Appraisal of proposed solar farms in Ecuador

      Corn farm at almost 10,000 feet above sea level

In my native land of southern California, it is becoming common to turn marginal agricultural land into photovoltaic solar farms, particularly in Kern County, the Mojave Desert and Imperial County.  Some parcels have a unique advantage if they are located near a power grid substation, near a major city (Los Angeles or Las Vegas), and have enough water available for keeping dust off of the machinery (about one acre-foot of water per 20 megawatts of production. One acre-foot is equivalent to the water needs of about 4 households.)

Many landowners in these areas, most of whom are absentee, hope to get phone calls from solar farm builders who want to lease or buy their land.

Other countries have “Green initiatives”, too, and such initiatives give hope to owners of marginal agricultural land in Ecuador.

The farms I appraised were at opposite ends of Ecuador.   One was located about 20 km north of Quito, Ecuador’s second largest city, at an elevation of almost 10,000 feet above sea level, and one was located in the low-lying Guayas province about 50 km west of Guayaquil, Ecuador’s largest city.

        High voltage transmission lines on subject property

Both farms had high voltage electrical transmission towers on their properties, but only the Quito property was near a power grid substation, 2 km away in Pomasqui, which provides power to the entire northern half of the Quito metro area, having a total population of 1.5 million residents. This solar farm operator planned to supply power directly to the high voltage lines on his properties, which can be done in Ecuador because the power grid has single government ownership in Ecuador vs. the multiple private ownerships that sometimes govern power lines in parts of the United States.

This being the case, that anyone with a high voltage transmission tower on his property in Ecuador could supply electricity to the Grid, greatly increases the supply of available sites and provides little or no financial advantage to the landowner compared to his neighbors.  Neighboring farms with power lines near the Guayas property were selling in the range of $900 to $2000 per hectare.  Not a lot of value there. 

The property near Pomasqui was very difficult to appraise due to its unique flaws -- steep slopes and lack of accessibility; solar farms are not considered viable on slopes exceeding 10%. The escritura (deed) indicated that the property had been purchased for 1,680,000 sucres in 1997.  That sounds impressive until one learns that the Ecuadorian sucre was replaced by the dollar in 2001 at an exchange rate of 25,000 sucres per dollar, making the purchase price effectively worth about $67. Then again, it is common in Latin America to record false purchase prices in order to minimize transfer taxes.

To make matters worse, the borrower did not even own the land serving as collateral for the loans. Never was a purchase mentioned, either.  There was a misunderstanding of the concept of "loan collateral". A collateral lender expects the loan proceeds to go towards immediate purchase of the land; otherwise, what else is there to provide security for the loan?

Another complication for this assignment was that the client, a private lender, ordered an “as is” appraisal, and the borrower did not even have licenses yet for the solar farms. So the properties had to be appraised as agricultural land, which was a big disappointment to the borrowers.

In any case, there is not yet an established “market” for solar farms in Ecuador, making valuation a very difficult process, and even if there was one, 99% of the value is in the improvements and little value is in the land. 

PS: I have received several inquiries asking who is financing construction of solar photovoltaic cell farms, but the only financiers that I am aware of can only lend upon substantial existing assets. Any solar photovoltaic construction lenders are welcome to introduce themselves in the comments that follow.

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• Yes, Ecuador is Still a Bargain, but Not for Partying

Appraisal of land outside Regina, Saskatchewan

Saskatchewan is unique in Canada for its continuing economic boom, fueled by world demand for its potash and oil.  Similar mineral-led economic booms in places such as North Dakota, Wyoming and Western Australia have also led to housing shortages and rising land prices.

Before this valuation assignment, I last appraised in Saskatchewan during the Fall of 2010, and the boom has continued since then.  The property being appraised this time was almost one square mile of cropland right outside the city limits of Regina, SK, presently cultivated with canola and wheat, but in the process of being rezoned for mixed use to accommodate the expansion of the city of Regina, a city of 200,000 residents in the southeastern part of the province.

Appraising land in Canada is an easy assignment compared to most international work.  Each province has its own land registry system capable of providing comparable sales, and the prices for sales data are low in Saskatchewan ($20 got me 150 sales), and the last time I appraised in Alberta, their sales data were free. In British Columbia, the provincial land registry wholesales the data to middlemen such as Landcor, which costs several times as much, but is still a bargain.

