The International Appraiser

The International Appraiser
Lima financial district, Peru

Friday, February 3, 2017

A Foreigner and His Real Estate Investment are Soon Parted in Costa Rica




He returned to the U.S., broke and reduced to sleeping on friends’ couches.

I first started appraising in Costa Rica in 2010, and I started hearing stories of foreigners cheated in real estate deals.  The best known story at that time was the experience of Sheldon Hazeltine, who created a YouTube video titled “Costa Rica land fraud”.  Hazeltine and his partners bought a coastal parcel near Los Sueños with the intention to develop it.  While he was outside Costa Rica, a nearby wealthy landowner organized squatters to occupy the land and then declare squatters’ rights.  In Costa Rica, a squatter can acquire a right to possession (not ownership) after just one year of occupation, unless it is an agrarian parcel, in which case, the Institute for Agrarian Development can expropriate the land and transfer ownership to squatters who are farming the land. Otherwise, after 10 years of occupation, the squatter can then obtain titled ownership, anyway.

After some time being occupied by squatters, though, a billboard was erected on the property advertising the development of a hotel on the site by the wealthy landowner.  He basically paid the squatters to take the land and enable him to obtain ownership through their squatters’ rights. The squatters were paid off to leave. Hazeltine had been trying to get back his land for almost 20 years.

This YouTube video is no longer available due to a defamation lawsuit against Hazeltine.  He accused a thief of being a thief.

A North American expatriate living in Costa Rica recently contacted me about the squatters who have taken over properties previously belonging to Tropical American Tree Farms, a failed teak farm venture. A young attorney organized squatters to occupy the former teak farms, charging them for the privilege. They cut down the trees and planted crops. It is possible, now that the teak farms have been vacated for so long, that the squatters may have obtained title to the lands per agrarian law.

There is a logic behind these squatters’ rights laws that is antagonistic to absentee landlords living in other nations.  Possession is nine-tenths of the law; there is little sympathy for supposedly rich gringos that own land but do nothing with it when there are so many landless campesinos in Costa Rica who just want to earn a basic living.

But the problem of expropriation of land from foreigners gets worse.  There has been a proliferation of property theft gangs which use public notaries to record transfer deeds in their favor without the owner of the land knowing about it.  Any deed transfer by a notary public is accepted as true until a judicial proceeding establishes otherwise, and such litigation typically takes 5 to 7 years.

Property theft through fraudulent title transfer has become such a problem in Costa Rica that a legislative bill was introduced last August to quicken the pace of justice for defrauded landowners.  

Legislative bill number 19.968, the Law for the Cancellation of Irregular Entries in the Property Registrar (Ley De Cancelación De Asientos Irregulares En El Registro Inmobiliario Del Registro Nacional), would create an administrative mechanism to cancel fraudulent property documents that have entered into the Property recording system.   By bypassing the courts, the time frame to revert a fraudulent transfer would be significantly reduced.

If a foreigner wants to be an absentee landlord in Costa Rica, nevertheless, the risks are high.  The best way of having a defensible ownership is to buy within a gated community.  Otherwise, one must live in Costa Rica full time or else hire security, and there may be little to prevent your security guards from transferring the ownership into their names.




