The Issue of Client Pressure on Valuation Results in International Appraisals

Costa Rican subdivision overlooking the Gulf of Nicoya

It has been almost 3 months now since I’ve done a foreign appraisal assignment, and there are a couple of reasons for this.

1. I’ve had a large increase in business in appraisals of domestic “solar farms” (photovoltaic energy generation) in the U.S. Southwest, and

2. Foreign appraisal assignments have been offered to me with “conditions” that would compromise the ethical code most appraisers follow, conditions which would require me to deceive lenders or the U.S. Internal Revenue Service.

Here are some situations:

1. An owner of a high-end condo on Grand Cayman Island was fishing for an appraiser who could guarantee that his condo was worth $2 million in every year that he has owned it since 2006. But the Caymans have had the same rise and fall as every other Caribbean condo market, and it would not seem reasonable to anyone, including the Internal Revenue Service, that it had been worth the same amount in every year since 2006. The fact that he did an e-mail broadcast of these appraisal conditions to other appraisers could also end up getting him into trouble with the IRS, who provides rewards to whistleblowers.

2. Developers of ocean view residential subdivisions in Brazil and Costa Rica wanted to me to provide current market value opinions on their subdivisions without having me visit their properties. Yes, I was already familiar with their subdivisions, but a determination of current market value requires me to know current market conditions in these respective localities, requiring that I visit and analyze competing subdivisions, too.

“Desktop appraisals” (appraisals done without a property inspection) have limited reliability for overseas properties and are not likely be taken seriously by lenders, either. I also need to see if amenities, such as the guardhouse, pools, recreational areas are operational and that infrastructural development is continuing.

Ecuador Revisited

The property north of Quito, near 10,000 feet above sea level



My previous Ecuadorian land appraisal reports [see July] were not favorably received by the loan applicant when I valued the two properties as the marginal agricultural land that they were. Besides, this loan applicant had not even received solar farm licenses yet nor had purchased the parcels or presented purchase contracts. The rebuttal was that Ecuadorian land was much more valuable than California solar farm land that I was used to appraising, a concept that sounds somewhat silly since I receive International Living and Pathfinder Alert e-mails every week declaring Ecuador to be the ultimate real estate bargain.

The farm in Guayas. The unique trees are called "ceibos".

The developer pointed out the massive profits to be made in solar farming – so profitable, in fact, that the location or choice of land did not matter to him.  This rebuttal proved counterproductive to his wishes, as my client is a collateral lender who was being offered only the land as collateral for their loans.  There were no solar farm improvements on these parcels, nor were there solar farm licenses. 
 
If 99% of the value of a solar farm is in the improvements, then very little of value was being pledged as collateral for the loans, leaving the loan almost unsecured prior to the receipt of solar development licenses and their subsequent development.  This is not a desirable position for a lender to be in, and is particularly unacceptable to a collateral lender.

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Appraisal of proposed solar farms in Ecuador

      Corn farm at almost 10,000 feet above sea level

In my native land of southern California, it is becoming common to turn marginal agricultural land into photovoltaic solar farms, particularly in Kern County, the Mojave Desert and Imperial County.  Some parcels have a unique advantage if they are located near a power grid substation, near a major city (Los Angeles or Las Vegas), and have enough water available for keeping dust off of the machinery (about one acre-foot of water per 20 megawatts of production. One acre-foot is equivalent to the water needs of about 4 households.)

Many landowners in these areas, most of whom are absentee, hope to get phone calls from solar farm builders who want to lease or buy their land.

Other countries have “Green initiatives”, too, and such initiatives give hope to owners of marginal agricultural land in Ecuador.

The farms I appraised were at opposite ends of Ecuador.   One was located about 20 km north of Quito, Ecuador’s second largest city, at an elevation of almost 10,000 feet above sea level, and one was located in the low-lying Guayas province about 50 km west of Guayaquil, Ecuador’s largest city.

        High voltage transmission lines on subject property

Both farms had high voltage electrical transmission towers on their properties, but only the Quito property was near a power grid substation, 2 km away in Pomasqui, which provides power to the entire northern half of the Quito metro area, having a total population of 1.5 million residents. This solar farm operator planned to supply power directly to the high voltage lines on his properties, which can be done in Ecuador because the power grid has single government ownership in Ecuador vs. the multiple private ownerships that sometimes govern power lines in parts of the United States.

This being the case, that anyone with a high voltage transmission tower on his property in Ecuador could supply electricity to the Grid, greatly increases the supply of available sites and provides little or no financial advantage to the landowner compared to his neighbors.  Neighboring farms with power lines near the Guayas property were selling in the range of $900 to $2000 per hectare.  Not a lot of value there. 

The property near Pomasqui was very difficult to appraise due to its unique flaws -- steep slopes and lack of accessibility; solar farms are not considered viable on slopes exceeding 10%. The escritura (deed) indicated that the property had been purchased for 1,680,000 sucres in 1997.  That sounds impressive until one learns that the Ecuadorian sucre was replaced by the dollar in 2001 at an exchange rate of 25,000 sucres per dollar, making the purchase price effectively worth about $67. Then again, it is common in Latin America to record false purchase prices in order to minimize transfer taxes.

To make matters worse, the borrower did not even own the land serving as collateral for the loans. Never was a purchase mentioned, either.  There was a misunderstanding of the concept of "loan collateral". A collateral lender expects the loan proceeds to go towards immediate purchase of the land; otherwise, what else is there to provide security for the loan?

Another complication for this assignment was that the client, a private lender, ordered an “as is” appraisal, and the borrower did not even have licenses yet for the solar farms. So the properties had to be appraised as agricultural land, which was a big disappointment to the borrowers.

In any case, there is not yet an established “market” for solar farms in Ecuador, making valuation a very difficult process, and even if there was one, 99% of the value is in the improvements and little value is in the land. 

PS: I have received several inquiries asking who is financing construction of solar photovoltaic cell farms, but the only financiers that I am aware of can only lend upon substantial existing assets. Any solar photovoltaic construction lenders are welcome to introduce themselves in the comments that follow.

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