What are some of the factors that may make Puerto Rico a compelling destination for Opportunity Zone investment, particularly in a post-COVID world?
Eric Berman is chief investment officer and Adrian Beales is director of sales at Lifeafar Capital, a boutique private equity real estate firm with two OZ projects in Puerto Rico.
Click the play button below to listen to my conversation with Eric and Adrian.
- What makes Puerto Rico unique for Opportunity Zone investors.
- The investment case for Puerto Rico: why Lifeafar Capital thinks Puerto Rico will rebound as a post-COVID tourist destination.
- Local tax credits and how they can pair with Opportunity Zone tax benefits when putting together a project’s capital stack, decreasing the amount of leverage required.
- The benefits for a U.S. taxpayer that relocates to Puerto Rico, per the Incentives Code of Puerto Rico (Act 60-2019).
- How infrastructure improvement funding may lead to more Opportunity Zone investment in Puerto Rico.
- The two single-asset Opportunity Zone projects that Lifeafar Capital is currently developing on the island, and how their Qualified Opportunity Funds are structured.
- The case for why luxury hotel developments can stimulate the local economy and create positive social impact in Opportunity Zone communities where they are located.
Featured on This Episode
- Eric Berman on LinkedIn
- Adrian Beales on LinkedIn
- Lifeafar Capital
- Opportunity Zones in Puerto Rico
- Opportunity Zone Investing in Puerto Rico, with Maria Rivera
- Puerto Rico Act 60
- PREPA unveils 10-year, $10.7B grid revitalization program
- Puerto Rico gov’t unveils $135M Aguadilla airport runway project
- Plaza Colón Hotel & Suites
- Luxury Beachfront Hotel Offering from Lifeafar Capital
- OZ Pitch Day video of Lifeafar Capital’s Luxury Beachfront Hotel Project
Industry Spotlight: Lifeafar Capital
Lifeafar Capital is a boutique private equity and asset management firm focused on the acquisition and development of unique and bespoke luxury hospitality concepts for both multi-family and mixed-use real estate. They have two luxury hotel projects in Puerto Rico — the first in Old San Juan, and the second a beachfront hotel on the west side of the island.
Learn more about Lifeafar Capital:
- Visit LifeafarCapital.com
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.
Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host Jimmy Atkinson. What makes Puerto Rico unique in the opportunity-zone world? Here to discuss this with me today are Adrian Beales and Eric Berman from Lifeafar Capital. Eric is Chief Investment Officer at Lifeafar Capital, and Adrian is Lifeafar’s Director of Sales. They come to us internationally today. Eric joins us today from San Juan, Puerto Rico, and Adrian comes to us all the way from Medellin, Colombia. Gentlemen, welcome to the show.
Eric: Thanks, Jimmy. Looking forward to the show today.
Adrian: Thanks for having us, Jimmy.
Jimmy: Yeah, great to have both of you on with me today. And I think this is gonna be a very informative episode for any investors out there who are intrigued by the possibility of opportunity-zone investing in the Caribbean, and in particular in Puerto Rico. So, Adrian, let me turn to you from my first question here. I wanted to talk about…I’ve covered Puerto Rico a little bit, on this show, in the past, but it’s been a while since we had a Puerto-Rico-centric episode. So, to recap for anyone who may already be familiar or to introduce this concept to anyone new listening, could you go over Puerto Rico’s unique space in the opportunity-zone world?
Adrian: Yeah, for sure, Jimmy. I mean Puerto Rico is quite interesting because about 97% of the island is actually an opportunity zone. And, obviously, unlike the mainland U.S., it’s a Caribbean island, so, there’s some really unique opportunities in Puerto Rico. On top of that, which we’ll get into later today and Eric will touch on, there’s a whole variety of different tax incentives on the island. A big part of that is due to the recovery effort from Hurricane Maria. And those incentives, coupled with opportunity zones, make it a really really unique investment opportunity for investors.
