Real Estate 2024 Comparisons

The main sources of real estate law in Puerto Rico are the Civil Code, the Real Property Registry Act, the Notarial Law, and Supreme Court of Puerto Rico jurisprudence.

The higher cost of capital, higher interest rates and geopolitical tensions have resulted in a slowdown in M&A, real estate, and other commercial transactions in Puerto Rico during the past year. The top target industry sectors in Puerto Rico during the past year were energy transition projects, PPP projects and hospitality-tourism transactions.

The energy sector was driven mostly by the Federal Emergency Management Agency and Community Development Block Grant (CDBG) funding as part of the Puerto Rico Electric Power Authority (PREPA)’s 2024 Integrated Resource Plan and the ongoing process to restructure PREPA’s debt under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). The principal PPP project for 2023 was the award of the PPP contract for the rehabilitation, maintenance and operation of highways PR-52, PR-53, PR-66 and PR-20. This transaction closed in December 2023. Hospitality-tourism transactions consisted principally of the sale of existing hotel facilities and resorts, including the acquisition of distressed assets and strategic purchases. Transactions in this sector were driven mostly by existing tourism tax incentives in Puerto Rico.

The private equity market also remained strong in Puerto Rico during 2023. Transactions in this sector consisted mostly of the sale of privately owned mature companies based in Puerto Rico in transactions that were driven principally by the tax incentives under the Private Equity Funds Act that was codified in the Puerto Rico Incentives Code, known as Act 60. As a result, several local private equity funds were organised and have capital available for investment.

There are currently no legislative proposals that would have a significant impact on the real estate market in Puerto Rico.

The fee simple estate, leasehold estate, and mortgage rights are the principal categories of property rights that can be acquired under Puerto Rican law. Other real property rights, such as easements, usufructs, options, rights of first refusal, and surface rights are also recognised under Puerto Rican law.

Transfers of title to real estate are mainly governed by the Civil Code, the Real Property Registry Act, and the Notarial Law. Special laws, such as the Condominium Act, the Condohotel Act and the Timeshare Act may also be applicable depending on the type of property in question.

Transfers of title to hotel and industrial projects are generally not subject to special laws, but such transfers may be benefited by laws relating to tax or other governmental incentives for the development and/or operation of such projects. Residential properties may be subject to certain consumer protection laws and regulations, particularly if the transferor is the developer of the residential project. The authors note that, unless a given statute specifically excludes Puerto Rico from its application, federal laws ‒ including the Truth-in-Lending Act, the Real Estate Settlement Procedures Act and other similar consumer protection laws ‒ may apply to transfers of title in Puerto Rico.

Lawful and proper transfers of title to real estate in Puerto Rico are effected by a public deed executed before a notary public. Deeds need to be executed in person before a notary public. No new procedures that were implemented during the COVID-19 pandemic remain in effect.

Although recordation is technically not required in order to effect a valid transfer of title to real property, it is customary ‒ and recommended ‒ that transfers of title be recorded in the Registry of Property of Puerto Rico because of the protections that recordation confers to the parties. Title insurance is common in Puerto Rico in commercial and most residential transactions.

As a part of their due diligence, buyers of real estate in Puerto Rico typically search government records to determine the status of title, real property taxes, zoning and land use, flooding, and environmental conditions. It is not uncommon for buyers to also perform an on-site physical inspection of the property and to include the preparation of surveys, soil studies, environmental assessments, and structural condition reports as part of their due diligence.

Representations regarding title, property tax status, environmental conditions, pending or threatened condemnation or litigation proceedings, leases and other third-party occupancies, and structural conditions are most typical in commercial purchase–sale transactions of real property in Puerto Rico. Sometimes, depending on the relative bargaining strength of the parties, some of these representations are qualified by the “knowledge” of the seller. Unless waived by express agreement of the parties, Puerto Rico laws provide statutory warranties in the sale of real estate that cover title and hidden defects in the property being transferred. Additionally, statutory warranties that are broader in scope apply to the sale of residential real estate by its developer. Such broader warranties cover non-critical construction defects that a seller of real property, in the absence of an agreement to the contrary, would not otherwise necessarily be obligated to correct. Remedies for breach of representations include rescission and damages.

Purchasers of real estate in Puerto Rico should always consider the tax consequences of their investment and the type of investment vehicle that is utilised. It is also important to consider the impact of environmental laws if contamination is present or suspected. In the case of new construction and development, it is essential to account for possible land use and zoning restrictions affecting the real property.

Under environmental laws applicable in Puerto Rico, if the buyer is unable to establish that the contamination is not attributable to its action or inaction, then the buyer may be held liable for environmental pollution or contamination of real property. Therefore, it is important that the buyer establish a baseline of the environmental condition of the property prior to acquiring the real estate assets by undertaking a thorough environmental assessment of the property conducted by a qualified expert. It is significant to note that, in addition to local environmental laws, US federal environmental laws and regulations are also applicable in Puerto Rico.