Tuesday, January 10, 2017

Latest EB-5 Visa Regional Center Scandal in California, December 2016

The latest EB-5 regional center to face charges from the SEC (U.S. Securities and Exchange Commission) is the Z Global Regional Center, owned by PDC Capital, managed by Orange County attorney Emilio Francisco, who took in $72 million from mostly Chinese investors and allegedly bought himself a yacht through $9.6 million stolen from the investors.
 As with any government program installed without the proper controls, this industry has attracted opportunists who would exploit or abuse this program for financial gain.  What makes this particular EB-5 scandal different is my involvement.  Almost a year ago I made a complaint about Mr. Francisco to the SEC, contending that Mr. Francisco was violating securities laws in soliciting investors by not disclosing his sordid legal history.  I performed a background check on him and found one bankruptcy and 38 civil liens and judgments against him. If such information was disclosed to you, would you entrust $500,000 to him?
The recent involvement of the SEC in this USCIS-administered program is the best effort so far in cleaning up this program, and chances are good for 144 Chinese investors to get back almost all of their $500,000 investments in this regional center, but the EB-5 program is still managed in a puzzling manner that defies logic. This is probably because USCIS was never intended or staffed to examine businesses but to examine immigrants.  Here are some of the errors being made:
1.       No background checks are done on the executives of regional centers. Instead, regional center approval is based mainly on the submission of an economic study produced by the econo-whore industry. USCIS is now adding additional economists to scrutinize these economic studies when they would be better off using an administrative assistant to perform background checks on the CEOs. $10 and 10 minutes each is all it would take to screen out scoundrels.  I have found many regional center executives with unfavorable legal histories.   The most common problem seems to be IRS tax liens, but civil judgments and foreclosures are also common, and recent bankruptcies of the executives are not uncommon.
2.       Misprioritization of effort.  Between August 2012 and December 2016 the number of USCIS-approved regional centers quadrupled to 865.  Meanwhile, in June 2016 the USCIS reported a backlog of 16.7 months for I-526 (temporary green card) petitions and a 21.3 month backlog for I-829 (permanent green card) petitions, while regional center applications were dealt with in an average of 10 months.  With a 38-month delay for each visa applicant on top of the 2-year period in which the I-526 petitioner creates at least 10 permanent jobs, the green card process has mushroomed from 2 years to over 5 years.  There are lawsuits against the USCIS for unreasonably delaying action on EB-5 visa applications. The U.S. already has too many regional centers.  Better to re-deploy staff resources to resolve the delays in visa processing times.
3.       Too many regional centers. Consider that only 10,000 visas are allocated annually for this program, less than 12 per regional center for the 865 regional centers.  A recent NES Financial conference indicated that the average regional center has $50.3  million in investor funds, corresponding to about 100 investors. 865 regional centers can thus accommodate 86,500 investors, or about 10 years' worth of investors considering that only 90% choose regional centers for their EB-5 investments.
4.       Lack of transparency. The USCIS does not make regional center applications (I-924s) and annual status reports (I924A’s) public, making them very difficult to monitor.  Moreover, to make an FOIA (Freedom of Information Act) request, the USCIS requires me to secure the permission of the regional center.  A crooked or ineffective regional center would not permit such a request. 
5.       Disorganization of information.  Last year I made an FOIA request to the USCIS to find out how many regional centers had actually produced permanent green cards for EB-5 investors.  They responded that I needed to narrow my search parameters. I then requested  the number of I-829 (permanent green card approvals) accomplished in years 2013 through 2016.  It took them a week to compile the list, which had many duplications as well as some nonsensical entries such as “NonRegional Center NonTargeted” as well as “Non-Regional Center Non-Targeted” as well as “regional center”.  I counted just 48 unique entities, two of which have already been terminated for fraud (Luca Energy and the South Dakota International Business Institute).  This means that out of 865 regional centers, less than 6% have actually produced permanent visas for their clients in the last 4 years. What surprised me the most was that USCIS was not even measuring the success of its EB-5 program and that all of this data could have been at their fingertips with a properly maintained Excel spreadsheet.
6.       Approving regional centers operated by unqualified people.  The four most common types of regional center owners I see are real estate developers, immigration lawyers (such as Mr. Francisco), securities salesmen and real estate salespeople.  Of these four types, only real estate developers actually create jobs.  The immigration lawyers, securities salesmen and real estate salesmen attracted to the EB-5 program are typically underemployed and lack the capacity or knowledge to create jobs. They serve merely as opportunistic middlemen siphoning off fees while searching for job-creating enterprises, sometimes at a leisurely pace. The EB-5 program would be better served if regional center approval was restricted just to job-creating enterprises, of which real estate development is the most common in this program (86% of projects). 
7.       Allowing the sale or rental of existing regional centers to unvetted entities. The Z Global Regional Center falls into this category.  Its regional center ID number indicates that it was approved by the USCIS in 2010, but there is no record that they accomplished anything prior to selling their regional center to Emilio Francisco in March 2015. He's not the only shady buyer of regional centers that I have seen.
 
Indeed, some regional centers are created and approved without intention of following up on their fake business plans and instead immediately shop around for buyers or renters, but nobody keeps track of who the buyers and renters and what their intentions are.  These regional centers make their presence known at EB-5 trade conferences. For an example, go to eb5affiliatenetwork.com.
Some regional centers are even sold to foreign entities. I’ve seen one sold to an entity in Mauritius (off the coast of Madagascar), another rented to a Canadian company whose CEO has a criminal history in the U.S. (Canadian criminal records are private), and the Seattle Area Regional Center, an active real estate developer, sold a 20% stake to a Chinese real estate developer and the CEO then bought a $2.9 million Thunder Jet boat.  This is all supposedly legal.
 
 Baidu Baike (Baidu Encyclopedia) published an interesting statistic on litigation against EB-5 regional centers:  Between February 2014 and August 2015 there were 5539 EB-5-related lawsuits from Chinese investors.  That amounts to more than 300 lawsuits per month just from China, or about 3600 per year.  Some suits were against the USCIS for unreasonable visa processing delays, but most were against regional centers or their agents.
 
