Monday, March 15, 2010

Appraisal in Costa Rica

The property consisted of three parcels of raw land totaling 92 acres adjacent to a remote beach in Guanacaste, a northwestern province of Costa Rica. The owner wished to finance construction of a 5-star hotel, tourist hospital and wellness center. The owner had signed a management agreement one year ago with Barcelo Hotels, a Spanish-owned luxury hotel group with many existing hotels in Mexico and the Dominican Republic. There were Costa Rican appraisals estimating the combined property to be worth about $26 million “as is”.

Although written in Spanish, the Costa Rican appraisals seemed to contain too much hyperbole to be considered objective. For instance, what were described as 360 degree panoramic views were largely obscured by hills and protected mangroves. The appraisers also assumed that 25 kilometers of unpaved road leading to the project would soon be paved and they valued “protected” (unbuildable) land at 80% of the value of buildable land. (Twenty percent would be a more reasonable number, since nature preserves do add some incremental value to adjacent development land.)

The owners claimed to have full entitlements to build the project, but the submitted documents only indicated approval to build 12 seven-story condominium towers on one of the three parcels, and these approvals were from 2007. The owner had decided to turn the condo towers into hotel rooms, without creating architectural drawings or plans, and there was no documentation that a development plan for a hospital and wellness center was even under consideration by local authorities. There were no drawings, plans or specifications for the revised development plan, other than a generalizd aerial view of the proposed project. The only site work had been to drill two authorized wells.

There were factors that caused great doubts about feasibility, the first of which was the lack of paved road access. The closest paved roads were in Santa Cruz, 25 km away, and the 6-month rainy season and rugged topography of this region can make road travel difficult, as roads are occasionally flooded during the rainy season. Four wheel drive vehicles are needed for half of the year. This is not a good setting for a 5-star hotel, but for a hospital, the setting was particularly doubtful. Successful tourist hospitals are typically located near airports, indicating that accessibility is a strong selection criterion of a hospital. The notable tourist hospitals in Costa Rica are CIMA, Clinica Biblica and La Catolica, located in the capital of San Jose, and the first two are already developing similar facilities near the Daniel Oduber airport in Guanacaste, with La Catolica also considering a branch there.

The idea for this project is that the hospitals would specialize in cosmetic procedures and that patients had the choice of convalescing in a time-share wellness center or else in a room in a 5-star hotel. Get a face-lift, for instance, and spend a month recuperating while gazing at the ocean. Still, the concept of a hospital so far removed from paved roads seemed to be far-fetched. Imagine being sore from a tummy-tuck operation and then having to return to the airport over bumpy, gullied roads.

The other factors that made me believe that this was not a serious project were:

1. The property is listed for sale for $8,500,000, entitlements included.
2. The property was previously listed for sale in 2008 for $5,500,000 and marked sold.
3. The construction cost estimates were quite incomplete, as were designs, drawings, plans, and specifications.
4. The lack of housing in the area for hospital or hotel support staff.

Considering that the owner had originally conceived of condo towers and townhouses on his property, the change to hotel and hospital seemed like an afterthought. This was a parcel of land in search of a profitable use, not a hospital enterprise in search of an ideal location.

As in Mexico, comparable sales are hard to come by in Costa Rica. There is no rule that the sales price recorded has to be accurate, and there are other circumstances that induce sellers to record false prices. I turned to listings of entitled land and unentitled land to set a ceiling of value for the property, and there are getting to be more fully entitled projects put on the market today just as in U.S. beach communities, too. I found entitled projects priced as low as $20,000 per developable unit, and unentitled ocean-adjacent land in Guanacaste priced as low as $10,000 per acre. I valued the hotel parcel as entitled land and the other two parcels, with no proven entitlements, as unentitled land.

Unfortunately, when looking at lending opportunities in Latin America, I see too many deals like this one, with the property listed for sale at a fraction of the value estimated by local appraisers, with the owner meanwhile spinning a fanciful story of a world-class development project. Lender beware!

My observations about international real estate deals are essentially this:

The least desirable properties must travel the furthest to find buyers or lenders. Good real estate opportunities tend to get picked off by local investors and lenders.