Wednesday, February 15, 2012

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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Friday, February 10, 2012

Appraisal of Beach Land in Nayarit, Mexico

This appraisal assignment illustrates the problems in obtaining reliable Mexican market data.

The subject property is about 100 hectares of raw, beachfront land located on the Novillero Peninsula in the state of Nayarit, about a two-hour ride south from Mazatlan, Sinaloa on Mexico’s west coast. Playa Novillero has the distinction of being Mexico’s longest continuous beach, at 82 kilometers. The beach itself is not particularly impressive, consisting of dark colored sand and lacking distinctive physical features, but it does have coconut palms and is quite wide and flat.

Unlike the Mazatlan area to the north and the Nayarit Riviera to the south (close to Puerto Vallarta), the Novillero area is characterized by abandonment rather than development. I saw no new development, but plenty of abandoned beach homes. One problem is the lack of good road access to this area.
Abandoned Novillero beach homes

Prior to my arrival I was told that the owner had acquired the parcel in 1998, had received an offer of $7 million for the property and had a Mexican appraisal estimating value to be about $5.9 million.

When I obtained the escritura (deed), however, it indicated that the owner had purchased the property a year ago for only about $85,000.

Which number more accurately reflected market value? Most likely, none of these numbers, for the following reasons:

1. The only honest Mexican appraisal I’ve ever seen was one I ordered myself.

2. If I took “offers” seriously as indicators of market value, my lender clients would have ended up foreclosing on allegedly $50 million worth of scattered woodlands in rural Tennessee, an allegedly $100 million mountain in northern California, and an allegedly $100 million isolated Texas beach.

3. It is standard practice in Mexico to understate sales prices in deed transfers in order to minimize the 2% transfer tax required of the seller. It doesn’t matter that it is also illegal tax evasion witnessed and sanctioned by notaries public; the tax laws do not seem to be enforced.

I did ask the property owner to tell me whether the deed was correct, to which he indicated no, and then submitted documentation that he actually paid over $1 million, more than 12 times as much as was recorded, which seemed credible in light of much higher asking prices in the area.

Still, it bothered me that the Mexican appraisal valued the property at more than 5 times the price allegedly paid for it a year ago (and 68 times what was officially recorded as being paid), when this was the last sale in the area. How could he document an increase in value of that magnitude? When asked to show his comps, the Mexican appraiser presented listings only, no closed sales, with prices ranging from $10,000 to $30,000 per lineal meter of beach. The last closed sale I know of was at about $1500 per lineal meter, so why are asking prices so much higher than the last closed sales?

One factor influencing asking prices in southern Sinaloa, on the other side of the estuary from Novillero, was the announcement 3 years ago of a grand tourist development project sponsored by FONATUR, the Mexican government's tourist development agency. Southern Sinaloa state will be groomed to become "the next Cancun", although it lacks Cancun's white sand beaches.
The excitement has driven up beach land prices in southern Sinaloa to as high as $30,000 per lineal meter.

These high expectations have crossed the estuary which separates the states of Sinaloa and Nayarit, and asking prices on Novillero beach land are also in the range of $10,000 to $20,000 per lineal meter. Unfortunately, although Sinaloa and Novillero are just a few km apart as the crow flies, there is no bridge over the estuary and one has to drive miles inland to the highway to travel north and then travel miles back to the beaches of Sinaloa, which are much more accessible to tourists coming from Mazatlan, the general entry point for tourists in this region.

Inflated asking prices are not the same as closed sales as indicators of value, and the only closed sale I have was at about $1500 per lineal meter, far lower than current asking prices in the area. It also worries me that everything is for sale and nothing is selling.

Next stop: Bahia, Brazil
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