A couple of issues relating to the conversion of farmland to residential development relate to the ability of the soils to support vertical construction and the potential for toxic contamination of the soil by pesticide use.  Another newly built Regina-area subdivision several miles northwest of the subject is currently sinking in the mud, for instance, due to the failure to discover the unsuitability of the soils until it was too late.

I normally like to read a geotechnical study and environmental report during the appraisal of a subdivision instead of copping out with the use of “assumptions and limiting conditions” that everything is assumed to be all right. A lot of money has been lost with assumptions, and I disagree with the appraisal profession's mindset that placing "assumptions and limiting conditions" in appraisal reports is good appraising.  It is not good appraising; it is dangerous appraising. Complicating the situation, though, was a lender client who let the developer set the stage for intransigence by refusing to show purchase contracts.

Although this was a Canadian property, I still follow USPAP (Uniform Standards of Professional Appraisal Practice set by the Appraisal Foundation, a U.S. institution), one of which is Standards Rule 1-5(a): “analyze all agreements of sale, options, and listings of the subject property current as of the effective date of the appraisal”.  My request to see the purchase agreements spooked the developer, who called the client to call off my request due to the fear that I would practice “anchor bias”, the tendency among real estate appraisers to “hit the purchase price” in 96 to 97% of appraisals.

The developer’s fear was unfounded, as I do not practice anchor bias and am also mindful of USPAP Standards Rule 1-4(c): “When analyzing the assemblage of the various estates or component parts of a property, an appraiser must analyze the effect on value, if any, of the assemblage.  An appraiser must refrain from valuing the whole solely by adding together the individual values of the various estates or component parts.” This assemblage would probably be more valuable than the sum of its parts.

The comparable sales were rather consistent in this Rural Municipality – farmland was selling for about $2500 per acre, while close-in farms were being bought by developers for up to $20,000 per acre prior to rezoning. I certainly recognized the value of the assemblage going on, but my client's tacit permission to let the developer stonewall me hindered my ability to protect them.  When I asked for other information, such as a geotechnical study and the names of the current property owners, the initial responses were "Have a blessed day", and then "Geotechnical Report...not available at this present time" and finally "this question is un-usually [sic] and has no merit when completing an appraisal value report on a property."  

While I disapprove of the practice of most appraisers and valuers to defer essential issues as buildability and environmental contamination to “Assumptions and Limiting Conditions”, which often don’t get read by clients, I had to in this instance. If the soils or water table make construction infeasible or the soils are contaminated by pesticides, the value of the property reverts back to agricultural land values, a significant diminution of value.  I made my estimate of value conditional upon the receipt of an acceptable geotechnical report and environmental report and prominently displayed this by my conclusion of value, and then presented a separate value of the property as agricultural land just in case the developer refused to present relevant documents.  So far, this developer continues to refuse to cooperate.

As for why I ask to see purchase contracts, this is a USPAP rule (not required in Canada but sometimes followed), and it often alerts me to sales concessions, flips (when the seller is not the registered property ower), sales between related parties, or suspicious discrepancies, such as when a buyer or seller misspells their own name (suggesting forgery) or doesn't sign at all. The reason why I ask who the sellers are is if the sellers' names are different from the recorded property owner's names, the transaction becomes more suspicious. In a classic illegal flip, the buyer uses a disguise, such as an LLC or LP, to purchase the property at a lower price and then sell the property to himself at a much higher price, thereby fooling lenders and appraisers. The first time I saw this a doctor paid $1.8 million for an apartment building and then sold it to himself for $2.7 million, thereby tricking the lender into lending too much money on the property.

Lenders need to consider the consequences, though, of letting borrowers decide which questions they can decide to answer or not answer, which is tantamount to letting the borrower dictate appraisal policy and letting the fox run the hen house.

Next stop, Ecuador.

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A More Critical Look at “Skyscraper Index” Theory

          Shanghai Financial District skyline April 2012 -- A harbinger of doom for China?
                        Cranes behind Aurora Tower are on China's future tallest buiilding.

My post on Shanghai merely touched the surface of the discussion and analysis that has taken place about this theory that the completion of new “world’s tallest buildings” tends to coincide with economic downturns. The explanatory hypothesis is that these new world’s tallest buildings are emblematic of the misallocation of capital that fuels commercial real estate bubbles as economic interests take a back seat to inflated egos.

