ease the way of doing business in Puerto Rico through then having this private capital coming in through the firms investing in Puerto Rico businesses or Puerto Rico projects will be a perfect match preparing for a full recovery of the economy. You know, most of you are aware that Puerto Rico is under an oversight board for a couple of years now. And mostly because of the debt issue.

You know, Puerto Rico issue more than we can pay. That’s true. And it happens from other states and cities. Yeah. And so right now we’re dealing with the oversight board. And then María came. So I wouldn’t like to say it’s complicated but it’s a different scene. But I’m always optimistic person. So I believe we’ll be able to get out of this and with the help of the opportunity zones legislation and bringing outside capital to Puerto Rico. And if they are aware of all these incentives we have in Puerto Rico, I think they will be looking to Puerto Rico for their investments when deciding where.

Jimmy: Right, right. And speaking of outside capital and attracting it, the Puerto Rico legislature currently has legislation pending that will even further enhance opportunity zones on the island and provide benefits to certain real estate projects. Can you tell me a little bit more about that pending legislation and when you think it might be passed?

María: Sure. And it’s interesting because in the panels today, we were hearing about other states doing kind of similar, you know, things trying to attract, of course, people to their opportunity zones to invest. So we think Puerto Rico, along with the tax incentive programs we talked about, which can definitely help increase the return on investment there because if you pay less taxes, your return should be higher, of course. It’s also working on a special opportunity zone bill, if we want to call it that. It’s divided in three parts mostly. The first part is the one that’s dealing with projects or what they call priority projects that would not qualify for any other of the incentives we talk about, as it’s written by now, if you qualify for an Act 73 or Act 83, you cannot claim the benefits of this special law that is being promoted because you have your incentives for that industry.

Jimmy: So the bill only relates to types of businesses, types of projects that don’t already qualify for exempt.

María: Like, for example, a real estate development. You buy a building, you substantially improve it, and then you rent offices or apartments. That doesn’t have an exemption grant for it. There’s no law for that. So that could certainly be one of the priority projects that will qualify for the tax incentives in this bill. And what they’re saying is if it’s a priority project and it has to be designated, priority project by committee, a committee is going to be formed and that committee is going to pass judgment on the proposals of projects, you get a fixed 20% income tax rate. And you say, “Wow, 20% versus 4%.”

But remember I said Puerto Rico is the foreign jurisdiction when we talk about tax and international provisions like GILTI and control foreign corporations from the international tax side in the U.S. would apply to investments in Puerto Rico. So if we have a 20% rate or even an 18% rate, which is now the number that is, you know, being said, it will take you out of GILTI because it’s a high tax. So there’s some structuring to work around that. But let’s talk about the Puerto Rico side, they will provide you with a lower tax rate compared to the 38.5% I mentioned. So 20%,18% is a good way for something that does not qualify for a an exemption and then…

Jimmy: It’s better than the 38.5%, right?

María: Right. Much better. And then zero tax on the dividends, at least zero Puerto Rico tax on the dividends that are distributed from these entities to the farm or the shareholders. And then, again, some property tax exemptions and Bollinger business exemptions, construction excise tax exemption to incentivize, you know, this projects to be done. Who’s gonna say, “Yeah, it’s a priority project or not,” but is this committee that the law as the bill, under the law, the bill as originally filed said it was going to be composed of three people. After all the debate and in the legislature and an influence and pull by the local, different municipalities, we have 78 municipalities in Puerto Rico. The committee, the last time I heard, was increased, I think, to seven person.

So they might be including some representatives from the mayors and local agencies in deciding. Yes, it’s a priority project or not. Why? Because they want the projects to fulfill the need of economic development and improvement of both social and economic situation of the zone where they’re going to be done. So, in summary, that’s what the bill has, the first part. The second part is that the bill brings into the Puerto Rico law the same opportunity zone sections, the wording of the two sections. In the U.S. court they just translate that to Puerto Rico and they are adopting to the tax code. So…

Jimmy: So Puerto Rico currently is not conforming but this legislation will.

María: Yeah, this will conform. Yeah. And that’s very important, not just for the U.S. shareholders or, I mean, the U.S. investors but for local investors.

Jimmy: Yeah, for Puerto Rican residents who are investors, yeah.

María: Because as I explained to you, Puerto Ricans or U.S. citizens that live in Puerto Rico, we don’t pay U.S. tax on capital gains. So the benefits of deferring the capital gains really doesn’t make any difference for us because we don’t pay U.S. tax on those.

Jimmy: Right. But it would make a difference if you can differ and exclude local gains, right? Yeah.

