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 real estate market in Puerto Rico has demonstrated considerable strength during the past year, driven in significant part by increased investment in hospitality projects and the continued construction of housing units financed with Community Development Block Grant (CDBG) funds allocated by the US federal government. Notwithstanding persistent inflationary pressures and uncertainty arising from evolving US trade and tariff policies, the volume of new development activity on the Island has remained strong, reflecting sustained investor confidence in Puerto Rico’s real estate sector.

The demand for luxury residential properties continued to show sustained growth, driven in significant part by Puerto Rico’s tax incentives legislation (including the incentives available under Act 60-2019), which continues to attract affluent investors and entrepreneurs seeking to relocate to the Island. The short-term vacation rental sector has also continued to expand, with new and rehabilitated properties entering the market in response to strong tourism demand.

The development of new affordable housing remains a critical priority for the local government, particularly considering the ongoing housing shortage on the Island. Community Development Block Grant (CDBG) funds allocated to Puerto Rico by the US federal government, together with federal tax credit allocations and other federal programmes, have continued to support the financing of affordable housing projects. However, uncertainty regarding the future availability and levels of federal funding has introduced additional challenges for developers and lenders operating in this sector.

Several significant hospitality and mixed-use projects remain in the development pipeline on the Island, supported in part by Puerto Rico’s tourism incentives legislation. However, the feasibility and timing of these projects continue to be influenced by construction cost escalation and the broader economic uncertainty stemming from US fiscal and trade policy developments.

The government of Puerto Rico has made the transformation of the Island’s land use and permitting system a centrepiece of its legislative agenda, with two companion bills currently pending before the Puerto Rico Legislature:

• Senate Bill No 1173, filed on 6 April 2026, proposes what would be known as the “Law to Simplify Puerto Rico’s Permitting System” (Ley para Simplificar el Sistema de Permisos de Puerto Rico); and
• Senate Bill No 1183, filed on 8 April 2026, proposes the creation of a new comprehensive “Planning and Permitting Code” (Código de Planificación y Permisos).

At their core, both measures represent a fundamental philosophical shift in how government relates to real estate development and private investment – moving away from a model in which the state acts as a gatekeeper that must affirmatively approve activity before it can begin, toward one in which clear, objective rules define what is permissible and the private sector may act immediately upon compliance with those rules, with government oversight focused on post-authorisation enforcement rather than front-end approval. This conceptual reorientation seeks to address the perception that Puerto Rico is a difficult jurisdiction in which to obtain development permits.

The two bills propose to replace the existing patchwork of overlapping agencies, conflicting statutes and unpredictable administrative processes with a single, coherent and digitally integrated regulatory architecture. Rather than navigating multiple bodies with overlapping jurisdiction, developers would interact with a unified framework governed by uniform standards, consolidated into a single regulatory instrument and administered through a fully electronic and traceable system.

Equally significant is the proposed shift of responsibility to accredited private professionals for certain permitting determinations, transferring expertise and accountability from government bureaucracy to a regulated professional sector. These reforms aspire to reposition Puerto Rico as a predictable, transparent and competitive environment for real estate and infrastructure investment, while preserving environmental, historical and due process protections.

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 are also recognised under Puerto Rican law, such as easements, usufructs, options, rights of first refusal and surface rights.

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 benefitted 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. 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 – in person – before a notary public.

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

As 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. Depending on the relative bargaining strength of the parties, some of these representations are sometimes 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.

In addition, 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 obliged 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 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, a buyer may be held liable for the environmental pollution or contamination of real property unless the buyer can establish that such contamination is not attributable to its action or inaction. It is therefore important for the buyer to establish a baseline of the environmental condition of the property prior to acquisition by undertaking a thorough environmental assessment conducted by a qualified expert. 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 determine the uses permitted for the property. Under certain circumstances, project-specific variances may be granted by the relevant permitting authorities in accordance with 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 in order to determine just compensation for the taking by means of an independent appraisal. Upon depositing the corresponding amount with the expropriation 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. In addition, 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 0.0001 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 the 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 financial institutions 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) to secure repayment of commercial loans for the acquisition or development of real estate.

There are no Puerto Rican restrictions on the granting of security to foreign lenders, nor 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 0.0001 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. 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, there is a statutory preferential lien for unpaid property taxes that takes precedence.

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.

