Appraisal of land outside Regina, Saskatchewan

Saskatchewan is unique in Canada for its continuing economic boom, fueled by world demand for its potash and oil.  Similar mineral-led economic booms in places such as North Dakota, Wyoming and Western Australia have also led to housing shortages and rising land prices.

Before this valuation assignment, I last appraised in Saskatchewan during the Fall of 2010, and the boom has continued since then.  The property being appraised this time was almost one square mile of cropland right outside the city limits of Regina, SK, presently cultivated with canola and wheat, but in the process of being rezoned for mixed use to accommodate the expansion of the city of Regina, a city of 200,000 residents in the southeastern part of the province.

Appraising land in Canada is an easy assignment compared to most international work.  Each province has its own land registry system capable of providing comparable sales, and the prices for sales data are low in Saskatchewan ($20 got me 150 sales), and the last time I appraised in Alberta, their sales data were free. In British Columbia, the provincial land registry wholesales the data to middlemen such as Landcor, which costs several times as much, but is still a bargain.

A couple of issues relating to the conversion of farmland to residential development relate to the ability of the soils to support vertical construction and the potential for toxic contamination of the soil by pesticide use.  Another newly built Regina-area subdivision several miles northwest of the subject is currently sinking in the mud, for instance, due to the failure to discover the unsuitability of the soils until it was too late.

I normally like to read a geotechnical study and environmental report during the appraisal of a subdivision instead of copping out with the use of “assumptions and limiting conditions” that everything is assumed to be all right. A lot of money has been lost with assumptions, and I disagree with the appraisal profession's mindset that placing "assumptions and limiting conditions" in appraisal reports is good appraising.  It is not good appraising; it is dangerous appraising. Complicating the situation, though, was a lender client who let the developer set the stage for intransigence by refusing to show purchase contracts.

Although this was a Canadian property, I still follow USPAP (Uniform Standards of Professional Appraisal Practice set by the Appraisal Foundation, a U.S. institution), one of which is Standards Rule 1-5(a): “analyze all agreements of sale, options, and listings of the subject property current as of the effective date of the appraisal”.  My request to see the purchase agreements spooked the developer, who called the client to call off my request due to the fear that I would practice “anchor bias”, the tendency among real estate appraisers to “hit the purchase price” in 96 to 97% of appraisals.

The developer’s fear was unfounded, as I do not practice anchor bias and am also mindful of USPAP Standards Rule 1-4(c): “When analyzing the assemblage of the various estates or component parts of a property, an appraiser must analyze the effect on value, if any, of the assemblage.  An appraiser must refrain from valuing the whole solely by adding together the individual values of the various estates or component parts.” This assemblage would probably be more valuable than the sum of its parts.

The comparable sales were rather consistent in this Rural Municipality – farmland was selling for about $2500 per acre, while close-in farms were being bought by developers for up to $20,000 per acre prior to rezoning. I certainly recognized the value of the assemblage going on, but my client's tacit permission to let the developer stonewall me hindered my ability to protect them.  When I asked for other information, such as a geotechnical study and the names of the current property owners, the initial responses were "Have a blessed day", and then "Geotechnical Report...not available at this present time" and finally "this question is un-usually [sic] and has no merit when completing an appraisal value report on a property."  

While I disapprove of the practice of most appraisers and valuers to defer essential issues as buildability and environmental contamination to “Assumptions and Limiting Conditions”, which often don’t get read by clients, I had to in this instance. If the soils or water table make construction infeasible or the soils are contaminated by pesticides, the value of the property reverts back to agricultural land values, a significant diminution of value.  I made my estimate of value conditional upon the receipt of an acceptable geotechnical report and environmental report and prominently displayed this by my conclusion of value, and then presented a separate value of the property as agricultural land just in case the developer refused to present relevant documents.  So far, this developer continues to refuse to cooperate.

