Paulson’s Bet on Puerto Rican Hotels Hasn’t Gone So Well

  • Hurricane Maria, bankruptcy hurt prospects for economic growth
  • FEMA employees staying in his luxury hotels for $167 a night

Puerto Rico Governor on Recovery Efforts and Debt

Three years ago, John Paulson predicted Puerto Rico would become a tax haven for the wealthy -- the Singapore of the Caribbean. He snapped up high-end hotels and other real estate, betting on what he thought would be an upswing in the island’s economy.

“We believe the Puerto Rican economy is at the cusp of recovery,” the billionaire hedge fund manager said in 2014, announcing the purchase of two San Juan hotels.

Paulson was gambling on a 2012 law that allows U.S. investors to pay little or no taxes if they move to the island. He expected a wave of millionaires and billionaires would help reverse years of shrinking population and sky-high unemployment.

Like a lot of Paulson’s recent bets, that one hasn’t turned out as planned. On Sept. 20, Hurricane Maria slammed into the island, wiping out its power grid and leaving many of its 3.4 million citizens without food, water and medicine. The Category 4 storm arrived just a few months after the commonwealth sought protection from creditors in the largest U.S. municipal insolvency.

Downward Slide

Paulson’s hedge fund firm, Paulson & Co., has itself been on a downward slide. In 2011, it managed $38 billion, about half of which was Paulson’s own fortune built largely on a prescient bet shorting subprime mortgages. Since then assets have tumbled and performance has been hurt by wrong-way bets on gold, U.S. banks and pharmaceutical shares. Paulson now manages about $10 billion, almost 80 percent of it his own money.

A lifelong New Yorker, Paulson considered moving to Puerto Rico in 2013 to take advantage of the tax benefits. He changed his mind citing “media attention,” though last year he said he’s still considering a move to the island.

In September 2013, Paulson took a majority stake in the St. Regis Bahia Beach Resort and the Bahia Beach Resort & Golf Club, buying loans with a face value of $250 million at a discount of as much as 60 percent. The following March, he acquired a majority interest in the Condado Vanderbilt Hotel and the La Concha Renaissance Resort in San Juan for $260 million, including costs to complete construction of the Vanderbilt.

Alberto Baco Bague, Puerto Rico’s secretary of economic development and commerce, said at the time that Paulson planned to invest more than $1 billion on the island. A spokesman for Paulson’s firm declined to comment on how much the billionaire has invested or what impact the hurricane and bankruptcy might have.

Paulson’s firm acquired the 16-story American International Plaza office building in San Juan’s financial district in August 2014 and has bought several parcels of land for future development. He also owns a vacation home at the Bahia Beach resort and an apartment.

Paulson’s early Puerto Rican investments included bonds and a 7.3 percent stake in Popular Inc., the island’s largest bank. He no longer owns either.

‘So Frightening’

Paulson was about to open a new San Juan hotel, the Serafina Beach Hotel, when the storm hit. It’s now slated to start operating at the end of December, according to the spokesman for Paulson’s firm. The Condado Vanderbilt isn’t taking reservations until after Nov. 1, while La Concha will open its books Oct. 15, the spokesman said. The St. Regis Bahia Beach Resort, one of the island’s most expensive hotels, is closed and won’t reopen until Dec. 1.

“The whole Caribbean thing is so frightening, but for Puerto Rico specifically it’s going to be a long time” before tourism rebounds, said Martin Rapp, senior vice president of leisure travel for Altour International Inc., a corporate and leisure travel agency based in New York. He said business might not pick up until the latter half of next year.

In the meantime, Paulson has found a way to make some money in Puerto Rico. His San Juan properties are at full occupancy, housing relief workers including those from the Federal Emergency Management Agency, according to hotel employees. That’s a lot more business than they normally would be doing in the off-season, even if the $167 government rate is below what the Condado Vanderbilt charges at this time of year -- from $200 a night for the cheapest room to $5,125 for a three-bedroom oceanfront suite.

— With assistance by Hui-yong Yu

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