Jimmy: Very good, Adrian. Yeah, it’s incredible that so much of the island was designated as an opportunity zone. They carved out that special exception for them because of the hurricane, as you rightly point out. Eric, I’ll turn to you now and ask you maybe you can give me the case for why Puerto Rico as an opportunity-zone investing destination? You know, I’ve heard from some investors who are a little bit wary about investing in the Caribbean and in Puerto Rico, particularly with a hospitality-themed investment, like Lifeafar Capital offers, but, post-COVID-19, do you think that tourism will come back to previous levels? Give us the case for why Puerto Rico and why Puerto Rico specifically as a post-COVID-19 tourism destination.
Eric: Yeah. So, I think there’s a couple of things to think about, as we break down for opportunity-zone investors why Puerto Rico is unique. One would be on just a macro basis of what types of real-estate assets you’re looking to invest in. Right? So, for multi-family or office investors, a lot of those opportunities lie throughout cities in the United States, the mainland U.S. While investors looking for hotel opportunities, they would probably be hard-pressed to find beachfront opportunities like we have in Puerto Rico in cities in the U.S. So, I think that’s one opportunity to diversify a bit of your portfolio and where you’re placing the capital.
Puerto Rico, from a hospitality and travel destination standpoint, I think provides a lot in a post-COVID-19 environment. And before COVID, there were a lot of issues that Puerto Rico had with Hurricane Maria, there was the earthquake and the economic downturn, but we really believe that it’s positioned for a boom. Recently, I think it was USA Today that did a poll of travelers in the U.S. looking to travel outbound, and Puerto Rico was top number one on the destination list. I think there’s just so much uncertainty with foreign restrictions and navigating a foreign country, if you’re going somewhere else, and determining, “How do I get a PCR test to return to the U.S.? Am I gonna have any issues there? Are there gonna be any shutdowns?” I think people just feel safe coming to Puerto Rico, being that it is the U.S., no passport required, everything works here just like it does in the mainland U.S. And, so, I think there’s going to be a huge boom of tourism here. And we’re already seeing that. I live in San Juan and I’m definitely already noticing a lot more activity.
Jimmy: And, yeah, you’re right to point out that it is part of the United States. I’ve been to Puerto Rico a handful of times. It can feel like a foreign destination, you know, the language there is predominantly Spanish and everything’s just a little bit different down there, different customs than in the mainland. But it is part of the United States, so, that makes it very convenient. You don’t need a passport, and particularly with the current restrictions on needing to get tested to come back to the United States from a foreign entity, it does make things much more convenient. That’s a good point. That’s a good point, Eric.
Adrian, turning to you now, what is Puerto Rico doing to further incentivize investment in tourism long term on the island? You know, we’re speaking about how Puerto Rico may be a great post-COVID-19 destination in the previous question, but, you know, it’s still kind of a tough play at the moment. What is Puerto Rico doing to further incentivize investment in hotel projects or other tourism-related projects on the island?
Adrian: Yeah. So, Jimmy, so, one of the things that I think is really interesting about Puerto Rico and the tourism space too is that, you know, there’s a large shortage of hotel rooms. This was even pre-Hurricane Maria and, obviously, pre-COVID-19. They had a great year in 2019 when it was a boom in tourism. But they’ve created these tourism tax incentives because they’re making a long-term play for tourism, as part of their economy. The fact that they’ll give developers up to 40% of the development cost back in either new development or redevelopment projects. But that really, to me, shows that they’re investing in the tourism industry, and these are stacked on top of opportunity-zone benefits.
So, what does this mean? It means that investors in projects that are hospitality projects, in Puerto Rico, essentially are getting a large percentage of the project value back in these tax credits, which are sellable, which really brings down your need to leverage to hire high amounts of leverage, to have high amounts of leverage.
So, if we look at a lot of deals in mainland U.S., they may be using 70% or 80% loan to value on their debt and equity stack. Whereas in Puerto Rico, you know, we’re able to get away with 40% or 50%, which is really quite conservative. And a lot of that is because of the fact that there are these tourism tax credits in place. It also allowed you to look at options like refinancing after 3 or 4 years of operations. So, it really really bolsters the returns for investors and minimizes the risk. So, I think it’s a really great incentive that marries up really really well with opportunity-zone incentives.