And for the Chinese investor, remember that USCIS approval of a regional center does not vouch for the integrity of the operator or the soundness of the business plan. It just means that the regional center paid a fee and submitted an economic study.  By my calculation, only 6% of regional centers have produced permanent green cards for their investors.
 
My advice to foreign investors seeking the EB-5 regional center route towards a permanent green card is  to consider the following criteria:
 
1. Look for a regional center with approved projects ready for construction.  The term "project exemplar" indicates a project specifically approved by USCIS.  Do not be swayed with vague verbiage such as "we only select the best projects", which sometimes is an excuse to do nothing but use your money for other purposes.  Your response should be "Name those projects!".
 
2. If you are conversant in English, make a telephone call to or e-mail the local government planning department about the project you will be funding.  In a few minutes you can ascertain that the project is approved for construction.  The most ready-to-build projects will have both development approval and building permits. Too many foreign investors, however, are stuck in limbo regarding projects which have not yet had development approvals. Development approval and building permits can take years, and you will not be able to apply for the I-526 temporary green card until afterwards.
 
            3. Look at the track record of the regional center.  This is easier said than done because some regional centers make false claims, such as "100% approval of green cards". If in doubt, one can make an FOIA (Freedom of Information Act) request to USCIS to verify that the regional center has had I-829 applications for the permanent green card approved.   Needless to say, EB-5 regional centers are not monitored for truth in advertising.
 
If you are already an EB-5 investor and you think that you have been cheated by your regional center, please feel free to contact me for a free consultation.  You may not have to hire an attorney if I can persuade the U.S. Government to file a complaint.
 
我的建议,外国投资者寻求EB-5区域中心路线永久绿卡,考虑以下标准:1.寻找一个已批准项目准备建设的区域中心。术语“项目范例”表示USCIS特别批准的项目。不要用模糊的语言,例如“我们只选择最好的项目”,有时是一个借口,做什么,但使用你的钱用于其他目的摇摆。你的回答应该是“命名这些项目!”。2.如果你熟悉英语,请打电话或电邮地方政府规划部门你将资助的项目。几分钟后,您可以确定该项目已获批准建设。最准备建造的项目将有发展批准和建筑许可。然而,太多的外国投资者对尚未获得开发批准的项目也陷入困境。发展审批和建筑许可可能需要多年,您将无法申请I-526临时绿卡,直到之后。


            
3.查看区域中心的记录。这说起来容易做起来,因为一些地区中心提出了虚假的声明,例如“100%批准绿卡”。如果有疑问,可以向USCIS提出FOIA(信息自由法案)请求,以验证该区域中心已获得I-829申请永久绿卡的批准。不用说,EB-5区域中心没有监测广告的真实性。如果您已经是EB-5投资者,并且您认为您已被您的区域中心欺骗,请随时与我联系,免费咨询。如果我能说服美国政府提出投诉,您可能不必聘请律师。
 
 

Sunday, November 27, 2016

Appraising Vacation Home Subdivisions

New subdivision near San Pedro de Macaris, Dominican Republic
 
If you have read my previous posts, one common observation is that there continues to be a worldwide oversupply of uncompleted vacation home subdivisions, condo projects and proposed subdivisions whose developers continually search for lot buyers and financing. I get to visit some of them for my lender clients.

I sometimes fly thousands of miles to see a project, only to find a mangrove swamp, jungle forest, steep hillside or a sugar plantation.

Sometimes the developer has obtained development approvals, sometimes not. The development approvals can be valuable in areas of land scarcity, but more often I am driven into a wilderness with pretty views but awkward access and a lack of local services.

It is useful to remember that market value depends upon what can be sold, not necessarily what can be developed.

I also see the same developments marketed to consumers with unrealistic photos of bikini babes in infinity pools, colorful tropical birds, the smiling faces of the grateful local natives, and cocktails at the beach.

Sometimes appraisers and valuers are confronted with the task of evaluating pre-sales contracts for lots. Should these prices be considered as market value?

Here are some things to consider in analyzing the sales:

1. What percentage of lots are currently sold or pre-sold? If the subdivision contains 900 lots, but only 20 are sold, this would represent an oversupply situation in which lot prices would have to be discounted.

2. Where are the buyers coming from? If the developer is from Omaha and the buyers are, too, this is cause for suspicion. These might not be real buyers and real sales. Another cause for suspicion is if the buyers are LLCs (limited liability corporations).

