Puerto Rico Housing Incentives Policy: Analyzing Government Sponsored Housing Incentives in Puerto Rico from 2007 to 2011
| Autor | Carlos Infante Gutiérrez |
| Cargo | J.D. University of Puerto Rico School of Law (2011) |
| Páginas | 316-347 |
P
UERTO
R
ICO
H
OUSING
I
NCENTIVES
P
OLICY
:
A
NALYZING
G
OVERNMENT
S
PONSORED
H
OUSING
I
NCENTIVESIN
P
UERTO
R
ICOFROM
2007
TO
2011
C
ARLOS
I
NFANTE
G
UTIÉRREZ
*
I. The State of Puerto Rico’s Real Estate Market ....................... ........................ 316
II. Housing Incentives Launched in Puerto Rico since 2007 .......................... 319
A. The Newly Built and Existing Housing Acquisition Tax Credit
Programs........................................... ........................................... ............................ 319
B. The Puerto Rican Economic Stimulus Plan ...................... .......................... 322
C. My New Home Program Act ............................................ ................................. 324
D. The Puerto Rico Real Property Market Stimulus Act ............................. 325
III. Effect of Incentives in the Housing Market .......................... ............................ 328
A. Effects of Incentives in Home Prices During their Validity .................. 329
B. Effect on Property Values after Incentives Expire ....................... ............ 331
C. Private Sector Incentives ..................................................... .............................. 332
D. Why Stimulate the Housing Market through Incentives? ..................... 333
E. Other Factors to Consider ..................... ............................................................ 335
IV. Conclusion ................................................................... ................................................. 336
V. Exhibits .................................................................................................................. ........ 341
I. T
HE
S
TATE OF
P
UERTO
R
ICO
’
S
R
EAL
E
STATE
M
ARKET
Puerto Rico’s economy has been on a steady decline since 2007. The
island’s real Gross Domestic Product (GDP) growth rate has declined from
0.05% in 2006 to -5.8% in 2010.
1
This negative growth is expected to
continue throughout 2011. The more optimistic expect this situation to turn
around in 2012.
2
As expected, the financial, real estate, and construction
sectors have been severely affected by the island’s poor economic
* J.D. University of Puerto Rico School of Law (2011); M.B.A. concentration in Finance,
University of Puerto Rico Graduate School of Business (2011); B.A. in Business
Administration concentration in M arketing from the Carroll School of Management, Boston
College (2004). The author currently wor ks as a Law Clerk for Hon. Judge Mildred Cabán
Flores in the United States Bankruptcy Cour t for the District of Puerto Rico. Also, the author
would like to thank Dr. Scott Brown and Eugenio Torres-Oyola , Esq. for being his research
project’s lecturers.
1
The World Fact Book, C
ENTRAL
I
NTELLIGENCE
A
GENCY
2011, https://www.cia.gov/library
/publications/the-world-factbook/geos/rq.html (f ollow “Economy”). (negative estimates for
GDP growth though the period -1.2% in 2007, -2.8% in 2008, -3.7% in 200 9).
2
Carlos Marquez & Jose L. Carmona, Puerto Rico is Now Ready for Growth Finally, C
ARIBBEAN
B
USINESS
, March 10, 2011 (citing GDP President Juan Carlos Battle who expects the economy
to report positive economic growth in the 2012 fiscal year).
No. 2 Puerto Rico Housing Incentives Policy 317
performance over r ecent years. Furthermore, the global economy collapsed
in 2008, dealing another serious blow to the local economy. At that point,
Puerto Rico’s public debt was already growing at a higher rate than its
economic growth, forcing the government to undertake massive budget cuts
in 2009 to prevent the island’s bonds from reaching junk bond status.
3
All
these factors had major effects on virtually every economic sector. For
instance, the economy contracted as a result of a steady increase in the
unemployment rate and a reduction in capital investments. Local economists
have dubbed this local recession as the “Recesión Criolla”.
Before Puerto Rico’s recession started, the construction and real
estate markets seemed to thrive by posting strong sales numbers. As a result,
new construction developments flourished and people rushed to take
advantage of extremely accessible and attractive financing offers in order to
make a seemingly “safe” and profitable investment. Speculation in the market
led to increases in property values and homebuyers were more than happy
to spend as much as 50% of their household incomes on h ousing expenses as
they expected to capitalize on their property’s appreciation in value.
4
However, after peaking in 2006, this speculative appreciation of property
values came to a screeching halt by year’s end. As property values rose to
unattainable levels, housing market developments that were usually sold
before completion started to accumulate in unprecedented amounts.
