OZ Pitch Day - March 7, 2024
In this webinar, Ari Kresch discusses the Island Paradise OZ strategy in the hospitality industry in Puerto Rico.
- Ari’s history as a successful entrepreneur and real estate investor who moved to Puerto Rico to take advantage of significant tax incentives;
- A review of the challenges Puerto Rico has faced, and reasons to be bullish on the economic outlook for the island now;
- How Puerto Rico’s Opportunity Zones, which cover more than 95% of the island, stand out from those in the mainland;
- Discussion of the significant tax credits available to investors in Puerto Rico through Act 60 and the Opportunity Zone incentive;
- Review of the Island Paradise portfolio and pipeline, including projects in San Juan and beyond;
- Live Q&A with webinar attendees.
Industry Spotlight: Island Paradise
Island Paradise is a Qualified Opportunity Fund and Qualified Opportunity Zone Business purchasing hospitality assets in Puerto Rico. The management team has extensive experience in the Puerto Rico real estate market and has developed a portfolio of distressed properties that will be developed into world class hotels and resorts throughout the island.
Learn More About Island Paradise
- Visit IslandParadisePR.com
Jimmy: Now, next one up is the Island Paradise Qualified Opportunity Fund, presented by Ari Kresch. How are you doing, Ari?
Ari: Can you hear me?
Jimmy: I can. Yes. How’s it going? Thanks for being here with us today.
Ari: I love being here and I love hearing all the passion that everybody is speaking about and learning about all these great opportunities. I’m in Puerto Rico as well. I’m gonna be speaking to you about Island Paradise Qualified Opportunity Zone. This is a Puerto Rico multi-asset qualified opportunity fund that is purchasing distressed assets at incredible prices and transforming them into luxury high-end-cash-flowing hospitality properties. Today I’m gonna walk you through the advantages of not just ordinary opportunity zones but Puerto Rico opportunity zones, and they are different and walk you through some of the properties that we are invested in.
So, first, let me tell you a little bit about myself. Aside from being, you know, during COVID, everybody was worried a bit about coming infected with COVID. I got infected by Ashley Tison with Opportunity Zones, Puerto Rico opportunity zones right around the same time. I’ve been practicing law since 1978. I’m the founder and CEO of 1-800-LAW-FIRM. It’s a very active business. and that’s the reason that I moved to Puerto Rico in the first place. I’ve been investing in real estate since I was a teenager. And when I came to Puerto Rico and I saw the opportunities and I learned about Opportunity Zones, I sold in about two and a half years, I sold more than 50 properties in Michigan and in New York just to take advantage of the opportunities in Puerto Rico because they are stupid. All right. And I really mean that. They just don’t make any sense. So, next slide over here is the disclaimers, you know, the standard disclaimers that, you know, we have to post that nobody uses anyway. And I wanna talk to you about the general benefits of Opportunity Zones, which probably everybody here knows about, but I’ll just go through it really quickly.
You can get a deferral on the property if you’ve got a capital gains. And I love this law. If you have a capital gains, you can take these capital gains and throw it into an asset that you don’t have to pay taxes on them for until December 31st, 2026. And one of the greatest things that I thought about this law was that it’s turning assets that, you know, people inherit and they don’t wanna sell because they don’t wanna be exposed to the tax liability. And then somebody invented this concept to develop areas in need, you know, with these kinds of investment properties and investors. So, they created this wonderful vehicle. So, the standard, the general, you know, the way that these things work is that is a tax deferral on the original investment, and then you eliminate the taxes for the investment that you make. And in this case, it would be Puerto Rico.
So, if your property doubles or triples or quadruples in value, none of that is taxable ever. And then in addition to that, there’s a bonus that you get, and that is you can do accelerated depreciation that you can offset other income. Now, what I wanted to speak to you about specifically because, you know, there’s, in my opinion, there is the location of the property, the jockeys that are running the property. Those are the most important things that we got going over here. Now, in Opportunity Zones, it is such a great vehicle. You’ve got competition in every market, and everybody is bringing their own value add to the situation. And some of them are awesome, some of them turn out better than others. But you’re limited. You’re limited to the geographic location where the government says, “This is an opportunity zone.”
Puerto Rico is an incredible island. I’ve been living here for five years. And when people ask me if I like it here, I always say no because I love it here. And I love it here because the people are awesome. And take a look at this map. I mean, we’re surrounded by water and anything that isn’t water is beautiful land. You’ve got mountains, you’ve got rivers, you’ve got every topography, you’ve got arid land, you’ve got, you know, rainforest, you’ve got these bios. You’ve got all kinds of great stuff here and it’s wonderful. So, what I will talk to you about, first of all, because Puerto Rico has gone through hell, you know, and when I say hell, I’m talking about Maria, a hurricane, they went through bankruptcy. They speak Spanish here. People think that this is a foreign country.