Real property in Puerto Rico is classified by the Puerto Rico Planning Board (or, in certain cases, by the autonomous municipalities) under publicly available land use and zoning classifications, which establish the different uses that are permitted to be given to the property. Under certain circumstances, project-specific variances may be granted by the relevant permitting authorities after following established procedures (which, among other things, may require public hearings).

Public taking or condemnation of private property is possible in Puerto Rico for public purposes. The process requires the government to establish the value of the property as just compensation for the taking by means of an independent appraisal. Upon depositing the corresponding amount with the expropriations court, title is automatically transferred to the condemnation authority. However, the property owner has the right to contest the valuation in a judicial proceeding and – if successful – to recover a higher value if accepted by the court.

Stamp taxes, recording fees and notarial fees are typically applicable in a transaction for the purchase and sale of real property in an asset deal. Unless the parties reach a different agreement, the transferor of real property will typically pay the stamp taxes with regard to the original of the deed of purchase and sale, and the transferee will pay the stamp taxes with regard to the certified copy of the deed and the applicable recording fees.

Stamp taxes and recording fees are not applicable in the case of a transaction for the total or partial transfer of shares or other equity interests in a property-owning entity. Additionally, a partial exemption for stamp taxes and recording fees may be available in the case of tourism development projects.

The Internal Revenue stamp taxes for the original of the deed of transfer are calculated at the rate of USD2 for the first USD1,000 or fraction thereof, and USD1 for every USD1,000 thereafter, based on the purchase price of the real estate. The Internal Revenue stamp taxes for the certified copy (which is the document that is actually filed for recording) are calculated at the rate of USD1 for the first USD1,000 or fraction thereof, and USD0.50 per USD1,000 thereafter. Legal Assistance stamps are also required to be affixed to the deed and are calculated at .0001 times the purchase price for the original of the deed of sale and half of that amount for the certified copy.

The fees for recording a deed of purchase and sale in the Registry of Property are calculated at the rate of USD2 per USD1,000 (or fractions thereof) for the first USD25,000, and USD4 per USD1,000 for amounts in excess of USD25,000, plus a filing fee of USD15.50. The calculation of recording fees is based on the greater of the purchase price of the real estate and the sum of all the amounts that are secured by the mortgages that encumber the real estate at the time of the sale. In addition, the Notarial Law mandates payment of a notarial tariff to be calculated on the basis of the stated amount of the transaction – for example, the purchase price or the amount of the mortgage. For transactions with stated amounts not exceeding USD10,000, the applicable notarial tariff is USD150. With regard to transactions with stated amounts between USD10,000 and USD5 million, the parties may negotiate the notarial tariff, but in no event may the tariff be greater than 1% of the transaction amount or less than 0.5% of the transaction amount. For transactions with stated amounts of more than USD5 million, the parties are free to negotiate the notarial tariff but the tariff in those cases will never be less than USD25,000.

There are no local legal restrictions on foreign investment in real estate. However, it is important to note that any federal laws restricting foreign investment in the USA are also applicable in Puerto Rico.

Commercial real estate acquisitions in Puerto Rico are principally financed by commercial banks located in Puerto Rico or the mainland USA. There have been some financings with alternative sources such as insurance companies and private capital firms.

Lenders in Puerto Rico will typically require a real property mortgage and a security interest over personal property assets (including rents and other contract receivables generated by the property) in order to secure the repayment of commercial loans for the acquisition or development of real estate.

There are no Puerto Rico restrictions on the granting of security to foreign lenders or on repayments made to foreign lenders under a loan agreement. Although each case must be examined in light of its particular facts and circumstances, interest payments made to non-Puerto Rican lenders are generally not subject to a Puerto Rican withholding tax unless the payor and the recipient are related parties.

The stamp taxes and recording fees payable in connection with the granting and cancellation of mortgages are similar to those payable with regard to transfers of title.

The Internal Revenue stamp taxes for the original of the deed of constitution and the deed of cancellation of mortgage are calculated at the rate of USD2 for the first USD1,000 (or fractions thereof), and USD1 for every USD1,000 thereafter, based on the amount of the mortgage plus an additional amount equal to 10% of the mortgage to cover protective advances. The Internal Revenue stamp taxes for the certified copies are calculated at the rate of USD1 for the first USD1,000 (or fractions thereof), and USD0.50 per USD1,000 thereafter. Legal Assistance stamps are also required to be affixed to the deeds and are calculated at .0001 times the amount of the mortgage plus an additional amount equal to 10% of the mortgage to cover protective advances for the deeds of constitution and cancellation of mortgage (and half of that amount for the certified copies).

