AN ACT (H. B. 2205) (No ) (Approved December 16, 2009)

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1 (H. B. 2205) (No ) (Approved December 16, 2009) AN ACT To create the Puerto Rico Vacation Home Act, in order to foster the strengthening of the tourist industry in Puerto Rico through the creation of a new legal framework that expedites investment in vacation home facilities. STATEMENT OF MOTIVES The public policy of the Government of Puerto Rico is to propitiate a rapid and vigorous growth in the tourist industry of Puerto Rico. To support such public policy, measures aimed at providing a legal framework that fosters the development of the highest possible number of tourism projects have been adopted so as to meet the expectations of the different consumer markets and increase Puerto Rico s competitiveness with other tourist destinations. Said public policy is supported by the granting of tax and public financing incentives for the construction and operation of certain types of tourist facilities and by the marketing activities carried out abroad by the Puerto Rico Tourism Company. By virtue of the need to offer a diverse range of tourism products, tourism project developers in Puerto Rico now offer several tourism development alternatives, to wit, hostelries, golf courses, and tourist marinas. Those traditional tourism projects are frequently complemented by residential projects that provide tourists with the opportunity to acquire, by purchase or lease, housing units or time-share units, mainly for vacationing, which are marketed mainly abroad. Branded residential projects developed through agreements with multinational

2 companies that establish design and construction parameters and specific amenities to generate demand in the international vacation market, especially the luxury market, stand out among these types of projects. In many cases, these residential projects address not only the need to diversify the offer of our tourist industry, but also to support the operational stability of hostelries and all other traditional tourism projects developed by affiliated companies. There are several aspects to this type of support. Among them is the generation of a temporary or permanent additional demand for the products and services of such traditional tourism projects. This demand is formally structured through product and service access between contracts owners of traditional tourism projects and owners of units in residential projects like, for example, memberships in golf and beach clubs. Residential projects also contribute to the operational stability of traditional tourism projects by sharing the responsibility for certain costs inherent to the integrated tourism developments to which they belong, mainly expenditures related to the development, improvement, and maintenance of the infrastructure of said integrated projects. Moreover, a portion of the proceeds of a vacation home sale is used to repay the financing of the construction of traditional tourism projects, thus guaranteeing their feasibility. Given the leading roles of the Tourism Company and the Government Development Bank for Puerto Rico in the financing of tourism projects, using a portion of the proceeds of such sales to repay debts reduces the risk for such government entities, and expediting repayment allows them to finance other projects and thus develop the tourist industry and foster the creation of jobs. The Puerto Rico Tourism Company is the entity that is mainly responsible for the development and promotion of the tourist industry. Therefore, the Puerto Rico Tourism Company regulates all aspects related to the quality of services, facilities, and business practices of the tourist industry, plays an essential role in

3 the integrated and coherent marketing of the said industry abroad, and endorses and supervises the activities of projects that avail themselves of the available tax incentives. Thus, it has a particular institutional interest in the successful operation of projects that, once endorsed, operate under grants awarded by it. Such interest is even greater when the tourism project in question, its construction and/or operation are being financed through government programs, such as those of the Hotel Development Corporation, a subsidiary of the Tourism Company, and AFICA and the Tourism Development Fund, both subsidiaries of the Government Development Bank. Given the impact of vacation home projects on traditional tourism projects and on the image of Puerto Rico as a tourist destination abroad, the Puerto Rico Tourism Company has a particular interest in the coherent, responsible, and successful development of such vacation home projects. Unfortunately, the development and marketing of vacation homes built or to be built in Puerto Rico has been obstructed by obsolete law and regulation provisions, which were not drafted considering residential developments aimed at the tourist market or at Buyers that are not seeking to satisfy an immediate need for a residence, but to invest in a vacation development with the amenities offered by world-class resorts. Consequently, it is necessary for the Tourism Company and the Department of Consumer Affairs (DACO, Spanish acronym) to provide an adequate legal and regulatory framework for the development of this type of project that is different from such legal provisions that suitably regulate the development, construction, and sale of traditional housing aimed at families in the home market. By virtue of this Act, such vacation home projects integrated or to be integrated into the operation of traditional tourism projects, either under a grant of the Tourism Company and/or a brand, as well as the activities of their developers,

4 are regulated. Through this Act, the Tourism Company and the DACO are empowered to regulate such projects. This Act shall also apply to condohotels, given that, though they are traditional tourism products already regulated in various ways by the Puerto Rico Tourism Company, they share certain characteristics with vacation home projects, mainly the possibility that the owners thereof may occupy their units as vacation homes and the contracting of services and amenities for occupants thereof by adjacent hostelries. BE IT ENACTED BY THE LEGISLATIVE ASSEMBLY OF PUERTO RICO: Section 1. This Act shall be known as the Puerto Rico Vacation Home Act. Section 2. Scope. This Act shall apply to the development, construction, sale, and marketing of Vacation Homes, as defined herein and through Regulations jointly promulgated to such effect by the Puerto Rico Tourism Company and the Department of Consumer Affairs, pursuant to what is established herein. Section 3. Definitions. (a) AFICA shall mean the Industrial, Tourist, Educational, Medical, and Environmental Control Facilities Financing Authority. (b) ARPE shall mean the Regulations and Permits Administration of Puerto Rico or any entity that, by virtue of law, assumes the responsibilities of or supersedes the same. (c) Golf Course shall have the meaning given to such term in Regulation No. 5053, as amended, promulgated by virtue of Act No. 78 or in any regulation that supersedes the same.

