Another land appraisal in Costa Rica

 

Here was a property that measured 4 square miles of ocean view land, of which there are plenty in Costa Rica due to the sloping topography. It is not uncommon for properties this size to be marketed to developers, but they are not necessarily publicly marketed, making comparable properties, particularly closed saled, hard to find.

This particular property, at its closest point to the ocean, extended as close as 1000 feet to the water. As is often the case, the developers of such a parcel try to secure a beach parcel, too, often with the label “Beach Club”, to establish an identity as a beachfront property, but such a parcel is not necessarily contiguous, as was in this case, so the developer of an ocean resort property with a noncontiguous beach club has the added difficulty of purchasing a connecting easement or parcel, or else have the added burden of transporting hotel guests to the beach. In this case, the distance was slight. In Costa Rica, the best beach parcels (closest to the water) are on leasehold parcels on "concession land" which is owned by the municipality and typically leased at favorable rates. This "concession land" is the land belt immediately inland from the undeveloped "Maritime Zone" preserved as public beaches. 

Comparable sales ranged from $12,200 per hectare to $19,500 per hectare (indicating a significant discount for extra large size), and could be adjusted for distance from beach, with the cheapest parcel being no closer than 2 kilometers to the water, but still possessing ocean views.

A Recent Appraisal in Costa Rica's Zona Maritima

Most of the real estate in Costa Rica consists of "freehold" or "fee simple" interests in real property, or in other words, properties with titles, estimated to cover about 85% of the country.

The remaining 15% is leasehold land known as “concession properties”. Concession properties are considered desirable because they are at the beachfront, where titled land is not available.

All Costa Rican beach properties are located in what is known as the Maritime Zone, a 200 meter strip starting from the average ocean high tide line. The ZMT (Zona Maritima) is divided into a 50 meter strip closest to the shore known as the public zone, which cannot be privately occupied, and the remaining 150 meters can be applied for “concession” in the corresponding Municipality. 

Think of “concession land” as a “concession stand” at a ball park or a fair. All Concession land is leasehold land, with lease payments going to the municipality; it cannot be privately owned, but real estate developers and wealthy homeowners can lease and develop these properties profitably.

The subject property was zoned as a “Hotel and Touristic Zone”, which is a valuable zoning classification to have, and the owners wanted to develop it with a hotel, but the key to maximizing the value of the land is to have an already-approved hotel development plan in place, as it can take years to get a hotel project approved. Otherwise the concession is only worth half as much

PS: Next stop, Greece, or maybe not so, with the Greek nation on Coronavirus lockdown. Non-EU citizens are not allowed to visit until after April 18 and I could not negotiate a later appraisal deadline.

Another appraisal in Puntarenas, Costa Rica

The subject property was unimproved, mountainous, ocean view land of about 160 acres, located on the Nicoya Peninsula. It has no utilities, paved road access or development entitlements.

A decade ago, ocean view land parcels were trading at much higher prices because of their value to real estate developers, as each had dreams of building luxury vacation or retirement communities for wealthy foreigners. This same situation prevailed throughout Mexico and the Caribbean, too.

The only problem with this vision is that Costa Rica, owing to its topography and coastlines, has tens of thousands of square miles of land with ocean views, and there aren’t enough homebuyers to take up all the possible lots, particularly when having to compete with many other tropical paradise nations. Partially completed subdivisions ended up competing with other partially completed subdivisions when the market went into decline in 2007, and other projects never moved forward due to the difficulty in receiving all the necessary permits.

The land development approval process can take years in Costa Rica, much like in California, and typically entails:

1. Approval by the “municipality” (similar to a U.S. county),

2. Approval by the national environmental agency, SETENA (Secretaria Tecnica Nacional Ambiental),

3. Approval of all architectural and engineering design by the Department of Professional Responsibility of the CFIA (Colegio Federado de Ingenieros y de Arquitectos) [Translated: the Federal College of Engineers and Architects], and

4. Approval from the Ministry of Health

Last time I was in Puntarenas, in 2012, it seemed that every ocean view parcel of land was for sale and nothing was selling. Little has changed since then, except that asking prices are slightly lower now. Many landowners can’t reduce their prices any more and pay back the debt they’ve taken on. A broker was able to supply one closed sale occurring at a price at only one third of the asking prices of nearby parcels, but no large development parcels have been acquired since 2007.