The fees for recording the deeds of constitution and cancellation of mortgage in the Registry of Property are calculated at the rate of USD2 per USD1,000 (or fractions thereof) for the first USD25,000 and USD4 per USD1,000 for amounts in excess of USD25,000, plus a filing fee of USD15.50. The calculation of recording fees is based on the amount of the mortgage. In addition, the Notarial Law requires payment of a notarial tariff to be calculated on the basis of the amount of the mortgage transaction. For transactions with stated amounts up to USD10,000, the applicable notarial tariff is USD150.00. With regard to transactions with amounts between USD10,000 and USD5 million, the parties may negotiate the notarial tariff, but in no event may the tariff be greater than 1% of the transaction amount or less than 0.5% of the transaction amount. For transactions with mortgage amounts of more than USD5 million, the parties are free to negotiate the notarial tariff but the tariff in those cases will never be less than USD25,000.

There are no special legal rules or requirements (such as “financial assistance” or “corporate benefit” rules) applicable in Puerto Rico that must be complied with in order for a debtor to give a valid lien over real estate assets. However, third parties granting security for the benefit of others must account for fraudulent transfer and fraudulent conveyance challenges that may be available under the Puerto Rican Civil Code and US federal bankruptcy statutes. If successful, these challenges may result in the lender’s loss of its security over the real estate assets.

Under Puerto Rican law, a real property mortgage is not duly constituted or effective unless it has been recorded in the Registry of Property. Therefore, before enforcement of a real property mortgage lien is sought, the secured party should confirm that the mortgage has in fact been recorded in the land records. Priority among real property liens is generally determined on the basis of the order of filing of the corresponding lien instruments in the Registry of Property. However, it is significant to note that there is a statutory preferential lien for unpaid property taxes.

Enforcement of a real property mortgage lien in Puerto Rico is accomplished pursuant to a judicial proceeding filed in the local court corresponding to the jurisdiction where the mortgaged property is located. Alternatively, if federal jurisdictional requirements are met, the foreclosure action may also be brought in the United States District Court for the District of Puerto Rico. Since it is an ordinary civil action, the judicial foreclosure proceeding includes all of the different stages of legal actions set forth in the Rules of Civil Procedure (including, for example, the filing of a complaint, discovery, trial, etc). With regard to enforcement of a mortgage lien on real property that is the principal residence of the debtor, the lender and the debtor are first required to participate in compulsory mediation proceedings for the purpose of attempting to reach an agreement that would permit the debtor to retain ownership and possession of the residence. However, the mediation proceedings do not obligate the parties to reach such an agreement, but often cause delays in completion of foreclosure of the mortgage lien.

Under Puerto Rican law, existing secured debt may be subordinated to newly created debt by agreement among the parties. There is also a statutory, preferred lien for unpaid real property taxes to which a mortgage lien will always be subordinate. It is also important to point out that the United States Bankruptcy Code applies in Puerto Rico and that US bankruptcy courts have broad discretion, under certain circumstances, to subordinate the claims of competing lienholders.

A lender holding or enforcing a lien on real property in Puerto Rico may be liable under environmental laws if it exercises sufficient control over the contaminated property and/or the owner of the property so as to be deemed responsible for the environmental condition of the property.       

As a general rule, insolvency alone will not void a security interest in real estate under Puerto Rico law. However, if a borrower grants a lien when it is insolvent and does not receive equivalent value in exchange, the lien may be voided or set aside under the fraudulent transfer provisions of the Puerto Rican Civil Code or the fraudulent conveyance provisions of the United States Bankruptcy Code.

In Puerto Rico, there are no rules, regulations or requirements ‒ whether existing, pending or proposed ‒ compelling lenders or borrowers to pay any recording or similar taxes in connection with mortgage loans or mezzanine loans related to real estate.

The public policy of the Commonwealth of Puerto Rico with regard to land use and the development and conservation of natural resources is set forth in a Land Use Plan, which was adopted by the Puerto Rico Planning Board and approved by the Governor of Puerto Rico. The Land Use Plan establishes land classifications for the entire territory of Puerto Rico, which are general categories of land use based on the land’s characteristics and values (ie, urban soil, rustic soil, soil that may be urbanised, etc). Also, at a central level and complementing the Land Use Plan, there is the Joint Regulation for the Evaluation and Issuance of Permits related to Land Development and Use (the “Joint Regulation”) and other regional plans governing particular geographical regions, and sectorial plans addressing specific issues or needs within a particular sector that require a more detailed analysis. These plans may establish both land classifications and zoning districts. A zoning district is established based on the underlying land classification but governs more specific development parameters, such as permitted uses, density, building heights, lot sizes, setbacks, and occupation areas, among others.

There is another layer of land use and planning instruments adopted at the level of the municipality (a smaller self-governing division within Puerto Rico) – of which the primary is the Municipal Ordainment Plan. Municipal Ordainment Plans set forth the land use and development policies at the municipal level and may also establish land classifications and zoning districts within the municipality. Municipal land use and planning instruments must be consistent with the current Land Use Plan and, if not, must be revised to achieve such consistency.

