Wednesday, November 20, 2019

Another Misleading Rental Property Offering From Global Investments Incorporated Through Mondinion (Global Investments)

My name is on many “real-estate-for-suckers” spam lists, and some it comes out of Britain from Mondinion, Global Investments Incorporated, PropertyO, NuBricks or whatever name they change to again. This is a group of British real estate salesmen internationally hawking rental properties in some of America’s most troubled urban residential markets, such as Detroit and St. Louis. The central problem with these cities is depopulation, and in 2017 CBS News declared St. Louis to be the fastest depopulating major city in the nation, with population declining by more than 1% per year.

One may wonder why they would go to such trouble to find and market properties in bad neighborhoods of America’s fastest depopulating major cities. It is because they can claim high initial rates of return on investment (“capitalization rates”) without disclosing such recurring problems as vacancy, low income areas, foreclosures, depopulation and crime in the neighborhood, instead describing these neighborhoods as “stable” and “safe”. These properties can be acquired quite cheaply and be flipped to naïve British pensioners and foreign investors.

High capitalization rates, such as return on investment > 10%, indicate properties with uncertain futures and high risk; thus the investor wants to get his return on investment much sooner before conditions deteriorate. There is also the possibility that the numbers are false.

I commented previously about them in 2017 ( they were selling residences in the Detroit area, which they continue to do. They described the Inkster, Michigan neighborhood as safe although it ranked 93 percentile for crime in the state of Michigan.

This time Global Investments contacted me with a list of 6 homes in St. Louis. I chose to analyze one at random, 5752 Astra Avenue, an 1107 square foot, two bedroom, 1 1/2 bathroom home built in 1927 which they listed for $43,900 (about $45 per square foot) and described as “fantastic” and tenanted at a rental rate of $750 per month.

Checking the local Multiple Listing Service I found that the home was still vacant and listed for sale, but a sale was pending, maybe to Global Investments, the company that is marketing these homes. The brochure begins by describing the house as a 3-bedroom house  (not 2 bedrooms as actual) and already tenanted. The brochure itself shows the house to be vacant, with the only furniture being a dining table. They also neglected to disclose that the home is next to a mosque.

These groups have the habit of marketing their properties as rented, but the photos they show are of empty properties. If they do have a tenant waiting, why would a tenant wait when there are other vacant homes ready to move into?

From an appraiser’s point of view I searched for the 3 most proximate sales to the property this year and found two similar but larger homes at 5980 and 5984 Astra which sold for $10,000 and $20,000, respectively. The next closest sale was on a cross street, 5756 Vivian Avenue, a 2504 square foot duplex that sold for $52,000. The prices ranged from $6.86 per square foot to $20.52 per square foot.

As for the neighborhood, the Census Bureau’s information for this census tract as of 2015 was that it had a median annual household income of only $24,519 and a housing vacancy rate of 19.2%. This is about as bad as urban neighborhoods get.

The property was represented as tenanted, although vacant, so it is hard to say whether it would earn $750 per month, but more importantly, neighborhoods like this have poor tenant quality, so the new owner would have to scramble around to rent the home again before too long. When there is depopulation, filling homes can sometimes be like a game of musical chairs. This home is also adjacent to a mosque, which may be considered an adverse influence.

I was later telephoned by Global Investment’s sales director, who also advised me that they also charge a fee of $4000 in addition to the purchase price, to compensate their efforts in turning around the property. Had they actually been to St. Louis?

I have seen other rental home opportunities marketed by Global Investments Incorporated for cities such as Chicago, Cleveland and Memphis. These are all depopulating cities. CBS News, for instance, compiled a list in 2017 of the 12 major U.S. cities fastest losing population:

1. St. Louis

2. Baltimore

3. Milwaukee

4. Buffalo

5. Detroit

6. Cleveland

7. Hartford

8. Rochester

9. Chicago

10. Memphis

Here’s the reason to avoid such investments:  Depopulating cities experience decreasing property values and rents. Investing in older buildings in depopulating areas is a prescription for failure.  The Rust Belt, for instance, has many cities that have lost half their population in the last 50 years, including Detroit, Cleveland, Youngstown and Dayton.  This usually means increasing vacancies, despite gallant leasing efforts.  Rents are so low that only the lowest cost renovations make any sense, too.  Even then, other new space gets built, hastening the demise of the older buildings. 

So beware of rental properties being offered at high returns; these returns might not be long lasting.

Update Dec. 5, 2019:

A list published on AOL today indicated that the 6 fastest depopulating U.S. cities, in absolute numbers, are:

1. Chicago
2. Los Angeles
3. Detroit
4. St. Louis
5. Cleveland
6. Memphis

Friday, July 12, 2019

Tropical American Tree Farms Update, 2019: A Guest Post

Cear-cutting of part of the teak farm


Squatter home built from TATF timber

"She does not or did not, know the Brunners and cannot speculate if TATF was a fraud. The Brunners certainly did benefit from the money of the investors over the many years. But to her knowledge, the Brunners never received any money from the harvesting of the teak wood. 

The majority of the teak has been harvested- but not by the Brunners. 

