Caught between the demands of billionaires, pro-bankruptcy activists and more than three million people plagued by unemployment, poverty and government debt, who would you choose? As Puerto Rico confronts the quagmire of its $72bn financial crisis, it has come up with an answer: humouring a few very wealthy people.

The island has for three years courted some of Wall Street’s richest citizens, from solitary investors to hedge fund elites. Last year it sold at auction hundreds of millions of its debt to various funds, displeasing many who believe the “vulture funds” only want a quick profit off Puerto Rico as it desperately tries to repay debt with high local taxes and austerity cuts.

Hedge fund manager John Paulson, best known for making billions off the 2008 subprime loan market crash, led the charge last year when he declared the island “the Singapore of the Caribbean”. His fund bought more than $100m of Puerto Rico’s junk-rated bonds last year.

The most visible effect has been a rush to buy property akin to the buying spree by two billionaires in Detroit as that city filed for bankruptcy. Detroit’s woes are often held up for comparison to Puerto Rico’s but the island lacks the statehood or permission from Congress it would need to file for bankruptcy and follow Michigan’s decision to declare Motor City bust.

While funds have inched away from Puerto Rico’s debt debacle, Paulson has bought into land. In 2014 he spent more than $260m to buy three of the island’s largest resort properties, and announced plans to develop $500m-worth of “residences and resort amenities” to add to the existing beachfront condos and golf courses.

He has a fellow cheerleader in billionaire Nicholas Prouty, who has invested more than $550m into turning San Juan’s marina into a bastion of the elite that includes an exclusive club and slips for “megayachts of 200 feet or larger”.

As in Detroit, ultra-high-end developments abut scores of empty buildings, either for sale or abandoned by owners searching for work. With unemployment more than twice the US national average, the island’s median household income is nearly $7,000 less than that in Detroit, and less than half the US average.

In its search for solutions Puerto Rico has tried to rebrand itself as a tax haven for the super rich. Laws enacted in 2012 can exempt residents from tax on nearly all investment income, which with Puerto Rico’s exemption from federal income tax makes the island especially attractive.

One financial manager said the appeal was self-explanatory: “Tax evasion is illegal. Tax avoidance is a right.”

So many mainlanders have migrated to the island that some investors formed a nonprofit named after the tax laws and meant to help émigrés adjust to island life.

Rob Rill, of the private equity firm Strategic Group PR, founded the 20/22 Act Society in 2013, shortly after moving to the island. The society holds monthly dinners and two annual large events to help hedge fund and private equity expats network and acclimate.

“We’re really here to help each other,” Rill said. He said the society has about 400 members, and estimated that as many as 600 people had received tax exemptions from the government. “We’re a victim of our own success.”

Rill argued that although financial firms employ only a few people, their affluent leaders hugely contribute to the island’s tax base and cause a “multiplier effect” of investment on the island.

“People think we pay no taxes, but you know if a company makes $10m, a 4% tax rate still means $400,000 by itself,” Rill said. “And that has nothing to do with the regulation fees, relocation and other costs we pay.”

Rill acknowledged that the financial crisis had created dire conditions for many Puerto Ricans, and said that the society makes concerted efforts to give back. Its two main charities include a program to provide computers to the island’s desperately needy school system and a program to spay and neuter Puerto Rico’s many stray dogs.

The island’s secretary of economic development, Alberto Bacó Bagué, has met with the millionaires and actively encouraged a lax interpretation of residency rules. “There’s nothing wrong with spending 183 days a year on a sailboat or yacht and working from here,” he told the New York Times in 2013.

But experts say it’s not clear whether the plan will create jobs and prompt investment – or simply divide the haves and have nots.

“These folks are preying upon distressed economies to try to gain maximum amount of return,” said Javier Valdés, core executive director of Latino advocacy group Make the Road New York. “They should not just continue to expect the same return on their investment. Everyone needs to take a cut.”

By Valdés’s count, more than 200 people joined him last week at a protest against the funds at one investor’s home in the Hamptons. “The same politics cannot continue,” Valdés said. “They need to come to the negotiating table and be more lenient.”

For the island and the majority of its residents there are no signs that their troubles will be over soon. Puerto Rico’s governor, Alejandro García Padilla, conceded in late June that the island’s debt is “not payable” in its current form. The comment exasperated many investors, some of whom promptly sold debt holdings, according to sources familiar with trades.

Major investor Oppenheimer Funds released an unusually blunt statement, saying it was “disappointed” by Padilla’s remarks but still expected full returns as promised. According to Morningstar and liberal Wall Street watchdog Hedge Clippers, mutual funds and hedge funds respectively own 20% of Puerto Rican bonds.

But despite Padilla’s remarks signalling he wants some funds to take losses, Puerto Rico continues to court extremely wealthy Americans with recent breaks that can reduce some tax rates to zero, a tax regime that has lured hundreds of affluent Americans Puerto Rico hopes will put down roots – and cash.



“You could argue that the Puerto Rican economy was built on favorable tax treatment,” said Tracy Gordon, a senior fellow at the Urban Institute. Special tax breaks brought pharmaceutical jobs for decades to the island, she noted. Then the companies left when the breaks expired.



“You could also argue that with this tax strategy you’re trading on a house of cards,” Gordon added. “If this goes away, well, there’s no guarantee anyone will have actually invested into Puerto Rico.”

“Certainly the federal government and states try to do a lot of tax credit zones, but there’s very mixed evidence of whether they work,” she said.

With high crime areas and costly regulations, Gordon said the island is “on paper not a great place to do business. Essentially Puerto Rico has, with help from the tax code, papered over the deficiencies, but that creates this swiss cheese system where you then have to raise revenues in other places.”

For now, the tax breaks create “two buckets” of real estate, said Kenneth Blatt, a principal of CPG Real Estate: one for locals and one for transplants.



The locals are “challenged” by more supply than demand, Blatt said in reference to the mass exodus from the island by native Puerto Ricans – some 1.5 million people left between 2003 and 2013. The transplants, however, have “a one-stop shop for a luxury home” without the taxes of the Hamptons or West Palm Beach.

For this elite market of resorts and condos like the storied El Dorado, Blatt said, the financial crisis was a relatively distant concern: “It’s its own little bubble.”