The Land Use Plan and other central government instruments generally have precedence over the Municipal Ordainment Plans and other municipal-level instruments.

The design, appearance and method of construction of new buildings or refurbishment of existing buildings are typically subject to requirements established under the zoning district where the new building or existing building is located. The zoning districts are established under the applicable regional, sectorial or municipal-level plans and regulations. These plans and regulations and a central government regulation called the Joint Regulation specify the controls and parameters applicable to each district, which include building height, setbacks, occupation areas, parking areas, fences, and signs, among other things. The determination of which of these zoning regulations applies to a specific project depends on the nature and location of the project.

In addition, technical construction requirements apply to all buildings and refurbishments of buildings under the Puerto Rico Building Code, a central government regulation. Other central government regulations governing technical requirements may also apply depending on the nature and location of the particular project.

The Puerto Rico Planning Board and the Office of Management of Permits (OMP) are the central government agencies with jurisdiction over land use and development permitting. The jurisdiction of these agencies over a project depends on the type of project and permit under consideration, with the Planning Board generally having jurisdiction over more complex projects. In some cases, however, a municipality may have the primary authority to issue certain land use or development permits if the municipality has a Municipal Ordainment Plan and if the authority to issue these permits has been transferred from the central government agencies to the municipality. The legal instruments that apply in the evaluation or processing of permits by these agencies include the Land Use Plan, any applicable regional, sectorial or municipal plans and regulations, and the Joint Regulation, depending on the circumstances. 

The Planning Board has exclusive jurisdiction over certain projects requiring changes in zoning that are of regional impact or that do not meet use or density/intensity requirements in their zoning district, among other things. In a process known as a site location consultation, the government may approve these types of projects and authorise waivers of use, density/intensity and other requirements, if applicable conditions are met. A site location consultation typically contains general parameters related to the proposed project, such as overall density, proposed uses and the proposed master plan. 

The OMP or the municipality, in turn, typically consider lesser permits, including:

• non-discretionary construction permits (for projects strictly complying with all applicable requirements in the corresponding zoning district);
• construction consultations (for projects requiring one or more waivers of applicable construction requirements under the corresponding zoning district); and
• approvals for projects involving lot divisions and urbanisation or subdivision type projects, addressing primarily infrastructure development requirements.

The construction consultations and permits address the specific allocation of density, building heights, lot sizes, setbacks, and occupation areas, among other things. The construction permit is the final permit that must be obtained prior to actual earth movement for building construction (other than the earth movement for infrastructure, which may be covered in the lot division/urbanisation/subdivision approval). Other permits addressing environmental and natural resource impacts may also be required prior to construction. 

Once the construction is completed and before commencing operations, a project must obtain a Single Permit from the OMP or the municipality, as applicable. The Single Permit consolidates the use permit, sanitary licence, fire prevention certification, and other licences that could apply based on the specific activities taking place at the building or facility.

All permit proceedings are commenced by filing an application before the relevant agency. Upon filing of the application, the applicant typically is required to install one or more signs at the project site notifying the public of the application and where to submit comments. Except for non-discretionary construction permits, applicants may also be required to notify the property owners that are contiguous to or within a wider radius of the project site, depending on the type of permit requested. 

During the permitting process, the applicant must seek comments from the agencies with jurisdiction about the project (including public utilities, highway and transportation authorities, environmental and natural resource agencies, among others), and the requirements of these agencies may be imposed as permit conditions. The applicant must also obtain a certification from the OMP that the project meets certain regulatory environmental review requirements to ensure that a thorough assessment of the environmental impact of the project has been performed. 

The agency may hold a public hearing to consider the application, which may be mandatory or discretionary in some cases. Any interested person may submit written comments in favour or against the permit to the permitting agency during the specified comment period and may also appear at the public hearing, if any, and provide verbal or written comments at such time in favour of or against the project. During the permitting process, a third party may also request that the agency grant it the right to participate as an intervenor, which the agency may approve if the party meets certain requirements. As an intervenor, the third party would be afforded the status of a party to the proceedings.

After the hearing, or completion of all necessary steps to evaluate the project (as applicable), the agency will evaluate all the information in the record and issue a decision, approving or denying the permit.

Every applicant of a project who is denied an application for a permit to develop or use real property has the right to appeal the determination within the specified legal/regulatory timeframes. Generally, the applicant has the option of requesting the permitting agency to reconsider its determination or seeking judicial review of the determination by a court with jurisdiction. The applicant may also choose to exercise both options – by seeking reconsideration first and, if denied, pursuing judicial review.

In order to obtain development permits or approvals, an applicant is required to seek and obtain the recommendations regarding the project from the various agencies with jurisdiction over the matter. Among the agencies typically consulted during this process are municipal governments, utility suppliers (which in Puerto Rico are government-owned), and agencies with jurisdiction over natural resources and the environment, public highway and transportation systems and cultural, historical or archaeological resources, among other thingss. 