The government of Costa Rica has turned a completely blind eye to the illegal invasión and stealing of this wood and land - bought and paid for by foreign investors dollars. Many of the locals, who worked and benefited for years from TATF money are the same ones now stealing the trees and the land. Please be assured that these are not needy people. Sadly the locals are also invading the primary forests and destroying land the Brunners had left in conservation.

This is in complete violation of environmental laws in Costa Rica."

Tuesday, June 18, 2019

Appraisal in Quebec: A Lesson on the difference between “Aggregate retail value” and “Market value”


Tuesday, March 19, 2019

Financial Trouble at Oceanwide Plaza and the Effect of Chinese Capital Controls on Certain North American Real Estate Markets

Some Hong Kong appraisal firms subcontract North American appraisal work to me. The work is for financial reporting purposes, as the property owners are publicly traded firms, and I have gotten used to the writing reports in compliance with the Hong Kong Institute of Surveyors.

On January 28 I was asked to bid on an appraisal of Oceanwide Plaza being built across from Staples Center, a leading sports and concert venue in Los Angeles.  Oceanwide Plaza had just topped out with three towers of 40 or more stories. This was said to be a $1 billion project.

I was surprised by this request because just the previous week, Lendlease, the Australian general contractor, had rocked the LA real estate world by announcing that it had halted construction on Oceanwide Plaza. The interior remains to be built. There were rumors that the lender had pulled out of the project, but no explanation of why. 

In November 2018 the FBI served a search warrant to China Oceanwide Holdings in an investigation of local public officials and Chinese developers regarding bribery, extortion , money laundering and kickbacks relating to 4 prominent Chinese real estate developers, including China Oceanwide and Greenland Group (developer of the new Metropolis condominium/hotel project nearby). No charges have been filed against China Oceanwide or the others.

A press release from China Oceanwide explained the need for capital restructuring and that construction would resume in February. With my own eyes I saw the project still stalled as of March 18, 2019.

Here are some hypothetical explanations for the continued shutdown:

1.       Chinese capital controls, instituted two years ago, are preventing the necessary funds from leaving China. The purpose of the new regulations was to reduce “irrational outbound investment and to improve the development of China’s overseas investment.” China has been attempting to crack down on capital flight resulting from a slowing economy and downward pressures on the exchange rate. These same controls have caused other Chinese developers to place their North American assets for sale. Greenland, developer of a similar project called Metropolis, a few blocks north of Oceanwide Plaza, has placed one of their three residential towers plus their Indigo hotel for sale. There seems to be a pattern here of Chinese developers now placing their properties for sale, as Dalian Wanda sold its unbuilt One Beverly Hills project (valued at $444 million) last November, and Oceanwide itself placing its unbuilt 80 South Street project in Manhattan for sale for $300 million after buying it for $390 million 3 years ago. Meanwhile, the Chinese government has seized the insolvent Anbang Insurance Goup and will be selling off its U.S. hotel assets, acquired for $7.45 billion during 2014 to 2016, which includes the Waldorf Astoria Hotel in New York, which itself cost $1.95 billion.

2.       Lack of buyers. As local realtors speak of the residential sales slowdown at the Metropolis, the same forces may be working against Oceanwide Plaza. One realtor said that 60% of the residential sales at the Metropolis were to Chinese buyers who did not intend to occupy their units. A Chinese-American bank even asked me to appraise one of the units as a rental property, and I told them that if 60% of the units are placed for rent at the same time, there is no way of estimating how far market rent would fall. Downtown Los Angeles already has a 17% residential vacancy rate, the highest vacancy rate since the 1990s. Capital controls could be affecting these Chinese buyers, too. Some say their main reason for purchase was to remove capital from China, either because they do not trust their own government or perhaps to place ill-gotten gains away from capture.

More news came out in February about $62.5 million in mechanic’s liens on Oceanwide Plaza, but more intriguing was some private correspondence from general contractor Lendlease to some of its subcontractors, stating that Oceanwide “had failed to maintain the minimum contractually required payments for both your and our work”, yet Lendlease, with an $814 million construction contract, had not filed any mechanic’s lien yet.

Looking at the bigger picture, the Chinese capital controls law passed two years ago will be starting to affect certain North American real estate markets, such as Los Angeles, San Francisco, Vancouver and New York, which have been highly boosted by Chinese investment. The Chinese government measures net capital flow to the United States, which has been profoundly positive for a few years, but in the last quarter of 2018, the net capital flow was a huge $54.6 billion outflow of capital back to China. Forbes Magazine estimates that China has lost $3.8 trillion to capital flight during the last decade. They want their money back. One expert estimated that the ratio of outbound Chinese capital (back to China) to inbound capital is about 10 to 1.

As for the outcome of Oceanwide Plaza, there are various scenarios:

1.       A white knight lender from outside China will provide necessary funds to finish this well-located project,

2.       The property will need to be auctioned off to a more solvent owner,

3.       Or in the worst case, if building and safety laws were allowed to be violated, Oceanwide Plaza could end up being 3 decaying 40+ story hulks sullying the downtown L.A. skyline.

I told the Hong Kong appraisal firm that they should ask to be paid in advance, which is not the custom in this type of financial reporting work. They replied, "Noted, with thanks".