Appraising Vacation Home Subdivisions

New subdivision near San Pedro de Macaris, Dominican Republic

 

If you have read my previous posts, one common observation is that there continues to be a worldwide oversupply of uncompleted vacation home subdivisions, condo projects and proposed subdivisions whose developers continually search for lot buyers and financing. I get to visit some of them for my lender clients.

I sometimes fly thousands of miles to see a project, only to find a mangrove swamp, jungle forest, steep hillside or a sugar plantation.

Sometimes the developer has obtained development approvals, sometimes not. The development approvals can be valuable in areas of land scarcity, but more often I am driven into a wilderness with pretty views but awkward access and a lack of local services.

It is useful to remember that market value depends upon what can be sold, not necessarily what can be developed.

I also see the same developments marketed to consumers with unrealistic photos of bikini babes in infinity pools, colorful tropical birds, the smiling faces of the grateful local natives, and cocktails at the beach.

Sometimes appraisers and valuers are confronted with the task of evaluating pre-sales contracts for lots. Should these prices be considered as market value?

Here are some things to consider in analyzing the sales:

1. What percentage of lots are currently sold or pre-sold? If the subdivision contains 900 lots, but only 20 are sold, this would represent an oversupply situation in which lot prices would have to be discounted.

2. Where are the buyers coming from? If the developer is from Omaha and the buyers are, too, this is cause for suspicion. These might not be real buyers and real sales. Another cause for suspicion is if the buyers are LLCs (limited liability corporations).

3. Read the sales contracts. Is the transfer of ownership conditional upon improvements completed by the developer? How much cash down payment is required? In some cases it might be only 5%, but if buyers perceive that their property has decreased by more than 5%, they might default on their payments.

4. What has happened on the lots that have been sold? Have they been developed or are there For Sale signs on them?

5. Are there lots already listed for sale in the secondary market? Check brokers and ads.

6. What infrastructure (roads, utilities, promised amenities) has been completed?

The preferred method of valuing a subdivision is a discounted cash flow analysis commonly called “The Subdivision Method”, in which all revenues and expenses are forecasted over time and discounted at a market rate of return. Witnessing very low rates of absorption of lots, however, I presently discourage this method for most vacation home subdivisions.

Whenever possible, I look for actual sales of incomplete subdivisions. These can be very hard to find, however. If such properties are listed for sale, though, that is a good place to start before applying appropriate market-based adjustments.

How Can Aggrieved Chinese EB-5 Investors Get Their Money Back?

 

 

Vine Street property in Cincinnati

According to Baidu Baike (a Chinese on-line encyclopedia), there were 5539 Chinese EB-5 investor lawsuits filed in U.S. courts just within the 18 months between February 2014 and August 2015, or more than 300 investor lawsuits per month. That’s a large number considering that only 10,000 EB-5 visas are allocated per year. 

In most cases, the Chinese investors are suing their own regional centers for fraud, embezzlement or mismanagement. Regional centers pool investors’ funds to develop real estate projects in most cases. Some were suing US Citizenship and Immigration Services for denial of their permanent visa applications, but with each denial, it was the regional center that failed to perform up to job creation expectations, which mainly require that each investor prove that he or she created at least 10 permanent jobs lasting up to 2 years.

For those investors who want their money back, navigating the U.S. Justice System can be tricky, as evidenced this week in a U.S. District Court for the Southern District of Ohio in the matter of Hu et al v. Chan et al.

Ten Chinese investors contributed $545,000 each to the Midwest EB-5 Regional Center based on false statements allegedly made by some defendants in the Private Placement Memorandum as well as in presentations made by some defendants in China. The job creation project was to renovate retail buildings on Vine Street in Cincinnati, Ohio in order to create a “restaurant row” consisting of 9 restaurants. Renovations started but never finished, and all of the Chinese investors’ money disappeared. The false statements in the PPM were that investors’ funds were guaranteed by the Ohio state government, that investors’ funds would be kept in escrow accounts and only released upon USCIS approval of an I-526 (conditional green card) for the investor, and that investors’ funds would be supplemented by bank loans and tax credit financing, none of which were true.

The lawsuit was dismissed “with prejudice” (preventing other suits on the matter) on August 16th by U.S. District Judge Sandra Beckwith on the grounds that the fraud claim lacked “sufficient particularity” as required by Rule 9(b) of the Federal Rules of Civil Procedure, stating “The complaint does not identify with any specificity the time, place, or identity of the speaker of the alleged false and misleading statements." This was a surprising ruling to me, given the falsehoods contained in the Private Placement Memorandum, which would seem to be prima facie proof of false and misleading statements, plus the fact that the investors lost all of their money and did not get green cards. The USCIS even terminated this regional center in February 2015 due to failure to create jobs and misuse of investor funds.

Rule 9(b) is as follows:

(b) FRAUD OR MISTAKE; CONDITIONS OF MIND. In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.

I should disclose that I am not an attorney and do not provide legal advice. I report this case as a cautionary tale to aggrieved foreign investors. One recommendation that comes to mind is to hire an experienced securities attorney who already knows these rules of procedure.

