In this webinar Kira Golden discusses an asset in Aguadilla, Puerto Rico near the longest runway in the Caribbean that will be positioned to benefit from a surge in industrial activity on the island.

Webinar Highlights

• Overview of an industrial asset in Aguadilla, Puerto Rico near the research and development hub of the island;
• Renovation and upgrade plans for the facility, including a solar system;
• Structure that allows investors to come in to either the QOF or QOZB;
• Review of the infrastructure in place, including layers of backup power plans;
• Plans for a retail buildout in addition to the industrial facility;
• Photos and renderings of the industrial facility;
• Economic activity in Aguadilla, the second busiest airport in Puerto Rico and home to the longest runway on the island;
• Additional tax incentives beyond the OZ program in Puerto Rico;
• Live Q&A with webinar attendees.

Industry Spotlight: Direct Source Wealth

Direct Source Wealth is a real estate investment firm led by Kira Golden. An active investor since the age of 18, Kira has built a portfolio for herself as well as Direct Source’s co-investors. The portfolio includes vacation rentals, large multi-family commercial real estate, and various holdings in start-up companies and alternate ventures. Prior to Direct Source Wealth, Kira worked for a large national brokerage firm as a financial advisor and held her Series 7 and AAMS.

Learn More About Direct Source Wealth

• Visit DirectSourceWealth.com

Webinar Transcript

Jimmy: Kira, you’re the third person from the island of Puerto Rico joining the show today. I don’t know if you were aware of that, but welcome. Thanks for coming back on OZ Pitch Day again.

Kira: Thank you. I’m very glad to be here. No, I didn’t know that. That’s incredible. I’ll go ahead and put a little self-promotion in. I’ve been here since 2013 and am the seventh applicant under the tax decrees. So, I’ve been here a while. We’ve been doing business down here and working through Puerto Rico for a long time.

Super happy to be here. The last time we presented, we brought this same deal. It was our second tranche so this deal has been funded in three tranches. This is our third and most likely final tranche. So, what we do is we break down certain milestone phases of completion before we raise in more capital. Our PPM has a total raise of 15 million. We’re currently at nine million and we think we’ll be able to close out at 11 million. So, what’s nice about that obviously is less equity means less solution. So, we weren’t sure if we’d be able to get institutional debt down here and we’ve been able to get a solid term sheet on that. So, we’re really excited.

So, this asset is a multifamily, I’m sorry, multifamily, excuse me, not at all. An industrial asset here in Puerto Rico in Aguadilla in the research and development hub about five miles away from the airport here and the largest runway in the Caribbean. So, very attractive industrial space. The airport near us is getting a billion dollars to do additional redevelopment. I think they’re planning on doing cold storage facilities, as well as putting in another runway. So, a lot of development is happening and we’re right in the middle of it. This property used to be an old Tyco facility and it’s been very, very well maintained. So, we are gonna go in and, you know, obviously, you can take a look at it, it looks dated, we’re gonna paint it. We’re gonna update the roofs. And then our biggest value add is that we’re gonna be going in and putting in a 4.5-megawatt solar system.

Diana, if you can go ahead and go to the next slide. So, as you can see here, we’ve got about 330,000, it’s technically 328,000 square feet. You can see in the photos we’ve got roll-up doors, 16-foot ceilings, very attractive warehouse space. The play here is very straightforward. The property is owned by a QOZB, “qualified opportunity zone business.” We also have a “qualified opportunity zone fund.” So, if you’re an investor who has your own qualified opportunity zone fund, you can direct invest. Or if you have capital gains from a sale you can go ahead and invest through our fund. So, there’s two ways to get involved and either one is an option. And there are people who’ve done actually both depending on the way they have certain things structured. Diana, go ahead and go to the next one.

So, a couple of things here. There’s two buildings and a cafeteria. There’s over 60,000 gallons of water storage on-site, and a water treatment plant on site. These are obviously very important features and the most number of parking spaces that I have seen kind of per square foot in industrial, we’ve got over 55 acres and that includes a significant number of two different parking spots. Two different parking spaces. Also, we have two sets of fully operational backup generators, which can run 24/7 for an extended period of time. It can operate the entire facility. So, in addition to having LUMA and the generators and the solar that’s coming in, we address one of most manufacturers who are considering coming to Puerto Rico’s primary concerns, which is power.