While a similar theory was presented in the early 20^th century and had proponents such as eminent urban geographer Homer Hoyt, it became a moot point with the Great Depression and World War II. No new “world’s tallest buildings” were being built between 1931 and 1970, until the spell was finally broken by the World Trade Center in New York.

 As I mentioned previously, the skyscraper index theory was re-introduced in 1999 in a paper with the tongue-in-cheek title of “The Skyscraper Index: Faulty Towers” by research director Andrew Lawrence of Dresdner Kleinwort Wasserstein in response to the Petronas Towers of Kuala Lumpur being completed right as Malaysia and neighbors Thailand and Indonesia were economically collapsing in the famed “Asian Contagion” of 1998.

 Scholarly Research

Some notable academic articles have been published since then to test this theory.

In 2005, Auburn University economist Mark Thornton published "Skyscrapers and Business Cycles" in The Quarterly Journal of Austrian Economics, which is not an Austrian publication, but the publication of a U.S. think tank that explores the libertarian, anti-Keynesian economic theories of such famous Austrian and Austrian-influenced economists as Ludwig von Mises, F.A. Hayek and Joseph Schumpeter.  Although Thornton found the skyscraper index to be less than perfect in predicting economic downturns, he stated “The ability of the index to predict economic collapse is surprising,” and considered it to work better than many other recession predictors commonly relied upon by economists. http://mises.org/daily/3038

In a 2010 article in the same journal, Greg Kaza referred to the Thornton article and added “The tallest or once-tallest buildings in 40 states were completed in NBER-identified contractions.” [National Bureau of Economic Research] Despite his opinion of a high correlation between the skyscraper index and economic contractions, he considered the skyscraper index as “not meant to be a predictor of either economic contraction or financial crisis” but “meant to be a powerful illustration” of the effects of “stimulation by the central bank and the resulting pattern of entrepreneurial error that is revealed in the aftermath.” This is a somewhat political statement, as Austrian School economists are no friends of activist central banks such as the Fed.

A contrary view on the reliability of the Skyscraper Index was taken by a team of Rutgers University economists in an article published last December, entitled “Skyscraper Height and the Business Cycle: International Times Series Evidence,” concluding that there was no correlation between business cycles and the development of new world’s tallest buildings. papers.ssrn.com/sol3/papers.cfm?abstract_id=1970059

One good point that they made early in the article is that the announcement of the construction of a new world’s tallest building usually occurs several years before it is completed, and they could find no correlation between such announcements and economic downturns. (Of course, most announced "world's tallest buildings" never get built; see photo below.)

                                One "world's tallest" that never happened -- The Chicago Spire

They then tried to correlate the date of the opening of the skyscraper with the nearest economic peaks and troughs as established by the NBER and could find no correlation.

One odd flaw of this article is that it refers to “international time series evidence” but uses U.S.-centric NBER data to measure economic peaks and troughs relating to business cycles. This would not be a problem for the time period in which “world’s tallest building” was a uniquely American phenomenon, but this American dominance ended with the Sears Tower in 1974. Their comparison of the opening of the Petronas Towers in Kuala Lumpur in 1999 to the U.S. economic peak in 2001 completely forgets that the Malaysian economy peaked in 1997 and went into an economic tailspin in the Asian Contagion of 1998. The U.S. economic peak is irrelevant in this case, and this oversight is surprising considering that Lawrence's re-introduction of skyscraper index theory in 1999 was inspired by the example of the Petronas Towers and the Asian Contagion.

The authors' repeated misspelling of Mark Thornton’s name (spelled as Thorton) causes one to also wonder how closely they read his work.


Their use of months as their unit of time measurement also introduces some statistical “noise” that might possibly obscure a real pattern. If one uses years as units of measurement instead, one can almost see the forest for the trees:

 Building               Opening date  Nearest economic peak in same nation

Pulitzer                   1890             1890

Manhattan Life       1894             1893
Park Row                1899             1899
Singer                     1908             1907
Met Life                  1910             1910
Woolworth              1913             1913                                                              
40 Wall                   1930             1929
Chrysler                  1930             1929
Empire State          1931             1929
Twin Towers          1970/72        1969
Sears Tower           1973             1973
Petronas                 1999             1997* (my change)
Taipei 101               2004             2008* (my change)
Burj Khalifa              2010             2008* (my change)

There seems to be a pattern defied only by Taipei 101. Have other readers noticed this, or am I just applying false significance to the data, like an astrologer would?

