An Appraisal in Alaska

 

Although I devote this blog to foreign appraisal assignments, I find appraising in Alaska not so different from appraising in a foreign country, due to low population, lack of data and government, and thinly traded  markets.

Alaska divides itself into “boroughs”, analogous to counties in other states, except that some of these boroughs, rural in nature, have no government or municipal services because almost all of the land is owned by the U.S. government. No local services are needed independently of what the U.S. government is already providing, which in the Borough of Yukon-Koyokuk are mostly road maintenance.  No schools or hospitals.  No tax assessor. Yukon-Koyokuk is also the largest county or county-equivalent in size in the USA, being larger than the state of Montana.

Yet its Census 2020 population was just 5343 residents.

The subject property consisted of several hundred acres along a riverfront, a modest single-family residence and an airstrip in a town with a census population of less than 20 residents, more than one hundred miles from Fairbanks.

The loan applicant wanted to contain the appraisal cost by requesting a desktop appraisal, meaning that I appraise the property remotely using Google Earth and other photographs. This is a service that I sometimes provide in land appraisals (usually small urban lots) under the theory that land doesn’t change -- but sometimes it does.  I search for evidence of fires or floods.  In this case, the subject property abutted a river that flooded in May 2022 due to an “ice floe jam”, a common type of flood in northern latitudes, including the upper Mississippi River. The flood killed fish due to the toxic contaminants in the water, including fuel oil, gasoline, antifreeze and sewage, some of which got into local homes.

Value of off-grid living

The home was also advertised as offering “off-grid living”. The supposedly exciting advantage of off-grid living is not having to pay local public or private utilities (of which there are none in this region) .  The disadvantage is having to maintain the utilities yourself or find maintenance in the wilderness.

The home has complete solar and wind power, although solar power can be greatly diminished during winter months at this 65-degree northern latitude, not far south of the Arctic Circle. It is difficult to find data on the value created by living off grid in Alaska. Living off grid may not really be cheaper. Transportation costs to the subject property are much higher, including the necessary cost of maintaining an air strip and clearing roads. There are potentially enormous savings on electric bills, but batteries will eventually need to be replaced, which costs thousands of dollars, similar to electric vehicles. While there are no water or sewer bills, pumps will sometimes need to be replaced, also at great expense. Trash removal will also be more difficult. At this latitude, power during the winter can be problematic. The homeowner can chop down trees for firewood on site, but this takes manpower and truck power.  A homeowner may be better off just buying propane, but that must be transported in.

The airstrip might seem like a luxury to some readers, but at this latitude, it can be the only dependable transportation during the winter. Private air transportation is quite common in Alaska.

What finally killed the deal, though, was the expected marketing or “exposure time”. When comparable sales take 5 years to sell, private lenders ask me to discount the value to the time it would take to sell in 6 months. That results in a nasty discount.

Yes, I am a certified general appraiser in Alaska.

The Effect of Chinese Government Policy on the Failures of High-rise Residential Towers in Los Angeles and Other World Cities

Graffiti-clad Oceanwide Towers in LA

In March 2019 I reported on the failure of three 40-story residential towers being built in downtown Los Angeles. (https://www.internationalappraiser.com/search?q=oceanwide) Lendlease, the Australian general contractor, had rocked the LA real estate world by announcing that it had halted construction on Oceanwide Plaza over unpaid bills. The interior remains to be built. There were rumors that the lender had pulled out of the project, but no explanation of why. A press release from China Oceanwide explained the need for capital restructuring and that construction would resume in February 2019. With my own eyes I see the project rotting and covered in graffiti five years later in February 2024. Its location is less than ideal, being across the street from a sports and concert arena occasionally plagued by basketball riots.

At the same time, similar residential towers in LA, New York, Malaysia, Australia and Vietnam, among other countries, have also been failing, towers which were effectively being built for Chinese millionaires trying to get their money out of China. Most did not intend to occupy their new condos.

The Towers of the Waldorf Astoria, developed by Chinese Developer Dajia, is one such project that is also languishing without sales for its 374 units. The Chinese government seized the insolvent Anbang Insurance Goup to sell off its U.S. hotel assets, acquired for $7.45 billion during 2014 to 2016, which includes the Waldorf Astoria Hotel in New York at a price of $1.95 billion. 

One of my first blog posts in 2010, now deleted, was the Forest City development on the Iskandar peninsula of Johor Bahru, Malaysia, and directly across the strait from Singapore. This particular luxury project was also directed towards Chinese investors. I went to an international property buyer conference in Singapore in 2010 and found this to be the most heavily promoted project at the conference, but the scale seemed outrageous in scope -- $100 billion to build 300,000 homes on 4 man-made islands off the southern coast of Malaysia close to Johor Bahru, a bedroom community to Singapore. I deleted my post after being told “Don’t count out Chinese investors!” 

Nowadays, only a fraction of these homes have been built, and most that have been built are still vacant. In hindsight I was really being told not to count out lemmings, even though lemmings can be counted on to eventually jump off the cliff. 

There are two major Chinese government policies that have slowed the demand and financing for such projects:

1. Chinese capital controls on citizens, instituted at the end of 2016 by Chairman Xi Jinping, are preventing the necessary funds from leaving China. The purpose of the new regulations was to reduce “irrational outbound investment.” China has been cracking down on capital flight, characterized by Chinese investors purchasing foreign condos, perhaps to place ill-gotten gains away from capture or perhaps due to distrust of the government. The PRC wants the money back. One expert estimated that the ratio of outbound Chinese capital (back to China) to inbound capital was about 10 to 1 at the time of my last blog post in March 2019. 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, placed one of their three residential towers plus their Indigo hotel for sale. 

 2. The “Three Red Lines” policy. This might sound like a cute maxim from Chairman Mao, but it is actually sound banking policy instituted by Chairman Xi Jinping back in 2020. The three red lines are: debt-to-cash, debt-to-equity, and debt-to-cash. If a developer wants a loan from a Chinese bank, these tests must be met. These new controls have sent some major Chinese developers, such as Evergrande and Oceanwide, reeling into bankruptcy.

3. The Communist Party policy switch to "Common Prosperity" in August 2021.  This follows the famous open door policy started by Chairman Deng Xiaoping in 1978, igniting unbridled capitalism with the proclamation, "It is glorious to be rich!" The switch to "Common Prosperity"  is to "reasonably regulate excessively high incomes, and encourage high-income people and enterprises to return more to society.” This might not be good for real estate developers.

Indeed, the Minister for Housing and Urban-Rural Development promised no bailouts for real estate developers, stating "For real estate companies that are seriously insolvent...those that much go bankrupt should go bankrupt or restructured."

"We must avoid herds and bubbles"

Now China and Chairman Xi are facing an American-style real estate collapse, too. The Chinese government did what they had to do, but too late. It was like taking the punchbowl away from a festive party that was already out of control. 

As for the outcome of Oceanwide Plaza, I laid out the following scenarios back in 2019: 

1. A white knight lender from outside China will provide necessary funds to finish this 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 continue to be violated, Oceanwide Plaza could end up being 3 decaying 40+ story hulks sullying the downtown L.A. skyline. Scenario number one was a possibility back in 2019. I had at least two inquiries as to whether I wanted to appraise the property, but the clients changed their minds. So, what we see today is Scenario number three, with 40-story towers covered in graffiti and serving as jumping bases for wannabe “spidermen” and their YouTube audiences.