Puerto Rico woos the rich but so far gains little

DORADO, Puerto Rico (Reuters) - Hedge fund manager Robb Rill grins. He has just had word that U.S. financial regulators have finally closed Puerto Rico’s ailing lender Doral Financial, a stock he has been shorting for the past six months.

Pedestrians stand outside a branch of the Doral Bank in San Juan February 27, 2015. REUTERS/Alvin Baez-Hernandez

“Doral is no more,” he tells staff in his office, its marble desk tops, dark wood furniture and leather chairs more reminiscent of a New England country club than a Puerto Rico beach town.

Rill is one of a cohort of money managers from the mainland who moved to the U.S. territory lured by tax breaks introduced in 2011 to boost the flagging economy and betting against a troubled local bank may not be what the authorities had in mind.

To be sure, Rill’s fund played no part in the lender’s downfall and its business plan focuses on investing in tech and financial firms. But the Doral transactions serve to symbolize Puerto Rico’s challenge of ensuring that the tax breaks spur enough economic activity to reverse years of decline.

Almost four years on, the economic payoffs still appear elusive.

The government says nearly 900 individuals and firms have moved under the tax relief program, creating 7,000 jobs.

So far, however, economic data and those with a front row view of the territory’s economy - real estate brokers, investors and lawyers dealing with cross-border transactions - have yet to register a significant upswing.

“We are starting to see some activity - not huge, it’s very slow,” says Fernando Toro, a real estate agent at Cushman and Wakefield in San Juan, about interest in rental office space.

Mark Leeds, tax partner with international law firm Mayer Brown, says interest in the tax breaks only picked up last year.

“I have not seen a rush toward this,” he said. “For whatever reason it doesn’t seem to be for everybody.”


Strict residency conditions, which include spending half of the year on the island and selling or leasing home on the mainland, discourage some individuals. The precarious state of government finances and fears that tax rules could change again, seem to keep bigger firms sidelined, lawyers and brokers say.

“What we’re talking about right now is very small dollars and a very nominal piece of the overall GDP of the island,”

Todd Hagerman, a spokesman for the Government Development Bank in Puerto Rico says.

The government expects each new company to create 30 jobs on average, but Hagerman says most firms that have moved are small businesses, with the exception of call centers that employ hundreds and flatter the overall jobs count.

However, he voices optimism that the tax program would gain momentum, echoing its chief architect Alberto Baco, who says the number of new jobs it brings will double this year and 82,500 more will be added to the $100 billion economy over the next five years.

Yet so far the island, which has been in an out of recession for the past nine years, lost 36,000 jobs since 2011. Between 2010 and 2013 twice as many Puerto Ricans left for the mainland than in two decades to 2000.

The tax program that covers financial services firms, other companies that export services and wealthy individuals offers a flat 4 percent corporate income tax, and exemption from capital gains tax and certain interest and dividends taxes.

The territory counts prominent hedge fund manager John Paulson among its investors and supporters, although he has not taken up tax residency there or moved his firm to the island. Paulson, who redeveloped San Juan’s five-star Vanderbilt hotel is investing in commercial real estate and called Puerto Rico the “Singapore of the Caribbean.”

But Paulson, who manages $19.3 billion in assets, is hardly representative for 509 individuals and 346 firms that have taken advantage of the tax incentives through the end of 2014. Most of the hedge funds and traders on the island appear to be relatively small outfits trading in public markets, such as Rill’s sub-$100 million fund.

Based in Dorado, a resort town outside San Juan, the fund has a local staff of eight, which is already a significant contribution to the local economy, Rill says.

“We are picking up people in the professional class that are outstanding that otherwise simply wouldn’t have any opportunity,” Rill says.

Rill says his firm is looking at launching a fund focused on local investments after Puerto Rico last year introduced tax breaks for private equity investments on the island.

A $4.7 million KPMG study that Puerto Rico commissioned to guide its tax overhaul criticized the tax breaks as “inordinately complex” and suggested scrapping the incentives for individuals and linking corporate ones to economic activity.

Nick Prouty, a Puerto Rico-based real estate investor with $500 million worth of projects on the island, says it badly needs more capital, but it is equally important how that capital will be put to work.

“Will these people make investments in Puerto Rico or will they sit in Dorado and trade?”

(This story corrects names in penultimate and first paragraphs)

Reporting by Edward Krudy; Editing by Tomasz Janowski