Jimmy: Yeah, I think that’s a really good point you bring up there, Adrian. There are often times, not just in Puerto Rico but all over the United States, there’s oftentimes state incentives or other local tax credits or incentives that can be stacked with the opportunity-zone program. And certainly there are no shortage of those available in Puerto Rico, the Puerto Rico government has done quite a bit to incentivize capital flow onto the island. So, to whatever extent any deal sponsor or fund issuer can use their expertise to take advantage of all of these extra tax incentives and tax credits that are specific to Puerto Rico, you can oftentimes layer them onto opportunity zones, as opportunity zones cover such a wide area of the island. Almost every single…not every single, but almost every single census tract, on the island, is an opportunity zone, as we alluded to in the intro. Can definitely juice the returns all that much more.
Eric, turning to you again now. I wanna go into the benefits of a U.S. taxpayer relocating to Puerto Rico. I’d spoken, in a previous episode of this podcast, with Maria Rivera and Kevane Grant Thornton about Act 2022, which is now renamed Act 60. Maybe you could tell us a little bit more about Act 60 and how that could potentially be driving high-net-worth individuals and other major U.S. taxpayers to the island?
Eric: So, the Act 60 is really the consolidated incentive code now. And there’s two main parts of that that I think apply to our conversation here. One is Act 2022, which is an individual basis that incentivizes pretty much high-net-worth individuals to relocate to Puerto Rico. Another code section of the incentive Act 60, which is relevant to us, is the tourism tax credit. This was formerly called Act 74. And what it allows is, the types of projects we do in tourism, you can take up to 40% of the total project cost back in a tax credit. And those tax credits are sold on the secondary market for, let’s just say, 90 cents on a dollar, on average. And, so, it boosts the equity returns on development projects like the ones that we undertake.
From an Act 2022 community, the individuals relocating here, you might ask, “Why is that relevant to constructing luxury hotels on the island?” Well, naturally these people, that are living here, will look for places to vacation, whether it’s a weekend getaway or a staycation. And I think that it just goes into improving the visitor economy and having products to serve that segment. So, I think it’s a huge win-win.
Jimmy: Give examples of individuals who have moved there because of the act, go into detail on how it would work exactly. Say, I, or somebody else, wanted to actually undertake taking advantage of Act 60 and Act 74. What’s the process for doing it, how long does it take? Do you have any information on that?
Eric: Yeah. So, I’m not an expert qualified with that, but the huge advantage of it is that you don’t have any taxes on dividend, interest, dividend income, interest income gains. Their main requirement — and you have a low-income tax rate on an effective basis — but the main requirement is a physical presence and really relocating your life to Puerto Rico. So, the rule of thumb is 6 months, 180 days, you spend on the island. There are a number of other guidelines of how to open bank accounts and show that really you’re relocating the center of your life here. But the main thing is a physical presence, and you can reap those benefits.
Jimmy: And, yeah, those are some major benefits for sure, reducing the taxes. Like you are able to. And hey, it’s not a bad place to live either. Pretty nice weather, outside of hurricane season at least, and beautiful beaches. Adrian, let me turn to you now, I’d like to hear more about how we can incentivize more opportunity-zone investment in Puerto Rico. I think a lot of that has to do with the existing infrastructure there and a lot of it being in need of repair or renovation. What are some of the major infrastructure investments that are happening right now in Puerto Rico?
Adrian: So, Jimmy, there’s been, obviously, a lot of talk about the funds that were getting allocated to Puerto Rico post-Hurricane Maria. And it’s quite interesting, there was 13 billion dollars of additional FEMA funds announced by the Trump administration. And more recently we’re starting to see some of these funds come through. So, only recently PREPA announced a 10.7-billion energy grid revitalization program, which is, obviously, a major investment in the infrastructure on the island. And one that’s a little close to home for us was, in November, 135-million upgrade of the Aguadilla International Airport, which is an international airport on the west coast which has direct flights to New York, for example. So, there’s been some major actual announcements recently of these funds getting put to use on the island. Which is great to see.
