Wednesday, July 17, 2013

Appraisal of an Industrial Property in San Jose, Costa Rica

Urban real estate appraising sometimes yields pleasant surprises, as the shortage of land in growing or geographically constricted cities can create situations in which a property’s land value can exceed its value as currently improved. I appraised a similar situation in San Francisco, California immediately before flying to San Jose, Costa Rica to appraise the property of a bankrupt boatbuilding company.

I stayed at the charming Hotel de Bergerac in the Los Yoses barrio of San Jose while making a two-kilometer walk to and from the subject property, located in the rapidly urbanizing suburb of San Pedro in the canton of Montes de Oca. Vacant lots were few to be found, and new, upscale retail stores were often built next to dilapidated, corrugated steel structures, as often occurs in Latin American cities concurrently experiencing prosperity and land shortages. Moreover, much of San Pedro had been upzoned, permitting building heights of up to 7 stories and site coverage of up to 85%.

Montes de Oca has a particular attribute contributing to its growth. It is also known as Costa Rica’s “Cradle of Higher Education”, including the Universidad de Costa Rica, Universidad Latina and Universidad Fidelitas, all located in or near San Pedro.

Arriving at the subject property, I was initially disappointed to see the physical deterioration of the various structures, most of which were aging metal buildings with rusting steel roofs. This is one of the common letdowns of foreign appraising – traveling many hours and thousands of miles to find a property that is far less than as described. It makes me anxious that someone is going to be angry with my report. The remaining physical life of these particular buildings was rather limited, although San Jose’s 96% industrial occupancy rate does prolong the usage of older buildings.

What was encouraging to see, though, were two neighboring industrial sites that had already been redeveloped with attractive new multifamily housing. San Pedro has a housing shortage and has been encouraging multifamily development.

In one of my posts last year,, I described my lunch with a Costa Rican appraiser in which I asked what Costa Rican appraisers use for comparable land sales. He said that because of the lack of publicly available land sales data, the San Jose provincial government has created a map system for appraisers known as La Mapa de Valores de Terrenos, which sets a baseline value per district, which is then adjusted by appraisers for site factors such as size, zoning, commercial street frontage and terrain. The base rate for this section of San Pedro is 180,000 colones per square meter, equivalent to $358 per square meter (or $33.25 psf) at today’s exchange rate. These land values are comparable to CBD land values in many U.S. cities.

When the comparable improved property sales and listings and land sales and listings were compared, it became clear that the subject property was no longer improved at its “highest and best use”. The land value of the site, even adjusted for demolition and remediation costs, still exceeded the “value in use” of the current improvements, and there seems to be enough collateral value to support the requested loan, which, ironically, is going to be used to restart boat production.

More later, when the loan is funded.

Friday, July 12, 2013

A Warning to Chinese EB-5 Visa Applicants about Investing in Real Estate through U.S. “Regional Centers” 警告通过美国的“区域中心EB-5签证中国投资房地产申请人”

Advertised as "suitable and qualifies for multiple EB-5 applications"

Twenty years ago the U.S. government began a program to grant permanent resident visas, or “green cards”, to immigrants who invest at least $1 million to create an enterprise in the U.S. that creates or preserves otherwise-lost jobs for at least ten Americans outside the immigrant’s family. The threshold investment was reduced to just $500,000 in “targeted economic areas” of unemployment; 50% above the national average or in metropolitan areas of less than 20,000 inhabitants.

While the EB-5 visa program was slow to gain popularity, the number of applications has gone way up in recent years in response to the following three forces:

1. The proliferation of “regional centers”, private projects that pool the resources of multiple EB-5 investors,
2. The explosion in the numbers of Chinese applicants for the EB-5 visa, which now exceed all other countries combined, and
3. The desire of the real estate industry to find new sources of low cost capital, particularly “dumb capital”.

The EB-5 visa program is administered by USCIS (U.S. Citizenship and Immigration Services), who approves applications from visa applicants as well as projects wishing to be approved as “regional centers”. An approved regional center is allowed to solicit investments from EB-5 investors, but the USCIS continually issues the following caveat regarding investments in regional centers:

USCIS approval of an EB-5 Regional Center application does not in any way:
• Constitute USCIS endorsement of the activities of that Regional Center;
• Guarantee compliance with U.S. securities laws; or
• Minimize or eliminate risk to the investor.

In other words, “Investor Beware”. This is particularly problematic since USCIS states that more than 90% of EB-5 applicants are choosing to invest through regional centers rather than opening their own businesses. These are typically immigrants without entrepreneurial backgrounds, possessing more money than business skills.

