Monday, August 19, 2019

Puerto Rico, Land of OZ 

By on January 31, 2019


Editor’s note:
 The following originally appeared in the Jan. 24-30, 2019, issue of Caribbean Business.

After Gov. Ricardo Rosselló Nevares announced in April 2018 that Puerto Rico was designated an Opportunity Zone under the Tax Cuts & Jobs Act by the United States Treasury and federal Internal Revenue Service (IRS), the island will host its first Opportunity Zone Conference (OZ19) Jan. 30 at the Condado Vanderbilt in San Juan. 

Ricky Santana Villanueva, managing partner of Colectivo 360, a Puerto Rico-based business, real estate and investment consultancy firm hosting the event, explained that with the designation as an Opportunity Zone, 94.5 percent of Puerto Rico is poised to become a very attractive and diverse market for investment in the Opportunity Zone funds program. 

The real-estate expert explained that these areas are created to encourage investment in disadvantaged communities throughout the United States and can receive preferential treatment in federal taxes for what he predicts will become a boost for the economy. 

“This is a tax-deferment tool that basically functions as an individual retirement account [IRA] where you have a capital gains tax. For example, a person sold an asset that has a profit, the IRS offers a window that allows you to put that money in an ‘opportunity fund zone.’ The best way to explain this without a lot of confusion is that this works like a corporate IRA, but anyone who has ‘capital gains tax,’ who has had to pay it either as a corporation or as an individual, and who has had a capital gain, can use this vehicle and have a ‘tax deferral’ for 10 years,” Santana Villanueva explained, while emphasizing that this tax tool is not exclusive to real-estate investment firms. 

As a result of a decade-long recession, the expert argued, most of the island’s real-estate value has experience significant loss, which creates an opportunity for enormous upside. Moreover, Puerto Rico’s Act 20 and Act 22 tax incentives remain powerful drivers for attracting companies and individuals relocating to Puerto Rico. With all this in mind, Puerto Rico is on the path for unprecedented economic resurgence. 

“That is why we have created the Puerto Rico OZ19, to gather the island’s key stakeholders at one major event, to serve as a catalyst in the deployment of massive amounts of Opportunity Zone capital,” Santana Villanueva said. 

The expert insisted there is misconception about this initiative, referring to it as federal funds when it really is a tax incentive that would not be affected by the federal government’s historic shutdown. However, he admitted that due to this closure, the IRS regulations regarding these zones of opportunity were not issued Jan. 10 as expected. 

“The funds are working based on many assumptions. The IRS has provided guidelines on how the program should work but the final regulations that were supposed to be issued in January have yet to be released. Certainly, the government shutdown has delayed this, but in my opinion, in any case, it has been beneficial because the clock has yet to start ticking. We have a window where we have six months to put the capital gains tax in a fund when the investors file their income tax, which notifies the IRS of that capital gains tax investment in that instrument, just as is done with a receipt for an IRA account, and the government recognizes you don’t have to pay taxes on that gain,” Santana Villanueva added.  

He also explained that a jurisdiction can be classified as a zone of opportunity once the chief executive makes a formal request to the federal Department of the Treasury. Once the application is submitted, it is evaluated according to the disaster zones determined by U.S. Census metrics. The ideal areas for opportunity zones, he said, are the most neglected and the tax tool is the incentive the federal government uses for private companies to have an impact on infrastructure where the government cannot. Therefore, areas of high economic growth, such as Santurce’s Condado community, do not qualify. 

The keynote speakers at the event will include such industry trailblazers as Ian Ross, founder & managing principal of Somera Road, a New York-based commercial real-estate investment firm that has acquired more than $600 million in real estate; James Frank Austin, founder & CEO of Propel Opportunity Fund Inc., which is investing $450 million in real-estate projects throughout the United States; and Steve Glickman, founder & CEO of Develop LLC and co-founder of the Economic Innovation Group, the bipartisan organization that was the chief architect of the $6 trillion Opportunity Zone program. Among other funds that will be participating are Sikari Inc, which has $1.6 billion in Qualified Opportunity Funds in active investment. Sikari is a private real-estate corporation with headquarters in Tampa, Fla., and specializes in opportunity zone fund investments. 

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