3. Read the sales contracts. Is the transfer of ownership conditional upon improvements completed by the developer? How much cash down payment is required? In some cases it might be only 5%, but if buyers perceive that their property has decreased by more than 5%, they might default on their payments.

4. What has happened on the lots that have been sold? Have they been developed or are there For Sale signs on them?

5. Are there lots already listed for sale in the secondary market? Check brokers and ads.

6. What infrastructure (roads, utilities, promised amenities) has been completed?

The preferred method of valuing a subdivision is a discounted cash flow analysis commonly called “The Subdivision Method”, in which all revenues and expenses are forecasted over time and discounted at a market rate of return. Witnessing very low rates of absorption of lots, however, I presently discourage this method for most vacation home subdivisions.

Whenever possible, I look for actual sales of incomplete subdivisions. These can be very hard to find, however. If such properties are listed for sale, though, that is a good place to start before applying appropriate market-based adjustments.

Thursday, August 18, 2016

How Can Aggrieved Chinese EB-5 Investors Get Their Money Back?

 
 


Vine Street property in Cincinnati



According to Baidu Baike (a Chinese on-line encyclopedia), there were 5539 Chinese EB-5 investor lawsuits filed in U.S. courts just within the 18 months between February 2014 and August 2015, or more than 300 investor lawsuits per month. That’s a large number considering that only 10,000 EB-5 visas are allocated per year. 

In most cases, the Chinese investors are suing their own regional centers for fraud, embezzlement or mismanagement. Regional centers pool investors’ funds to develop real estate projects in most cases. Some were suing US Citizenship and Immigration Services for denial of their permanent visa applications, but with each denial, it was the regional center that failed to perform up to job creation expectations, which mainly require that each investor prove that he or she created at least 10 permanent jobs lasting up to 2 years.

For those investors who want their money back, navigating the U.S. Justice System can be tricky, as evidenced this week in a U.S. District Court for the Southern District of Ohio in the matter of Hu et al v. Chan et al.

Ten Chinese investors contributed $545,000 each to the Midwest EB-5 Regional Center based on false statements allegedly made by some defendants in the Private Placement Memorandum as well as in presentations made by some defendants in China. The job creation project was to renovate retail buildings on Vine Street in Cincinnati, Ohio in order to create a “restaurant row” consisting of 9 restaurants. Renovations started but never finished, and all of the Chinese investors’ money disappeared. The false statements in the PPM were that investors’ funds were guaranteed by the Ohio state government, that investors’ funds would be kept in escrow accounts and only released upon USCIS approval of an I-526 (conditional green card) for the investor, and that investors’ funds would be supplemented by bank loans and tax credit financing, none of which were true.

The lawsuit was dismissed “with prejudice” (preventing other suits on the matter) on August 16th by U.S. District Judge Sandra Beckwith on the grounds that the fraud claim lacked “sufficient particularity” as required by Rule 9(b) of the Federal Rules of Civil Procedure, stating “The complaint does not identify with any specificity the time, place, or identity of the speaker of the alleged false and misleading statements." This was a surprising ruling to me, given the falsehoods contained in the Private Placement Memorandum, which would seem to be prima facie proof of false and misleading statements, plus the fact that the investors lost all of their money and did not get green cards. The USCIS even terminated this regional center in February 2015 due to failure to create jobs and misuse of investor funds.

Rule 9(b) is as follows:
(b) FRAUD OR MISTAKE; CONDITIONS OF MIND. In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.

I should disclose that I am not an attorney and do not provide legal advice. I report this case as a cautionary tale to aggrieved foreign investors. One recommendation that comes to mind is to hire an experienced securities attorney who already knows these rules of procedure.

There has been a growing trend among attorneys to “just sue everyone”, but perhaps there is a lesson to be learned here, which is to document who said what, when, how and where so that guilt can properly be placed on the appropriate defendant without the complaint being dismissed.

The plaintiffs are still allowed to file suit in Ohio state courts, as this was a Federal court decision.

A reader may ask, “Who cares about Chinese millionaires?” Stereotypes abound of “princelings” and relatives of government officials who get sweetheart government contracts.

In the first three of my 5 trips to China, I brought a neighbor, a Chinese immigrant, to interpret for me. When I finally asked him how so many Chinese people became millionaires, his answer was disarmingly prosaic – “By investing in real estate”. Many who bought condos in Beijing and Shanghai 15 years ago are now millionaires on paper, but not necessarily in cash. The same can be said for most California millionaires. His mother, a seamstress in Shanghai, had also become wealthy that way.