María: Right. Because capital gains will be subject to local tax. Right now is a long-term capital gains with a 15% tax. But if you are subject to the alternative tax, something similar to the EMT tax, it could be 24%. So if local investors can realize these gains and invest in the funds who invest in the projects, they can also benefit from the deferrer. So that’s the second part of the bill. And it’s to conform to the U.S. and to provide the benefits for the local investors. And for a fact, I know there are families that want to do that. But if they need to pay 15% or 24%, it’s harder. So that would be great.

Jimmy: There’s not much of a benefit there, yeah, for local residents. Okay.

María: Yeah, because it would be just realized in the game, paying the tax, and investing whatever you want on the project. So that will be great. And then the third change, they’re also making a change to the Act 22 I just talked about before. And the present law, remember I talked about the 10-year facing period for the gain? Puerto Rico says, “Well, if you’re going to pay tax to the U.S. on that gain, I’m going to tax it here and you get a credit for whatever you pay in the U.S.” They are making a change to that because if you are in Act 22 and you have this gain that have not realized because you want to wait the 10-year period, and you say, “No, I can realize it now. I can defer it for U.S. purposes. But if I have to pay tax in Puerto Rico, it’s still good.” So again, it’s unethical for me change for the Act 22 individuals that have moved to Puerto Rico and have those unrealized gains still there.

Jimmy: Gotcha. So it goes hand in hand with number two a little bit.

María: Yeah, yes. But just especially for…

Jimmy: But especially for the Act 22.

María: But remember in Puerto Rico special laws will go over the general law. So if the special law, which is Act 22 says is taxed at whatever the percent.

Jimmy: They have to make change. They have to make the change to that procedurally.

María: They have to make changes to it.

Jimmy: Yeah. Gotcha. Very good. So this legislation is pretty crucial then, especially for local residents in Puerto Rico. Do you have any ideas as to when it may be passed? By the way, for my listeners listening, we’re having this conversation on April 4th. I’m not sure. I’m trying to get this episode out within the next few weeks. But it’s possible that it will have been passed by the time this episode is…

María: Yeah, we certainly expect it to be passed in the next couple of weeks. Yeah, the legislation was introduced by the governor back in November. And again, it’s been there in our legislature since November. Of course, there were some breaks on the sessions. But the President of the Senate just said a couple of weeks ago that he wants to approve it in the next, you know, in this session, so that means in the next couple of weeks. So we certainly expect it to be approved then before the end of April. Yes. And again, time is ticking, the clock is ticking, because as I mentioned, we are adopting the same rules in the U.S, so the 180 days apply, the 3 months threshold applies and all…

Jimmy: I’m sure you have a lot of egger investors waiting for this to get passed.

María: Yes. And some of them were kind of unhappy because they had some gains last year that could have been sheltered if this had been approved before, but it is what it is. And again, the legislature is trying to accommodate all the players.

Jimmy: Yes.

María: Of course.

Jimmy: I’m sure.

María: And especially the municipalities where these projects are going to be built. So that’s why it’s taking some time. And that’s democracy. So…

Jimmy: Yeah, it could be a little slow sometimes, right?

María: Yes. We certainly expect it in a couple of weeks.

Jimmy: Yeah. Okay, good. I’m glad to hear that. And possibly, by the time this podcast airs, it will have been passed. So you mentioned the 78 municipalities across the island of Puerto Rico. And when we were on the phone, a few weeks back, you were talking about how the mayors in Puerto Rico, the mayors of these 78 municipalities actually hold a lot of power. And I know that there’s been some work done on expediting the permit process at the state level for opportunity zone projects. But what is happening at the local level and what conversations are you having or are the elected officials having with local community leaders and mayors and mayors’ offices?

María: Yeah. As we mentioned, we have 78 mayors, 78 legal towns. And, okay, the mayor of a town is like the person that everybody looks to. So when something needs to be done in the municipality, you go to the mayor. And he is going to try to help you. Municipalities as well as the central government is going through rough times. Their funds have been cut and they’re looking into ways to increase their funds to attend to the needs of their constituents who voted for them. So when this type of lot of legislation is introduced where exemptions are being granted at the municipal level, of course, you know, they want to be consulted and have to say on what type of businesses they’re going to be.

I think right now everybody is waiting and see how it’s going to come out. I personally believe that if a project is going to come to your town, it is going to be good for your town. If you need to give some incentives for the business to come to your town, you just have to see the whole picture and see what’s coming after that. So specifically talking to mayors or officials from different municipalities, I haven’t been involved in that. I do know what comes out in the newspapers and in the news. And yes, they want to be involved. They want to have a say on what’s given or what incentives are being given to the businesses that are coming to their towns.