5 (d) Tourism Company shall mean the Puerto Rico Tourism Company, a public corporation and instrumentality of the Government of Puerto Rico. (e) Buyer shall mean any person who acquires a Vacation Home Unit from its Vacation Home Developer and any person who, in turn, acquires it from the original Buyer. (f) Grant shall have the meaning given to such term in Act No. 78, or in any law that supersedes the same. (g) Condohotel shall have the meaning given to such term in Regulation No. 5053, as amended, promulgated by virtue of Act No. 78 or in any regulation that supersedes the same. (h) Purchase Agreement shall mean a contract executed by a Vacation Home Developer for the acquisition of a Vacation Home Unit when the offer and sale of the Unit is carried out in Puerto Rico. (i) Approved Purchase Agreement shall mean a Purchase Agreement model approved by the DACO, which is deemed as approved pursuant to the provisions of Section 13 of this Act and in accordance with what is established through regulations. (j) Exempt Purchase Agreement shall mean a contract executed by a Vacation Home Developer for the acquisition of a Vacation Home Unit when: (1) the offer and sale of the Unit and the Buyer s execution of the appropriate Purchase Agreement are carried out outside of Puerto Rico; (ii) the jurisdiction in which the sale of the Vacation Home Unit is carried out regulates through special laws the sale in that jurisdiction of residential products located outside said jurisdiction; and (iii) the Vacation Home Developer has complied with the laws that apply to such residential products in that jurisdiction.

6 (k) Exempt Special Escrow Account Agreement shall mean an escrow account agreement executed by the Vacation Home Developer regarding an Exempt Purchase Agreement. (l) Special Escrow Account Agreement shall mean an escrow account agreement executed by the Vacation Home Developer regarding a Reservation Contract or a Purchase Agreement. (m) Reservation Contract shall mean a contract executed by a Vacation Home Developer, which establishes the intention of a person of acquiring a Vacation Home Unit when such Vacation Home Unit reservation is made in Puerto Rico. (n) Approved Reservation Contract shall mean a Reservation Contract model approved by the DACO, or deemed as approved pursuant to the provisions of Section 13 of this Act and in accordance with what is established through regulations. (o) Exempt Reservation Contract shall mean a contract executed by a Vacation Home Developer, which establishes the intention of a person of acquiring a Vacation Home Unit when: (i) the offer of the Unit and the Buyer s execution of the appropriate Reservation Contract are carried out outside of Puerto Rico; (ii) the jurisdiction in which the reservation or offer of the Vacation Home Unit is carried out regulates, through special laws, the reservation or offer in that jurisdiction of residential products located outside said jurisdiction; and (iii) the Vacation Home Developer has complied with the laws and regulations that apply to such residential products in that jurisdiction. (p) Amended Contract shall mean a Reservation Contract or Purchase Agreement submitted by a Vacation Home Developer to be reevaluated for approval after an Initial Negative Evaluation.

7 (q) Exempt Contracts shall mean, jointly, an Exempt Purchase Agreement, an Exempt Reservation Contract, or an Exempt Special Escrow Account Agreement. (r) Special Escrow Account shall mean an escrow account established in accordance with a Special Escrow Account Agreement and subject to the provisions of the Reservation Contract or the Purchase Agreement. (s) DACO shall mean the Puerto Rico Department of Consumer Affairs. (t) Final and Binding Decision shall mean a final and binding administrative decision made by the DACO regarding controversies adjudicated under this Act. (u) Construction Defects shall mean any anomaly, defect, lack of accessories, fault, premature deterioration, malfunctioning, inaccuracy in measurements, or any other condition, other than the normal tolerances allowable in a structure or house, or in the area on which it was built, or any other flaw or condition that exceeds the measure of imperfections to be expected in construction, without it being attributable to force majeure and/or natural phenomena, or due to abuse, alterations, lack of maintenance, or normal wear, as more broadly established through Regulations. (v) Director or Director of the Tourism Company shall mean the Executive Director of the Tourism Company. (w) Initial Negative Evaluation shall mean a negative evaluation issued by the DACO regarding the approval of a Purchase Agreement or Reservation Contract. (x) Hostelry shall have the meaning given to such term in Regulation No. 5080, as amended, promulgated under Act No. 10 of June 18, 1970, known as the Puerto Rico Tourism Company Act.