As the judicial foreclosure proceeding is an ordinary civil action, it includes all of the different stages of legal actions set forth in the Rules of Civil Procedure (including 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 oblige the parties to reach such an agreement, and 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 lien-holders.

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 compelling lenders or borrowers to pay any recording or similar taxes in connection with mortgage loans or mezzanine loans related to real estate.

In Puerto Rico, land use, development, design and construction are regulated at both the legislative and regulatory levels. At the legislative level, these matters are regulated primarily by Act 161-2009, as amended, known as the Puerto Rico Permitting Reform Act (“Act 161”). In general, Act 161 establishes Puerto Rico’s policy and general processes for the review and issuance of development permits. Act 161 also created the Puerto Rico Permits Management Office (OGPe, per its Spanish acronym), ascribed to the Puerto Rico Department of Economic Development and Commerce (DDEC, per its Spanish acronym). OGPe is the government agency in charge of evaluating and issuing development permits. In that regard, OGPe implements Regulation No 9473: Joint Regulation for the Evaluation and Issuance of Permits related to the Development, Land Use and Operation of Businesses (“Joint Permits Regulation”) adopted by the Puerto Rico Planning Board on 16 June 2023.

The Joint Permits Regulation is the primary regulation regarding land use, development, design and construction as it contains the specific permits, processes, applicability of permits, allowed uses in the various zoning districts, design parameters, and requirements in order to obtain the corresponding permits. Note that certain Puerto Rico municipalities may have autonomy in connection with the issuance of permits and may have independent, municipal permit offices to that effect.

Obtaining development rights in Puerto Rico is a highly regulated, multi-step process. In general, project development is subject to obtaining a series of permits, licences and authorisations. Naturally, depending on several factors (including the type, magnitude, location and design of the project, and environmental conditions at the site), the development may require additional approvals.

Prior to approving a project, the corresponding government agencies (including OGPe) must review its environmental impacts. Depending on the proposed project, the environmental impact review requirement may be satisfied through an environmental assessment recommendation (REA) and environmental assessment determination (DEA), through an environmental impact statement (EIS), or by obtaining a determination of no-significant environmental impact (Categorical Exclusion). After fulfilling the environmental impact review requirement, a proponent may seek additional permits, such as a land use consultation or construction permit, including comments and recommendations from the agencies with jurisdiction. During this permit review process, third parties or those claiming to be affected by the proposed project may appeal and/or object to the development.

Regarding the enforcement of planning and zoning restrictions, the Joint Permits Regulation establishes the uses allowed as of right in the various zoning districts. During the permit application process, if the proposed use is not allowed as of right in such zoning district, the proponent must seek additional approvals – ie, Land Use Consultation. This Land Use Consultation process is also subject to public review, during which a third party may object.

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 (see 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 obtaining 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. 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 may take the form of a corporation, limited liability company, partnership or trust, and 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 are the surface right and the usufruct, but these are rarely utilised.

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 can be 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 one or two months’ rent in advance and/or a security deposit, typically equivalent to one month’s rent.

In multi-tenant properties such as shopping centres and office buildings in Puerto Rico, the cost of the 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. Such expenses that relate to the common areas of a multi-tenant property are allocated among all of the tenants on a proportionate basis.

Tenants are typically required to reimburse the landlord for a pro rata share of real estate taxes on a pass-through basis in multi-tenant commercial properties. Since failure to pay real estate taxes will result in the imposition of a statutory lien on the leased property, in single-tenant properties the landlord will customarily pay the real estate taxes but include that cost in the rent to be paid by the tenant (with escalations in the rental rate if the tax assessment increases over the lease term).

As is the case with real estate taxes, 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 US 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. When a defaulting residential tenant is insolvent, the legal process for eviction has certain additional requirements (as discussed in 6.21 Forced Eviction).

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, 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 the applicable rent will increase considerably if a tenant’s occupancy continues after expiration of the lease term (eg, by 150–200%). This type of provision serves to discourage holdover tenancies.

The lease agreement will usually stipulate whether a 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 the 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 the 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 landlords’ 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 these three methods, 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 USD1 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 the 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 that notice of the judicial order be given 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 the Family must be joined 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. 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 in accordance with the terms of the lease agreement.

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.

A variety of methods are 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 they are 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, ranging 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).

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 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 income tax rates (up to 37.5%) for real property considered inventory; or
• preferential income tax rates (20%) 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.