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A Commonwealth of Hotel Development

Puerto Rico Represents Opportunity With Demand On The Rise

Wednesday, November 09, 2016
Miss Kerry Medina
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The 6th annual Caribbean Hotel Investment Conference & Operations Summit, taking place from Nov. 10 to 11, is expected to bring together more than 300 regional and international investors and operators in addition to regional government officials and executives from major hotel brands. But what’s really worth noting about the event is that—for the second consecutive year—it’s taking place in Puerto Rico, where the public $70 billion debt crisis could make new investment seem a perilous venture while a growing tourism infrastructure represents unprecedented opportunities for new hotel development.

“We work with investors to evaluate where the best locations are for new hotel construction, in terms of current traction or demand for more supply,” says Ingrid Riviera, executive director of the Puerto Rico Tourism Authority. “Right now, the Tourism Authority endorses 15,000 rooms, but we believe Puerto Rico definitely needs more hotels.”

Riviera notes that there are approximately 5,000 more rooms on the island that don’t meet the Tourism Authority’s endorsement standards, such as not meeting ADA requirements. But even with a total count of about 20,000 rooms and average occupancy at 71%, the destination continues to seek more flags from internationally recognized brands in order to meet the growing influx of visitors, which is set to reach 9.3 million by year end. Totaling airport arrivals, cruise ship passengers and five million overnight visitors, tourism alone has a $3.8 billion economic impact on Puerto Rico.

“Puerto Rico is the economic hub for the entire Caribbean, with connectivity to many parts of the world,” said Parris Jordan, vice president of HVS New York and managing director of HVS Bahamas. “So it’s definitely an attractive market for hotel investors because it has such diverse demand, from corporate and leisure travelers to meetings and groups.”

Jordan also points out a host of other attributes that make Puerto Rico ideal for hotel development, including a wide variety of attractions, dining options, reputable medical facilities, low crime rates and the fact that Americans don’t need a passport to travel to the island. Andrew Cohan, managing director of Horwath Miami and moderator of a panel discussion focused on challenges faced by first-time hotel developers in the Caribbean, believes “the attributes that have kept Puerto Rico ‘the shining star of the Caribbean’ aren’t going anywhere.”

But investment insiders saw other advantages in 2015 when Wall Street hedge funds began taking an acute interest in Puerto Rico’s development. The island’s flailing economy began taking its toll on properties like the San Juan Beach Hotel, which filed for bankruptcy, and the Condado Plaza Hilton, which closed its casino.

According to Jordan, a subsequent flurry of deals resulted—at least in part—because developers thought the debt crisis would lend itself to lower prices. However, he also adds that “values are based on the current hotel performance and its net operating income and hotels in Puerto Rico continue to perform well. So investors may perceive opportunity to buy at a discount, we haven’t seen a decrease in value in Puerto Rico.”

Still despite Puerto Rico’s multi-billion dollar debt crisis, investors like billionaire hedge fund manager John Paulson swept in and poured $20 million into the San Juan Beach Hotel. He also acquired the Condado Vanderbilt Hotel, La Concha Renaissance Hotel and Tower and the St. Regis Bahia Beach Resort. Investment firm Fundamental Advisors acquired the El San Juan Resort and Casino for $71 million from Blackstone.

While the value proposition that struggling properties represent coupled with the fact that federal taxes don’t generally apply to income generated by corporations (or individuals) within the Commonwealth are both undoubtedly factors that have attracted these investors. Riviera credits Acts 20 and 22, tax incentive laws enacted in 2012, as the driving force behind the investment influx. “Even with the debt situation, Puerto Rico continues to be an attractive destination to invest in because of the incentives and the tax benefits,” she says, citing other investors including Nicholas Prouty and Keith St. Clair.

For certain Wall Street hedge funds holding general obligation bonds, including entities managed by Aurelius Capital Management, Autonomy Capital, Covalent Partners, FCO Advisors, Monarch Alternative Capital and Stone Lion Capital Partners, the investment resulted in a lawsuit against Puerto Rico Governor Alejandro Garcia Padilla this past July, when Puerto Rico defaulted on the first repayment in the schedule. The island is now accused of violating the federal law Promesa, which prohibits the creation of new legislation that could divert revenue—sales tax revenue in this case—in order to give precedent to any other form of debt over the recompense of general obligations. The hedge funds further amended their complaint in October to include the bonds’ issuer, Puerto Rico Sales Tax Financing Corp., as a defendant.

“The federal appointment of a Puerto Rico fiscal oversight board has helped restore confidence that further defaults will not happen, but it came too late to avoid the July 1 missed payment,” says Cohan.

But as the litigation between Wall Street and Puerto Rico drags on, Apple Leisure Group will focus on opening its first resort on the island in 2018 and Marriott will continue a multi-million dollar renovation that will transform the Radisson Ambassador Plaza into an AC Hotel by Marriott. The room count and commercial space surrounding the convention center district in San Juan is also expected to double with a $150 million investment. “The convention center hasn’t really taken off because there aren’t enough hotel rooms and you’re only going to build hotel rooms and wait for the conventions to book with government incentives or if you’re willing to take a chance,” Cohan says.

But he is keeping an eye on the Santurce neighborhood, located between the convention center, Condado and downtown. “This area has really started to turn around in the last year,” he says. “After being somewhat rundown, it’s now on the verge of becoming to Puerto Rico what Wynwood is to Miami. Santurce is ready to be gentrified, so it’s a good time to roll up your sleeves and get busy because in a few years people will say they could’ve bought the property for a song.”

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Miss Kerry Medina
Freelance Writer
Other (not listed above)
Kerry Medina, Freelance Writer
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