8 (y) Act No. 5 shall mean Act No. 5 of April 23, 1973, as amended, known as the Department of Consumer Affairs Organic Act, or any law that supersedes it. (z) Act No. 10 shall mean Act No. 10 of April 26, 1994, as amended, known as the Act to Regulate the Real Estate Business and the Profession of Real Estate Broker, Salesperson, or Companies in Puerto Rico, or any law that supersedes it. (aa) Act No. 78 shall mean Act No. 78 of September 10, 1993, as amended, known as the Puerto Rico Tourism Development Act of 1993, or any law that supersedes it. (bb) Act No. 130 shall mean Act No. 130 of June 13, 1967, as amended, known as the Act of the Office of the Construction Officer Attached to the Department of Consumer Affairs, or any law that supersedes it. (cc) Act No. 170 shall mean Act No. 170 of August 12, 1988, as amended, known as the Uniform Administrative Procedures Act, or any law that supersedes it. (dd) Tourist Marina shall have the meaning given to such term in Act No. 78 or any law that supersedes it. (ee) Theme Park shall have the meaning given to this term in Section 2(h)-5 of Regulation No. 5053, as amended, promulgated under Act No. 78 or any regulation that supersedes it. (ff) Person shall mean any natural or juridical person. (gg) Traditional Tourism Product shall mean any hostelry, time-share project, theme park, tourist marina, golf course, or any other eligible business that qualifies for a grant.

9 (hh) Project or Vacation Home Project shall mean: (i) a residential project physically located in Puerto Rico that is part of an integrated development that includes at least one Traditional Tourism Product that holds a grant and: (1) whose assets or income shall serve as collateral or source of debt repayment; or (2) which shall increase the cash flow of a Traditional Tourism Product; or (3) whose buyers shall be required to share operational costs (e.g., the maintenance of common areas) or to acquire goods and services (e.g., club memberships to use the facilities of such integrated development); or (4) which are required to make their units available to generate an additional inventory for a Traditional Tourism Product, insofar as such Traditional Tourism Product holds a grant; or (ii) a mandatory or voluntary condohotel or mandatory or voluntary rental management program that holds a grant; or (iii) residences, whether branded or not, insofar as such residences or units are offered for sale outside of Puerto Rico, as evidenced by: (1) A final and valid registration in at least five (5) jurisdictions outside of Puerto Rico, which require drafting a plan with the details of the offer for residents of the jurisdiction in question; and (2) the approved and effective filing of a property report in the Office of Interstate Land Sales Registration of the United States Department of Housing and Urban Development, under the Interstate Land Sales Full Disclosure Act, 15 U.S.C et seq., and its regulations, as these are amended. (ii) Negative Reevaluation shall mean a negative evaluation issued by the DACO regarding the approval of an Amended Contract. (jj) Secretary shall mean the Secretary of the Department of Consumer Affairs.

10 (kk) Unit or Vacation Home Unit shall mean a residential unit that belongs to a Vacation Home Project. (ll) Vacation Home Developer shall mean any person who obtains a Vacation Home Developer license to develop Vacation Home Projects pursuant to the terms and conditions set forth herein. Section 4. Powers of the Secretary of the Department of Consumer Affairs. The Secretary shall have the following powers and authorities in the administration of the provisions of this Act: (a) To implement the provisions established through a Regulation drafted and approved jointly with the Tourism Company and shall be able to establish additional requirements in such Regulation, insofar as the same are also approved by the Director of the Tourism Company and are not inconsistent with this Act; (b) To interpret the Regulation according to the expertise of his/her agency, allowing the Company, through its Director, to express itself regarding issues related to its expertise if controversies arise with regards to this Act and its Regulations; provided, however, that any interpretation shall be made according to the purposes sought by this Act; (c) To issue, deny, revoke, and renew a license to any person who wishes to act as a Vacation Home Developer and make the pertinent investigations to determine whether the corresponding license should be issued, denied, renewed, or revoked; (d) To carry out the investigations he/she deems pertinent in order to: (i) prevent undesirable practices in the business of developing, offering, and selling Vacation Home Projects; (ii) prevent any negligent, intentional, or fraudulent action that may cause significant damage to the Buyer of a Unit; (iii) determine if

11 any person has failed to comply with the provisions of this Act; and/or (iv) obtain any information that may be useful for the administration of any of the provisions of this Act or its Regulations; (e) To ensure that Reservation Contracts, Purchase Agreements, and Special Escrow Account Agreements comply with the provisions of this Act; (f) To intervene in procedures aimed at the dissolution, bankruptcy, transfer, and/or changes of control over Vacation Home Developers, in order to comply with the responsibilities imposed by this Act; (g) To investigate the operations, transactions, accounts, files, documents, lines of credit, and capital of all Vacation Home Developers, and the directors, officers, or affiliates thereof, in order to determine whether the same comply with this Act and/or its Regulations; (h) After notice and administrative hearing, to issue cease and desist orders and to prescribe the proper corrective terms and conditions according to the evidence available to him/her and the applicable laws. When, in his/her judgment, a violation of this Act and/or its Regulations causes or may cause immediate serious damage to the Buyer or to any particular or potential Buyer or Buyers, he/she shall be able to issue provisional cease and desist orders, without the requirement of previously holding an administrative hearing, but holding such hearing within ten (10) days following the date of issue of the order, in order to resolve whether the provisional order becomes permanent or is revoked; (i) To create forms related to the filings established in this Act; (j) To issue any other order or notice established or allowed under this Act and/or its Regulations; (k) To impose fines for violations of this Act and/or its Regulations;

