Thursday, April 27, 2017

Appraisal of a 5-star hotel in Vancouver





This renovated 5-star hotel, the Rosewood Hotel Georgia, had recently been acquired by a publicly traded Chinese joint venture company for $145 million.  The purchase price was equivalent to a capitalization rate of 4.16% of the adjusted net operating income of the hotel in 2016, or CAD$930,000 per room, although NOI had reportedly quadrupled between the years 2014 and 2016.
This improvement in the hotel’s performance coincided with 3 years of double digit increases (10 to 12%) in RevPAR (Revenue per available room) in downtown Vancouver as Vancouver experiences steady increases in tourism, reaching an all-time high in 2016.  Every year in the last 25 years has shown an increase in tourism except, naturally, for 2009.
Tourism statistics for British Columbia continue to show that the leading country of origin for tourists is Canada itself.  With improving commodity prices since last year, this should be a secure niche.  The second largest tourist contingent is U.S. tourists, and the devaluation of the Canadian dollar relative to the U.S. dollar should increase U.S. tourism to Canada.  In third place are Chinese tourists, perhaps the most rapidly increasing tourist segment, with Chinese visits said to have increased by 94% from 2011 to 2015.

That being said, there is an ongoing increase in hotel room inventory represented by the following hotel projects:
·       J.W. Marriott, 350 rooms
·       Autograph collection – The Douglas, 188 rooms
·       Trump International Tower, 147 rooms
This marks a 6.5% increase in high-end downtown rooms.  HVS (Hospitality Valuation Services) forecasts RevPAR growth of about 6% in 2017 and flat growth in 2018 as this new inventory hits the market. They also anticipate more competition from AirBnb as visitors try to save money, and I have an investor friend doing just that.
Since such valuations are based mainly on the Income Approach (U.S.) or the “Profits Method” (Hong Kong), it was looking very difficult to support the $145 million price. Projecting next year with a 6% increase in RevPAR, and a smaller increase in expenses, I still forecasted a 9% increase in NOI, but there was no local data to support a 4.16% capitalization rate.  There had been no published transactions on capitalization rates in Vancouver in a couple of years, so I had to rely on a CBRE investor sentiment survey from the first quarter of 2017, in which investors in downtown Vancouver hotels were seeking rates of return from 5.5% to 6.5%, which were an all-time low for this particular survey.  Back in 2003 the expected rates of return for Vancouver hotels were 12 to 14%. Needless to say, I could not support any capitalization rate that supported a valuation of $145 million.
One problem is that a 4.16% rate of return is considered high in Hong Kong but low in Canada, and the investors were using Hong Kong investment expectations. In this sense, return on investment will meet investor expectations, but estimating market value is a different matter, as I needed to estimate a price that it could sell for.
The second problem was the sales comparison approach. Up to this date, the highest price per room achieved in Vancouver was the sale of the Westin Bayshore for $567,500 per room in September 2015. This waterfront hotel was built in 1960 and 1974 and in need of some upgrading, although some have speculated that this hotel was really bought for eventual redevelopment as condos in the prestigious Coal Harbor part of town. Nightly rates are similar to the Rosewood, though.
 
How was I able to justify a price of $930,000 per room and a cap rate of 4.16%?  I could not.
My valuation was done for Hong Kong Stock Exchange financial reporting purposes, and a market value appraisal was required.  I've been doing these since 2009. Unfortunately, this client did not want a market value appraisal but instead elected "to engage other valuer to conduct the valuation as its targeted figure could not be reached." They were kind enough to pay me, however, but this illustrates the point that public companies, even in Hong Kong, have the power to bias valuations in their favor, and that target values sometimes take the place of market values.
I was shown a Colliers International valuation with slightly higher rates of growth in earnings -- 13.5% in 2017 and 11.5% in 2018, but the most remarkable part of their report was that not one single comparable sale was from Vancouver, and most comparable sales were taken from Hong Kong and New York, also adding their contention that 5-star hotels anywhere in the world start at $1 million per room..
 
 
 

Monday, April 10, 2017

Appraisal of a Fractional Interest in Acapulco




Most of the inquiries I get about my foreign appraisal services are of properties that are not large enough to justify the expense of my trip, such as individual lots or homes. The above home is a 12-bedroom home, used for vacation rentals, located in the prestigious cliffside neighborhood of Las Playas in Acapulco. This home was used in the film “Blow”, starring Johnny Depp and Penelope Cruz. I’ve visited this neighborhood before, too, as a tourist coming to visit the Quebrada, the famed diving cliff.

The actual valuation assignment was to appraise a one-third ownership interest in the home, which made it an even smaller assignment from the standpoint of a client’s cost limits, but a more difficult assignment because a partial interest has to be discounted for lack of liquidity, lack of control, lack of marketability and lack of mortgage financing. Finding comparable sales is very difficult, because only about one out of about every 500 property sales are of fractional interests.

When I appraised in Acapulco before, I collaborated with a local appraiser, Arquitecto Hector Huerta. (Most professionally recognized appraisers in Mexico are either trained architects or trained engineers.) To keep the cost down for the client, I suggested that they hire him to do the appraisal of the residence and then have them send the report to me for translation into English and application of the partial interest discount. The ultimate intended user was the Internal Revenue Service, so it had to be an English language report done by a “qualified appraiser”.

I used a technique known as “factor-based fractional discounting”, a technique developed by the Appraisal Institute, in which individual factors are quantified and discounted, such as asset risk, profitability, condition, liquidity, diversification, size of interest, lack of control, management and growth potential.