Developers and their financial partners faced a huge problem as the current
economic climate and their poor forecasting decisions led them to a dead
end.
5
Due to an increase in the cost of materials, the Federal minimum
wage, and a long bureaucratic permit process amongst other factors during
the aforementioned time period, developers of new properties chose to focus
on mid to high price range properties in order to obtain profit margins that
would justify undertaking such projects. The increase in construction and
other development costs forced developers to steer away from low i ncome
housing projects despite the availability of government subsidies and instead
focus on higher priced projects with greater profit margins.
6
Therefore,
although the demand for low income housing units existed, low profitability
and market risk scared developers from constructing these types of
3
See The Special Act to Declare a Fis cal Emergency and to Establish a Fisc al Stabilization
Plan to Salvage the Credit of Puerto Rico, Act. N o. 7 of March 9, 2009, P.R. L
AWS
A
NN
. tit. 3, §§
8791-8810 (2009). (Puerto Rico’s bo nds had been downgraded by credit rating agencies to
BBB- and where closely monitoring the islands actions).
4
See Graham A. Castill o, Situation and Outlook of the Housing Market, 18
th
Housing Congress,
Estudios Técnicos, Inc., August 18, 2010.
5
Castillo, supra note 4 (it is estimated that there is an existing inventory surplus of 19,841
new housing units of which 97% have been on the market fo r more than 18 months).
6
H
OUSING AND
U
RBAN
D
EVELOPMENT
C
OMMISSION
P
OSITIVE
R
EPORT ON
P.
DE LA
C.
1577, Legis.
Assemb. 16-1577, 1st Sess., at 3-8 (P.R. June 16, 2009).
318 U.P.R. Business Law Journal Vol. 3
properties. The difference between the increase in real estate prices and
household income created an oversupply of mid to high-end properties and a
lack of supply of lower priced properties.
7
This, along with stricter lending
guidelines adopted by banks due to the global financial crisis, led to a drastic
reduction in new home sales, constructions, and loans originated by local
financial institutions. U nlike the situation in t he United States, the island’s
housing p roblems were not necessarily due to sub-prime mortgage lending
practices as economic hardship, foreclosures, and distressed properties were
substantial problems as individual’s struggled to fulfill their financial
obligations.
8
The problem in Puerto Rico was not lack of demand but lack of
adequate housing supply for the market's needs.
9
Developers and financial
institutions ignored key economic variables
10
and saturated the market with
mid to high income housing units and developments which offered the
highest profit margins. This had the effect of undersupplying the mid to low
income housing market, which in turn had limited viable housing options to
choose from. The most undersupplied segment consisted of potential buyers
with moderate income who did not qualify for public housing benefits,
because of their income, but could not afford to buy houses due to high
asking prices and limited financing options.
11
Due to the importance of the
construction industry’s multiplying effect in the economy,
12
since 2007 it has
been the acting government’s priority to reduce the inventory of properties
available for sale in order to encourage new c apital investments by
developers and provide liquidity to the financial institutions tied to these
developments. Consumers were supposed to benefit from the government’s
efforts to stimulate the real estate market, as they would obtain different
types of incentives such as tax exemptions and bonuses which could be used
as down payments or to cover closing costs. We now proceed to analyze
these strategies established by the acting government in response to the
collapse of the real estate market.
7
Castillo, supra note 4 (of the existing i nventory surplus of 19,841 reported as of June 2010,
only 5,560 units were priced under $150,000 and 6,136 were priced over $300,000).
8
Id. (delinquency rates o n home mortgages have reportedly i ncreased from 2.8% in 2006 to
13.5% in 2010 and personal bankruptcies have spiked 10.2% and commercial bankruptcies
climbed to 30.3% as of June 2010).
9
D
EPARTMENT OF
H
OUSING IN THE
H
OUSING AND
U
RBAN
D
EVELOPMENT
C
OMMISSION
F
INAL
R
EPORT ON
R.
DE LA
C.
238, Legis. Assemb. 16-238, 1st Sess., at 6 (P.R. May 13, 2009).
10
Such as unemployment rate, med ian income, population i ncreases/decreases and general
economic health of the island.
11
F
INAL
R
EPORT
R.
DE LA
C. 238, supra note 9, at 6.
12
My N ew Home Program, Act No. 209 of December 29, 2009, P.R. L
AWS
A
NN
. tit. 1 7, § 1034
(2009). (estimated at 165 according to the Statement of Motive s).
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