12 (l) To execute, together with the Tourism Company, cooperation and reciprocity agreements with the authorities of other jurisdictions, in order to harmonize Vacation Home Unit offer and sales practices outside of Puerto Rico; (m) To issue any other orders or notices established or allowed under this Act and/or its Regulations; or (n) To relieve from and/or adapt the application of effective regulations to achieve the purposes sought by this Act; (o) To coordinate with the Tourism Company any power, duty, authority, or function conferred to it by this Act or its Regulations, so that the latter may exercise, comply, or perform in its stead. (p) To adjudicate complaints filed with the DACO between Buyers and Vacation Home Developers related to construction defects, special escrow account agreements, reservation contracts, and Purchase Agreements. Section 5. Powers of the Executive Director of the Tourism Company. (a) To draft and approve Regulations, together with the DACO, to implement the impositions of this Act. He/she may establish additional requirements in the Regulations, insofar as they are also approved by the Secretary of the DACO and the same are not inconsistent with this Act; (b) To interpret the Regulations according to the expertise of his/her agency, allowing the DACO, through its Secretary, to express itself regarding issues related to its expertise if controversies arise with regards to this Act and its Regulations; provided, however, that any interpretation shall be made according to the purposes sought by this Act; (c) To assist the Secretary, when deemed necessary, with his/her investigative powers in everything related to a Vacation Home Developer and the directors, officials, or affiliates thereof, in order to determine whether the same comply with this Act and/or its Regulations;

13 (d) To issue any Orders or Notices established or allowed under this Act and/or its Regulations; (e) To impose fines for violation of this Act and/or its Regulations; (f) To execute, together with the DACO, cooperation and reciprocity agreements with the authorities of other jurisdictions, in order to harmonize offer and sales practices outside of Puerto Rico and Vacation Home Units; and (g) To coordinate with the DACO any power, duty, authority, or function conferred to such Department by this Act or its Regulations, so that the DACO may exercise, comply, or perform the same in its stead. Section 6. Information Register. The Secretary shall keep a public register with the following documents and information: (a) Vacation Home Developers to whom any type of license under this Act has been issued or revoked, and the directors, officials, and shareholders thereof with more than five percent (5%) of the capital of the company; (b) Documents related to any bond and/or surety filed by the Vacation Home Developers; (c) History of fines under this Act imposed on Vacation Home Developers and the directors, officials, or affiliates thereof; (d) All documents related to any registration outside of Puerto Rico of every Vacation Home project; (e) All contract models approved for each project and copies or issues of all the marketing and advertising materials used for the project; and (f) Any other document or information filed with the Tourism Company or the DACO, in accordance with this Act.

14 Section 7. Licenses General Provisions. (a) No person may engage in the business of developing and/or constructing Vacation Homes in Puerto Rico without first having obtained a Vacation Home Developer license, as regulated by this Act. (b) The DACO may issue two types of licenses the regular license and the provisional license. The regular license shall be effective for a term of five (5) years counted from the date it was issued, and may be renewed for the same term. The provisional license shall be issued in those cases in which the applicant, or the persons that control the same, do not have previous experience in the development or construction of Vacation Home Projects or Traditional Tourism Projects, and shall be effective for a term of two (2) years counted from the date it was issued, and may be renewed for the same term. For purposes of this Act, the term control shall mean having the power to directly or indirectly direct[sic] or influence the decisions regarding the administration or norms of the juridical person in question. (d)[sic] All licenses issued under this Act shall be non-transferrable. If there were a change in the control over the Vacation Home Developer, the DACO shall be notified of such fact within thirty (30) days counted from the date of effectiveness of said change in control. The DACO may require the issuance of a new license, unless the new person in control has previous experience in the development or construction of Vacation Home Projects or Traditional Tourism Projects, or if control of the Vacation Home Developer is acquired by a financial entity in the exercise of its right as creditor of the Vacation Home Developer or the affiliates thereof.

15 (e)[sic] All Vacation Home Developers shall post the license in the main office and simple copies thereof in a visible place in each office that receives public arriving with the intention to purchase a Unit. In the event that the Vacation Home Developer has a website, it shall provide a link through which the public may see a true and exact copy of such license. (f)[sic] Any Vacation Home Developer who wishes to renew its license as such must file with the DACO a license renewal application at least sixty (60) days before the expiration date of such license. (g)[sic] The DACO may revoke the license of any Vacation Home Developer who has incurred any of the following actions or omissions: (i) Providing incorrect or incomplete information with regards to any substantial issue in any application to or filing with the DACO or the Tourism Company under this Act or its Regulations; (ii) Failing to keep the records required under this Act or its Regulations; (iii) Failing to follow the provisions of a final and binding order of the Secretary or to pay a fine imposed by the same or by the Director of the Tourism Company pursuant to this Act or its Regulations; (iv) Incurring any of the undesirable practices numbered in Section 15 of this Act or any other violation of this Act or its Regulations; (v) Failing to return deposits when this Act or its Regulations so require; (vi) Violating laws or regulations of other jurisdictions where the Developer offers Units; or (vii) Failing to notify or send a copy to the DACO of any summons or complaint against such Vacation Home Developer in another jurisdiction regarding the authorization to offer Units in such place.

