Mexico's La Riviera Maya: Ruins from a post-Columbian Race

Storm clouds gather at El Cañón de los Condos, Cozumel

Many tourists are drawn to Mexico's Riviera Maya to visit ruins from a pre-Columbian civilization known as the Mayas, a civilization thought to be the most sophisticated civilization in the western hemisphere prior to the arrival of Columbus, with surprisingly advanced knowledge of astronomy, mathematics, medicine and engineering. Legendary L.A. schoolteacher Jaime Escalante referred to Mayan mastery of mathematics to instill confidence in his Mexican-American students.  

Unlike the Aztecs, the Mayan civilization reached its zenith 6 centuries before the arrival of Columbus and then fell into a mysterious decline. The reason for this decline is not yet understood, and their ruins leave us curious to know more about them.

In my valuation work in Latin America, I have encountered equally interesting ruins from a post-Columbian race of people, a people I label as desarrolladores especulativos (“speculative real estate developers”). Although always present in the indigenous population, their numbers exploded during the first decade of the 21st century, with a significant influx from North America, but this race curiously disappeared after 2008.

One builder's abandoned hommage to the Mayan ancestors, Playa del Carmen

As an appraiser-anthropologist, I have actually met and worked with these people and participated in their beer-drinking  and overeating rituals afterwards. The desarrolladores especulativos were of diverse ethnicity, with some being Latino and others being North American. The one thing they seemed to have in common is that they were all middle-aged and older males. Could this gender imbalance be a biological reason for the disappearance of this race?

No, because this race is not actually extinct, but is instead just hiding from creditors.

Still, there is little left to understand these people other than the ruins they left behind.

La Piscina para los Dioses

As the 21st century began, the desarrolladores greatly increased in numbers. Many came from English-speaking countries. Some called themselves “developers”; others called themselves “renowned developers”. Members of this latter group had sometimes produced only one successful development. (Would Trump need to describe himself as "renowned"?) Some had no actual development experience, and when asked about what other projects they had built, they responded evasively with answers such as “I’ve been in this business 20 years” (most likely in real estate sales).

"La Torre Disponible" peeks out of the jungle much like pre-Columbian ruins in San Miguel.  

Some historians speculate that the Mayan civilization fell due to an unknown cataclysmic event in about 900 A.D. Similar to this theory of Mayan destruction, the desarrolladores especulativos disappeared in an event known as el día en que murió préstamos “the day the lending died”, which can be narrowed down to some time in late 2008.

Here I am surveying an airplane wreck at la Playa del Cid La Ceiba. Could this have been a high-flying developer who found himself "underwater" in his development loans?

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Mitsui Fudosan and Shuwa Investments: Then and Now

Mitsui Building in Tokyo's Shinjuku district, Nov. 2, 2012

Some of us still remember a time, about a quarter of a century ago, when rules of valuation of office buildings were completely ignored in an ego-fueled Japanese buying binge.

The competition between Shuwa Investments Corporation and the real estate subsidiaries of Mitsui, Sumitomo and Mitsubishi in overpaying for real estate became insane. (“Mitsui Fudosan”, established in 1941, means “Mitsui Real Estate”)

For instance, the Exxon Building in New York was already listed for sale for $330 million when Mitsui came in and offered $610 million, or 85% above list price in 1986. When Mitsui representatives were later asked (after the deal closed) why they bid 85% above the list price, they said it was because Mitsui’s president wanted to be in the Guinness Book of World Records, and the previous high price for an office building had been $600 million [per Roger Simon Farrell, A Yen for Real Estate: Japanese Real Estate Investment Abroad – from Boom to Bust, 2000, Edward Elgar Publishing, Cheltenham, UK].

Not to be outdone, Shuwa Corporation acquired the Arco Plaza in downtown Los Angeles for $650 million in 1986, only to spend tens of millions more on asbestos abatement. Many of us who worked in L.A. in the late 1980s sat by our phones hoping for a call from Shuwa’s headhunter, because working for Shuwa meant being welcomed anywhere like a binge-shopping Arab sheik or Elizabeth Taylor at a jewelry store. 

