Appraisal of Coastal Land on a Pacific Island

Notice the proximity of the cliffs and the calm, reef-protected waters. 

Some of my appraisal assignments call for “second opinions”. This one called for a third opinion, as appraisal reports had been respectively submitted by two MAIs who resided on the island. The estimates of value were more than $50 million apart. Who was right? Who was wrong? 

A survey measuring more than 250 acres had been done 8 years previously after an assemblage of smaller lots had been rezoned to hotel use. This survey was officially accepted by the local government, but the survey had a strangely unprofessional appearance. The survey was two-dimensional except for a central portion of the site which was described as “cliff face area” and drawn 3-dimensionally, including ravines within the cliffs, and this area was given a significant amount of site area, 63.5 acres, even though the cliffs appeared to be almost vertical. Had “vertical” become the “new horizontal” on this quaint island? Upland area had been measured at 110 acres and beachfront area had been measured as 105 acres.

Survey  

These cliffs are mislocated on the survey

Google Earth now gives us tools in measuring land, and the differences between the satellite view and the survey were quite apparent. The survey showed the cliffs by the shore at only the northernmost part of the property, whereas they seemed to be touching the shore in 3 different places from south to north in the satellite photo. 

Measuring all site area below 50 feet in elevation, I found only 36 acres of beach land, not 105 acres. 

Surveys of tropical beaches often have to be redone every few years due to beach erosion or accretion as a result of tropical storms, and this island experiences plenty of storms, but the loss of 70 acres of beach land seemed to be too much to be believable for a coral reef-protected beach like this one. 

I had to conclude that the survey was inaccurate to begin with, due to its strange measuring conventions, seemed almost to exaggerate this site's beach land and overall site area. 

In addition, as I have constantly maintained on this blog, the most accurate technique for valuing beach land is the use of “price per lineal meter” or “price per lineal foot” as the unit of comparison. The use of price per square foot or price per square meter yields less precise results, as the value on the beach side of the property is so much more than the value of inland area. Every statistical analysis I have done indicates that price per lineal measure provides the least variance among possible beach land valuation results. 

Nevertheless, the appraisers were both using price per square meter as their metric. I asked one why, and the response was that there was no public data on beachfront or waterfront length on this island, so price per square meter is what they felt that they were limited to.

For certain comparable sales and listings, though, there were satellite photos, some of which were sufficient to make estimates of the beach length. Some times using the right metric requires some extra effort.  The comps for raw beach land were in a range of $1650 to $2500 per lineal foot of beachfront.

That's enough of today's lesson, but I want to discuss the politics I sometimes have to contend with on foreign assignments such as this. The politics typically comes from loan salesmen and/or jealous, mediocre appraisers.

1. "These are the acknowledged appraisal experts for this island! They are MAIs! How dare you challenge their expertise in their own land. You are geographically incompetent!"

First of all, these grand poobahs did not even agree on value. One estimate was almost three times as high as the other one.  They did not even measure the length of the beach, the most important part of the property. They used outdated sales from prior to the pandemic, and did not notice beach property listings at much lower prices than yesterday's sales. I have always wondered why The Appraisal of Real Estate, the most comprehensive real estate appraisal textbook in the U.S today, spends less than one paragraph explaining how listings can be used to estimate market value in declining markets.

I have had no prior experience with this island, but I have spent the last 15 years appraising beach properties in Fiji, Hawaii, Brazil, Barbados, Puerto Rico, the Dominican Republic, Costa Rica, Mexico, U.S. and Canada.  So that is my statement of geographic competency.

Waterfront Land Appraisal in Puerto Rico

This was a 1000+acre combination of fee simple (freehold) and leasehold interests in land around a scenic bay in Puerto Rico, and the lease agreement also had an option to purchase. A developer was acquiring these interests for an already approved project to build hotels, villas, and a cruise ship port. This mixture of interests meant that I had three tasks to do:

1. Determine the market value of the fee simple parcel, whose purchase price had been set in year 2000,
2. Determine the market rental rate for the remaining parcels and compare to the contractual rental rate to determine if there is a positive leasehold value, and
3. Determine if the option price was above or below market value in order to determine if the option had any value.

In my background check on the borrower, I found that he had pled guilty a year ago to a criminal charge of mortgage fraud and was also being sued by the FDIC. This became troubling to me as he required a quick closing on the loan and was using an unknown escrow company, yet had no signed, valid contracts as of my visit or several days afterward. What was also suspicious was that the price kept on changing with each new contract version he sent, all of which were in MSWord and easily alterable.

The ground lease was to another unaffiliated LLC who was supposedly going to assign its interest to the borrower after the lease was signed, but despite my requests, I never received a document of this assignment of leasehold interest. Moreover, the lease had a clause which rendered it null and void if anyone in the tenant’s company had had a criminal conviction.

The fee simple parcel had an abandoned sugar mill, and there was no environmental report to inform me about possible contaminants. Common sugar mill contaminants include bagasse (from boiler fuel), pesticides from the sugar liquid and residue, and metal oxides from the rotting of the structures. This site had an estimated 50,000 tons of scrap metal, much of it rusting, placing iron and zinc oxides into the soil.