There are enough land parcels with development entitlements or paved road access or utilities that unimproved land like the subject has little chance in competing for buyers, except at highly discounted prices.

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.

Updated Guide to The International Appraiser’s Most Popular Posts

The two posts still drawing in the most readers, the post about the failed New South China Mall and the post about the mass marketing of Costa Rican teak farms to international investors, are two years old now.

The New South China Mall seems to be a source of endless fascination for journalists all over the world, having opened as the world’s largest mall in 2005 and going bankrupt soon afterward. I posted about my visit to the mall and my assessment of the reasons for the mall’s failure in May 2011. (http://www.internationalappraiser.com/2011/05/new-south-china-mall-worlds-largest.html)

I published “Costa Rican Teak Farms for Gringo Investors” (http://www.internationalappraiser.com/2011/08/costa-rican-teak-farms-for-gringo.html) in August 2011, and received more e-mails about this post than any other one, discovering that thousands of American, Canadian and British Investors had already invested in such teak farms or were considering investing. My post focused on the misinformation and deceptive marketing used to sell such farms and the perils of real estate and/or development done to satisfy investor demand rather than consumer demand.

The third most read post is one of the first posts from 2010, “Appraisal in Costa Rica” (http://www.internationalappraiser.com/2010/03/appraisal-in-costa-rica.html), which examined the feasibility of a tourist medical hospital project in a remote coastal area without paved roads.

The fourth most read post, about La Riviera Maya (http://www.internationalappraiser.com/2012/11/la-riviera-maya-ruins-from-post.html), was a farcical post on the modern ruins left by speculative real estate developers in this area of ancient Mayan ruins.

The fifth most read post has been the recent post on Ronan McMahon, International Living, and Real Estate Trend Alerts (http://www.internationalappraiser.com/2013/02/ronan-mcmahons-real-estate-trend-alert.html). I subscribed to both publications and found the investment advice (as opposed to travel, relocation, or retirement advice) offered by this publisher to be of questionable value, particularly the continued promotion of raw land parcels in failing subdivisions. Most of the recommended investments or brokers appeared to have already been repeatedly advertised in International Living.

I apologize to readers for rehashing old posts because of a lack of new international work in the last few weeks. I have recently bid on appraising an affordable housing project in Santo Domingo, Dominican Republic and a tourist development in Scotland, so I hope to have something interesting to report soon.

Costa Rican Teak Farms for Gringo Investors

I’ve been preparing for an upcoming tree farm appraisal assignment in Costa Rica, but learned late that what was thought to be a teak farm is actually a tree farm with lesser tree species. Nevertheless, something should be said about the teak farm market in Costa Rica.

In the late 1980s Costa Rican President Oscar Arias declared a state of emergency concerning the depletion of the nation’s forests, much of which had been felled for timber harvesting or cattle ranching. Generous tax exemptions were put in place to encourage commercial reforestation projects. Capitalism quickly and enthusiastically addressed the problem, and some of those who observed the flow of international capital into Costa Rican forestry investments figured out that perhaps there was more money to be made by selling forestry investments than in actually growing, harvesting and processing the trees.

As with any market for investment properties, distortions are created when properties are developed in response to investor demand rather than consumer demand. For instance, great surpluses of “rental homes” were developed in Arizona, Las Vegas and Kissimmee, Florida, not in response to a shortage of housing in those areas, but to sell to out-of-state investors. Costa Rican tree farms are now repeating the same concept all over again.

Teak became the preferred tree farm crop because of its high value. There were no restrictions on the creation of new supply in Costa Rica, so many entrepreneurs got into the teak plantation business and European “investment funds” (syndications) were organized to develop teak plantations for small investors, charging high mark-ups. Many teak plantations were subdivided into smaller parcels for purchase by small, absentee investors in North America and Europe.