By the end of the 1980s, though, Shuwa had lost its luster and even attracted local consternation in L.A. when local employees sued for being physically beaten at work. Finally, in 2002, the troubled loan from the Bank of Tokyo for all of Shuwa’s downtown L.A. office buildings was bought for $255 million.

"Yoshi-san just spent $650 million for Asbestos Plaza ! Hit him !"

[Disclaimer: Not an actual photo of employee beatings at Shuwa Corporation]









The causes

There was a perfect storm of causes that resulted in this legendary period of Japanese misinvestment:

a. The appreciation of the yen, starting in the mid-1980s. The Japanese manufacturing miracle suddenly elevated the yen to a status in which the rest of the world looked cheap.

b. Japan’s extraordinarily low cost of capital, which allowed borrowers to settle on lower returns from foreign real estate.

c. Japanese bank regulations which were favorable to real estate because real estate inflation was a fact of life at that time in Japan.

d. Rivalry for prestige among Japanese companies such as Mitsubishi, Shuwa, Mitsui and Sumitomo, which created a competitive haste to acquire trophy properties without adequate due diligence.

e. The Guinness Book of World Records.

f. The use of domestic investment criteria to evaluate overseas investments. In Japan at that time, real estate investors were being enriched by capital gains, and investors looking overseas were so convinced that capital gains would continue that they overlooked current financial performance. Japanese investors did not use DCF models or current rates of return in evaluating their foreign purchase decisions, as they assumed that capital gains would take care of everything.

Mitsui Fudosan today

As a publicly owned company, Mitsui Fudosan was forced to become run in a more sensible manner, and pursued a course as a savvy, diversified real estate developer involved in office, retail, and housing, with new initiatives in logistics facilities, solar power development and private REITs. It is not a J-REIT (Japanese REIT), but a development company focused on growth through value-added projects, and it had a good record in the last decade by increasing revenues by 21% and increasing the dividend from 14 yen per share in 2007 to 22 yen per share in 2009, where it has remained since, equivalent to a current dividend rate of 1.3%. The most recent annual report, however, indicated 4% slippage in revenues, down to 1.338 trillion yen, due mainly to the falloff in the property sales business.

One of Mitsui's most interesting recent projects has been DiverCity Tokyo Plaza, a grand mixed use project on Odaiba Island in Tokyo Bay with an office tower and 154store, "theater-oriented" retail center. Just as New York Harbor has the Statue of Liberty, Mitsui has now given Tokyo Bay a statue of Gundam, a popular Japanese anime character.

Both Jones Lang LaSalle and Cushman & Wakefield have recently published reports that Tokyo now ranks third in the world for new real estate investment, trailing only New York and London, and some of these Tokyo investments are of the "flight to safety" type that also define the New York and London markets.

Part of this "flight to safety", however, is a flight to seismic safety after last year's 9.0 earthquake, creating an interest in new, safer office structures and also causing more functional obsolescence for high-rise structures built before 1981, when seismic standards were considerably strengthened.  The above-depicted Mitsui Building in Shinjuku, for instance, was completed in 1974, although one can observe that the entire east-facing wall of the building is dominated by seismic cross-bracing.

Although the U.S. hasn't had a major destructive earthquake since 1994, there is currently a flight to building safety after Hurrican Sandy caused such unexpected destruction in New Jersey and New York. In this case, tenants are seeking buildings more resistant to wind and water damage. It is not a good time to sell a beach house.

Last year, Mitsui Fudosan had a 25th year anniversary celebration of their acquisition of the Exxon Building, now known as 1251 Avenue of the Americas, in the building lobby.

Shuwa Investments Corporation was dissolved some time during the turn of the century. Being a privately held corporation, they did not have angry shareholders to keep them in line.

Per Jones Lang LaSalle and Cushman & Wakefield, the Tokyo office vacancy rate was last measured at 8.9%, down from over 10% the year before.