Jimmy: And all of that makes opportunity-zone investing and undertaking QOZP projects, or other opportunity-zone real-estate deals, all that much more enticing, whether you are an individual investor or a fund issuer or a business or real-estate deal sponsor. Absolutely, I think those major infrastructure investments will go a long way toward incentivizing further investment in the island. I wanna talk about what Lifeafar is doing specifically on the island. You guys have two projects that are underway currently, I believe. Eric, let me turn to you now. Could you go into detail on the two funds and the two single-asset projects that you have underway on the island? Maybe you can tell us a little bit more about what asset class they’re in and where they’re located?
Eric: Sure. So, our first project that we’re undertaking here is a luxury boutique hotel in Old San Juan. We acquired the property in May of 2019 and we’re a little more than halfway through construction at the moment. The way that we structure these opportunities, they’re are single-asset funds. And the second project is structured the same way, so, we have a parent company, which is a qualified opportunity from the QOF, and that entity receives all the investment from the capital…the big opportunity-zone investors, excuse me. And then there’s the operating entity which owns the asset, develops the project. And that entity is 100% owned by the QOF.
So, I think one thing that makes Lifeafar Capital stand out is that we structure the opportunities and then present them to the investors. And, so, the assets are already identified, it’s not a blind discretionary fund. And investors can really choose whether they believe in that specific project and would like to invest in the opportunity.
The Old San Juan hotel, to tell you a little bit more about the specifics of both projects, the Old San Juan hotel will be about 55 rooms, ranging from standard-size to suites. It’ll have a restaurant and cafe and bar on the ground floor, fitness center, and then the rooftop which will have a swimming pool and a rooftop lounge area. We’re right at the entrance of Old San Juan, so, we don’t have to fight traffic. We’re really excited about that project. And then that will also play nicely into this beachfront property that we’re developing in Rincon. A lot of travelers who come to Puerto Rico always would like to spend a couple of days in the city, particularly visit Old San Juan. And then, being that you’re in the Caribbean island, they wanna go to the beach.
So, the project that we’re developing in Rincon, and we are actively syndicating capital for it still, it’s a renovation and expansion project of a distressed asset that we’re picking up. And it’s going to come to 60 total rooms and it’ll also be very upscale luxury, have a variety of restaurants and bars and have a new fitness center and spa. And it’ll maintain a strong focus on sustainability, ecotourism. We wanna play to the traveler sentiment of 360 health and wellness as well. So, we’re excited about it and think that, not only does it provide great opportunity for investment, and particularly opportunity zone investors, but it provides us a unique position in the market as an operator in managing those properties.
Jimmy: Yeah, and I’ve seen both properties and they look phenomenal. I know you’re offering that second one that you’re developing, the luxury beachfront property in Rincon. You’re offering it under a non-disclosure agreement, so, you’re not able to go into too much detail on what it is exactly. But I’ve seen it and it looks phenomenal, if I may say so.
Adrian: So, what’s really interesting about the second investment opportunity we have on the island is it is a really iconic asset. So, it’s an asset that’s won lots of awards, you know, it’s been mentioned in “Forbes,” in “Content Traveller.” And the investors who are buying the asset are, obviously, buying the land, the business, and that reputation. And it’s an asset that’s had celebrity guests for many decades now. And we actually pitched this, for those of you who wanna see it, we actually pitched this in November, we launched it November on the Pitch Day that Jimmy held. So, if you wanna check out a little bit of a glimpse of the video and of the project, you can go to Jimmy’s website and look at that video there.
Jimmy: Yeah, absolutely. Thanks for bringing that up, Adrian, I’ll be sure to link to that video from the OZ Pitch Day that we did just back November, 2020, just a few short months ago. So, yeah, it’s very fresh material there, and again, I’ll be sure to link to that on the show notes page at opportunitydb.com/podcast.
