PUERTO RICO Law and Practice Contributed by: Antonio Santos, Donald Hull and Paola Canino, Pietrantoni Mendez & Alvarez LLC
vides design, construction and contract administra - tion services for the project. 7.3 Management of Construction Risk Construction risk in Puerto Rico is typically managed contractually in the project agreements by means of warranties, indemnification provisions and limita - tions 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 sure - ties 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. 7.4 Management of Schedule-Related Risk The most common method that owners of construc - tion 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 man - ner, as well as monetary rewards for early completion. 7.5 Additional Forms of Security to Guarantee a Contractor’s Performance 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. 7.6 Liens or Encumbrances in the Event of Non-Payment Puerto Rican law does not provide project contrac - tors 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. 7.7 Requirements Before Use or Inhabitation In Puerto Rico, once a project is completed, the pro - ject 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 specifica - tions 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. 8. Tax 8.1 VAT and Sales Tax There is no VAT (or equivalent) applicable to the sale or purchase of real estate in Puerto Rico. 8.2 Mitigation of Tax Liability 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. 8.3 Municipal Taxes 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
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