property tax

At first sight, Puerto Rico’s real estate market appears to be an investor’s dream. Identifying possible investment properties in prime locations is as easy as walking through the streets of Santurce, Calle Loíza, and Old San Juan because there are hundreds of unused structures, many of them visibly falling apart.

But investors soon find out the dream market is just an illusion. Many of these properties are either not for sale or priced too high for a sound investment, even when taking into consideration tax breaks and incentives.

The reason for this market dislocation is simple; Puerto Rico’s property tax system (CRIM) is broken. Property taxes in the island have two major flaws; first price appraisals are sometimes decades old which results in trivial tax bills for many of these underutilized properties. Second, there is no lien market so property owners can go for years without paying a cent in taxes while holding on to their assets and waiting for an overly optimistic investor to come and pay their inflated prices.

In other words, this broken tax system is one of the main factors preventing more investments from flowing into the island’s real estate market. I know for a fact some of the most iconic abandoned properties in Santurce haven’t paid taxes in 10 to 20 years and owe hundreds of thousands of dollars to the government even though their yearly tax bill is only a fraction of what it would be if their appraisals were up to date.

In total, property owners in Puerto Rico owe the government over $2.3 billion in unpaid taxes. If a transparent lien market were set up, the government could recuperate a large portion of this debt in a short period. But more importantly for the Puerto Rican economy, developers would get access to thousands of abandoned properties in prime locations across the island at reasonable prices.

Rosselló’s Administration has publicly entertained the idea of selling a portion of this debt to private investors in order to raise funds for the government and municipalities. But previous efforts involved private deals instead of creating a permanent and transparent lien market. If this administration truly wants to bring investments into the island, it has to strive for a permanent solution to this issue, not one-off deals.

It has to recognize that property taxes and lien markets aren’t just a mechanism to increase government revenues, but also a tool that can be used to curve real estate speculation and promote owners to develop their properties or sell them at a reasonable price to someone who will.

I know many will scoff at the idea of using taxes to fix anything, I usually would as well, but private markets are clearly not working in this situation. The government needs to implement a system that systematically reappraises properties and create a mechanism for private markets to deal with assets that are being used so inefficiently their owners can’t pay their taxes.

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