Having obtained their wealth through real estate investment rather than entrepreneurial activity, such EB-5 applicants are naturally attracted to the regional center concept of gaining an EB-5 visa, which is to pool funds with other similar investors in order to develop real estate. About 90% of EB-5 visa applicants choose to invest in a regional center rather than starting their own business. They are not experienced businessmen.

Some Chinese EB-5 applicants are not truly wealthy people. There have been some hard luck stories where the investor had to mortgage his own home to raise the minimum $500,000 plus administrative costs investment. If that money is stolen by a crooked regional center, that can create desperate circumstances for the family, including foreclosure.

As a Certified Fraud Examiner, I try to help aggrieved investors find a solution. If you have been cheated by an EB-5 regional center, you may feel free to e-mail me about your complaint, and I can present some options to you at no cost, but I am not an attorney and cannot file a lawsuit for you. All I can do is catalog the bad players in the industry and notify authorities.

Friday, August 5, 2016

An Appraisal of a Commercial Property in Seoul, South Korea.

 
 
 
 
A wealthy Korean immigrant died in California and his will left a commercial property in Seoul solely to his only daughter, thereby freezing out her brothers.  Two brothers traveled to Seoul to have a Korean court overturn the will and obtain partial interests in the building.  They succeeded.  The daughter, in turn, sued her brothers in California court for full ownership, as California Estate Law had been violated. She won.
My assignment was to review a translated Korean language appraisal that had been ordered by a Korean court, in order for me to figure out the damages her brothers had to pay her for stealing part of her inheritance, and testify to this in a California court.
I had been a speaker at a conference sponsored by the Korean Association of Property Appraisers in Seoul in 2008, and was familiar with some of their valuation methods and the differences there are with U.S. valuation methods.
Two differences are:
Land and improvements are valued separately.  This is similarly done in Germany and by U.S. tax assessors, and I’m finding it increasingly necessary in Los Angeles County, where land values are spiraling upwards, calling into question the highest and best uses of many older properties.
Because Seoul is built out and there is a lack of land sales, The Minister of Land, Transport and Maritime Affairs also compiles a “price announcement system” similar to that used in Costa Rica, and appraisers refer to a map to obtain land values. I often find that such price announcement systems fail to keep pace with changing market conditions, especially if created by a government bureaucracy.
These land values maps are overly general, too.  Theoretically, the appraiser should adjust the land value on the map for accessibility, size, market conditions and developability. This appraiser made no adjustments.
In this case no adjustment was made for a 4-story. 7736 square foot building that had no road access (see photo).  It was situated on a 241.3 square meter (2597 square feet) lot in Jongno-gu, which is one of the two wards that compose the central business district of Seoul. The building itself is situated behind and obscured by a taller building and thus had no street access or visibility.
The appraiser stated land value to be 12,210,000 Korean won per square meter, equivalent to $10,912 per square meter or more than $1000 per square foot.  I have seen such land valuations in Manhattan, and since Seoul is a city of 10.2 million people with twice the population density as New York, I did not immediately doubt such a figure.
Nevertheless, the zoning for the site allowed only one extra story of height, and the site was already fully covered.  Accessible only by alley way, there would have to be an assemblage of adjacent parcels if any type of redevelopment could be done.  This made a value of $1000 per square foot highly unlikely.
Although this building was classified as an office building, its employees were more likely to be employed as seamstresses than office workers.  The lack of vehicular access limited this property’s highest and best use. The size of the lot, less than 2600 square feet, was only about half the size of a typical residential lot, which is not conducive to high-density redevelopment, and the space between buildings was so tight that the photographer could not get a photograph of the whole building in one frame.
To find comparable sales and listings I turned to the auction houses which publish details of their real estate auctions.  They typically publish the original reserve price, which is based on appraised value, and then subsequent reserve prices which are discounted by 20% each month until they attract bidders. It seems that a glut of auction inventory has been building in the last two years and many properties have failed to attract bidders at appraised value.  The subject property itself had failed to attract bidders at two auctions and the reserve price for the next auction is now set at 64% of appraised value.
When I saw superior Jongno-gu sites listed for sale at $500 per square foot and one closed sale at $422 per square foot, it suggested to me that a decline in land prices was underway and that the government’s price announcement system had not been kept to date and was forcing Korean appraisers to overvalue properties.  That may be why so many properties were not attracting bids at appraised value or 80% of appraised value.
Are there any factors that would lessen demand for commercial real estate in Seoul?  The Korean economy is at full employment and they report continually rising GDP.  One curious statistic, though, is the year-over-year decline in:
1.       Industrial production
2.       Producer price index
3.       Exports, and
4.       Imports
It appears that the Korean economy is on the verge of a slowdown and this is adversely affecting Seoul CBD land values.
In the end, the client still needed an opinion of value and I could not agree with the Korean appraiser's estimate of land value. I performed what the appraisal profession calls a "desktop appraisal", meaning that I didn't visit the property.  Because land prices had considerably decreased, I went back to price per square meter of building area to find meaningful results. The most revealing data were similarly situated and sized commercial buildings in Jongno-gu, also lacking visibility and access, priced at below $270 per square foot of building area.
 