Misleading data crowding out objective data

The Costa Rican timber market is fragmented and lacking in price information, which has led to the crowding out of objective information by hyperbole crafted by investment promoters, many of who claim historical investment returns in the timber industry of greater than 13% per year. This is not based on Costa Rican data, however.

The most recent price survey among the Costa Rican members of OLAT (the Latin American Teak Organization) indicates prices between $120 and $595 per cubic meter for standing teak trees, depending upon diameter, but prices appear to have decreased since February of this year. For instance, standing teak trees of 50 to 59 centimeters in diameter were priced at an average of $220 per cubic meter then but are now priced at $175 per cubic meter, a drop of 20% in the last six months. Mature trees above 30 years in age have much greater value per cubic meter than immature (“short rotation”) trees, as they can be more efficiently processed into large pieces of sawn wood.

Investment promoters, however, are misleading investors with pro forma cash flow projections based on price increases of 5 to 10% per year, despite the increasing supply of Costa Rican teak, and unrealistically shortened maturity times of 20 to 25 years. OLAT’s data is based on reported prices for mature 30-to-50-year-old trees (the older, the more valuable) and describes 20 to 25-year old plantations as “young plantations” for which there is insufficient market price data, and also commenting that “Latin America will supply an important part of the teak market, but is not properly geared to marketing short rotation material. This will change in the coming years, with the knowledge that producers are not getting the best price, the market being controlled by buyers.” In Asia, teak trees are often not harvested until 60 years.

As for the balance between teak supply and demand in Costa Rica, OLAT states “With all the money that was invested by forestry funds over the years in Latin America many plantations were enthusiastically created and the know-how has been improving steadily. Lacking, to some extent, are the sales aspects of plantation products.”

Investment Promoters and Scam Artists

Some investment promoters are not even selling land to investors, just the trees themselves. It is important to know that titled ownership in Costa Rica extends to real estate only; there are no tree titles, and the idea of tree titles in a nation with so many more trees than people would be an administrative nightmare, even if it was tried.  How does one prove ownership of trees that are situated on someone else’s land? Any contract in English is not valid or enforceable in Costa Rican courts, either.

Many investors claim to be victims of scams in which plantation owners sell tree ownership and then charge a fee to manage the tree investment; Tropical American Tree Farms seems to have attracted the most complaints. Most of the alleged fraudsters are gringos themselves, including Eric Heckler, who was a fugitive from mortgage fraud charges in Florida when found selling Costa Rican teak trees that weren't his before being extradited back to the U.S. in 2009.

In the numerous listings of teak plantations for sale in Costa Rica, a sizeable discount per tree is apparent for the larger plantations, indicating an insufficient demand for the quantities of teak they are producing, with prices as low as $167 per standing tree for 20-year-old trees, which translates to about $244 per cubic meter (based on an average of 0.8639 cubic meters per 20-year-old teak tree), or 58 cents per board-foot, quite a bit lower than even the OLAT-published prices.

Next stop: Tepotzotlan, Mexico

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Title Problems and “Lack of Transparency” in Latin American real estate

Ejido de Llano Largo, Acapulco

One reader commented to me about the lack of real estate market transparency in the Dominican Republic and particularly warned me about title problems. He referred me to his web site www.DominicanWatchdog.org which contains the following warnings about title issues:

"1. Before signing any contracts or paying any money you must use a trusted lawyer to make a "deep" local title search. It's not enough to check if the title is "Clean", the ownership history must also be investigated as there has been and still is a lot of fraud with titles in the Dominican Republic.


2. If you are buying land you must use an independent surveyor to re-measure the land and confirm the position (the lawyers know which one to use in the area). Do NOT buy any land with squatters on it and make sure that no squatters are moving into your land as it's impossible to remove them later on."