It is not uncommon for a public utility provider, such as an electric power service provider or the water and sewer service provider, to include conditions on improvements to be made by the applicant in order to obtain the desired services in its recommendations. Sometimes these conditions may require the applicant to make capital investments. The parties may find it necessary or convenient to enter into an agreement specifying their respective obligations, including any infrastructure development and capital commitments from the parties, commitments from the utility regarding the capacity to be supplied, procedures for the connection of different phases of a project, and any negotiated terms for the payment of connection fees, among other things. 

An agreement may also be necessary with the highway and transportation authority to address necessary highway infrastructure improvements and the payment of impact fees (as applicable). In the case of projects that impact natural resources, the applicant may be required to reach an agreement with the natural resource protection agency to address mitigation or compensation requirements, which in some cases may include the transfer of lands for preservation. Agreements with other agencies may be required in order to address their recommendations or as a pre-condition to obtain development permits or implement a project.

Each ongoing construction project must have an independent inspector designated by the owner to periodically inspect it. The inspector must be a licensed architect or engineer in Puerto Rico. The inspector who is required to submit monthly reports to the owner and inform the owner of any non-compliance issues. Depending on the circumstances, the inspector may also be required to notify non-compliance issues to the OMP, file a complaint against the project at the OMP, or request the stay of the construction work from a court with jurisdiction, among other things. At the conclusion of construction, the inspector must submit a certification to the OMP to the effect that the completed project complies with the requirements of the applicable permit or approval. 

The OMP may initiate enforcement action against a person or entity found to be in violation of applicable land use and zoning requirements or permits. There are two mechanisms through which the enforcement process may be initiated:

• the filing of a complaint by a third party; or
• the commencement of an investigation by the OMP.

The complaint may be filed by any member of the public or by any other government agency. An investigation is then commenced. If the investigation indicates that violations exist, the agency may:

• issue an administrative order requiring the cessation of unauthorised activities, imposing administrative fines, or taking other regulatory actions to address the non-compliance; or
• seek an injunction in court to revoke the violator’s permits, order the cessation of unauthorised activities, or demolish structures, among other things.

The OMP may also refer the matter to other agencies with jurisdiction, depending on the nature of the violations. 

The OMP is also empowered to conduct physical inspections, based on an inspection programme, of any properties subject to decisions, permits or authorisations issued by the agency in order to assess compliance and issue reports of their findings.

The most common forms of ownership vehicle for commercial real estate assets in Puerto Rico are the corporation and the limited liability company. Puerto Rico does have legislation that allows for the establishment of REITs (further details of which can be found in 5.3 REITS).

Corporations and limited liability companies are constituted by registering their organisational documents with the Department of State of Puerto Rico. Registration fees are USD150 in the case of corporations and USD250 in the case of limited liability companies. Forms for the obtention of an employer identification number and election of the tax treatment for such entities are typically filed with the corresponding taxing authorities simultaneously with their formation with the corresponding taxing authorities. Other governmental filings may be necessary, depending on the particular business activities in which such entities will engage.

Puerto Rico does have legislation that allows for the establishment of REITs, which provide important tax benefits; however, owing to restrictive income and ownership tests, this vehicle has not been widely used in Puerto Rico. A REIT, which may take the form of a corporation, limited liability company, partnership or trust, is an entity that owns and operates income-producing, commercial real estate and is owned by 50 or more investors.

There is no statutory minimum amount of capital required in order to establish any of the entities used to invest in real estate in Puerto Rico.

Corporations are governed by the provisions of their by-laws and articles of incorporation. The decision-making authority over the governance of a corporation is vested in its board of directors and, under certain circumstances, the stockholders. Puerto Rico law does not establish a required structure for the governance of limited liability companies. A limited liability company is governed in accordance with the provisions of the operating agreement entered into by its members.

Corporations and limited liability companies are required to pay an annual fee of USD150 in order to be in good standing and maintain their status as registered entities authorised to conduct business in Puerto Rico. Corporations are also required to file an annual report with the Department of State, which must include the financial statements of the corporation for the corresponding year. The financial statements filed with the annual report must be audited by an independent certified public accountant in Puerto Rico if the annual gross revenues of the corporation exceed USD3 million.

The most common arrangement that Puerto Rican law provides for the temporary occupancy and use of commercial real estate is the lease. Other arrangements, which are rarely utilised, are the surface right and the usufruct.

There is only one type of commercial lease commonly in use in Puerto Rico, although the terms of each lease vary according to the agreement of the parties.

Rents and lease terms on commercial leases are freely negotiable by landlord and tenant in Puerto Rico. Of course, no contractual arrangements in Puerto Rico, including leases, may violate the general prohibition against agreements that are contrary to the laws, morals or public order.

The length of the lease term under a commercial lease in Puerto Rico can vary according to the needs and desires of the parties. However, agreements that provide for unusually long lease terms (eg, 99 years) may be scrutinised as disguised sales.

