Sunday, February 16, 2014

An Appraisal in Nigeria, Land of Inconvenient Factoids

Ikoyi neighborhood in Lagos

A factoid is defined by Wikipedia as “a questionable or spurious (unverified, false, or fabricated) statement presented as a fact, but without supporting evidence.” A good appraiser learns how to distinguish between facts and factoids. A bad appraiser does not care.  In my latest assignment in Nigeria, I found the nation to be as rich in factoids as it is in oil.

I was initially given 2 weeks’ time to submit a valuation report on an 11-unit luxury apartment building in the prestigious Ikoyi neighborhood of Lagos, Nigeria’s largest city. In contacting the borrower, I stipulated that tenants had to be notified in advance that I would be entering their apartments during my property inspection. The borrower then informed me that this could not be done, because Nigerian Law required that an attorney be hired to provide 21 days’ advance notice to each tenant. Was this law real, or just a factoid? These apartments were labeled as “corporate serviced apartments”, which suggested to me that they received regular maid service of some kind, and how often do maids need a legal writ to clean a room?

The importance of seeing inside the apartments was mainly to verify occupancy, as the subject neighborhood of Ikoyi in Lagos has become seriously oversupplied with new, luxury 3 bedroom 3 bathroom apartments.

Several years ago, prior to the Global Financial Crisis, Ikoyi was known as the most expensive neighborhood on the African continent. Flats were selling for more than a million dollars and renting for $5000 to $7000 per month. The last canvassing of vacant apartments in Ikoyi in late 2012, however, indicated a vacancy rate of 42%.

The subject property was represented as fully leased at individual unit rents of $58,000 to $60,000 per year, or about $5000 per month. Was this real or just a factoid?

Arrival at Lagos Airport

The Nigerian embassy in Washington had provided my visa and told me that no immunization certificates were needed for entry into Nigeria when traveling from USA or northern Europe. When I was exiting customs at Lagos Airport, however, a customs agent asked for my proof of Yellow Fever immunization (which I had left at home). I told her what the embassy had told me, but she told me that all persons entering the country had to show the card. Was this the truth or just a factoid?

Without my Yellow Fever card, she said that I would be sent back home [having wasted more than $10,000 on a plane ticket]….unless….I paid a fine. “How much is the fine?” I asked. “How much can you pay me?” she responded. “$50,” I said. She said “No, $100.” When I tried to hand her the $100, though, she cautioned me to not display the money, instead instructing me to go to the men’s room and then place the $100 in my passport, which she took out of my folded passport as I exited Customs. As this was the first of other attempted extortions to come, I learned one useful thing – Nigerian civil servants do not like to be witnessed taking bribes.

Back home from Nigeria, I read the current issue of The Economist, which had an article entitled "Big Country, Thin Skin", stating that Nigerian "corruption is so endemic that many visitors pay their first bribe before they have even left the airport."

Research in Ikoyi

Since the crisis, demand for luxury apartments has weakened, and some major oil companies such as Shell, Exxon and Schlumberger have constructed their own employee housing. Meanwhile, construction of new luxury 3 bedroom apartments continues unabated.

In driving through Ikoyi at 9 pm, it was eerie to see so many dark, empty residential towers. I wanted to see the subject property at night (one way to estimate occupancy), but the borrower told me that he had no permission to enter the subject’s gated Parkview Estate community during the night.

He couldn’t get permission to visit his company’s property? Either this was another factoid or neither he nor his company really owned the building. Neither he nor his company was named on the Certificate of Occupancy, the Nigerian version of title.

The inspection

I was indeed shown only one apartment the following day, and the functionality of the building was not impressive, with long narrow apartments, no elevators, minimal fenestration, and no power on during my inspection, despite the presence of two back-up generators.
Center hallway inside unit
Typical bedroom
Kitchen
In the U.S., when an appraiser inspects a building represented as fully occupied and finds the power turned off, this is an instant red flag, but there are many power blackouts per day in Lagos, which has one of the world's least reliable electrical infrastructure. That is why many buildings there have back-up electrical generators, and the subject property had two of them to guarantee 24 hours-a-day electrical service.

Most new apartments in the U.S. have separate electrical meters for each apartment, so I asked to see the meters just in case only one meter was turned off. There was only one meter for this whole property, though, and I noticed that common area electricity was turned off, too. For the period of time I was at the property, about 45 minutes, the power was off the whole time, which would be a situation unacceptable to real occupants as food perishes in dark refrigerators and freezers, and fussy executives don’t want to come home to walk up three flights of stairs in the tropical heat to a warm apartment.

There were no signs of other tenants during my 11 am weekday inspection, although there is the possibility that all tenants would be at work. Nevertheless, there were no personal effects or plants in windows or on balconies to indicate that anyone lived there. The two cars in the parking lot belonged to staff only.

On that basis I had to conclude that the property was vacant. I don’t give loan applicants “benefit of the doubt” in face of evidence to the contrary. Moreover, an examination of documents further made their claims of rent and occupancy to be absurd.

The documents

Despite repeatedly requesting operating statements for 2012 and 2013 prepared by a property manager or accountant, I instead received an Excel spreadsheet for 2013 indicating that 12 units out of 11 had been occupied at rents of $58,000 to $60,000 per unit per year (representing 109% occupancy) at rents well above asking rents in the neighborhood, with relatively few expense items listed, all in very round numbers (not typical of an accountant’s report or professional management report), and not including usual line items such as building insurance, water, sewer or property management. The report appeared to have been hastily prepared and not consistent with standard worldwide real estate accounting procedures.

I did find 10 of the subject property’s apartments listed as available for rent on the Internet for the dollar equivalent of $36,810 per year each, or about 40% less than what the borrower had represented as being rented for at the time, which was November 2012.

On that basis I dismissed the operating statement and rent roll as factoids and not facts.

Leaving Lagos

The passenger screeners were greedy. I normally travel with both a laptop and an I-Pad, but did not take the I-Pad out of my luggage. The first passenger screener informed me that failing to take out the I-Pad was a violation and I would need to pay a fine. I asked “How much?” and she said “Just drop it into the luggage tray” without specifying an amount. I took out Nigerian currency from my wallet and hurriedly dropped a 100 naira note into the luggage tray, failing to compute that my bribe amounted to the equivalent of only 60 U.S. cents. She just looked at it, irritated, and said “Take it back”.

I stuffed my remaining Nigerian currency into my right pocket and was then greeted by a personal screener (frisker). He detected the wad of cash in my pocket and asked to see it. He then asked how much I could give him, and I just responded with a loud “How much do you want?” That seemed to embarrass him and he hurriedly let me pass.






2 comments:

George Mann said...

With a borrower like that, I hope you got your appraisal fee and expenses paid up front!

Vernon Martin, MSRE, CFE said...

The lender secured the appraisal fee in advance.