Jimmy: It’s understandable, right?

María: Yeah.

Jimmy: Yeah. You spoke on a panel here at the conference yesterday on opportunity zones investing in Puerto Rico. Can you recap for me and for my listeners some of the main points that you and the other panelists discussed? And what types of questions or topics regarding Puerto Rico OZ investing are developers and investors seeking more information on?

María: Okay. The panel was a really good exchange of ideas. We were three of us there. We had a promoter of Puerto Rico who is originally from Dallas and he moved to Puerto Rico under Act 22 and Act 20.

Jimmy: That’s Chris Hamm.

María: Chris Hamm.

Jimmy: Right, yeah.

María: And then Giovanni Mendez was the other panelist. He’s a tax attorney in Puerto Rico that deals a lot with Act 20s and Act 22s, and myself. And we certainly just gave an overall picture of Puerto Rico. Where is Puerto Rico? Why Puerto Rico? Is it special to look at for investment? We talked about all the tax incentives that we can offer. And we talked about a little bit about the current situation, which is always worrisome. You know, the country is in bankruptcy. How my investment is going to be guaranteed or secured, etc., etc. But investing in Puerto Rico, it’s as safe as investing anywhere else in the States. And again, a deal has to be a good deal before you do it.

Jimmy: And there’s risk involved anywhere.

María: Anywhere. So not just because of the tax incentives or just because of the opportunity zones you’re going to invest in Puerto Rico. It has to make sense for you. But if it’s a good deal, Puerto Rico can increase the goodness of the deal because of the extensions. And because of the culture, the people, their location, the geographic location, Puerto Rico is right center in the Caribbean.

Jimmy: Worst places to be than in the Caribbean, right?

María: Yes. We have hurricanes.

Jimmy: That’s true.

María: But we anticipate. We can see them coming.

Jimmy: Yes, yes.

María: And to the questions we get asked, one of the biggest or the most common questions we get is, “How is the recovery going? Is power up already?” And there is a great misconception of our current situation. Yes, the storms were bad, very bad. They were really, really bad. Devastation was just incredible. I’ve never seen something like that before. I don’t want to see anything like that before.

Jimmy: And you’ve lived there your whole life and this is…

María: I have lived in Puerto Rico all my life and this…

Jimmy: This was the worst.

María: This has been the worst. But Puerto Rico is back up and running. We have one of the high-speed internet that you can find anywhere. We have it in Puerto Rico. We have all…the power is up. The system is more reliable now. Of course, after the storm, it took some time to rebuilt, but the system is very reliable. And that’s one of the largest project the government has. They are going to privatize the energy distribution, the electrical grid. So from an infrastructure perspective, we’re back and running, 100% as before the storm. So that’s one of the most common questions. People are concerned, “Oh, I’m going to Puerto Rico. I’m going to lose my money.” And you need to do the same analysis you will do for investing anywhere else. And you will have risk like anywhere else. But you calculate your risk and you decide to invest or not. But again, Puerto Rico is a good place to invest because of the gravy we can put into the plate. But first it has to be a good deal for you.

Jimmy: Right, right. Well, yeah. I was in Puerto Rico just last month. I spent about a week there on the island. And I was surprised by how nice everything looked. Like the infrastructure was, to me, you know, the roads were fine. The power was fine. Well, we did have one power outage our first night there. But the backup generator kicked on and we were okay. But, yeah, the internet worked fine. If I had known that Hurricane María had come through and Hurricane Irma had come through just a year and a half ago, you know, I don’t know that I would have really known anything. I wouldn’t have noticed at all. I was impressed with how quickly the island has been rebuilt relatively speaking anyway.

María: Even the nature. Even nature.

Jimmy: Yes.

María: You know, all the leaves are back on the trees, we lost all our vegetation in the storm. And it looked like a bomb had fall in the island. But you go now, and, you know, everything is green again and a lot of vegetation is back. So even nature is giving us a lesson that you’ll just come back.

Jimmy: Yeah, no. It’s seems to be rebounding quite nicely from just anecdotally what I saw on my trip last month. I was impressed with how little devastation I saw. It’s mostly returned back to normal.

María: From a business standpoint, we’re really back to not good. And again, we’re very hopeful that all these programs will turn eyes into Puerto Rico. And again, I always see the silver lining in everything. María was bad. It was really bad. But it put us in the news.

Jimmy: It did put you in the news, right?

María: Yeah. And those that didn’t know about Puerto Rico now know of Puerto Rico, you know.

