The Municipality of Carolina is moving forward with a $34.5 million investment aimed at expanding its growing healthcare cluster after securing approval from the Financial Oversight and Management Board for Puerto Rico for a new bond issuance that will finance the construction of a medical office tower.
The approval shows how differently Puerto Rico municipalities now borrow. Carolina’s note goes to a single lender, Oriental Bank, at a fixed 6.15%. San Juan’s $122 million general-obligation bond sale in August went to the open market and cost the city about 4.99% including issuance expenses, as CB reported on Aug. 20.
The project, which will add a four-story building known as Medical Tower Building II to the Carolina Medical District, represents the latest effort by the municipality to strengthen its position as a regional healthcare hub while generating economic activity tied to medical services.
A bank-placed note for a second medical tower
Under the approved transaction, Carolina will issue a $34.46 million Municipal General Obligation Note, Series 2026-B, to Oriental Bank. The proceeds will be used primarily to develop and construct a building housing 27 medical offices, with a small portion of the financing earmarked for issuance and closing costs.
A general obligation note is debt that a municipality backs with its full taxing power rather than with the income of the project it pays for. Because Carolina is placing this one directly with a single bank, a structure known as a private placement, the terms were negotiated between the two parties instead of being set by competing bids from many investors, as happens in a public bond sale.
While the project is framed as a public infrastructure investment, it also reflects the increasing importance of healthcare as an economic development strategy for municipalities seeking to attract physicians, specialized medical practices and associated service providers.
Taken together, the Carolina and San Juan deals show two tracks in Puerto Rico’s municipal finance, as cities begin going to market directly. A city with investment-grade ratings, years of budget surpluses and strong CAE collections can sell bonds to institutional investors and borrow near 5%, while a bank placement such as Carolina’s costs 6.15%.
By expanding the medical district, local officials are positioning the area to capture additional healthcare spending and reinforce Carolina’s role as a destination for medical services.
This is not the first medical tower Carolina has financed. According to published reports at the time, construction began in September 2020 on a $12.7 million, six-floor tower near City Hall, paid for by the municipality and linked by a bridge to Doctors’ Center Hospital San Fernando de la Carolina, with offices for specialist physicians and other health professionals. Medical Tower Building II builds on that earlier investment.
San Juan’s bond sale set the benchmark
Carolina’s financing comes amid a resurgence in municipal borrowing across Puerto Rico as local governments regain access to capital markets and bank financing after years of fiscal restrictions under PROMESA.
Earlier this year, the Municipality of San Juan completed a landmark $122 million general-obligation bond offering, becoming the first Puerto Rico municipality in roughly a decade to access the U.S. municipal bond market directly.
Investor demand significantly exceeded the amount offered, highlighting renewed confidence in municipal credits backed by the Special Additional Tax, known as the CAE.
San Juan’s offering totaled $122.2 million, of which $112.6 million was tax-exempt and $9.6 million taxable, with RBC Capital Markets as underwriter. Fifty-three institutional firms placed orders of about $2.2 billion, roughly 18 times the bonds available, which allowed the city to price at a total cost of about 4.99%.
Rating agencies cited five consecutive years of budget surpluses, improved liquidity and stronger fund balances in assigning ratings of Baa3 from Moody’s and BBB+ from Fitch. Both are investment grade, a category that signals a lower risk of default, though Baa3 is the lowest tier of it at Moody’s, as CB reported on Aug. 17 and 20.
A private investor took part in that offering. PRMF Fund LLC, whose managing partner and co-founder Francisco de Armas said the San Juan deal was the fund’s first transaction, bought a portion of the bonds alongside other accredited investors. De Armas told CB that loans backed by the CAE have never had a technical or monetary default, including through Hurricane Maria, the 2019 and 2020 earthquakes, COVID-19 and Puerto Rico’s bankruptcy, and that the fund is in talks with other municipalities.
San Juan had already used the bank market. On June 29, the city refinanced $232.7 million in general-obligation bonds, notes and other debt with commercial loans at 6.35%, a seven-year structure with 15-year and 20-year amortization schedules that leaves a balloon of about $154 million due July 1, 2033, as CB reported in the Aug. 17 exclusive report.
Carolina’s note, at 6.15% with a final payment in 2034, resembles that June loan more than it does the August bonds.
More recently, the Financial Oversight and Management Board has continued approving municipal financing transactions, including proposals involving the municipalities of Arroyo and Yabucoa for infrastructure, public works and economic-development projects.
How the Carolina note works
In a Nov. 6 letter to Vicky González Vega, interim executive director of the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF), the board said it had completed its review and approved the Carolina financing under Section 207 of PROMESA.
PROMESA, the 2016 federal law that created the board, requires the board’s advance approval of new debt and of changes to existing debt while it remains in operation. Section 207 is the provision the board cited in approving the Carolina financing, which is why a municipal bank note needs a board letter before it can close.
The debt will be repaid through annual installments beginning in 2027 and ending with a final balloon payment in 2034. Repayment will be supported by revenues generated through the CAE.
A balloon payment is a large final installment that comes due when the payments before it have repaid only part of the principal. The structure keeps annual payments lower but leaves a sizable amount to be repaid or refinanced at the end.
The CAE is an unlimited property tax. In the structure CB described for San Juan, the Municipal Revenue Collection Center (CRIM) collects it and deposits it into the municipality’s redemption fund at Banco Popular, where it is set aside to pay debt service.
What the 6.15% rate says about access to capital
The financing carries a fixed interest rate of 6.15% if the transaction closes by Nov. 30, 2026. If the closing occurs after that date, the loan will convert to a variable-rate structure tied to the seven-year U.S. Treasury note plus 1.9 percentage points, with a floor rate of 6.15%.
A floor means the rate cannot fall below 6.15% in the variable case, whatever Treasury yields do. With the seven-year Treasury yield at 4.70% on Nov. 5, according to Federal Reserve data, the formula would produce about 6.60%, roughly 0.45 percentage points above the fixed rate.
The board letter as reported does not say whether the variable rate would float over the life of the loan or be set once at closing, and Treasury yields change daily, so the actual cost of missing the deadline would depend on market conditions at the time.
In the approval letter, Robert F. Mujica Jr., executive director of the Financial Oversight and Management Board, noted that the proposal had been submitted by AAFAF in September and thanked the agency for providing supporting documentation in advance of the review process.
Taken together, the Carolina and San Juan deals show two tracks in Puerto Rico’s municipal finance, as cities begin going to market directly. A city with investment-grade ratings, years of budget surpluses and strong CAE collections can sell bonds to institutional investors and borrow near 5%, while a bank placement such as Carolina’s costs 6.15%.
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