16 (h)[sic] The Secretary shall notify the Vacation Home Developer of the intention to revoke the license thereof and shall likewise notify that such Vacation Home Developer shall appear for an administrative hearing. The revocation of a license shall not affect any obligation imposed to its holder under the terms of this Act to protect consumers. Section 8. Minimum Application Content Requirements to Obtain a Vacation Home Developer License. To obtain a regular or provisional license, or to renew the same, an application shall be filed under oath attesting, at least: (a) The name, street and mailing address, telephone and fax numbers, and address of the applicant, of all managing or administrative partners, and of any person with a share of at least five percent (5%) of the capital of the company, if it is a partnership, of all directors and officials and of the resident agent, if it is a corporation or a limited liability company, and of any person with a share of at least five percent (5%) of the capital of the company. (b) A description of the proposed Vacation Home Projects, if this fact is known at the time of filing, including the location, number of Units, average pricing of the Units, and amenities to be included, as well as sources of capital and financing available for such Projects. (c) The number, name, and classification of construction projects of any type built by the applicant or the affiliates thereof before the application date. The application shall have the following documents attached: (i) A certified copy of the Memorandum or Certificate of Incorporation or formation; (ii) A balance sheet of the applicant at the time of filing the application, duly certified by an authorized official of the applicant;

17 (iii) A list of all affiliates devoted to the purchase and sale of land, construction, and/or property management, and an account of the businesses in which they are engaged; (iv) An account, as well as the status, of all lawsuits and administrative complaints filed against the same, the affiliates, directors, officials, partners, shareholders, and members thereof regarding construction projects of any type in any jurisdiction during the last five (5) years; (v) Evidence of having the bond or surety documents that may be required, pursuant to this Act or its Regulations; and (vi) A Certified Check or Postal Money Order made to the order of the Secretary for the amount of one thousand dollars ($1,000). Income generated from such charge shall be devoted to defray the expenses related to the implementation of this Act. Section 9. Application Approval or Denial. (a) The DACO shall evaluate the license application and carry out all the investigations it deems pertinent before approving the same. However, if a license application under the terms of this Act, duly filled out and accompanied by all the documents and information necessary for its consideration, were not denied within thirty (30) business days after being filed, it shall be deemed approved and the applicant may demand that the license applied for be issued within the following ten (10) business days. (b) As a condition for the issuance of a license pursuant to this Act, the Secretary may, when he/she deems it necessary to protect the Buyers interest, demand the posting of a fidelity bond on the amounts of money to be deposited in reserve or escrow accounts related to the Project or Projects of the applicant.

18 (c) The Secretary shall deny the issuance or renewal application of a Vacation Home Developer license when he/she determines that: (i) the application does not comply with the requirements of this Act or its Regulations for the issuance of such license, (ii) the examination of its content shows that there is a substantial risk that the applicant will not comply with the provisions of this Act or with the obligations assumed with the Buyers, or (iii) during the last five (5) years, the applicant has incurred one of the actions or omissions that would entail the revocation of an effective Vacation Home Developer license. (c) The DACO and the Tourism Company may jointly draft additional rules, through Regulations, with regards to the content and evaluation of the applications. Section 10. Deposit Management. (a) A Special Escrow Account Agreement shall be executed between a financial or cooperative institution in Puerto Rico and the Vacation Home Developer before the execution of any Reservation Contract or Purchase Agreement, including the terms agreed on by the parties; provided, however, that the same shall not contravene this Act. Said contract, or a model thereof, shall be filed with the DACO, together with the model Reservation Contract or Purchase Agreement, but the DACO shall not be empowered to review or approve the Special Escrow Account Agreement. (b) The Special Escrow Account Agreement may be drafted either in English or Spanish. (c) Every Vacation Home Developer shall deposit in a financial or savings institution authorized to operate in Puerto Rico the deposits received on account of a Reservation Contract or a Purchase Agreement with regards to each Project.