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Appraisal in St. Maarten

The property was a 20-acre hillside, ocean view parcel, improved with a 10,000 square foot home. The top half was zoned for conservation only, but the bottom half had an approved subdivision plan allowing 1200 square meter (13,000 square foot) lots. There were picturesque views of a bay and yacht harbor.

The home had been built in the 1970s and still had a few, dated design features from that time period, such as mirrored ceilings and flagstone facades, but was being renovated in preparation for the winter rental season, when it typically rents for $5500 per week. It had just received a new roof, kitchen and air conditioning units.

The buyer had not disclosed that the he was also the real estate broker who had listed the combined property for sale for the last 4 years at a price of $15 million. (Nothing else in the area had sold in the last 4 years, either.) The buyer offered $5 million, and the offer was accepted. Based on a cost approach and an income approach (based on weekly vacation rental rates) plus an estimate of value for unimproved, hillside land with ocean views, I validated the $5 million offer to be at market value.

Ordinarily, a scenario like this would result in a funded loan, but the buyer hired his own local appraiser to appraise the property for $36 million, and was intent on requesting an $18 million loan. He seemed quite insistent that he should be able to buy such a property for no cash down and also be able to pull $13 million out of the deal.

Similar to my discussion in my last Costa Rican post, it seems that there are many property owners and their pet appraisers who insist that highly sloping raw land is just as valuable as flat land. It is actually less valuable because of the extra costs to develop the land, but in the end, the finished lots are worth more becbause of the views.  In the mean time, it takes a lot of money to convert hilly terrain into finished lots. In this instance, too, the local appraiser assigned the same value to the unbuildable Conservation land as to much smaller flat, buildable parcels in the neighborhood. This is what makes lending on land particularly vulnerable to fraud.

Some other lessons to be learned here are:

1. Borrower-ordered appraisals are not taken seriously by lenders.
2. Requesting a cash-out loan for 260% of the purchase price is not likely to be taken seriously, either.
3. The market for luxury residential real estate in the Caribbean is still weak, just as it is in most other tourist destinations of the world.

It never ceases to amaze me, too, when a seller or broker fails to take their listing of the property off of the Internet before representing that the property has a much higher value.

I saw the same thing last week in Santa Fe, New Mexico, with a property currently listed for sale for $6.9 million, having been listed for sale for nearly 3 years, with an application for title insurance in the amount of $4.5 million in favor of the buyer, but the only purchase document I received was an unsigned, post-dated purchase contract for a price of $8.5 million (with $4 million in seller financing). Considering that the $4 million in seller financing was the exact difference between the contract purchase price and the amount of title insurance, one can conclude that the $4 million second mortgage was a "soft second", a forgivable loan meant to inflate the purchase price and trick the lender and appraiser in believing that the $8.5 million purchase price represented market value.

Central American Real Estate Horror Stories

I received another such phone call today. Today the offending country was Panama, but sometimes it is Costa Rica. I asked, “Did you get legal representation before you purchased the land?” The answer was “I didn’t know how to find an attorney down there, so I just went with the one recommended by the seller..” I asked, “Did you get title insurance?” The answer was “No. The title company thought it was a scam.” I’m short on time today, so let me just present 3 “musts” for investing in foreign real estate:

1. Get title insurance. It has become available in many countries where it did not exist before. If the title insurer won’t insure, that is Red Flag no. 1.

Get to know this "scent" before investing in Latin American real estate














2. Get independent legal representation. This means never use an attorney recommended by the seller. That is Red Flag no. 2.

3. Keep your property secure from squatters. If you do not plan to occupy your property, make sure that someone is there to keep the squatters off. Whether it is Latin America or Africa, once they’re living there, you will have a hard time removing them. Recall my previous post linking to a YouTube video of a desperate British investor who has fought for 14 years to remove squatters from his property in Costa Rica. My advice: If you’re just buying a vacation home, buy in a gated community.

Appraisal of Beach Land in Bahia, Brasil

This assignment was to value an L-shaped beach parcel, with the wide end of the parcel situated more than 1 km from the beach. 