So, they’re kind of not looking at this to put into their investment portfolio. But over here, right now Puerto Rico has made it into the news. They’ve emerged from Maria, they’ve emerged from COVID, they emerged from their earthquakes. They’ve emerged from this public perception that now used to be a very small percentage of the people that even knew Puerto Rico was part of America. And now it’s in the news all the time, and everybody knows about it. So, the fear is less, but it takes time for people to get acclimated to the idea that we do use U.S. currency here. All of the laws apply plus additional laws. So, what are the additional laws? I’m gonna go back to that previous slide. The additional laws are they give locally tax credits for investments in per, you know, certain areas.
So, in our areas, the ones that we’re promoting over here is hospitality. They give us a 40% tax credit for you as student investors to say, “What do I need to tax credit for? I’m not paying taxes on any of this stuff anyway.” Well, this is a gift that the Puerto Rico government gives to you for investing in a area that they wanna promote, which is tourism. And the gift is a tax credit because they’re not so good at writing checks, but they’re good at writing credits. You can take that credit and sell it depending upon how close it is to tax filing date. You can sell it for anywhere between 90 and 92 cents on the dollar. So, if I’m holding onto a million-dollar tax credit, I can sell that for $900,000 and…up to $920,000. So, this is over and above anything that you’ll ever get from any other investment.
Now, the other opportunities…the other things that make Puerto Rico unique is the lack of competition. They do not have sophisticated investors, they don’t know how to calculate ROI, and the opportunities are insane. When I say insane, I have never…I’ve been, you know, investing. I’ve done well in New York, I’ve done well in Michigan, but I’ve never seen anything that gives returns like they do over here. And I’m kind of a bottom feeder, so I don’t just like looking at a spreadsheet and trying to calculate whether my money’s gonna make me money, I look at, you know, ways to buy properties. And I’ve devised a whole because I’m a lawyer by nature, by trade. And I partnered with some other people who I will introduce you to later. I think that we have the best of all worlds.
And, you know, one of the things that I do, and I place a tremendous amount of emphasis on buying the property. I like to buy… You know, when people talk to me I say, “I don’t like to buy property, I like to steal property.” And there’s so much to be stolen over here because they have really complicated inheritance laws. And there’s so much property in the hands of dead people. How do you get…dead people, in case you guys don’t know, dead people aren’t such great negotiators. So, you wanna get as much property from dead people as possible. And in Puerto Rico, it’s kind of interesting the way this process works. It’s an expensive, complicated…they’ve got complicated inheritance laws. And in order to get property from the hands of a dead person into an investor’s hand, there’s a legal process that most people are intimidated by and most people can’t afford.
So, if we make offers to, it’s not even a state, but we, you know, to the children of a dead person, we make offers. Part of that offer is we’ll take care of all the legal work. It’ll come off the price of the property. And inevitably, it gets, you know, really good entry points. Now, the entry points have so much good property. We concentrate…you’re gonna see some of the earnings that we’re looking at, but this piece of property over here that we call…currently, we’re calling it, the Hawayek Building. Every one of these properties I’m gonna tell you about, you know, it’s like I pinch myself because they don’t make any sense. I bought this property for $1.4 million for the fund. And the property was being operated as an office building. The buildings were…it’s in a spectacular neighborhood, but they don’t have a very efficient way of, you know, distributing information.
So, some of these properties, some of these offices were being rented for $160 a month. They have crazy loss here. I mean, just wrap your arms around this. You have people that have leases in a building, the building gets sold. The leases are no longer applicable, except under very rare circumstances. So, if somebody has a lease in my building and I buy in, let’s say Ashley’s building and I buy the building from Ashley, all those leases are canceled, and I can kick all those people out. Go figure that one out. I can. So, there are some ways to get around that thing, but the story I wanna tell you about, the Hawayek Building is that it was so underutilized and it is such an incredible area. It’s right in the heart of Santurce. And I’ll show you some pictures of what Santurce used to look like that one of the tenants in the building was there for 80 years. 80 years. This is an old woman who inherited a business from her father. I walk into her office, she’s got file cabinets that you open it up. There were invoices from the 1950s. So, tell me that there is an opportunity, you know, for me to buy that building at a low price, which I did, and she was paying $160 a month rent. We’re gonna turn this into…this is what the front of the building is gonna look like. There’s two at the bottom floor, there’s two, you know, there’s one restaurant currently, but we’re gonna make it into two restaurants. And then there’s a central entrance that’s gonna go to the hospitality. It’s high-end hospitality. This is what it used to look like on the left. You know, it was the fifth avenue of Puerto Rico in the ’50s.