 

Thursday, July 28, 2016

Shameless Book Promotion

This week I received a $17.70 semiannual royalty check for my book, Fraud Prevention for Commercial Real Estate Valuation, published by the Appraisal Institute, which I have sometimes advertised in the sidebar of this blog over the last five years since its publication.  This royalty check is equivalent to the sale of about 3 books in the last six months.

If there was a New York Times “Worstseller List”, this book might be on it.  Last year’s royalties were equivalent to the sales of 18 books.

Now the Appraisal Institute is conducting a fire sale of my book, having reduced its price from $45 to $23, and $18 for Appraisal Institute members.  I suspect that they printed 1000 copies of my book and have a few hundred left to sell.

I admit that I have not properly promoted my book, mainly because I want readers to view my blog as an objective place to instruct and learn, and not a place to boast or hard-sell.  My expert witness practice thrives on credibility.

I know very little about the buyers of the book, but I have heard that the book is in the Cornell University Library, and the director of the MIT Center for Real Estate e-mailed me to compliment the book and to offer me free admission to the MIT World Real Estate Forum last May, which I accepted.  The knowledge that scholars are reading my book also encourages me to think that there is a new generation of real estate practitioners being better prepared than today’s generation for the seamy world of commercial real estate.

There is no book like it in real estate literature except for my previously self-published book, Lessons from Losses in Commercial Real Estate.  It is the opposite of the “Get Rich Quick in Real Estate” books you see at the bookstore; it is a book on how to prevent money from being lost in real estate.

One of the central precepts of the book consists of two words that are absent from other books on real estate or finance: People lie.

A typical appraisal assignment often involves mind games and factual errors from parties that have a vested interest in the results of the appraisal, such as owners, brokers, taxpayers, divorcing spouses, etc. What this book does is catalog all the deceptions I had seen over the first 27 years of my career and explain the due diligence needed to counteract the deceptions. I explain the conflicts of interest that exist. I finish the book with a fraud prevention checklist for real estate transactions.

One thing I learned when I began my appraisal career at global firm Jones Lang Wootton was that the farther a real estate deal had to travel for capital, the higher the risk of fraud, which makes international real estate valuation riskier than domestic valuation.  I worked in the JLW Houston office and remember twice receiving phone calls from JLW offices in Asia inquiring about Houston condo deals being marketed over there. I would visit these properties and find cheap construction and adult men loitering about on a work day. Once, when I arrived on the first day of the month, I found residents hovering around their mailboxes, waiting for their welfare checks, indicating that many of the condos were being rented to low income tenants.

The book is 120 pages long and is an easy read.  My mother and father even read it and understood it. But for those appraisers (or investors or lenders) who don’t have the patience or funds to read it, much of the advice can be condensed into 5 words uttered by two U.S. presidents. 

“Show me” – Harry Truman

For instance, if a developer claims to have his residential subdivision 70% presold, I ask “Show me the purchase contracts.”  In one of my previous posts, a Canadian developer had no presales, just expressions of interest recorded on her web site.  In domestic appraisal assignments, I sometimes see purchase contracts from LLCs and shell corporations from the developer’s home town hundreds of miles away from the property being built.  I view these with suspicion. When I started my private practice in 2006 I saw my best client wiped out by a condo development scam in which 95% of the contracts were not arm’s length.  The sale was either from the limited partnership to a partner or vice versa, but the sales were all at $500,000, well above true market value.