The subject parcel had already been approved by the local small town for a 900-lot residential development, and about 200 lots were sold before sales dried up 2 years ago.  One problem in selling lots was competition from other projects. This town, which had grand growth ambitions, had already approved 16 such projects, and the adjacent project had sold only 150 lots out of 735 before pulling the plug on development. If every approved home had been built, this small town would have expanded several times in size.

To re-energize sales, this developer was planning to reconfigure the project at a lower density and include a luxury hotel with amenities.  This new plan had not yet been submitted to the city for approval, nor had there been pre-sales activity.

Despite all the “planning approvals” dispensed by the town, there did not seem to be a concomitant plan to improve the transportation infrastructure in this area.  The approved projects consisted of vacation residences and hotel rooms, and tourists would generally be coming from the airport and large cities to the south.  However, this town can only be reached via a two-lane highway divided by an estuary that can only be crossed by ferry.  The ferry seems to run at full capacity already.  Imagine the strain on the ferry service when several thousand more people have relocated to this town.

 

   Main highway separated by ferry crossing

 

Debate about beach land valuation methods

 There is more than one way to value beach land. Some appraisers use “price per hectare” while others use “price per lineal meter of beach”.  I am in the latter camp for the following reason:

An appraiser or valuer takes raw sales data and tries to make order out of chaos.  This is often done with adjustment grids or calculation of price-per-unit indicators, such as price per hectare, price per meter, or price per room. The object of this process is to adjust comparable sales data into as narrow a range as possible so that a definitive estimate of value can be made with little room for doubt.

 In valuing beach properties, I have found that price per lineal meter of beach to be anywhere from slightly more correlated to significantly more correlated with sales prices than price per hectare.  The greater the variety of shapes, the less valid is the use of “price per hectare” as a unit of value.  This is intuitive, as a parcel with 400 meters of beach front and 100 meters of depth will be much more desirable than a parcel with just 100 meters of beach front but 400 meters of depth.

My use of “price per lineal meter” was contested by the mortgage broker, who thought that I should rely exclusively on “price per hectare”, which can be a valid technique under certain circumstances, namely that the size and shape of the parcels should be similar.  In this particular case, the subject property had only about 350 meters of beach front, while most of its lots were situated more than 1 km from the beach.  In other words, most potential residents in this project would be living far from the beach, and level terrain precluded having beach views. All of the 9 comps I found had better ratios of beach front to total area.

When I have doubts about which unit of comparison to consider, I calculate a coefficient of variation for each unit of comparison.  The "coefficient of variation" is simply the ratio of the standard deviation of the sample to the mean of the sample.  A low coefficient of variation means little variation and a narrow range of indicated values.

 In the case of price per hectare, the coefficient of variation was 1.68. Whenever the standard deviation is so much larger than the mean, you have a statistically meaningless relationship.

I then applied the same analysis to "price per lineal meter of beach". In this case, the coefficient of variation was .48, signifying a much higher correlation between price and lineal meters of beach front. When I removed the two most geographically distant parcels from my sample, the coefficient of variation fell to a remarkable .133 for price per lineal meter.

The point of this post is that differences in shape and beach frontage can cause significant variations in the value per hectare for beach properties. Value per lineal meter of beach front is the more reliable indicator of value.

 

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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Appraisals for Chinese divorce in California

    Beijing night market, September 2011

This blog has attracted inquiries from two separate California divorce attorneys who share a similar problem – what happens when Chinese couples divorce in the state of California and the marital assets must be divided 50-50, but those marital assets include residences in the People’s Republic of China?

 They need residential appraisal reports, but the reports must be in the English language and be literate enough to be submitted to a court of law.  Finding an English-literate Chinese residential appraiser is easier said than done, but to be fair, the Chinese have done a much better job learning English than Americans have done in learning Chinese. 

 When I have searched the directories of international appraisal organizations, I find the Chinese members to be sophisticated commercial real estate appraisers who appraise corporate assets, but who does one turn to for a simple condo apartment appraisal?