Go ahead and go to the next slide. So, this will show you the site plan, building one, two, and three, the cafeteria, all of those little lines are parking. So, tons of parking. And then in addition… And this is not even proforma, so this is what I would consider gravy. The five parcels in the front are additional possible retail and development spaces. So, we are actively interviewing for partners who, that’s not my specialty but who could do retail build-out. There is not really any restaurants, barber shops, anything to support, not only the staff on our property but Honeywell’s HP, the other buildings that are neighboring us on each side. Diana, if you can go ahead and go to the next one.

So this is the photo gallery. As you can see, large open warehouse space, truck capacity, and backup generators on site. Go ahead and go to the next and the next. So this puts you in context, you could see on the upper left-hand side Lufthansa and that Aguadilla airport. When you zoom in and take a look, as I mentioned before, we’ve got HP on our left, Honeywell on our right Pratt Whitley next to us. So very, very good desirable location.

Go ahead and go to the next one. This talks just a little bit about what’s happening in Aguadilla. Aguadilla is what I would consider maybe the second hub of Puerto Rico. You’ve got San Juan and the San Juan airport, and then Aguadilla is the next busiest airport. And as I mentioned, the largest runway in Puerto Rico. There was already $135 million project to develop the new runway. And then as I mentioned, they’ve got an additional nearly billion dollars of funding that’s coming in, an additional allocation for cold storage facilities and development. The purchasing power per capita within a one-mile radius, 14,241, 1,818 households, a population of 4,939. Diana, go ahead and go to the next slide. Next slide. Next one.

Okay, great. So our project, the acquisition price was $8 million. And we financed that initially with a $5 million equity tranche and a $3 million bridge loan. Our second tranche of capital, which was our first appearance on the “Opportunity Zone Podcast and Conference” was a million dollar pay down of the bridge loan, which left us with a $2 million bridge loan. And now we’re closing out the final $2 million of the bridge loan. A good portion of that’s been funded. The last time we were on, we closed out a million dollars, the full million-dollar tranche within basically a few days and literally only from “Opportunity Zone Conference.” So that was pretty incredible. So, we’re excited to be back.

I think that a lot of opportunity zone projects, especially on the state side, are in more challenging areas. And what’s nice about Puerto Rico is that 95% of our island is an opportunity zone. And what that means is that you end up with projects like this that are really hard to understand why they’re an opportunity zone. You’ve got the largest runway in the Caribbean. You’ve got a lot of capital coming into the area. You’ve got huge industrial partners, 330,000 square foot warehouse. You’ve got lease rates at around $10 a square foot and cap rates falling somewhere around 7% which puts you at an incredible cash-on-cash return.

And the other thing we didn’t even discuss on the last webinar, but some people have brought up asking questions since, is that there are also additional incentives here in Puerto Rico. So, we intend to tenant this property as a research and development facility. That’s how it’s being branded and built out. And research and development offers a 50%, 5-0% tax credit here in Puerto Rico. That again is also not on the proforma. So, just like that additional build-out of land, we held back the potential tax credits. I didn’t want to sell numbers based on that. There are some questions and some challenges to getting those tax credits. But we have a great legal team that specializes in it. And if we get those tax credits, that’s a 50% rebate.

So, $8 million purchase price. Currently, we’re looking at a $12 million construction budget including some of the expanded scope with solar that we’ve put in place. And so that puts us at approximately a $20 million basis. Ten million of that may be eligible for a tax credit in addition to the tax benefits of the buy and hold. Our plan, once stabilized in the next 24 months, is to refinance the property with a takeout lender. And if we hit the targets we’re looking at, we’ll be able to do a substantial return of principle while continuing to hold the property for the capital gains. Diana, go ahead and go to the next slide.