“Trust, but verify” – Ronald Reagan

I go to appraisal assignments with an open mind, and real estate developers tend to be likable, persuasive people.  They can feel like new friends. It’s often not until I get home that I complete my verification process and sometimes exclaim, “Wait a minute!  He:

1.      Doesn’t own the property or have a valid purchase contract.  A valid purchase contract needs to have the owner of record as the seller. Or

2.       Doesn’t have the entitlements he claims to have. Or

3.       Has the property listed for sale at much less than he claims the property is worth. Or

4.       Has been previously convicted or sued for mortgage fraud, embezzlement, etc. Or

5.       Is trying to finance a non-arm’s length, “pocket-to-pocket” transaction.

It disappoints me that so many appraisers and valuers have no interest in fraud prevention, instead trying to shield themselves from liability with lengthy Assumptions and Limiting Conditions.  For example, my book Fraud Prevention for Commercial Real Estate Valuation was based on my award-winning article in The Appraisal Journal in 2009, entitled “Preventing Fraud and Deception”.  It took six years to publish that article.  I submitted it three times to the TAJ review panel.  The first time it was submitted, it was rejected as inappropriate. The second and third times, the consensus of the review panel, consisting of practicing appraisers, was that appraisers are not responsible for fraud prevention, and publication of this article would set a dangerous precedent.

It was not until I presented the article to an international appraisers’ conference in Seoul, where the then-president of the Appraisal Institute, Wayne Pugh, was present, when he suggested that I submit the article to TAJ. I told him that I had already been rejected three times and that most of the editorial reviewers considered fraud prevention to not be an appraiser’s professional responsibility.  He responded, “But it is” and encouraged me to re-submit.  With his blessing, I finally got the article and the message published.

So, if you are an appraiser or valuer who cares about his or her clients, I strongly recommend this book. 

Sunday, July 24, 2016

Appraisal in Roatan, Honduras


The property was mostly raw, wooded, hillside land leading down to a beautiful, reef-protected, white sand beach, with a few existing apartments up the hill. Part of the shoreline was occupied by mangroves, which are a protected habitat in Honduras, much like most tropical countries. The idea was to build individual vacation rental residences. The surrounding area had tourist traffic, including cruise ships, scuba divers and snorkelers, a nearby dive shop and a luxurious dive resort. It was a nice setting for tourists, but a lot of site work had to be done.

I requested documentation of the property’s entitlements, i.e. what the developer has the legal right to build. Most of the documents I received were Solicitudes de permiso de construccion, which translates to “Request for Building Permit”, and there were three permit numbers assigned for structures which had already been built, including several condominiums in 2008. The rest of the solicitudes had no permit numbers assigned and were expired. In short, I saw nothing resembling an approved development plan. The developer had also changed his development goals since 2008.

When I stated that the appraisal might be more favorable with an approved development plan (typically called a “final map” in the USA), I received a development plan the next day, addressed that same day to the planning department for the municipality of Roatan. It was written in English and was very limited in detail, consisting of squares and lines on graph paper.

In the last year I have been meeting more and more “wannabe developers” who merely place squares or rectangles on a two-dimensional map, include some artist’s conceptual drawings and floor plans, and call it their “Development Plan”. What about the infrastructure, the provision and placement of underground utilities such as water and waste treatment, the excavation and movement of earth, the measures needed for erosion control or dust control, and the measures needed for environmental protection? Even the banana republics I work in have had rules that needed to be followed when building in an inhabited area, because what is built and how it is built has an impact on the neighbors and the environment. When I am unable to get plans and specifications and detailed construction drawings, how am I to determine if the development proposal is not just a hoax?

When I work with an experienced real estate developer, on the other hand, there is one point in the site visit in which I visit an office full of detailed construction drawings, surveys, third party reports, photographs of successful projects, development budgets, contractor’s estimates and laudatory newspaper clippings, including the press announcement that the project has been approved by all the required agencies. These documents take up a lot of space. If the development site is too far from his office, a developer may instead email a myriad of documents or place them in an on-line dropbox for me. On the other hand, an inexperienced developer (or a hoaxer) is more likely to ask me to meet him at Denny’s Restaurant and show me artist’s sketches.

There is also sometimes a misapprehension that raw hillside land with ocean views is more valuable than flat land. It is not, because of the costs of development. Developed lots with ocean views, on the other hand, are more valuable than lower lots without views and access to the beach.

This novice developer adamantly insisted on already having all necessary development approvals, but did not provide a relevant document on municipal letterhead in the only language legally recognized in Honduras, which is Spanish, nor did he provide construction plans and specifications and a budget. He called me a liar. He also mentioned having cousins in the Mafia. Does this mean that the International Appraiser will soon be “sleeping with the fishes”?

Sunday, May 22, 2016

The Growing Worldwide Glut of Luxury Condos



Pavilion Residences One and Two stand largely dark at night behind the successful Pavilion Shopping Mall in Kuala Lumpur's Golden Triangle, yet Phase 3 is now under construction and promises to be more luxurious, featuring serviced suites.  Were Phases 1 and 2 not good enough? Phase One is said to have been sold out to residents from 27 different nations, but few seem to live there.