 China Daily News has reported that there are about 550 appraisal companies in China, but finding one is a challenge in itself.  The most recent request I received was for the valuation of 4 apartments, three in Beijing’s ChaoYang District, in central Beijing, and one in the ShanDong province halfway between Beijing and Shanghai. 

 I contacted several Beijing appraisers listed in the Appraisal Institute directory but got only one response – with a price quote of 30,000 Chinese Yuan, or about $4750, which shattered my “everything is cheaper in Chinatown” way of thinking. The sample appraisal reports from the firm also showed how appraisal jargon can get lost in translation. For instance, what we call “comparables” were instead labeled as “contemporaries”.

While pondering this issue, I was contacted by my friend Ian Ng, the chief appraiser for the Hong Kong appraisal firm of Ascent Partners, who is about to embark on a U.S. business development tour.  I have collaborated with them before on corporate asset valuations and already knew of their ability to write lucid English-language appraisal reports, and he told me that they had the ability to handle such an assignment at a fairer price. 

The divorce attorney was pleased, but he also explained that the inherently emotional nature of divorce often leads to frequent starts and stops. In the mean time, I am willing to hear from any other Beijing or Shanghai residential appraisers.

And for Chinese husbands, treat your wives well.  Remember -- they get half.

Appraisal of a 1700-acre ranch in Belize

I sometimes encounter misperceptions about the effect on land value when a property is divided into two parts. In this instance, a ranch of several thousand acres of mahogany, rosewood and cedar in Belize had been appraised for $45 million in 2006 for a wealthy landowner. Then he died, and the ranch was split between heirs into western and eastern portions. I was to appraise the eastern portion.

Per the map, the western portion was accessible via the Northern Highway leading from Belize City to Orange Walk, and the eastern portion was accessible via the Old Northern Highway, 2 miles east of the Northern Highway. The property to be appraised was the eastern portion, and the mortgage broker must have assumed that values had remained unchanged from 2006 and that eastern and western parts were similar in value.

When I arrived in Belize I was surprised to find out that the Old Northern Highway serving as the western boundary of the eastern ranch had been dismantled back in the 1970s by the UK government because it was being used by Colombian drug smugglers as a landing strip. The subject property, two miles east of the Northern Highway, could only be accessed by tractor due to brush and topography (including wetlands).

To make matters worse, most of the valuable timber had been stolen, a common problem in Belize.

In the end, the value of the property, which had been represented as a seven-figure number, was appraised as a six-figure number.

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Appraisal of a vacation club timeshare in Thailand

This blog occasionally attracts inquiries from owners of foreign vacation timeshares.  They want their foreign timeshare appraised, but the remote location of their unit makes it not cost effective for an appraiser to perform a field inspection.  In many cases a desktop appraisal can be performed, however, as timeshare units are traded in a global market and there is a rich supply of data.

“Right-to-use” vs. Deeded Interest

In this case, the timeshare unit was not a deeded unit (a real estate interest), but simply a “right-to-use” share in a “vacation club”, entitling the timeshare owner simply the right to use a studio apartment unit anywhere in the resort network for one week annually during the “low season” for a period ending in 2049 .  Because the timeshare is not location-specific, this expands the selection of comparable units, as similar “right-to-use” shares in the whole network can be used as comparables. 

On the other hand, a right-to-use timeshare is inherently less valuable than a deeded unit because it is not a real estate interest.  If a timeshare resort company fails, the deeded owners still keep their ownership interests, but a right-to-use owner loses all rights. It is similar to the difference between a condo and a co-op apartment. Although deeded ownership is the preferred method of timeshare ownership, there are some reputable vacation club companies, such as Disney, that sell “right-to-use” timeshares only.

 
When a timeshare owner has been misinformed about value

When I receive a timeshare appraisal request, I warn the client that market value is not likely to be more than half of the original purchase price (unless it was purchased in the 1970s), just in case false expectations were created by untruthful salespeople or by fake resellers practicing advance fee frauds. 