So, this is a little bit dated statistic, 2018 unemployment rate was 8%. I actually think that has, despite the fact that nationally it’s gone up. I think in Puerto Rico we’re seeing higher employment rates. More entrepreneurs are coming down, more businesses are coming down and more opportunities happening. And so we actually are finding that the population is getting more engaged and quite frankly, people who aren’t working, a lot of them are leaving Puerto Rico and going back up to the States. So, what I’ve been seeing over the nine years I’ve been here is a population that’s gotten invigorated, revitalized, and engaged. And especially since Hurricane Maria is really passionate about bringing entrepreneurship down, being innovative. We purchased this property during COVID. And thank you. Clinch has posted 6.2% is the current unemployment rate in Puerto Rico. I appreciate that. Thank you.

The other big thing is that COVID has made Americans more aware. I mean, how many people have talked about the impact of supply chain issues on even just our own opportunity zone developments and in so many areas of life? And so warehouse, to me, makes a ton of sense. And the tenants that we’re hearing from are literally looking not just at our space, but multiple spaces in Puerto Rico, because they’re moving their entire operations back from China or back from India. Because of the massive incentives here in Puerto Rico, they are able to manufacture domestically, ship domestically from a U.S. territory to the U.S., and benefit from strong tax incentives. So there’s a huge demand.

When we originally underwrote this project, we were at $7 a square foot for our target tenant rent. We are currently at 10 and people keep asking me, “Have you got a tenant yet? Have you got a tenant yet?” But candidly, we are putting that off as long as possible. We’re doing as much as our renovation locking in our costs because our ability to get higher per square foot rents just continues to go up. I’m hearing numbers even as high as $11 and $12 a square foot and cap rates here on warehouse continue to come down.

So, we’re not proforma on that. We’re not basing it on that, we are going through right now, an update on the proforma. So, that will have another iteration. But that’s just gonna be what I would call another scenario analysis. So, we typically underwrite for, you know, what if a lot of things go wrong, that’s our scenario. But then we continue to update additional scenario analysis when we get new data.

Diana, if you could go ahead and go to the next slide and the next one, this just speaks about home ownership, how great Puerto Rico is, and our infrastructure. So, and I ain’t gonna lie to you guys. I have to change the tires on my car regularly. Just got both my red car and my gray car redone. So, I don’t wanna overstate our infrastructure. We have a lot of potholes. We do have some infrastructure maintenance issues here. But on a broader perspective, when it comes to moving merchandise, we have the freight airport in Aguadilla, which we mentioned. We have multiple seaports and a fairly decent highway system, as long as you can get around those potholes. But it’ll get you around the island and be able to move things on trucks, along the island, and then on by boat or plane. So, it’s relatively easy, particularly for the Caribbean, to move things. And we have active port movement regularly between Texas, Florida, New York to get things from, and to the United States.

One of the questions I get all the time, Amazon Prime, you know, nine years ago, Amazon Prime didn’t exist here. You couldn’t get a prime membership. They knew they couldn’t deliver on that. And when they finally did introduce it about five years ago it took a couple of weeks and now I would say 80% of the things shipped here are within two days. I think that speaks not just too obviously the development of Amazon’s shipping quality, but the overall infrastructure and ability to get things out and moving about on the island, which I give Hurricane Maria and the response to it a lot of credit. I think that action in a lot of ways was a silver lining on the hurricane.

Next slide, please. And next, oh, I’m gonna answer just in sensitivity to time, I’m gonna go ahead and jump into Q&A. I really hate presenting slides. I’d rather be interactive. So can you elaborate on the potential tax credits? Is that Act 60 or another incentive? Great question. Act 60 is the current sort of umbrella of tax incentives that are down here in Puerto Rico. The R&D tax credit is a separate one. But there are also a number of credits in here for export services, for filming, for… I can’t speak to all of them. I apologize. But so, that does mean that we’re not relegated just to an R&D tenant, but the 50% tax credit is the highest we’ve found and so that’s where our focus is.