19 (d) The amounts of money that the Vacation Home Developer is required to deposit in a Special Escrow Account shall be deposited within ten (10) business days following the receipt thereof. These amounts of money shall be kept separate from all other operating funds of the Vacation Home Developer. It shall not be possible to draw funds from this account in order for such amounts and their interest, if any, to be immediately refunded to the respective depositor, when appropriate, as agreed in the terms of the Reservation Contract or Purchase Agreement, or accredited to the purchase and sale price when the deeds are signed, all according to the manner and procedure provided hereunder. (e) Notwithstanding the foregoing, the Vacation Home Developer shall be allowed, after having consigned to the DACO the deposit of a bond in an amount to be determined by the DACO for the Tourism Project in question, to use the funds obtained through the deposits agreed on in the Reservation Contracts and/or Purchase Agreements only for expenditures related to the development of the Vacation Home Project. (f) Deposits shall be refundable to the Buyer in cases in which a Court or the DACO determines that the Vacation Home Developer engaged in undesirable practices as described herein or in any fraud or deceit with the intention to defraud, regardless of any terms providing otherwise in the Reservation Contract or Purchase Agreement. (g) The provisions of this Section shall not apply to Exempt Special Escrow Account Agreements. Section 11. Reservation Contracts. (a) No Reservation Agreement shall be executed for a Vacation Home Project without a location assessment, a preliminary plan or development, or any other endorsement or permit that substitutes the same by law, approved by the Planning Board and/or the Regulations and Permits Administration of Puerto Rico

20 or any government entity that, by law, substitutes the same in their functions, as the case may be, or by an autonomous municipality in the case that the power over city planning has been duly delegated thereto. (b) Reservation Contracts may be drafted in either English or Spanish and shall be filed with the DACO before being used by the Vacation Home Developer or any real estate broker or agent of the Vacation Home Developer, and shall contain the provisions detailed in this Section and any other provision that the Vacation Home Developer wishes. The DACO shall decide whether the Reservation Contract complies with the following content requirements: (i) The name of the person making the reservation and his/her personal circumstances, the name of the Vacation Home Developer and the authorized official that shall appear, the capacity in which he/she appears, and the street address of the main office of the Vacation Home Developer; (ii) The place where the Reservation Contract is executed; (iii) The estimated price; amount of the deposit; and location or possible location of the Vacation Home Unit, including a description and the approximate measurements of the Unit, and whenever possible and/or pertinent, the measurements of the lot; (iv) Approximate date of completion of the construction of the Unit; (v) A clarification that the deposits shall be deposited in a Special Escrow Account, as established herein, and the disclosure of the name of the banking institution; (vi) The obligation of the Vacation Home Developer to reserve the Unit and the right of the parties to demand specific compliance with such obligations under the Reservation Contract and to terminate the same, including the grounds for termination and penalties. The Reservation Contract shall include a provision that allows the Buyer to terminate the Reservation Contract at any

21 time, at his/her full discretion, before the execution of a Purchase Agreement and that, upon termination of the Reservation Contract, the deposits shall be refundable at the request and at the full discretion of the Buyer, and that when such refund occurs, the Reservation Contract shall be deemed extinguished; (vii) In the event that the Vacation Home Developer wishes to use the funds obtained through deposits for expenditures related to the development of the Project, pursuant to the provisions of this Act, such fact shall be recorded in the Reservation Contract with the details of the bond deposited by the Vacation Home Developer with the DACO; and (viii) A statement that the sales price may vary and that, if it does, the Vacation Home Developer shall notify such fact to the person who makes the reservation by certified mail. (c) The DACO may establish additional requirements through Regulations, insofar as they are also approved by the Tourism Company and they are not inconsistent with this Act. (d) The Reservation Contract shall be deemed an Approved Reservation Contract after it has been evaluated by the DACO, pursuant to the provisions of Section 13 of this Act and its Regulations. (e) None of the provisions of this Act or its Regulations shall be construed as to prohibit the parties to a Reservation Contract from conducting negotiations and agreeing on terms and conditions that are different from those of the Approved Reservation Contract, insofar as the Vacation Home Developer first shows the Approved Reservation Contract to the Buyer and notifies him/her that the Buyer is entitled to demand that such Approved Reservation Contract be used. (f) The provisions of this Section shall not apply to Exempt Reservation Contracts.

22 Section 12. Purchase Agreements. (a) No Purchase Agreement shall be executed for a Vacation Home Project without a location assessment, a preliminary plan or development, or any other endorsement or permit that substitutes the same by law, approved by the Planning Board and/or the Regulations and Permits Administration of Puerto Rico or any government entity that, by law, substitutes the same in their functions, as the case may be, or by an autonomous municipality in the event that the power over city planning has been duly delegated thereto. (b) Purchase Agreements may be drafted in either English or Spanish and shall be filed with the DACO before being used by the Vacation Home Developer or any real estate broker or agent of the Vacation Home Developer, and shall contain the provisions detailed in this Section and any other provision that the Vacation Home Developer wishes. The DACO shall decide whether the Purchase Agreement complies with the following content requirements: (i) The name of the Buyer and his/her personal circumstances, the name of the Vacation Home Developer and the authorized official that shall appear, the capacity in which he/she shall appear, and the street address of the main office of the Vacation Home Developer; (ii) The place and date on which the Purchase Agreement is executed; (iii) The price; amount of the deposit; and location of the Vacation Home Unit, including a description and the measurements of the Unit, and whenever pertinent, the measurements of the lot; (iv) An account of the liens that the Vacation Home Developer shall cancel on or before the execution of the deed of sale, and at the time of closing, a copy shall be handed to the Buyer of the documents cancelling the liens on the Unit that the Vacation Home Developer was committed to cancel;