There has been a growing trend among attorneys to “just sue everyone”, but perhaps there is a lesson to be learned here, which is to document who said what, when, how and where so that guilt can properly be placed on the appropriate defendant without the complaint being dismissed.

The plaintiffs are still allowed to file suit in Ohio state courts, as this was a Federal court decision.

A reader may ask, “Who cares about Chinese millionaires?” Stereotypes abound of “princelings” and relatives of government officials who get sweetheart government contracts.

In the first three of my 5 trips to China, I brought a neighbor, a Chinese immigrant, to interpret for me. When I finally asked him how so many Chinese people became millionaires, his answer was disarmingly prosaic – “By investing in real estate”. Many who bought condos in Beijing and Shanghai 15 years ago are now millionaires on paper, but not necessarily in cash. The same can be said for most California millionaires. His mother, a seamstress in Shanghai, had also become wealthy that way.

Having obtained their wealth through real estate investment rather than entrepreneurial activity, such EB-5 applicants are naturally attracted to the regional center concept of gaining an EB-5 visa, which is to pool funds with other similar investors in order to develop real estate. About 90% of EB-5 visa applicants choose to invest in a regional center rather than starting their own business. They are not experienced businessmen.

Some Chinese EB-5 applicants are not truly wealthy people. There have been some hard luck stories where the investor had to mortgage his own home to raise the minimum $500,000 plus administrative costs investment. If that money is stolen by a crooked regional center, that can create desperate circumstances for the family, including foreclosure.

As a Certified Fraud Examiner, I try to help aggrieved investors find a solution. If you have been cheated by an EB-5 regional center, you may feel free to e-mail me about your complaint, and I can present some options to you at no cost, but I am not an attorney and cannot file a lawsuit for you. All I can do is catalog the bad players in the industry and notify authorities.

An Appraisal of a Commercial Property in Seoul, South Korea.

A wealthy Korean immigrant died in California and his will left a commercial property in Seoul solely to his only daughter, thereby disinheriting her brothers.  Two brothers traveled to Seoul to have a Korean court overturn the will and obtain partial interests in the building.  They succeeded.  The daughter, in turn, sued her brothers in California court for full ownership, as California Estate Law had been violated. She won.

My assignment was to review a translated Korean language appraisal that had been ordered by a Korean court, in order for me to figure out the damages her brothers had to pay her for stealing part of her inheritance, and testify to this in a California court.

I had been a speaker at a conference sponsored by the Korean Association of Property Appraisers in Seoul in 2008, and was familiar with some of their valuation methods and the differences there are with U.S. valuation methods.

Two differences are:

Land and improvements are valued separately.  This is similarly done in Germany and by U.S. tax assessors, and I’m finding it increasingly necessary in Los Angeles County, where land values are spiraling upwards, calling into question the highest and best uses of many older properties.

Because Seoul is built out and there is a lack of land sales, The Minister of Land, Transport and Maritime Affairs also compiles a “Officially Announced Price System”. I often find that such price announcement systems fail to keep pace with changing market conditions, especially if created by a government bureaucracy.

The Government's computer-generated land valuations are overly general, too.  Theoretically, the appraiser should adjust land values for accessibility, size, and developability. This appraiser made no adjustments.

In this case no adjustment was made for a 4-story. 7736 square foot building that had no road access (see photo).  It was situated on a 241.3 square meter (2597 square feet) lot in Jongno-gu, which is one of the wards that compose the central business district of Seoul. The building itself is situated behind and obscured by a taller building and thus had no street access or visibility.

The appraiser stated land value to be 12,210,000 Korean won per square meter, equivalent to $10,912 per square meter or more than $1000 per square foot.  I have seen such land valuations in Manhattan, and since Seoul is a city of 10.2 million people with twice the population density as New York, I did not immediately doubt such a figure.

Nevertheless, the zoning for the site allowed only one extra story of height, and the site was already fully covered.  Accessible only by alley way, there would have to be an assemblage of adjacent parcels if any type of redevelopment could be done, but this is done commonly in Seoul if 80% of property owners consent to join a "redevelopment union".

Although this building was classified as an office building, its employees were more likely to be employed as seamstresses than office workers.  The lack of vehicular access limited this property’s highest and best use. The size of the lot, less than 2600 square feet, was only about half the size of a typical residential lot, which is not conducive to high-density redevelopment, and the space between buildings was so tight that I could not get a photograph of the whole building in one frame.

To find comparable sales and listings I turned to the auction houses which publish details of their real estate auctions.  They typically publish the original reserve price, which is based on appraised value, and then subsequent reserve prices which are discounted by 20% each month until they attract bidders.  The subject property itself had failed to attract bidders at two auctions and the reserve price for the next auction is now set at 64% of appraised value.

In the end, the client was able to get compensation from her brothers based on the original Korean appraisal.

One hidden treasure in these alley ways off of the street are blocks of street markets and food stalls.