I asked my Chinese associate who accompanied me in 3 of my last 4 business trips to China why there are so many Chinese millionaires choosing the regional center route rather than opening their own businesses.  How did they become millionaires in China without being businessmen? What was their source of wealth?

His answer was disarmingly simple – they became rich through real estate speculation. Being early in buying new condos in Beijing and Shanghai made many ordinary Chinese people rich without needing to learn the skills of starting and running a business. And having made their money through real estate, they are particularly attracted to regional centers which are real estate developments.

Although real estate developments have been approved by the USCIS as regional centers, they face a challenging task of proving that they have created 10 permanent jobs per investor, and there has been a lot of confusion as to what can be counted as qualifying jobs for purposes of earning the visa. Here are some of the misunderstandings:

1. Construction jobs to build the project are not considered eligible permanent jobs unless they are full time (35 or more hours per week) and provide 2 years of continuous employment for U.S. citizens. 

2. From the time of initial EB-5 visa application, the investor has two years to demonstrate that 10 jobs were created. Larger real estate developments can take sometimes take 2 years to start, beginning from the concept stage, then soliciting government approvals while ordering and submitting costly studies relating to traffic impact, environmental impact, and economic impact before finally being able to start construction. Finding protected animal and plant species or Native American burial grounds can indefinitely postpone the project.

3. Once complete, commercial real estate itself is not always labor-intensive enough, with the exception of hotels, restaurants and senior care centers, to produce 10 jobs per investor.

4. Normally, the jobs produced by tenants moving into the commercial property, such as a shopping center or office building, cannot be counted as jobs created by the EB-5 investment, unless it can be proven that there was such a shortage of space in that area that these jobs would otherwise not have been created or else that other qualifying jobs were indirectly created.

What about the people hired by the restaurant that moves in? Those are normally considered jobs created by the restaurant, not the real estate project, unless it can be shown that the restaurant would have never opened in that community unless this particular shopping center was built, and the standard of proof would require an expensive economic study. Restaurateurs usually have a selection of locations to choose from.

In response to a Freedom of Information Act (FOIA) request, USCIS delivered 895 pages of I-829 requests (the final application for the visa) that had been challenged or denied. The most prevalent issue was job creation, occurring in 65% of all cases. USCIS places the burden of proof of job creation on applicants. In many cases, the visa applicants had only created ineligible part-time jobs or had created an insufficient number of permanent jobs.

What is most concerning, however, is the data published by USCIS on May 31, 2017, indicating that only 61 out of the current 866 regional centers had actually gained I-829 approvals for their investors allowing them to get permanent residency.  In other words, only 7% of regional centers have been effective so far in getting their investors permanent green cards. 

Real estate developers applying to be regional centers

According to USCIS statistics, more and more of these developers are being turned down for regional center status, but some applications have gotten through, possibly due to the vagaries of USCIS staff, who are typically not trained in real estate economics, or else due to the persuasiveness of the developers who applied, and real estate developers can be very persuasive people. I meet one almost every month. Some fraudulent regional centers have been approved. See

Exploitation of Chinese investors

Also troubling is the proliferation of seminars and services on how to finance real estate development with money from Chinese EB-5 investors. The focus is not on how to gain visas for these investors, but on how to fund a project that has been turned down by all the banks and private lenders. This is a risky environment for EB-5 investors.

The top photo, for instance, is an intersection next to a 320-acre agricultural property in Imperial County, California, being marketed as “For EB-5 regional center…currently suitable and qualifies for multiple EB-5 applications”. It was once approved for mixed-use development and is advertised as having been appraised for over $15 million in 2006 “as is” and close to $26 million if development approvals were granted. What isn’t said is that the project never started and the current owners purchased it at foreclosure auction for $5,565,000 in 2007. The asking price is now $12 million, or $37,500 per acre in a county where irrigated farmland sells for $7000 per acre.

Farms do produce jobs, I must admit, but in this part of California, just across the border from Mexico, the likelihood is low that most of the farmworkers are U.S. citizens or permanent residents, who refuse to work in the 115-degrees-Fahrenheit heat of a summer day in Imperial County. Once the farm is up and running, investors will then have to prove to the USCIS that the workers are legal residents of the U.S., and that will be hard to achieve.

The recruiters

Situated on both sides of the Pacific Ocean is an industry of recruiters, most of whom are also ethnically Chinese, for EB-5 regional centers. They have been paid commissions up to $125,000 (A Chicago Convention Center) to land one of these Chinese millionaires, and they often make extravagant promises in China, promises that they wouldn't dare to make in the U.S.