Maintenance and repair obligations under commercial leases in Puerto Rico are typically allocated between landlord and tenant, depending on the type of repair in question. By way of example, structural repairs are generally the responsibility of the landlord, whereas most non-structural repairs must be undertaken by the tenant.

Rent payments under commercial leases are generally payable on a monthly basis.

The amount of rent payable under a lease of commercial property in Puerto Rico is usually increased over the term of the lease, particularly in the case of leases covering a term of more than two to three years.

Rental increases can be negotiated as pre-determined fixed amounts or calculated, at the time of the increase, on the basis of an established index (such as an inflation or consumer price index).

VAT is not payable on rents in Puerto Rico.

In some cases, landlords of commercial property in Puerto Rico will require the tenant to pay a month’s or two months’ rent in advance and/or a security deposit equivalent to one month’s rent.

In multi-tenant properties such as shopping centres and office buildings in Puerto Rico, the cost of maintenance and repair of common areas is commonly shared by all of the tenants proportionately (usually calculated on the basis of the proportion that the area leased by each tenant bears to the total leasable area of the property).

Utility and telecommunications expenses that relate solely to the leased premises are typically paid by the tenant. Those expenses, as they relate to the common areas of a multi-tenant property, are allocated among all of the tenants on a proportionate basis.

The cost of insurance under a lease of commercial property in Puerto Rico is most often assumed by the tenant. However, in the case of single-tenant properties, the landlord may opt to obtain and pay for insurance directly but include the cost in the rent to be paid by the tenant.

It is typical in Puerto Rico for the landlord to impose restrictions in the lease agreement as to the uses that can be given to leased property by its tenant. Zoning and land use regulations, as well as unlawful noxious uses, can also serve as limitations.

Landlord and tenant are free to stipulate in the lease agreement the applicable conditions that will apply to alterations that the tenant is permitted to undertake in the leased premises. It is most common for a tenant to be permitted to make non-structural improvements to the property but not structural alterations ‒ although agreements to the contrary are possible. In most cases, the landlord will reserve the right to approve all alterations (structural and non-structural). Conditions as to the types of alterations that a tenant may make vary ‒ usually depending on the type of property involved ‒ but, in all cases, a prudent landlord will require that all alterations and improvements be made in accordance with applicable laws.

There are no statutory or regulatory restrictions in Puerto Rico that apply to leases of different categories of real estate.

Under Puerto Rico law, the insolvency of the tenant will not have an impact on the validity of the lease – although the parties may provide in the lease agreement that a tenant’s bankruptcy or insolvency will be considered as an event of default. However, pursuant to federal bankruptcy laws applicable in Puerto Rico, a bankruptcy trustee may elect to reject (and, therefore, terminate) or assume a lease of a tenant that has filed for protection under Chapter 11 of the United States Bankruptcy Code. Additionally, when a defaulting residential tenant is insolvent, the legal process for eviction has certain additional requirements (as discussed in 6.21 Forced Eviction).

The most common type of security offered by tenants under commercial leases in Puerto Rico is a security deposit, usually equivalent to one month’s rent, which is kept by the landlord throughout the term of the lease. In the event that the tenant fails to perform a monetary obligation, the landlord uses the deposit to satisfy the tenant’s unpaid obligation. The tenant is typically required to replenish the security deposit if used by the landlord before expiration of the lease term. Tenants may also offer a bond issued by a surety company, or a guaranty from a solvent affiliate, in order to guarantee its obligations under the lease.

Under Puerto Rican law, a tenant is required to vacate the leased property upon expiration of the stipulated term of the lease. If the tenant does not vacate upon expiration and the landlord does not object to the tenant’s occupancy, then the tenant will be deemed to be occupying the leased property on a month-to-month basis under the same terms and conditions of the expired lease. However, knowledgeable landlords typically include a holdover clause in their lease agreements which provides that, if a tenant’s occupancy continues after expiration of the lease term, the applicable rent will increase considerably (eg, by 150–200%). This type of provision serves to discourage holdover tenancies.

The lease agreement will usually stipulate if tenant is permitted to assign the lease or to sublease the leased premises. Landlords typically include provisions in the leases requiring their consent for the assignment of the lease (including upon a change of control of tenant) or for tenant to enter into a sublease.

The lease agreement will usually stipulate which tenant defaults will permit the landlord to terminate the lease and evict the tenant. Typically, any default by the tenant in complying with any of its obligations set forth in the lease agreement will give landlord the right to terminate the lease – although the agreement normally provides the tenant with a cure period to remedy a default. Bankruptcy and insolvency are also customarily included as tenant defaults giving rise to landlord’s remedies under a commercial lease, but the landlord’s ability to terminate a lease after a tenant files for bankruptcy may be limited by the United States Bankruptcy Code.