23 (v) The due date for executing the deeds and the handing over to the Buyer of the use permit and the key of the Unit, which shall occur jointly; (vi) The approximate date of completion of the construction of the Unit; (vii) A description of the common elements and amenities that the Vacation Home Project shall have and a summary of the rules that shall govern their uses and management; (viii) A list of charges or fees that all Buyers shall have to pay on account of maintenance, uses, mandatory memberships, affiliation to a chain or brand, or any other type of expenditure related to the operation of the Vacation Home Project; (ix) The right of the parties to demand specific compliance with their obligations under the Purchase Agreement and to terminate the same; (x) The grounds for termination of the Purchase Agreement and penalties; (xi) The right of the Buyer to have the Vacation Home Developer show him/her the specifications and plans of the Unit subject to the Purchase Agreement; (xii) The specific sales price, which cannot be increased or decreased other than by agreement between the Buyer and the Vacation Home Developer; (xiii) A breakdown of the possible closing costs; (xiv) The obligation of the Vacation Home Developer of handing to the Buyer, free of charge, upon execution of the deed of sale, a copy thereof, a copy of the plans and specifications of the Unit sold, without its attachments or supplements. If the Unit sold was a condominium or a condohotel apartment, the Buyer shall receive a copy of the corresponding Declaration of Condominium Regime with its bylaws and a clear and accurate drawing of the distribution of the

24 apartment bought, as well as a complete copy of the plans and specifications of the condominium or condohotel, as the case may be, to the management of the same; (xv) The obligation of the Vacation Home Developer to offer the Buyer an insurance policy that protects his/her title deed, through the payment of an additional premium and that, if he/she declines such offer, the Buyer should express such declination in writing, provided, that every title policy issued according to this provision shall be issued by an insurer authorized to do business in Puerto Rico and shall be handed to the Buyer at the execution of the deed of sale; (xvi) That land taxes of the Unit subject to the Purchase Agreement shall be prorated as of the date of the execution of the deeds, those of the period before such date shall be covered by the Vacation Home Developer, and those of the period after such date shall be covered by the Buyer; (xvii) That the Vacation Home Developer shall be liable for the damages caused to the Buyer due to Construction Defects and for any misrepresentation of the Unit sold. Misrepresentation means to build the Unit differently from the one in the Reservation Contract, Purchase Agreement, brochure, or model home, or to use construction materials, accessories and equipment, parts or components of the structure that are inferior in quality instead of those specified in the plans and specifications approved by the government entities involved with the construction industry; (xviii) That the Buyer shall notify the Vacation Home Developer of the defects or flaws within the periods established in the Purchase Agreement, consistent with the law in effect, so that the latter can correct the same, and the Buyer shall allow the Vacation Home Developer to carry out the appropriate repair works. As for flaws or defects, be they latent or evident, in home appliances, whether electric or gas (such as kitchens, washers, driers, dishwashers, garbage

25 disposal units, air conditioners, ventilation equipment, intercom systems, etc.) that were sold as part of the Unit, these shall have the warranty offered by their respective manufacturers or their representatives. At the execution of the Purchase Agreement or in the closing of the sale of the Unit, the Vacation Home Developer shall notify to the Buyer the name, address, and telephone number of the dealer or representative of the manufacturer; (xix) In the case of sales of Units, under the horizontal property regime or under the condohotel regime, the obligation of the Vacation Home Developer that the common elements essential to the security, good performance, or necessary for the adequate use of the Unit be finished and have a use permit issued by the government entities involved with construction before the execution of the Purchase Agreement; (xx) The obligation of the Vacation Home Developer to keep the amounts of money given in advance by the Buyer in a Special Escrow Account, in the manner provided by this Act and its Regulations, and the name of the banking institution where the Vacation Home Developer has a Special Escrow Account related to the Unit; (xxi) In the event that the Vacation Home Developer wishes to use the funds obtained through deposits for expenditures related to the development of the Project, pursuant to the provisions of this Act and its Regulations, it shall be recorded in the Purchase Agreement; (xxii) The circumstances under which the Vacation Home Developer shall be entitled to retain all or part of the deposit received on account of the Purchase Agreement and the amount of said retention; and (xxiii) If the obligation of the Buyer to buy the desired Unit shall be subject or not to the contingency that the Buyer obtains financing for the purchase of said Unit, and in the event that it is not subject to such contingency, a provision

