Sunday, June 29, 2014

Appraisal of a proposed resort project near the Canadian Rockies

Curiously dead ground vegetation for a proposed vacation resort

These were 130 acres in a town west of the Canadian Rockies popular with snowmobile enthusiasts. Local leaders want to make their town the “Next Canmore”, an expensive vacation community about one hour's driving distance west of Calgary and the first town east of Banff, Alberta's most famous ski destination. This town, though, was 300 miles west of Edmonton.

The local authorities, eager for economic development, had granted entitlements to a developer to build 183 condos and 70,000 square feet of commercial space. To impress how much political support she had for this project, she invited the mayor to have lunch with us. I ordered a “moose burger”, but I was also informed by the two that the restaurant didn’t really serve moose meat.

No feasibility study had been done, but I was told that there was a waiting list of 250 for the condos, and substantial "verbal interest" for the commercial space (meaning no leases or letters of intent). It turned out that the waiting list for the condos was just as real as the mooseburgers. It was just a collection of names and addresses of people who had responded to ads in snowmobile magazines, and there had been no discussion of prices, nor had there been any contracts signed.

The condos were priced quite steeply, from $430 to $455 psf Canadian, with prices ranging from $350,000 to $680,000, in one high density building. The town itself, though, had 21st century homes on their own lots for sale for less than $270,000. Per Landcor, the data service I use in BC, the highest priced home sale in the last year had been at a price of just $225,000, a new log home of 1068 square feet on a conventional-sized city lot.

124 of the 130 acres were a former rail yard previously used by the Canadian National Railway. Railyards are often heavily contaminated through years of washing out tank cars. Rail ties, too, were treated with arsenic to resist rot before being set in place. The photo demonstrates a mostly grey area of dead ground cover, punctuated by young pine trees, a tell-tale sign of contamination.

The properties had been acquired at the peak of the market in 2007, and in my previous valuation assignment in BC, I noticed that the sale of vacation properties began to considerably diminish after 2007. Yet, in this situation, the developer had appraisals done by Canadian appraisers estimating land value several times as high as the acquisition price in 2007. It gives me the impression that the Canadian appraiser profession is less effectively regulated and policed than in the U.S.

Tuesday, June 17, 2014

Another appraisal assignment in Nayarit, Mexico raises red flags of possible fraud

This was the appraisal of nearly 1000 hectares (over 2000 acres) of beachfront land, my third appraisal in Nayarit. There were many red flags to cause me to be suspicious:

1. The borrowing entity was a company in Cyprus, a country known as a hotbed of offshore shell companies (2267 identified so far by ICIJ). Shell companies are notorious for straw officers and directors and untraceability. Think of Cyprus as another Cayman Islands.

2. The borrowing entity had no history and no web site.

3. The borrowing entity did not own the land but had a JVA (joint venture agreement) with the landowner, a Mexican national.

4. The principal of the Cypriot company consistently misspelled his own name throughout the JVA.

5. All the bank account information of the Cypriot company had the company name misspelled.

6. As with Mexican land scams I’ve uncovered, the borrower’s representatives extolled the development possibilities for the land, but their credentials were not as real estate developers, but as marketing or public relations consultants.

7. No credible development plan was presented, but I was told that there was an agreement with the “Canadian Retirement Association” to build thousands of vacation homes for Canadian retirees. I have been unsuccessful in verifying the existence of the Canadian Retirement Association.

8. The Toronto phone number I was given for the Canadian Retirement Association connected me to a man who seemed to be more fluent in Spanish than in English and who bragged about his 75 “advertising awards”. This is not the talk of someone who would be trusted to manage a Canadian pension fund.

9. Similar to the Mexican land scams I’ve seen, I never got to meet the actual property owner, but I was given a document that assigned the right to mortgage his land to one of the borrower’s representatives. As I learned today at the ACFE Fraud Conference in San Antonio, identity fraud is a growing problem in Mexico as it is here in the USA, so I have to be careful.

10. As with Mexican land scams I’ve seen, my request for a current predial (property tax bill) instead yielded a predial from 2008, raising the possibility that the property has diminished in value since then or even the possibility that there was no affiliation with present owner such that a current predial could be provided.

Having been collecting listing data on this part of Nayarit for the last two and a half years, I noticed that asking prices on beach land in this area have declined up to 60%. Regardless of the suspicions I had about the loan request, the appraised value fell short of what was needed, any way.

Land loans are an ideal conduit for fraud in Mexico, by the way, because the value is so hard to determine, accurate information is so hard to come by, and it is easy to hire a Mexican appraiser to appraise the land for $100 million.