Jimmy: And the fact that it destroyed a lot of your infrastructure, forced the government to rebuild it all. Now it’s better than it was a year and a half ago. Yeah, it’s better than before. And you wouldn’t be in that position if it hadn’t been for destruction. So it’s a silver lining.

María: That’s why I think it’s a silver lining.

Jimmy: It’s a silver lining. Of course, we wouldn’t wish a hurricane to come through again, obviously. But, you know, you do have to look at the silver lining some time, I agree. And so you touched upon some of the biggest misconceptions about investing in Puerto Rico post hurricane but, yeah, we’re here to let everybody know that Puerto Rico is ready to do business.

María: Yes. And we’re eager for you to come down. Visit and see for yourself. You know, when I get…

Jimmy: And see like I did, right?

María: Yes, like Jimmy did. You know, we get calls from people in the States, “Oh, I want to move to Puerto Rico because of this Act 20 or Act 22.” And one of the first question I ask him, “Have you’ve been here?” “Nope.” “Well, the first thing you have to do is take a vacation…”

Jimmy: Yeah. Take a vacation in Puerto for a week.

María: “…and come one week. And bring your family, the wife and the kids. Because if you’re going to do it just for the tax, it isn’t going to work. Because if your family doesn’t like it…”

Jimmy: Know what you’re getting into first, right?

María: Yes. Yes.

Jimmy: Yeah, because you gotta bring the wife and kids.

María: Yes. You have to move. You’ll have to move to Puerto Rico to get some of the benefits. You don’t have to move for an Act 20. You know, you can put your company and have employees in Puerto Rico and you don’t have to move. But if you wanted the full package, you need to move. But just one of the best things to do, you know, you’re looking for a place, you’re looking for projects to invest, go to Puerto Rico and take a look. You know, there are hotel projects going on, there are real estate projects going on, housing, low income housing, you know, there’s a lot of stuff going and the government has pinpoint priority projects they want to be taken. So there is an array of different alternatives to invest. But again, don’t do it alone. Be with the right, how do you say, consultants, attorneys, lawyers, CPAs or whatever.

Jimmy: Call María everyone.

María: María, Chris, or Giovanni, you know. And we work together as a team. Each one of us does different things, so we don’t compete with each other. We’re promoting Puerto Rico, you know.

Jimmy: Yeah. You’re all in it together it seems.

María: Yeah. Yeah. But you need to be well advised, you know.

Jimmy: I’m sure.

María: Because, again, it’s international tax issues that you need to consider.

Jimmy: And there’s a lot to keep track of. Yeah, so you need you need an expert. We were at the Coasis Coalition Opportunities Zone SuperConference. And the keynote speaker who spoke this morning was Dan Kowalski from the Department of Treasury. The second tranche of IRS guidance is expected out any day now. What are you personally most looking forward to receiving more clarity on?

María: Ongoing businesses. How is this going to work within ongoing businesses? Because we see real estate as everybody see it like the easy part, you know, if it’s a building that was there, if you substantially improve it, you know, you structure your deal, whatever, you are cautious, you know, with all the rules. It’s kind of middle of the road, right? But with ongoing businesses, it’s hard, you know, because the business has been there before 2017, so how the substantial improvement thing will come into play. It’s like an example I always give. If I have a manufacturing plant that manufacturers 1,000 pairs of boots a month and I get some investments and I buy some machinery and stuff. And after all that I produce 3,000 boots a month. Is that a substantial improvement for my business? I don’t know.

Jimmy: No one knows.

María: No one knows. So…

Jimmy: Hopefully we’ll find out soon. Yes.

María: So that’s like the kind of questions because there are ongoing businesses in Puerto Rico in need of capital, of course, or they’re getting ready to convert their temporary loan to the permanent financing and they want other alternatives. But we cannot give them the answers because we don’t know the answer yet. So, of course, we’re waiting for that and I guess a lot of people are waiting for that clarification on the ongoing businesses part of the opportunity zones I think it was Gerry who mentioned yesterday, that’s where he sees the most potential.

Jimmy: Right. It was Gerry Reihsen. The Coasis Coalition CEO.

María: Yes. So, I think, that’s one of the highest in the list, yeah, to get to clarification, again, with the original use that goes kind of hands of hands with that. For an ongoing business what it’s going to be original use, you know, substantial improvement with how you measure that. So that’s one thing. And then the other questions we get is people are maybe used to the partnership type of structure. And all these questions about how your basis is going to be affected by common distributions, by losses, if you get leverage distributions and all that type of questions which if you go to the law, the sections for partnerships, maybe the answer you get is kind of not in line with what the opportunity zones are dreaming to do. So in that area we also get a lot of questions for which we don’t have very clear answers. So I would say…

Jimmy: And hopefully any day now. And again, this may be known by the time this podcast airs as well.