In Puerto Rico there are no execution formalities for leases. A lease of real property for a term of six years or more is, by exception, recordable in the Registry of the Property of Puerto Rico as an encumbrance affecting title to the real property. A lease of real property for a term of less than six years may also be recorded in the Registry of the Property of Puerto Rico by mutual agreement of the parties.

In order to have access to the Registry of the Property, a lease agreement must either be:

• executed directly in deed form before a notary public in Puerto Rico; or
• set forth in a private document that may be:
1. executed in Puerto Rico and thereafter ratified and elevated to deed form before a notary public in Puerto Rico; or
2. executed by the parties before a notary public outside of Puerto Rico and thereafter protocolised by a notary public in Puerto Rico.

In each of the above-mentioned three methods described, the public deed is prepared by a Puerto Rico notary public in accordance with the form requirements of the PR Notarial Act.   

Lease Recordation Costs

Stamp taxes

The PR Notarial Act requires that internal revenue stamps be cancelled on the original and the certified copy of the aforementioned deeds. The Internal Revenue stamp taxes for the original are calculated based on the transaction amount at the rate of USD2 for the first USD1,000 (or fractions thereof) and USD for every USD1,000 thereafter. The Internal Revenue stamp taxes for the certified copy are calculated at the rate of USD1 for the first USD1,000 (or fractions thereof) and USD0.50 per USD1,000 thereafter. The transaction amount used to calculate the Internal Revenue stamps for a lease agreement is based on the aggregate rent to be paid during the entire term of the lease, including any extension options.

Recording fees

The fees for recording a deed in the Registry are calculated at the rate of USD2 per USD1,000 (or fractions thereof) for the first USD25,000 and USD4 per USD1,000 for amounts in excess of USD25,000, plus a filing fee of USD25.50. The amount used to calculate the recording fees for a lease agreement is based on the aggregate rent for only the first 15 years of the lease.

Notarial tariff

In addition, the Notarial Law mandates payment of a notarial tariff to be calculated on the basis of the stated amount of the transaction (eg, the purchase price or the amount of the mortgage). For transactions with stated amounts not exceeding USD10,000, the applicable notarial tariff is USD150. With regard to transactions with stated amounts between USD10,000 and USD5 million, the parties may negotiate the notarial tariff, but in no event may the tariff be greater than 1% of the transaction amount or less than 0.5% of the transaction amount. For transactions with stated amounts of more than USD5 million, the parties are free to negotiate the notarial tariff but the tariff in those cases will never be less than USD25,000.       

Under Puerto Rico law, a tenant may be evicted pursuant to a summary judicial proceeding if an event of default has occurred under the lease agreement. The proceeding requires that a hearing be held within ten days after the date on which the eviction suit is filed with the court by the landlord. Thereafter, the judge must issue a ruling within ten days after the date of such hearing. In practice, however, the eviction process may actually take longer than the foregoing periods set forth in the statute. This is particularly so with regard to the eviction of residential tenants that are insolvent families, which requires giving notice of the judicial order to the Department of Family and can only occur after 20 days from the date of such notice. Furthermore, in such cases, a representative of the Department of Family must be brought as a necessary party to the eviction proceeding.

A lease may be terminated by a governmental authority in Puerto Rico, using its powers of condemnation and expropriation, as a result of the taking of the leased property for a public purpose. However, the government must always pay just compensation to the affected parties, which is often the subject of litigation making the length of the entire process uncertain and unpredictable.

There are no statutory limitations on damages in the event of a tenant’s breach and termination of a lease. As indicated in 6.16 Forms of Security to Protect Against a Failure of the Tenant to Meet Its Obligations, the most common type of security offered by tenants under commercial leases in Puerto Rico is a security deposit. If the tenant fails to perform a monetary obligation, the landlord may use the deposit to satisfy the tenant’s unpaid obligation.

The most common types of contractual arrangements in Puerto Rico between the owner of a construction project and the contractor are:

• “stipulated sum” in which the basis of payment is a fixed price; and
• “cost plus” in which the basis of payment is the cost of the work plus a fee for the contractor.

Under the “cost plus” arrangement, the contractor’s fee can be a fixed amount or alternatively a percentage of the cost of the project. “Cost plus” contracts sometimes provide for a guaranteed maximum price such that the amount to be paid by the owner of the project to the contractor never exceeds a predetermined amount.

There are a variety of methods commonly used in Puerto Rico for assigning responsibility for the design, construction and administration of a project. Design, which is the initial step, must always be undertaken by one or more architects who are licensed in Puerto Rico. The construction of the project itself may be arranged under a single contract with a licensed general contractor or under a number of separate contracts with specialised contractors whose work is co-ordinated by the project architect or a construction manager. Finally, the design and construction functions may also be combined under a single approach commonly known as “design-build”, where the owner of the project contracts with a single entity that provides design, construction and contract administration services for the project.