You can see that picture on the left and on the right is what our rooftop space is gonna look like. So, that’s one property. This is another picture of the pool, and then there’s gonna be a bar area. The location is spectacular. There’s very few rooftop restaurants, bars here, but everyone that there is here is you can’t get a reservation for it. This is the lobby to the space, this is what the rooms look like. Anybody can write, you know, do anything they want, but this is… The beauty of this space is that it’s very, very well located.
This one over here is another asset that we bought right after Maria. If you take a look, there’s, you know, you can look at some…there’s a website of this luxury hotel with families frolicking in the pool and having a great time. Maria wiped this thing out. We bought this property and another one right next door. So, we combined two hotels, and we’re gonna fix this up. We paid about $4 million for it, but it is really well located. I think the next slide shows exactly. It’s right on the coast. We’ve got over 1,000, 1200 feet I think of beachfront. This one, I’m gonna say it’s one of my favorite, but they’re all my favorite. This is nuts. This over here is what they call a motel here in Puerto Rico. A motel is a specific name for a structure, a business that’s used for people to have sexual liaisons discreetly. And if you’ll look at these pictures, you’ll see that there’s garage doors. They pull into the garage door, they pull down the garage door and then everything else is behind closed doors.
There’s a certain shoot where they can order pizza, booze, whatever it is. And, you know, it was a business. This business used to be thriving in the early 2000s. This building was purchased for $8 million by the guy that we bought it from. And now we paid $1.4 million. It says here we paid $17,500 per door, but that’s a lie. We actually paid half of that. It says there’s 80 rooms, there’s 160 rooms because we are converting the garage spaces into individual rooms. We’re turning this into a jungle experience, and this is seven and a half acres. If you take a look at the background, seven and a half acres in the middle of the jungle. We’ve got a landscape architect that’s gonna turn this into a jungle experience. It is nuts how the numbers work out.
It’s embarrassing to even communicate that to you. This is what the garage doors look like. If you take a look at the picture on the right, we have mature bamboos. This is what it’s ultimately gonna look like. You’re gonna be in the middle of the jungle and you’re gonna be paying a premium for it. And then after I contracted to that and I found out that the business is kind of going downhill, you know, the discrete sex motel business, I bought another one for $550,000 that’s only $14,000. This property is probably the only one that’s close to…we bought it as an opportunistic buy like we do everything else. Paid $600,000 for it, ready to rock and roll. We just closed on it. It’ll probably be operational within the next 20 days. It’s got a swimming pool, it’s got about 11 rooms. It’s beautiful. And the condition that it’s in, we paid only $600,000 for it. And the reason that we got such a beautiful property for such a low price is it was gonna be an orphanage of some kind. And somehow that didn’t go through. This is what the island of Puerto Rico looks like in the top middle where it says number 4. That’s approximately where the San Juan International Airport is, that’s where our boutique San Juan hotel is. The other two properties, but directly below it are the…I’ll call them the sex motels that way you’ll remember what I’m talking about.
On the left is the Manati Villas. That is where the property that’s already gonna be in operation really soon. And on the lower left corner, we have this ridiculously beautiful resort in Cabo Rojo. Two hotels right next door to each other. Anyway, the thing that makes our properties investments difference is the embarrassingly high internal rates of return over time. And we’re so confident in what we’re doing. And I’m retired. I’ve got enough money to live on, but I do this because this is…I just love it. It’s so much fun and we don’t charge any acquisition fees, no disposition fee, no financing fees. We have no fees whatsoever, except for a 1% annual fee. That’s all we charge and our money comes out on the back end. There’s, you know, the returns. You can look at this. I know that I’m getting close to running out of time.
I wanna talk a little bit about team. We have three active members on the ground. I’m one of them. I’m the expert in finding distressed properties. I find them in really weird ways. And, you know, if you take a look at the prices that I pay for stuff versus somebody else, you’ll see that we make the money. We make a lot of money on the buy, and then we have added value. The added value comes from Robbie Crager, David Micale. They’ve been living here almost as long as I have. My other partners, Ashley Tison make sure that everything’s structured properly. Seth Rosenberg is an expert on finance. So, we are going to increase returns on these properties even more than we anticipated because a lot of the money we’re gonna be able to borrow once we get to certain places.
Our partners are, the premier partners, we’ve got Boutique Hotel Advisors that I wanna just kind of tell you. These are the guys that told us that in, you know, he’s done… John Sears is his name. He told us…he told me…I was thinking about turning this into an Airbnb. And we would get ridiculous returns on just a normal Airbnb with discounted rates because we’re a little bit far from San Juan. And he says to me, “Are you nuts?” He says, “I’ve been doing hotels all over the world and you know how many places that you can have a jungle experience within 30 minutes of an international airport? And the fact that it’s U.S., you don’t need a passport. There are so many reasons for people coming here. And if anybody has visited here in the last couple of years, the hotels are overpriced. They’re stupidly overpriced.