As for why I ask to see purchase contracts, this is a USPAP rule (not required in Canada but sometimes followed), and it often alerts me to sales concessions, flips (when the seller is not the registered property ower), sales between related parties, or suspicious discrepancies, such as when a buyer or seller misspells their own name (suggesting forgery) or doesn't sign at all. The reason why I ask who the sellers are is if the sellers' names are different from the recorded property owner's names, the transaction becomes more suspicious. In a classic illegal flip, the buyer uses a disguise, such as an LLC or LP, to purchase the property at a lower price and then sell the property to himself at a much higher price, thereby fooling lenders and appraisers. The first time I saw this a doctor paid $1.8 million for an apartment building and then sold it to himself for $2.7 million, thereby tricking the lender into lending too much money on the property.

Lenders need to consider the consequences, though, of letting borrowers decide which questions they can decide to answer or not answer, which is tantamount to letting the borrower dictate appraisal policy and letting the fox run the hen house.

Next stop, Ecuador.

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Appraisal in northern Saskatchewan

The property consisted of 190 acres in northern Saskatchewan in a summer tourism area. The local topography is glacial moraine, similar to Minnesota and Wisconsin, and features thousands of small lakes. The largest lakes have attracted small villages of summer cottages, most of which are unoccupied during the long winters at this latitude (53 degrees north).

Despite the booming Saskatchewan economy, buoyed by increasing world demand for potash, oil, and wheat, northern Saskatchewan remains a sparsely populated, slow-growing region. The local "Rural Municipality" (the Saskatchewan equivalent of a county), for instance, was last measured as having only 846 residents, increasing at a rate of about 17 new residents per year.

These 190 acres were acquired in 2007 and 2008 with the intention of building another vacation home subdivision. Unlike other vacation home subdivisions in the area, though, this property is not situated on a large lake, but has several small lakes within. Its terrain is quite hilly.

As nearby subdivisions continue to struggle to sell lots, the developer made the decision to seek a zoning change to allow development of a high-density senior "care and wellness facility" (with assisted living) and multifamily housing (fourplexes). This change in plans from conventional residential development to a "care and wellness" facility reminded me of my last appraisal in Costa Rica (see March blog), as the decision to develop a care facility in a remote, rural location usually occurs as an afterthought when the developer runs out of viable options.

Successful assisted living facilities usually have most of the following attributes:

1. Close proximity to a hospital. (The subject property is 35 minutes away from the closest one, and winter road conditions can prolong the journey to the hospital.)

2. Flat terrain. Seniors in ALFs often have trouble walking, and hills, particularly ice-covered hills, can limit their mobility outside the care center building itself. (My own father lives in an ALF in New Hampshire.)

3. Close proximity to relatives and friends. (The subject property is 113 km north of Saskatoon, a city of 223,000, the presumed source of most of the new residents, and the local area is very sparsely populated -- 846 residents in the entire rural municipality.)

4. Desirable climate. That needs no further explanation. On the plane ride to Calgary, for instance, I met a senior couple from Alberta (next to Saskatchewan) who had just made an offer on a house in Las Vegas.

In other words, there seems to be no compelling reason for most seniors to relocate to remote northern Saskatchewan. Sending Granny to isolated north Saskatchewan, moreover, doesn't seem much kinder than the ancient Inuit custom of launching infirm seniors into the sea on ice floes.

One nice thing about appraising in Canada is the provincial land registry systems. Sales data can be obtained for free in Alberta, for a small fee in Saskatchewan, or for a higher fee in British Columbia from a private vendor, such as Landcor. Most legal descriptions are based on the TRS system (township-range-section), and can be easily located on maps.

My client was interested only in the "as is" value of the site. Searching within a nine-mile radius plus the local rural municipality, land sales in the last 18 months ranged from $200 to $1500 per acre, and there had been no land sales above $295,000. The requested loan amount was more than $10,000 per acre.

The developer had hired his own Canadian appraiser, who estimated the value at $20,000 per acre, but this value was predicated on several undisclosed "hypothetical conditions", such as the subject land being rezoned and legally subdivided, and able to sell out its lots. Current zoning only allows two to four dwellings on the entire 190 acres, though.

Unlike the U.S., Canada does not statutorily require an appraiser to estimate "as is" value or to disclose hypothetical conditions in the report, which can seriously impair the credibility of a Canadian appraisal report. That might be the reason I get sent so often to Canada.

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