Construction risk in Puerto Rico is typically managed contractually in the project agreements by means of warranties, indemnification provisions and limitations of liability. Of course, the effectiveness of these devices is dependent on the solvency of the obligated parties. To the extent possible, when the solvency and experience of one of the parties is in question, the counterparty will seek to obtain guarantees from sureties or third-party guarantors. As a general rule, these devices are fully enforceable to the extent not found to be contrary to public policy.

The most common method that owners of construction projects in Puerto Rico utilise in order to manage schedule-related risk is the establishment of milestone dates for the different phases of a project. Project contracts will typically include monetary penalties for failure to comply with the milestones in a timely manner, as well as monetary rewards for early completion.

It is customary in Puerto Rico, particularly in the case of large projects, for owners (and their lenders) to require project contractors to provide payment and performance bonds. Although less common, letters of credit and completion guaranties from affiliates and/or principals may also be required in order to cover the risk of a contractor’s failure to perform under its project contract.

Puerto Rican law does not provide project contractors with so-called mechanic’s or materialmen’s liens if a project contractor is not paid the amount due. A contractor who is not paid must bring an action in court in order to recover amounts owed. However, the Puerto Rican Civil Code does give labourers and materialmen (including, for example, sub-contractors) who have not been paid by the project contractor a direct cause of action against the owner of the project to the extent of any amounts owed by the owner to the project contractor. Such right does not constitute a lien on any property.

In Puerto Rico, once a project is completed, the project inspector (who must be a licensed architect or engineer) must certify to the permitting agency that the construction has been undertaken in accordance with the government-approved plans and specifications for the project. The completed project must also be inspected and approved by the Puerto Rico Health and Fire Departments for compliance with the applicable fire and health codes. Once all required inspections, approvals and certifications have been submitted to the permitting agency, a final use permit is issued allowing for the occupancy and use of the completed project.

There is no VAT (or equivalent) applicable to the sale or purchase of real estate in Puerto Rico.

The conveyance of real estate in Puerto Rico is recorded in the Registry of Property, which results in the payment of recordation fees and stamp taxes. Transactions involving the purchase of the shares or other ownership interests in an entity (rather than the purchase of the assets of the entity) may be used to mitigate the recordation fees and stamp taxes, as the transfer of ownership interests is not subject to those costs.

Real property taxes are payable by the owner of real property in Puerto Rico. The tax rate varies depending on the municipality in which the property is located and ranges from 8.08% to 11.83%. The real property tax is imposed on the value of the property, as assessed (based on the replacement cost as of 1957) by the Municipal Revenues Collection Center (Centro de Recaudacion de Ingresos Municipales, or CRIM) and is payable semi-annually on July 1st and January 1st of each year. Real property tax exemption may be available under certain Puerto Rico tax incentives legislation (eg, tax incentives covering manufacturing, tourism, and other eligible activities).

Also, any for-profit entity engaged in a trade or business in Puerto Rico is subject to a municipal licence tax (a gross receipts tax or “patente”) imposed on gross revenues generated within the municipalities in which the entity conducts its business. The municipal licence tax rate varies depending on the municipality, but ranges from 0.2% to 0.5% of gross revenues in the case of non-financial businesses.

A foreign corporation that is not engaged in a trade or business in Puerto Rico is subject to Puerto Rico withholding income tax on its fixed or determinable annual or periodic gross income (eg, rental income) from Puerto Rico sources at a flat tax rate of 29%, which is fulfilled through withholding at source by the payor of the income. The foreign corporation may, however, elect to treat income derived from real estate located in Puerto Rico (whether the income is rent or gain from the sale or exchange of the property) as income effectively connected with a Puerto Rico trade or business (the “Election”), which would allow the lessor to avoid being subject to the 29% flat tax regime. Instead, the lessor would be required to file a Puerto Rico income tax return in order to declare the Puerto Rico rental income and claim all expenses associated with the production of such income, with the net rental income subject to tax in Puerto Rico at regular corporate income tax rates (up to 37.5%).

In the case of the sale of real property located in Puerto Rico by a foreign corporation that is not engaged in a trade or business in Puerto Rico, the purchaser of the real property asset is required to withhold 25% of the excess of the selling price over the sum of the seller’s acquisition cost of the property plus certain other items specifically provided under the law. However, if the foreign corporation has made the election, the gain from the sale of the real property would be taxed at:

• gradual (up to 37.5%) income tax rates for real property considered inventory; or
• preferential (20%) income tax rates if the real property is a trade or business asset or an investment property.

Income from certain real estate owned by a REIT in Puerto Rico is subject to preferential Puerto Rican income tax treatment. In general, if the REIT makes dividend distributions in an amount equal to at least 90% of its net income during a taxable year, the REIT will not be subject to the regular Puerto Rican corporate income tax rates otherwise applicable. Taxable dividends distributed by the REIT would be subject to a 10% Puerto Rican income tax withholding at source. Real property used in a trade or business or to produce income may be depreciated over its useful life.