Next steps. My information is over here. Just, you know, send an email. You can get a prospectus or anything else that you need. I think we’re trying to raise $17.5 billion. I’m not sure how much we’ve already raised, but I was the first investor I invested. You know, I was the first limited. I put in over a million dollars in that first project just to get it off the ground because I was so excited about it, and I hope that I was able to generate some excitement in all of you. Thank you very much for this opportunity. And if you have any questions, I’m here to answer them.
Jimmy: Fantastic. Well, thank you, Ari. We do have about three more minutes left for questions before we start our next segment. And we do have a few that have come in. Matthew’s actually asked a three-pack of questions here, so I’ll just rifle them off one at a time. Matthew’s first question. And again, if you do have questions, please use the Q&A tool in your Zoom toolbar. We’ll see if we can get to as many as we can. Matthew’s first question for you, Ari. How is the electrical infrastructure in Puerto Rico coming along?
Ari: You know, that’s part of a…it’s part of the experience of being in Puerto Rico. You just kind of accept the way it is. Now, what I wanna tell you is that for every problem, there’s an opportunity. We have $60 billion. Have already been approved and it’s starting to be allocated to infrastructure repairs. So, if you’re on a shitty arse street that’s got potholes, you know that it’s not gonna look like that in three years from now. $60 billion on this small island. So, you know, and there’s also a lot of…there’s a lot of investment in renewables. Everybody’s got a generator, everybody’s got, they’re doing solar, but I think the infrastructure’s gonna be improved. So, good question and it’s being addressed.
Jimmy: Now, another question from Matthew. He asks, how are your investments protected against hurricane and weather risks that may increase with climate change?
Ari: You know, I don’t know. I just, you know, everything, life is a crapshoot. You know, to me, I live right on the ocean. What’s to tell me that I’m not gonna be wiped out by the ocean tomorrow? Really nothing, but I, you know, these hurricanes statistically don’t happen very frequently and you know what? Somehow every time some disaster happens, you just build better. My best time in Puerto Rico was during the hurricane and after the hurricane, because the humanity of the people reaching out to each other and helping each other was a spiritual experience that in my entire life I never felt like that before. It was just like being in an envelope of love. So…
Jimmy: That’s great, Ari. That’s a refreshingly candid answer there. Matthew’s third and final question. How much Puerto Rico development have you, Ari, successfully completed on time and on and on budget?
Ari: Really good question. How many? I’ve probably been involved in about 25 so far. My partner, Robbie and Dave, over a hundred. We have a few projects together. And once we started working together, we were putting them in the fund. So, those are good questions on time and on budget. I love my contractors. We have really good relationships, really strong relationships. So, I would say most of them we haven’t gotten, you know, there’s always surprises, but I’m a real big chief skate and I watch things really closely. So, I can’t give you the exact number, but for the most part, I would be a very unhappy man when things get delayed. My word, people know not to use the word wait around me. I don’t wait for anything, I make stuff happen.
Jimmy: That’s great, Ari. We got time for one more question and then we’ll close down and move along to our next presenter. But Christopher wants to know when you said the motel biz is slumping right now, what makes you think you can overcome that? Is operational strength going to be one of the challenges to success? He likes the idea of investing with you.
Ari: Say that again. The first part. I didn’t understand it.
Jimmy: When you said the motel biz is slumping right now, what makes you think you can overcome that?
Ari: Okay. When I say the motel biz, I don’t mean the hotel biz, I mean the discrete sex business. That business was thriving as a cash business from 2002 until recently. I am taking advantage of the slump in that business. And if we raise enough money, I’ll buy…there’s 70 of these motels. I’d like to buy them all because they are in beautiful remote areas. And check this out. Imagine being in the jungle and all the rooms have solid walls. There’s no windows. You are in the middle of paradise and nobody’s looking at anything because when you’re doing that activity, you have your mind on other things. And I don’t blame them, but it’s fantastic.
Jimmy: So, great-looking properties. You’re gonna shut that stuff down and completely transform them.
Ari: For sure. For sure. And it’s a lot of fun. It’s a lot of gratification.
Jimmy: Excellent. Well, Ari, thank you for your time here today. We’ve run out of time. I wanna move the program along, but really appreciate you joining us today and great offer. To learn more, please do head to islandparadisepr.com. And we posted the link in the chat just a few months ago. So, click that link please if you wanna get in touch with Ari and his team. Thanks so much, Ari. I appreciate it.
Ari: Thank you very much. I appreciate what you’re doing.