The US Department of State has issued its own warning about the DR:

"Real estate investments in the Dominican Republic require a high level of caution, as property rights are irregularly enforced and investors often encounter problems in receiving clear title to land. Consultation with an attorney is recommended before signing documents or closing on any real estate transactions. Real estate investments by U.S. citizens have been the subject of both legal and physical takeover attempts. Absentee landlords and absentee owners of undeveloped land are particularly vulnerable. Investors should seek solid property title and not just a “carta de constancia,” which is often confused by foreigners with a title. An official land registry measurement (also known as 'deslinde' or 'mensura catastral') is also desirable for the cautious overseas investor. Investors should also consider purchasing title insurance. Squatters, sometimes supported by governmental or non-governmental organizations, have invaded properties belonging to U.S. citizens, threatening violence and blocking the owners from entering their property."

Market transparency

A transparent market is a market where relevant information is fully and freely available to the public. Jones Lang LaSalle, a major international brokerage (and former employer), published a Global Real Estate Transparency Index 2010 ranking countries according to the transparency of their real estate markets. Canada (no. 2) and the United States (no. 6, impaired by numerous “nondisclosure states”) ranked high in transparency and led the western hemisphere, while the Dominican Republic ranked 77th out of 81 countries and ranked last in the western hemisphere. (This list is not necessarily comprehensive; I once had to turn down a valuation assignment in Liberia, Africa, which is not ranked and seems to suffer from title anarchy.)

Squatters and "land reform"

In countries like Peru and Brazil there are vast shantytowns (AKA “pueblos jovenes” in Peru and “favelas” in Brazil) that are illegally erected on private land and extraction of squatters can also be legally difficult, as it is in the Dominican Republic and Mexico. The DR has also recently had a problem with an influx of Haitian refugee squatters after the earthquake in 2010. As Latin America has finally shaken off fascist governments, the new reality is that democratically elected governments are often more sympathetic to squatters and their alleged rights.

The government of Mexico, in carrying out land reform after the Mexican Revolution, re-instituted an Aztec agrarian communal system of ownership called the “ejido” in which campesinos share ownership of a large tract of land, land which is usually expropriated from the previous owner. A resident of an ejido is known as an ejidatario. Ejido parcels in Mexico cannot be sold, mortgaged or rented. The Mexican Constitution of 1917 promised to restore ejidos, and the expropriation of land for ejidos began in 1934 and continued until 1991, when President Carlos Salinas abolished the practice in order to ratify NAFTA, as American companies did not want to build plants on land that could conceivably be expropriated.

Llano Largo, Acapulco

As an example of the title issues inherent in the ejido system, I once appraised a parcel of land within the city of Acapulco, a few hundred meters north of the Boulevard de las Naciones which bounds the prestigious Zona Diamante section of town. The evening before I was to meet the landowner, I hired three Mexican real estate agents, including one appraiser, to accompany me to the property and share their opinions. While present on site, we were soon approached by several peasants from a neighboring shantytown. They politely asked what our interest in the land was and then claimed that the land belonged to them as part of an “ejido” granted to them. That introduced the possibility of a title problem. What was further perplexing was that the government had placed a sign on the property declaring it to be a “Reserva Ecologica” (ecological preserve).

The next morning the landowner/loan applicant drove me to a parking lot on the Boulevard de las Naciones and then pointed to his property across a grassy field. “Why can’t we go to it?” I asked. He reluctantly drove me to the western edge of the property, the only accessible edge, and when we disembarked, we were immediately approached by ejidatarios. Instead of talking to them, the landowner immediately summoned me back into his truck and we drove off. He called the ejidatarios “squatters who will be removed soon.”

The landowner further damaged his credibility when he presented me with an “Uso de Suelo” (a document certifying the permitted land use) for another parcel instead, a parcel described as being right on the Boulevard de las Naciones.

The need to use attorneys and title insurers

It is essential to use an honest, local attorney that has been carefully vetted. Several years ago, for instance, a Venezuelan friend of mine sold his business in Houston in order to retire in Costa Rica. He selected a house/restaurant on a cliff and was guided through his purchase by a local Costa Rican attorney. Unfortunately, he did not buy title insurance and the attorney he hired was in league with the swindler who claimed to own the property. My friend lost his life savings and ended up having to sleep on other people’s couches.

Two American title companies, Stewart Title and First American, now offer title insurance in Latin America. Be sure to specifically ask for coverage against squatters, too, or you may face years of litigation in a foreign land.

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