Liquidity was most difficult to measure. On the one hand, the ownership structure was corporate in nature, with any owner allowed to sell the shares any time. On the other hand, Acapulco has suffered through a shocking crime wave between the years 2009 and 2016, with drug gangs battling even in the tourist areas of the town, with about 3 murders per day. By comparison, Chicago, America’s murder capital and 4 times as large, averages less than 2 murders per day. The crime wave reduced Acapulco tourism by 85%. Local lodging occupancy averaged only 27% in 2014 but increased to 40% in 2015, as late in 2015 the governor called in the Mexican military to restore security to the city. So the liquidity situation was “easy to sell”, but “would there be buyers”?

As the security situation improves, there should be a return of travelers to this beautiful resort city, and vacation home ownership is conducive to fractional ownership.

And the client saved money on appraisal fees.

Thursday, April 6, 2017

California Investment Immigration Fund Busted: Another EB-5 Scandal




When visiting Chicago in 2013 I had a chance to visit the site of the largest EB-5 regional center scandal up to that date, “A Chicago Convention Center”, which I reported in blog post http://www.internationalappraiser.com/2013/05/attempt-to-defraud-261-chinese.html. This was at the same time that there was a proliferation of local (Los Angeles) realtor and appraiser seminars about how to profit from the EB-5 visa program.

After returning from Chicago I called a former neighbor, Marvin Vong, who is a former Chinese national and now a licensed immigration attorney in Los Angeles. I asked him if he steered clients towards EB-5 regional centers. He said no. I asked him why, and he said, “I don’t want to go to jail”. That was my first alert to the corruption going on in the EB-5 visa industry.

Not long afterwards I visited the San Gabriel Hilton hotel and found a plush office in the hotel lobby occupied by the California Investment Immigration Fund (CIIF), an EB-5 regional center whose purpose is to secure EB-5 visas for wealthy Chinese investors. Because of my Chicago experience I entered their office with some skepticism and asked them what projects they were trying to fund.

The young manager on duty explained that they were developing a commercial center in Indio, California, a low-income desert community, with an 82-room Holiday Inn Express, an office building, and 3 restaurants. 

Curious about why they were so specific about the hotel but vague about the office building, I asked “How large is the office building?” I did not get an answer. 

I called the Indio planning department to verify this project, and they explained that indeed a development plan had been submitted for their approval of a hotel and restaurants, but there was no office building in the development plan. At that time I surmised that this discrepancy was probably due to a lack of investors, not necessarily a fraud.  Lots of projects get downsized due to lack of funds.

Two years later, in November 2015, I revisited their office to inquire about the success of Victoria Center. There was a look of fear on the manager’s face when I asked that question. She then claimed no knowledge of Victoria Center but instead touted a project to be built in Rancho Cucamonga to be called “California China Town”. The illustration more resembled a 1970s government campus than a Chinatown. I called the Rancho Cucamonga planning department and they denied that there was a development application for any such thing and that they were not familiar with CIIF. 

Mythical project "California China Town" in Rancho Cucamonga

Strangely enough, when I contacted the City of Indio Planning Commission about Victoria Center, I was informed by assistant planner Laila Namvar that development of Victoria Center had been approved on January 14, 2015, but no development had started yet, two years later.

Victoria Center today, six years after soliciting investors

I did a search on Baidu, China’s leading search engine, and found that CIIF had a separate Chinese web site, www.ciif-eb5.com, which advertised several real estate projects not mentioned on their U.S. web site. These were projects in Ontario, Riverside, and Rancho Cucamonga, California. Calling the respective planning departments for these cities I found that these were all fake projects for which development plans had not been submitted. The Chinese web site even boasted that CIIF is the most successful EB-5 regional center in America.

I then wrote up a complaint to the SEC (Securities and Exchange Commission) about violation of securities laws. They contacted me shortly and asked me to contact their “embedded agent” in the FBI to provide useful information about their Chinese web site, the fake real estate projects that they were promoting in China and that the principals of CIIF, Tat and Victoria Chan, bought luxury homes within two weeks of each other after they started advertising Victoria Center. Tat Chan's home, bought for almost $5 million, is in the gated community of Bradbury, while Victoria Chan bought a Diamond Bar home for almost $1 million.

Yesterday, the CIIF office in San Gabriel was raided, in addition to homes owned by Tat and Victoria Chan, by the FBI for information pertaining to fraud and violation of immigration laws. 

As I have learned from my own work, and from the "A Chicago Convention Center" scandal, the quickest way to stop fraud at the start is to verify the project with the relevant local planners.  It is a phone call that takes only a few minutes, and if the planner is not in, they always call back.  Once I found all of the fake projects advertised on their Chinese web site and called the relevant city planners, I knew that CIIF was a fraudulent enterprise.

I also see an interesting pattern among fraudsters in this industry.  They go out of their way to get photographed with prominent politicians.  Anjoo Sethi of the Chicago Convention Center scandal aggressively pursued photo opportunities with the governor and senator from Illinois to provide the illusion of legitimacy for his fake project.  Here is Victoria Chan posing with Hillary Clinton in a photo on a big screen outside the CIIF office:
Hillary!  Be careful of who you're seen with!

The man in the photo is believed to be a brother of Victoria Chan. The big screen presents a slide show of poses with other public figures, such as former L.A. mayor and gubernatorial candidate Antonio Villaraigossa, and the front window is covered with letters of commendation from various local and state legislators for CIIF's contributions to local commerce or to the local community, but there is no record that CIIF actually did anything for the community or for commerce. They did make campaign donations, however.