The bay’s water was as turbid as New York Harbor and unlike the clear blue water one would normally expect in the Caribbean. The problem was agricultural runoff from the farms upstream, making the bay very silty, compounded by incoming wave action from the Caribbean Sea. The waterfront of the fee simple site, moreover, consisted mainly of bulkhead and mangroves, making it unsuitable for a beach. Beaches are one of the principal attractions of Caribbean resorts.

Moreover, the bay’s maximum depth was only 29 feet, whereas most cruise ships have drafts (distance from waterline to bottom of keel) of more than 25 feet and need another 6 feet of depth for clearance. The bay would have to be dredged first and periodically thereafter until the continuing river silt deposits were under control.

Sales of large parcels of entitled land had not occurred in several years in this part of Puerto Rico, but a look at listings of property for sale indicated asking prices below the sales prices of several years ago. An adjacent, waterview parcel entitled for 100 hotel rooms and 50 villas is listed for sale at just $35,000 per acre or $10,000 per UBV (“unidad basica de vivienda” or “unidad de vivienda basica”, meaning “basic housing unit”, a unit of measure uniquely created by the Reglamento de Zonificacion de Puerto Rico, the zoning regulation for Puerto Rico). One UBV is equivalent to a 3-bedroom dwelling. A 2-bedroom dwelling counts for .8 UBV. A one-bedroom dwelling counts for .6 UBV, and a hotel room counts for .4 UBV.)

The purchase option was based on a price close to $100,000 per UBV, ten times as high as the neighboring property, so the purchase option was considered to have no value.

Because the ground rent was in steps leading up to a stabilized rent equivalent to 8% of the purchase option price, and no ground leases were found as high as 8% of value, the leasehold interest itself was also considered to have no value.

The only parcel that was considered to have value was the fee simple brownfield parcel, so there was insufficient collateral to support the large development loan requested by the borrower. Furthermore, he never showed the ratified, valid contracts that would show that he was really closing these transactions (with my client's funds) on the day he specified, with his chosen escrow company. (I always advise my clients to use nationally known escrow companies.) I suspected a scam.

The effect of mangroves on the valuation of tropical waterfront land

Mangrove-fouled beach near San Pedro de Macoris, Dominican Republic








Many of my appraisal assignments involve tropical waterfront land with plans for tourism-related development. One common impediment to the development of many of these land parcels has been the presence of “mangroves”, also known as "mangle" and "manglar" in Latin America.

Those readers who have driven from Miami to Key West in Florida will have driven past miles of mangroves along Highway 1. These are protected by law. I have also encountered such laws when appraising in Mexico, Costa Rica, Fiji, Brazil and the Dominican Republic.

The word “mangrove” has more than one connotation, however. There is a specific family of plants, Rhizophoraceae, known as mangroves, but many environmental laws apply more generally to coastal marine habitats in which Rhizophoraceae may be present.

Mangroves are legally protected not because they are endangered, but because they serve as important marine wildlife habitats. They are found in 118 countries, mostly between the latitudes of 25 degrees north and 25 degrees south, and are estimated to dominate 75% of the coastlines in the tropical latitudes, as is demonstrated in the Wikipedia map below:

Source: Wikipedia

Mangroves impair the value of beachfront parcels in two ways:

1. In most countries they are protected by law and cannot be removed.

2. Mangroves create dark, organic sediment that fouls beaches.

The issue of mangrove removal is also problematic. First of all, it is illegal in many countries, and can be easily caught by satellite photography. Secondly, mangrove sediments are known to concentrate toxic metals, and the disturbance of these sediments pollutes the surrounding environment.

The issue of mangroves has come up in an APR (American Property Research)appraisal assignment in the Dominican Republic. The top photo demonstrates what I saw. Most of the subject property’s waterfront is dominated by dense vegetation that grows straight up to the waterline. The beachfront in the foreground appears to be fouled by dark sediments typically released by mangroves. This is not the pretty beach scene that typically serves as the foreground of a Four Seasons Resort.

Some clients have a policy of hiring a “national firm” for their appraisals, most often the appraisal subsidiary of a global real estate brokerage, in order to lessen the amount of thought going into the appraiser selection process. There is often a division of labor and responsibility, with one appraiser inspecting the property and another writing the report, which only exacerbates miscommunication and abdication of personal responsibility. The least experienced appraiser often does the lion's share of the work. (I began my career as an appraiser in one such global firm, Jones Lang Wootton.)

In this particular case in the Dominican Republic, there were two other appraisals of the same property done by national firms.

In one appraisal report, all the photos were of the wrong property, and all were taken by air. The property was described as hilly and having utilities, unlike the property I visited. I surmise that the property developer rented a helicopter and took the appraiser to the wrong property on purpose.

The other appraisal report was originally done for the developer and disclosed a long established relationship with the developer, a possible conflict of interest with the lender who re-hired them as appraisers.

Neither report disclosed the presence of mangroves, which leaves me wondering if most appraisers, particularly American appraisers, even know to look for it or consider its significance in the valuation of waterfront land.

Mangrove-fouled beach in Fiji

Mangrove-fouled beach in Costa Rica

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