26 to the effect of establishing whether the Vacation Home Developer shall retain all or part of the deposit in the event that the Buyer fails to comply with his/her obligation to complete the purchase due to a lack of financing, and the amount of such retention. (c) The DACO may establish additional requirements through Regulations, insofar as they are also approved by the Tourism Company and they are not inconsistent with this Act. (d) The Purchase Agreement shall be deemed an Approved Purchase Agreement after it has been evaluated by the DACO, pursuant to the provisions of Section 13 of this Act and its Regulations, if it is approved, it shall be deemed an Approved Purchase Agreement. (e) None of the provisions of this Act or its Regulations shall be construed as to prohibit the parties to a Purchase Agreement from conducting negotiations and agreeing on terms and conditions that are different from those of the Approved Purchase Agreement, insofar as the Vacation Home Developer first shows the Approved Purchase Agreement to the Buyer and notifies him/her that the he/she is entitled to demand that such Approved Purchase Agreement be used. (f) The provisions of this Section shall not apply to Exempt Reservation Contracts. Section 13. Contract Evaluation. (a) The DACO shall have thirty (30) business days counted from the filing of a Reservation Contract or Purchase Agreement to ascertain compliance with the provisions of this Act. If the DACO fails to express itself during such term, it shall be understood that the Contract or Agreement has received a positive evaluation and may be used by the Vacation Home Developer or any other real estate broker or agent of the Vacation Home Developer for purposes of the sales and marketing of the Units of the Project for which approval was requested.

27 (b) In case of an Initial Negative Evaluation, the DACO shall have to issue the same within thirty (30) business days counted from the filing of the Reservation Contract or Purchase Agreement, and shall be accompanied by specific, clear, and supported grounds. The Vacation Home Developer shall have thirty (30) days following an Initial Negative Evaluation to submit an Amended Contract. The DACO shall have fifteen (15) days counted from the filing of an Amended Contract to evaluate compliance with the provisions of this Act. If the DACO fails to express itself during such term, it shall be understood that the Amended Contract has received a positive evaluation and may be used. In case of a Negative Reevaluation, the DACO shall issue the same within said fifteen (15) day term, accompanied by specific, clear, and supported grounds. The Vacation Home Developer shall have ten (10) days after receiving a Negative Reevaluation to request an administrative hearing. The DACO shall carry out such administrative hearing within ten (10) days after the same was requested, and shall make a Final and Binding Decision within five (5) days after said administrative hearing. Any Final and Binding Decision shall be subject to review, pursuant to Act No (c) The date stamped by the DACO on the Reservation Contract, Purchase Agreement, or Amended Contract filed for approval shall be conclusive for the beginning of the terms provided herein. (d) A Negative Reevaluation may not be upheld by the DACO in allegations for which no grounds were provided in the Initial Negative Evaluation, insofar as the provision in question in the Amended Contract has not been altered by the Vacation Home Developer. (e) A Final and Binding Decision not to approve an Amended Contract may not be supported by the DACO in allegations for which no grounds were provided in the Initial Negative Evaluation or in the Negative Reevaluation.

28 Section 14. Exempt Contract Provisions. Exempt Contracts and the management of deposits acquired through the same shall be governed by the laws of the jurisdiction where they were executed. However, the remaining provisions of this Act shall apply to the Vacation Home Developer. Section 15. Mandatory Memberships. Mandatory memberships shall be valid in Vacation Home Projects, insofar as this obligation is included in the Purchase Agreement, including a summary of the terms and conditions of the membership and the fees (on account of what and for which estimated amount, if these have not been fixed) to be paid by the members. The membership terms and conditions shall be determined by the issuer of such memberships at his/her complete discretion. Such mandatory memberships may be in hotels, gyms, spas, recreational areas, or clubs, including sports clubs such as, but not limited to golf, tennis, or sailing clubs. Section 16. Undesirable Practices. The following practices shall be considered undesirable for purposes of this Act and its Regulations: (a) To commit any kind of fraudulent action that causes or may cause damages to Buyers and/or to the image of Puerto Rico as a tourist and investment destination. (b) To publish advertisements, statements, or information distorting or exaggerating the terms under which Units may be acquired. (c) To intentionally provide incorrect information to the DACO, the Tourism Company, and/or Buyers. (d) To execute a Reservation Contract, Purchase Agreement, or Special Escrow Account Agreement in contravention to this Act.

29 (e) To request or accept money deposits or advances to reserve Units in a Project without a location assessment, preliminary plan or development, or any other endorsement or permit that substitutes the same by law, approved by the Planning Board and/or the Regulations and Permits Administration of Puerto Rico or any government entity that, by law, substitutes the same in their functions, as the case may be, or by an autonomous municipality in the event that the power over city planning has been duly delegated thereto. (f) To fail to comply with the obligations under a Reservation Contract, Purchase Agreement, or Special Escrow Account Agreement. (g) To violate any other of its obligations provided herein or established by the DACO through Regulations. Section 17. Advertisements and Publications. (a) Any advertisement, contract, correspondence, document, card, sign, or any other kind of publicity shall indicate the full name, street address, and telephone number of the main office of the Vacation Home Development business responsible for the development of the Project. (b) A copy of any kind of publicity of the Vacation Home Project in question to be used in and outside of Puerto Rico shall be filed with the DACO before use, at which time it shall be included in the Vacation Home Developer s file, although the DACO shall not pass judgment on those materials except to corroborate compliance with the provisions of this Section. Section 18. Books and Records. Any Vacation Home Developer shall keep copies of its corporate books and records in a designated office in the Commonwealth of Puerto Rico, whose address shall be notified to the DACO. As part of such books, the Vacation Home Developer shall keep the following in the office: