Puerto Rico Gov. Ricardo Rosselló is trying to entice investors to the island’s hotel sector with a flagship $120 million deal and new tax credits.
On the second day of New York University’s International Hospitality Industry Investment Conference, Rosselló spoke to hundreds of attendees about tax credits and how private development can piggyback off of federal aid money that the island will receive as it recovers from the aftereffects of Hurricane Maria in 2017.
“We’re going to have an enormous amount of resources coming to Puerto Rico because of the rebuild,” he said. Couple that with the 30 to 40 percent tax credits the territory provides for tourism developments and the federal Opportunity Zone program, which incentivizes investors to deploy their funds by the end of 2019, and you get a “perfect storm of opportunities,” Rosselló added.
Rosselló said Puerto Rico is seeking to double its number of hotels rooms in five to seven years with a focus on luxury hotels and resorts. During his session, the governor broke down a new deal led by Miami-based developer Royal Palm Companies, New York-based investment firm Monarch Alternative Capital and Texas-based developer and operator Aimbridge Hospitality.
The deal by Rosselló involves the $120 million acquisition of the former 500-room Gran Meliá Puerto Rico on a peninsula known as Coco Beach, which is about a 30-minute drive from San Juan. The seller is Meliá Hotels International, a Spanish hotel chain, and the buyer is a joint venture between Royal Palm, Monarch and Aimbridge. The individual breakdown of ownership interests was not immediately clear at the time of this story.
OZ Real Estate financed 60 percent of the deal with debt and Puerto Rico provided $37 million in tax credits. The hotel, shuttered by Hurricane Maria, is expected to reopen as a Hyatt Regency in the fall. A source with knowledge of the deal said that due to the storm and then the Zika virus outbreak in 2016, the partners had to “look back quite far to get a [borrowing] base.”
Royal Palm development associate René Bello told The Real Deal that the island’s susceptibility to hurricanes and storms was “a determining factor in why we went with private lending.” Transactions in Puerto Rico commonly involve banks as a lender, added Carla Campos, executive director of the Puerto Rico Tourism Company.
Discussion of the high burden of insurance against natural disasters was a big topic throughout the conference, but Royal Palm CEO Daniel Kodsi said extreme weather doesn’t worry him.
“We’re Miami developers. We’re not concerned. We know how to deal with hurricanes,” he said. “Hurricane Maria was a once in a 50-year occurrence. So we’ve got 50 years.”
Coco Beach, the site of the now-shuttered Gran Meliá, is also in a designated Opportunity Zone, which allows investors to avoid or delay paying capital gains taxes if they invest in certain areas. Rosselló said that the Coco Beach land wasn’t initially included within the program but he later appealed to the U.S. Department of the Treasury to include it in the program. The Treasury Department clarified its guidelines for Opportunity Zones in April.
“That area was not populated. [So] it was a hiccup within the calculation,” said Rosselló, noting that as a governor he was given the chance to suggest a list of areas for designation to take advantage of the program’s benefits and exemptions. “When there was something left out the states and territories could go and appeal, and we went and appealed it,” he added.
One of the new equity partners, Monarch, had a preexisting controlling stake in 1,000 acres surrounding the Gran Meliá. Royal Palm, best known for its involvement in the Miami Worldcenter project, is working on a master plan for developing the entire parcel. The Coco Beach peninsula currently has two 18-hole golf courses, as well as St. Regis and Wyndham branded hotels nearby.
Campos, head of Puerto Rico’s tourism body, said that Monarch and Royal Palm are now searching for additional investors and development partners to build six additional hotels (or about 2,500 new rooms) on the Coco Beach peninsula, while also looking at other assets. She noted that $1.5 billion in investment dollars would be needed to complete the entire Coco Beach project.
Rosselló, a former biomedial researcher who became Puerto Rico’s governor in January 2017, added that the Gran Meliá deal is a sign of the potential awaiting investors on the island.
“This is an example of what can happen to the rest of Puerto Rico,” he said.