In my travels in the last year I have witnessed an increasing supply of luxury residential condominium towers in cities such as New York, Boston, San Francisco, Las Vegas, Seattle, Vancouver, Beijing, Shanghai, Kuala Lumpur and my home city of Los Angeles.

In many instances, luxury condo purchases represent foreign flight capital from the upper classes of nations with changing political conditions.  South Americans, particularly Venezuelans, have been attracted to Miami, where a condo glut from 8 years ago has been fully absorbed, with new condo towers now in the works. Western Pacific Coast condos are often being bought by Chinese buyers who want to diversify their investments or feel that they lack safe investment options within China, and some who just want a safe place to store ill-gotten gains now that the Chinese government is cracking down on corruption. 

In many cases, the motivating decision to purchase a luxury condo is the relocation and preservation of capital into nations with secure property rights and stable political conditions, such as the U.S., Canada and the United Kingdom.  Under the present circumstances in Venezuela, for instance, how secure can a high-net-worth individual or family feel when there are riots in the streets and the government is socialist?

As Jonathan J. Miller, New York’s most quoted appraiser, says in the New York Times, “We’re building the equivalent of bank safe deposit boxes in the sky that buyers can put all their valuables in and rarely visit.” These absentee ownership residences become obvious in night-time skylines all over the world, where few interior lights are on in the evening (such as the Pavilion Towers in Kuala Lumpur in the top photo). When preservation of capital is their main motivation, they hesitate to rent such units out and prefer to keep them vacant.
 
Preservation of capital, though, should not be confused with return on capital.  Those buying luxury condos for rental income will be disappointed, as some of these cities do not have the high income professionals (e.g. Miami, Las Vegas, Vancouver, and Kuala Lumpur) to cover the carrying costs of such condos. I have seen similar disparities in Honolulu.  Tourist cities might be pleasant locations for second homes, but local incomes are generally low, as how much can the local population earn working in hotels, taxi cabs and restaurants?

For those investing for property price appreciation purposes, I fear that the world is running out of multi-millionaires to purchase the swelling inventory, and depreciation is becoming increasingly likely, eventually resulting in fire sale prices. 

What happens, too, when the home country political conditions improve, and the owners decide to repatriate their capital back to their homeland?  Who will purchase such condos at resale?  Chinese and Japanese investors, for instance, have a distinct preference for purchasing new residences, and resales of luxury residences are often marked down. (I remember when the Turnberry was the place to be in Las Vegas in 2008 and have seen considerable markdowns since then.)

The result can be tumbling condo prices, as was seen in Vancouver at the beginning of this century, when Hong Kong investors in Vancouver condos decided it was safe to return to Hong Kong, where the capitalist economy was booming, and then sold their condos in Vancouver.  Now the buyers in Vancouver are from Mainland China. 

The recent regime change in Argentina might similarly entice wealthy Argentineans to return home to a new pro-business climate now that the incompetent Fernandez dynasty of 13 years is gone.  Argentina’s new leader, Macri, made a favorable impression in a recent episode of Sixty Minutes.

Within China there has also been an overdevelopment of luxury condos, as evidenced in the accompanying chart presented by a Chinese government housing official at the MIT World Real Estate Forum last week. The vacancy rate in the luxury residences (defined as Tier 3) is increasing while there is a great need for more “Affordable Housing” (Tier 1).  One young man in Beijing told me of having to share a one bedroom apartment with 3 other graduating college classmates while searching for employment in a country which generates more than 7 million new college graduates per year.  When I attended the OPIE (Overseas Property and Immigration Exhibition) in Beijing two weeks ago, I noticed a luxury condo tower breaking ground next to my hotel, the Metropark Yuantong.

Tier 3 housing has sold well in Beijing, Shanghai, Guangzhou and Shenzhen, but not so well in lesser cities such as Xi'an, where a 27-story high-rise tower had to be recently demolished due to lack of occupancy and deterioration.
 
 
 
 
Tier 3 Condo Towers in Shanghai

For most of China’s recent history, investment options have been few for local residents, so many have bought condos as a way of saving money with hopes of capital appreciation in the future. Local bank savings accounts offer paltry interest rates, and the Chinese stock market is increasingly viewed with suspicion as Chinese corporations do not operate according to GAAP (Generally Accepted Accounting Principles), but by CRAP (Chinese Regularly Accepted Accounting Principles).

With so many empty luxury condos, though, the prospects for value appreciation are becoming increasingly doubtful. Lately, there have been reports that Chinese investors are increasingly buying precious gold and silver, with precious metal transport companies reporting heavy inbound traffic into China.