Puerto Rico’s urban landscape has a severe problem of abandoned properties in prime locations. Investors often expect this scenario to translate into better prices and more investment opportunities for new and better developments. This does not happen. Here’s why.

In the past year, our firm conducted a study of the number of abandoned properties in the city of San Juan. Our research showed there’s a total of 265 abandoned properties between Condado, Miramar and Santurce. Santurce has 123; Condado has 68; calle Loíza has 31; Miramar has 21; and 22 there are in Punta las Marías alone. In the process of making this inventory, we learned that the main causes of this abandoned property crisis are speculation, inherited properties and tax delinquency.

There’s a couple companies that buy and hold abandoned properties waiting for the right time to sell. One of these “long-term” investors that we stumbled upon has held one of his iconic Ponce de León corners since 1982 without making any improvements or paying any taxes. Other properties have been abandoned for generations, owned by several inheritors that own too small of a share to care about these properties. These inheritors owe astronomical amounts in back taxes as well. The back taxes become a problem of its own. Once a property owes more than it’s market value, it passes a point of no return, the property can never be sold.

This has been allowed to happen because for some unexplainable reason Puerto Rico doesn’t foreclose properties for back taxes. In 2016, CRIM performed its first foreclosure for back taxes in 25 years. In lieu of an efficient lien market, this broken property tax policy has created the wrong incentives to sit on properties. If the government fixed this, owners would need to keep the property in productive use in order to pay their fair share of taxes. Another tax policy that has proven to work out well for cities with the same abandoned property problem has been to replace the current property tax regime with a land-value tax one. This change in the tax regime will penalize idle property and incentivize development, thus recalibrating incentives.

On the other hand, the municipality of San Juan has been shy to enforce the existing public nuisance laws to address this issue. At a state level, we have been waiting for a ruling for the newest public nuisance law for over two years now.

SOURCEThe Weekly Journal