María: Yeah, hopefully. Because we’re really waiting for those answers.

Jimmy: Yeah, we’re expecting that second tranche of guidance to come out any day now. Hopefully, by the end of the month at the latest.

María: He said this morning the latest the end of the month. I was hoping before that.

Jimmy: Yeah, I was hoping before that, too. It seems like everything’s taken a little longer than everybody expected.

María: Yeah. And then, you know, because you had that government shutdown.

Jimmy: Yeah. That didn’t help matters.

María: That didn’t help either so.

Jimmy: Yeah. That delayed the hearing also by seven weeks. I know we’ve touched up on some of the biggest misconceptions about investing in Puerto Rico. What are some of the biggest misconceptions or maybe any mistakes that you see being made regarding opportunity zones investing in these early days in Puerto Rico, specifically, before all of the guidance is out? What are you seeing people doing wrong I guess or thinking the wrong things?

María: I haven’t seen. It’s something so new. And I think that the interest in opportunity zones in Puerto Rico has just started probably from January to now. Again, the law was approved in 2017 but the zones were designated in April. And by the time everybody started to notice this thing going on it was January. You know, so November, December, you know. So interest is sparking, it’s increasing and, again, the most important thing we tell wherever we go and do conference…we have done conferencing in the island and we come to the States and talk about Puerto Rico, is that you need good advice. Before you set up your structure, you need to be advised, well advised of what you can do and what you can’t do. And have your plans and have your structure reviewed because in those early stages, you know, you can solve issues and solve problems. We haven’t seen bad deals yet because it’s too early. We certainly do not want to see those.

Jimmy: Right. You probably will at some point. But…

María: Yeah. As we deal with the Act 20s and Act 22s, some people say, “Oh, this is easy. I’m going to do it myself.” The easy part is to fill in the form but what goes before filling the form is what is going to decide you did it right or not. Sometimes we get people with their grants and we talk with them and what they got a grant for is not what they’re doing. So it doesn’t work for you. So…

Jimmy: Filling up the form is the easy part.

María: That’s the easiest part.

Jimmy: Staying in compliance…

María: Yes. And, again, with the opportunity zones it’s self-certified. So…

Jimmy: Yeah. So you could see similar up downs.

María: Yeah. I can see similar downs on that side. And again, advice is very important.

Jimmy: So consult a professional. That’s your advice.

María: Yes, my advice.

Jimmy: That’s good advice. So we’ve gotten to the end. That was the hard part. Yeah. So before we go, tell my listeners where they can go to learn more about you and Kevane Grant Thornton’s services that they provide to opportunity zones investing.

María: Yeah, sure. We have a website. It’s called…you can look for it on the kevane.com or Grant Thornton Puerto Rico. And you can find our website. It’s full of articles and write-ups about Puerto Rico and the different tax incentives we do. We love to write. So every time something new comes up, there is an alert and an update. We also have an app for your iPhone or your Android. You can download it free. Kevane, you look for Kevane and you can download it. And you will get push notifications of everything we’ve published there and the information about, you know, the partners and our services and everything we do.

Jimmy: Excellent.

María: And, again, you can find me on LinkedIn. You look for María de los Angeles Rivera on LinkedIn, and you will find my profile there.

Jimmy: Good. Very good. Well, interest is sparking in Puerto Rico Opportunity Zone investing. I hope this podcast can help spark some further interest and help promote Puerto Rico even more. So for my listeners out there who want to learn more and get links to all the resources that María and I discussed on today’s shows, I will have links to Kevane and to their app on iOS and Android. And I’ll have a link to María’s LinkedIn profile as well on the opportunity zones database website on the show notes page for this episode. You can find those show notes at opportunitydb.com/podcast. María, thanks for joining me today. This has been great.

María: Thank you, Jimmy, for inviting me.

Jimmy: And good luck to you and safe travels back to Puerto Rico. And good luck to Puerto Rico on getting some capital injection to the island, much needed.

María: Yes. Thank you. Thank you so much.

Jimmy Atkinson

Jimmy Atkinson

Hi, I'm Jimmy Atkinson... I founded OpportunityDb in August 2018. I'm a veteran Internet entrepreneur with a background in economics and Web marketing. I previously founded ETFdb.com. These days, I am passionate about impact investing and tax-advantaged investment opportunities. At the crossroads of these two ideals is the opportunity zones program, a place-based tax policy intended to economically transform some of the poorest areas of the United States with new real estate and business development.

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