Now, some of the criticism of the program might be directed at luxury hotel projects, such as the ones that Lifeafar Capital is building. I’d like, Adrian, you to try to dispel the notion that luxury properties can’t generate social impact or provide value for the residents in the communities where the luxury hotels are being built. Give us the case for why these properties, both the one in Old San Juan and the newer one, the luxury beachfront hotel in Rincon, are delivering huge value to the current residents there and are going to bring positive social impact and economic impact to the areas.
Adrian: Sure, Jimmy. Well, I think the thing that’s really interesting about the hotel developments versus other real-estate developments is, you know, something like a multi-family, you develop it and then that’s it, there’s not many ongoing operational jobs. Whereas a hotel asset is not just real-estate, it’s also a business. So, we’ve got construction jobs that we’re creating, and the first project we’ve already created more than 40 construction jobs. For the second project, we’re looking at over 100 construction jobs, we’re looking at north of 150 ongoing hospitality jobs. And we’re also looking at 150 indirect jobs to the local economy.
So, if you look at the second asset, we’re talking 10,000 guests plus per year. Now, when they come, yes, they will spend a lot of time in the hotel, but they’ll also go and participate in local activities, they may hire paddleboarding, they may go to a local restaurant. So, all of these things are stimulating the local economy. And the jobs, of course, are all being sourced locally. So, you know, we’re hiring and training local people. And because of the high-end boutique luxury hotels, these are well-paying jobs. So, I think that’s the key with a hotel versus other real-estate assets is, there’s a large amount of ongoing jobs. Actually more ongoing jobs than there are in the direct construction jobs.
Eric: Yeah, Adrian, I think you hit that spot on. And one thing that you alluded to was really, on a macro level, the visitor economy. And I think luxury hospitality is a necessary part of that, as is any other segment of hospitality, and bringing visitors to the island. And it stimulates other economic activity, whether it’s fishermen who are delivering produce to the restaurants there on property, or it’s people giving tours, or different sports activity operators, it really goes deeper than just the direct jobs that are being provided on the property and the dollars coming to the hotel operator.
So, Jimmy, we talked a little bit about the upper upscale and luxury hospitality segments and why we’re playing in that field. And I think it’s important to kind of grasp that the luxury segment is the most resilient typically, and, through cycles, it will hold strongest. And, in a post-COVID environment, I know I have, you know, friends and colleagues that I’ve chatted with about the hotel markets and acquisition activity, and, from an investment standpoint, people are looking for hotels that are not dependent on group and banquet business having these large business conferences. I think the corporate travel sector is going to take a while to rebound, while the leisure travel sector is definitely going to rebound a lot quicker. And, so, people are looking for more boutique hotels, experience-based, getting to know the local culture. And the travel trends are moving away from larger hotels with a lot of space to fill up.
Jimmy: Yeah, that’s a good point as well, Eric. I think that’s important for investors to be aware of is that, you know, these are luxury properties that you’re constructing and they are gonna generate some income, but they’re also doing quite a bit of good in the communities where they’re being built. And, you know, no need to apologize for that.
Well, gentlemen, thank you for joining me on the podcast today. I hope today’s episode has given our listeners a little taste of what opportunity-zone investing in Puerto Rico can be like. Before we go today, could you tell our listeners where they can go to learn more about you and Lifeafar Capital and your qualified opportunity-zone projects that are underway?
Adrian: Sure, Jimmy, I think the easiest way for people to get in contact with us is our website, which is lifeafarcapital.com. And you can find all the information on our offerings on the website.
Jimmy: That’s lifeafarcapital.com. Fantastic. And for our listeners out there today listening to today’s episode, I will, as always, have show notes available on the Opportunity Zones Database website. You can find those show notes at opportunitydb.com/podcast, and there you’ll find links to all of the resources that Eric, Adrian, and I discussed on today’s show. And I’ll be sure to link to lifeafarcapital.com, and you can find out more about their projects and how you might be able to invest in their qualified opportunity funds. Adrian, Eric, thank you so much for joining me today. I appreciate it.
Adrian: Thanks, Jimmy.
Eric: Thanks, Jimmy.