An untruthful salesperson might promise that the timeshare investment will appreciate in value as an investment, as real estate has historically been a hedge against inflation. The unit could indeed appreciate in value if one considers that only 25 to 50% of the purchase price is the actual value of the real estate; the rest is just marketing and administrative costs – the costs of roping in the sheep with free breakfasts and fake prizes.  Even more so than with a new car, depreciation in the unit’s value will be significant and almost instantaneous.  For example, I see a Hilton Head resort still selling timeshares for $23,000 while resales in the same resort are simultaneously occurring at 10 to 15% of this price.  Depreciation will only get worse with time, too, as maintenance fees increase faster than the rental value of the unit.

Fraudulent resale scams

Fraudulent timeshare resellers are in abundance nowadays; many of them appear at the top of Internet search results.  They contact timeshare owners (including me) with bogus offers above original purchase price, but a substantial advance fee must first be paid. Then they disappear with the money. There were over 5000 such complaints to the Federal Trade Commission last year alone. (The last scam letter I received required me to act before September 12th; that must mean that the boiler room will be vacated on September 13th.)  This makes my job as an appraiser harder, as clients want to hold on to their inflated beliefs about the value of their timeshares.  It is hard for anyone to accept the reality that he or she has been conned. 
 

Two such resellers have already been shut down with 14 individuals sentenced to prison. Creative Vacation Solutions and Universal Marketing Solutions were shut down after bilking 22,000 victims in the U.S. and Canada of $30 million between 2007 and 2010.  Ringleader Brian Christopher Morris of Boynton Beach, Florida was sentenced to 14 years in prison. Another such firm, Timeshare Liquidators of Boca Raton, Florida, just received 5 indictments two weeks ago for a similar scheme, and Florida law enforcement is going after others.

In this particular case, the timeshare had been purchased for about $12,700 in 2006 and a reseller was promising $20,000, but comps supported a value no more than $2000. The reseller required the seller to make a $1750 deposit.  Perhaps the mystery buyer was a Nigerian prince?

A depreciating asset

One problem with timeshares is the ever-increasing maintenance fees that eventually overtake the rental value of the unit.  If the timeshare is not in a good exchange program, the unit owners will start defaulting on their maintenance fees to the point where the resort goes bankrupt.  Maintenance expenses always increase faster than consumer price inflation because they are subject to price inflation in maintenance costs as well as the accelerating deterioration of the buildings over time.

I remember appraising one such resort in the Poconos.  All of the timeshare owners had defaulted in a resort known as Mountain Ridge, which was developed between 1982 and 1989.  A developer had assembled the units all over again and renovated them to start the “fractional ownership” process all over again.

Five years ago I inherited a 1980s vintage timeshare at Fairfield Sapphire Valley in North Carolina with monthly maintenance fees of $40. Five years later, that maintenance fee is now $80, requiring me to pay $960 per year for a unit with a rental value of about $850 for one week. That’s a compounded 15% annual increase in maintenance costs over 5 years. I’ve never actually seen the unit; I exchange it each year through Wyndham, usually for a resort in Hawaii. The only saving grace to owning this unit is to participate in the Wyndham exchange program.

Is a timeshare a good investment?

The market for timeshare resales has rapidly become a buyer's market, assuming a buyer can be found. Timeshare user web sites such as redweek.com and TUG (Tug2.net) report that FSBO (for-sale-by-owner) listings have more than doubled in the last year. Many timeshares cannot even be given away because they are not considered worth their maintenance fees over the long term. Timeshare owners are legally obligated to pay these constantly escalating maintenance fees into perpetuity.

In general, a timeshare is a depreciating asset that eventually costs more to maintain than its comparable rental value.  The timeshare concept made more sense in a day and age of high inflation; it guaranteed affordable vacations long into the future.  In today’s reality of overbuilt vacation condos and resort overcapacity, there is no compelling reason to buy a timeshare.

Next stop:  Belize

 

 

 

  

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