Next question. What are the biggest industries in Aguadilla? So, I apologize, but I’m going to have to speak somewhat anecdotally here. I don’t have hard and fast statistics to give you guys. In the ’50s and up to the ’70s, the leading industry down here absolutely was pharmaceuticals, that I can tell you unequivocally. When they allowed the tax incentive decree to expire a lot of the pharmaceutical companies just up and left. And that’s actually where a lot of our inventory for warehouses come from.

Currently, I think that there’s a better diversity of industries here. So, there is cannabis business has been thriving here, manufacturing of goods and services, clothing products. In fact, one of our potential tenants is one of the top 50 largest clothing manufacturing firms in the U.S. And we do still have some pharmaceutical. And then one thing I didn’t know until I was on a little hopper flight and a recruiter from AT&T informed me, but the University of Mayagüez is one of the leading engineering schools for recruiting for Boeing, for AT&T, for all kinds of engineering. And a lot of those people wanna stay here.

And so engineering development, things like HP, Honeywell, they’re moving down. So, there really is a diversified industrial complex here in Puerto Rico and the recent development of their, I would say more nuanced tax incentives, give broader incentives, and that’s really worked. It’s brought more people down here. So, we’ve had everything from telephone manufacturing companies, dropshipping companies, even U.S. military interested in the space.

How have interest rate increases been impacting your financing and underwriting? Oh, great question. So, one of the beauties of working in a place that has some of the challenges Puerto Rico has, and one of our challenges is liquidity. When the banks in the United States were propped up, banks in Puerto Rico were allowed to fail. When they failed and when the government of Puerto Rico defaulted on its debt, we lost institutional capital. And so what that means is that we are actually not anywhere near as interest rate-sensitive as the United States is.

Our business model was banked around Puerto Rican liquidity situations and Puerto Rican capital, which is typically not highly levered. So, when banks are putting money out, they’re putting their own balance sheet out. And so when we did experience a small rate increase, which quite frankly, I think is just marketing. Our lender, came back and said, “Oh, rates have been hiked. We’re gonna have to raise your rate.” But the reality is that their business model isn’t dependent on the Fed overnight rate for their capital that they’re placing. And so we are significantly less interest rate sensitive.

So, what I read recently and it’s really culminated in my heart, every challenge is an opportunity. And the challenge in Puerto Rico of liquidity is also an insulator from interest rate hikes. Another example of that is supply chain issues. Puerto Rico is under the Jones Act and actually, so are most places in the United States, but you’re not affected by it the same way we are, because anything we wanna ship into Puerto Rico has to first go to the United States and then come back. Now, our property is part of a free trade zone, and there are certain exemptions to the Jones Act at that Aguadilla airport that are other incentives and benefits of operating in that area.

But regardless, we also fix and flip, we do a couple of hundred fix and flips a year here in Puerto Rico which are also in opportunity zones and something else we could talk about. But those properties and the ones we’re doing here, we already underwrote to buy all of our materials upfront. And because we have 300,000 square feet of warehouse, it’s relatively easy to store our supplies. So, supply chain issues, I think, impact us less because we already had them and we already had to manage them. So where others are having to pivot and approach things from a new angle, we’re able to continue business as usual.

Jimmy: Well, that’s great. Kira, thanks for running your own Q&A session too. I didn’t even need to step in there. We’ve run outta time here for your segment. Before we go and move on to Blake Christian’s gonna be joining us for the last presentation of the day. How can folks reach out to you if they’re interested in learning more or possibly requesting subscription docs from you? Should they just email you directly, or what’s the process there?

Kira: Yes, email me directly. My email’s in the chat, but it’s my first name. kiradirectsourcewealth.com and yeah, just shoot me an email and we’ll get to the PPM, go through it with you, and get out sub docs. And hopefully, we’ll close out by tomorrow like we did last time.

Jimmy: Perfect. Well, and hopefully we’ll see you in the happy hour in a few minutes also when Blake is wrapped up with the last presentation today. Thank you so much, Kira and Diana, and we’ll see you soon. Appreciate your time today.

Kira: Thank you. Cheers. Bye-bye.