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Tax plan aids Puerto Rico's hoteliers
Hotel & Motel Management / May 20, 1996

By Larry Luxner

SAN JUAN, Puerto Rico -- While politicians here and in Washington continue to debate the merits of Section 936 -- a federal tax loophole that gives U.S. manufacturers big breaks for setting up factories in Puerto Rico -- one thing's for certain: Puerto Rico's own tax incentive program has been a windfall for local hotel developers.

Luis Fortuño, executive director of the government-run Puerto Rico Tourism Co., which fought for passage of the Tourism Incentives and Development Act of 1993 and now administers it, estimated that $680 million worth of hotel projects are under construction or in the review stage.

"Our statistics show that travel to Puerto Rico is now more popular than ever," said Fortuño. "With the addition of new and varied types of hotel properties, we expect to be able to meet the demands of a wider range of tourists."

Fortuño, who calls the tourism incentives act "probably the most important economic development legislation approved in the last several decades," is a rising star in the New Progressive Party led by pro-statehood Gov. Pedro Rosselló. Under Rosselló's overall plan, tourism would gradually replace manufacturing as the mainstay of Puerto Rico's economy as Section 936 is phased out, with the number of island hotel rooms doubling from the present 10,000 to more than 20,000.

To further that goal, Rosselló in 1993 signed into law the Tourism Incentives and Development Act, under which hotels get 10-year exemptions of 90% on property and income taxes, and 100% exemptions on municipal license, import and construction taxes. Another plus is an investment tax credit, which can be transferred or sold -- equal to either 50% of the amount invested in a project or 10% of the total cost, whichever is less.

According to Caribbean Business, the law also provides a flexible financing vehicle which requires potential investors to put up 20% in equity -- including the value of the land -- to begin a hotel project. Of the remainder, 20% is provided by the Tourism Venture Capital Fund and 60% by private banks, Puerto Rico's Government Development Bank (GDB) or the Economic Development Bank (EDB). In connection with the program, the government established a $50 million Tourism Development Fund to guarantee payment of loans and issue lines of credit.

Leaders of the opposition Popular Democratic Party -- which supports continued Commonwealth status for Puerto Rico -- aren't convinced this is the way to go, arguing that the Caribbean is already saturated with hotels and that overbuilding will lead to environmental damage. They also say that in the island's most expensive properties, such as the Caribe Hilton and the Condado Plaza Hotel & Casino, half or more of all guests are business travelers connected in some way to the Section 936 program, and that if the program is abolished by Congress, factories will close and executives will no longer have a reason to visit Puerto Rico.

Yet for now, Rosselló's much-publicized tourism incentives law appears to be working -- along with efforts to clean up the beaches along San Juan's garbage-strewn coastline and encourage taxi drivers and other service workers to treat tourists with respect.

"We used to get a lot of complaints about taxi ripoffs, and cabbies who wouldn't use their meters," said Esmeralda Pérez, deputy director of international markets for the Puerto Rico Tourism Co. "We've since put drivers through training so they'd receive tourists better." Information kiosks have also been placed at the arrivals terminal of Luis Muñoz Marín International Airport, giving incoming tourists up-to-the-minute data on hotel accommodations, car rentals and major attractions.

In 1995, tourist arrivals to Puerto Rico jumped 14.1% over the previous year, with more than 1.3 million visitors. Of that total, 661,000 visitors came from the U.S. mainland, 451,000 were returning Puerto Rican residents, 27,700 were from Europe and the rest from South America, Asia, Africa and other Caribbean islands.

To accommodate them all, at least 10 new hotel projects are now under construction or expected to break ground soon. The largest by far is the $179 million Westin Rio Mar Beach Resort & Country Club, located 16 miles east of San Juan in Rio Grande. This 600-room property, set to open Aug. 1, will feature 48,000 square feet of meeting space, including a 23,000-square-foot ballroom (the Caribbean's largest), along with a 5,000-square-foot casino, an 18-hole championship golf course, nine restaurants and lounges, 13 tennis courts and other luxury amenities.

Also opening soon are the $8.8 million Colony San Juan Beach Hotel (71 rooms, to open September 1996); the $35 million Wyndham Old San Juan Hotel & Casino (242 rooms, also to open in September, and the $131.5 million Ritz-Carlton San Juan Hotel & Casino (418 rooms, to open September 1997).

One of the first projects to make use of tax breaks under the law was the 300-room Embassy Suites Hotel & Casino, which will open at San Juan's Luis Muñoz Marín International Airport in October. Alberto Lugo, the new general manager, says the $46 million property will cater to corporate travelers and middle-income families. The government backed a loan that financed 60% of the project, while developers put up 20% and the remaining 20% was raised by individual investors using Puerto Rico Commonwealth incentives. Owners include the Government Hotel Development Corp., Mora Development Corp., Fundación Segarra Boerman e Hijos Inc., developer David Efron and engineer Cleofe Rubi.

In June 1997, another property -- also located in the Isla Verde tourist area -- will open. The 200-room, $17 million Hampton Inn is being developed by Caribbean Hotel Developer S.E., a partnership between the Edenton Co. Inc. of Memphis ($2.4 million) and local partners Rafael and Carlos Durand ($650,000). The government's Hotel Deve-lopment Corp. will put up $3 million in investment capital, to be repaid over 10 years. The rest of the $17 million is expected to be raised through an $11 million government bond.

Meanwhile, a new 100-room Comfort Inn will be built in Cabo Rojo, to be operational by September 1997. José Rodas, developer of the $7 million property, says there are no luxury hotels at present in Cabo Rojo, a beachfront resort along Puerto Rico's southwestern coast. Five smaller guest houses -- the Casablanca Inn, the Shangri-La Resort, the Hostal Aibonito, the Palmas de Lucia Hotel and the Hospederia Visa al Faro, area also being built around the island, away from the congested San Juan metro area.

"These projects will bring the economic benefits of tourism to places outside of the traditional metropolitan areas through the creation of job opportunities which will improve living standards throughout the island, while offering tourists a greater choice of accommodations and locales," Fortuño said, adding that Puerto Rico's total inventory of hotel rooms is expected to surpass 12,700 by fiscal 1997.

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