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Academia and International Real Estate

A good appraiser should have a solid academic foundation as well as empirically derived knowledge.

I have seen appraisers who did not understand that overbuilding causes rents and occupancies to drop, as they had not taken a college course in microeconomics. Discounted cash flow analysis, likewise, is chiefly taught in collegiate business schools, as is a sophisticated understanding of the concept of risk as it relates to investors’ expected rates of return.

Conversely, I have seen the growth of an academic real estate intelligentsia who has never gotten its shoes dirty, publishing scholarly articles about the behavior of people they apparently have never spoken to.  This is not an indictment of the academic community as a whole, but expression of a concern about a direction I see the academic community moving in regarding the teaching of real estate and the publishing of articles in scholarly journals such as International Real Estate Review. Some of today’s scholars are failing to talk to real word participants in the real estate industry and failing to perform field work, yet it behooves a scholar to have a complete knowledge of what he is writing about and the ability to teach practical skills to tomorrow's real estate professionals.

I first noticed this trend about 10 years ago as I read scholarly research relating to loan default modeling.  Scholars, many of whom were foreigners, developed multivariate models which included “appraised value” as a supposedly accurate fact, yet my friends who were residential appraisers regularly told me of the relentless pressure to deliver inflated appraisals, particularly as the mortgage industry became increasingly dominated the third-party-originators (such as mortgage brokers).  No one in academia or Wall Street was talking to appraisers.  Assuming that appraised value is indeed a factual indicator of value is a dangerous assumption, and that applies to commercial appraisals, too. Just ask any appraiser.

I consider myself lucky to have had some excellent real estate professors such as William Brueggeman (SMU), Kerry Vandell (now at University of California Irvine by way of U of Wisconsin) and Richard Peiser (now at Harvard), scholars who also had experience working in or with the private sector and could meld both real-world and theoretical concepts into their instruction.  I also notice that some universities, such as the University of Southern California, have seasoned appraisers teach real estate valuation, Ph.D. not required.

I also see other faculties increasingly dominated by professors whose only previous experience was as foreign graduate students in this country, and I see little to indicate that they were working real estate practitioners in the countries they came from.  Foreign nationality could be an advantage if they were teaching courses in International Real Estate, but almost none of them teach such a course, as such a course is rarely offered in the United States.

I have recently read the articles of university professors modeling the behavior of real estate developers.  Developers are described as carefully considering the exact amount of demand for their product and building no more than necessary to satisfy that demand.  Who did these scholars talk to? 

That type of demand analysis is something I would have liked to have done when coming out of graduate school in 1984. I interviewed for jobs at four development companies in Dallas, including Trammell Crow, and the response I got each time was “We can get 100% financing for our project.  Why analyze?” Of course, this reflected the general craziness of the Texas banking industry in the 1980s, but my work still has me constantly meeting and even traveling with developers, sometimes sharing breakfast, lunch, drinks and dinner with them, and their desire for 100% financing still exists, except now they have to trick lenders into financing 100% of the project (which involves trying to trick the appraiser, too). Misrepresentations abound, such as:

“We’ve already installed water and sewers.”

“We’re 90% pre-sold” (with many of the buyers being LLCs or friends with addresses in the developers’ same, distant home towns).

“Our final map will be approved by the County any day now” (or maybe it was rejected last month).

“We’ll be getting tax credits.”

“The City of Podunk has already approved $40 million in bond financing for us” (just wait until Podunk tries so sell such bonds).  Besides, bonds are liabilities which have to be paid back, and end-purchasers will just deduct their share of bonded indebtedness from their purchase offers.

Never has a developer told me, “My analyst told me to develop much less than allowed, based on his research.”  Few developers employ analysts. Developers generally develop to the limit of their entitlements.  If they are legally permitted to develop 100 homes on a site, they almost always will if it physically possible, even if the development is in phases, and I have seen this behavior outside the U.S., too, including Canada, Brazil, and Latin America. No developer has told me that he wanted to develop less than his entitlements.  That would mean having to ask for a smaller loan, and most everything in this business is done with “other people’s money”.

Are developers rational?  Hell, yes, but just not in the way the scholars see as rational. It's all about maximizing return on equity, which is best done by minimizing or even eliminating equity.

As a former, part-time University instructor, I have no hostility to the academic community, and I would like to extend an invitation to Academia to have a member accompany me (at University expense) on each international valuation assignment as a way of "putting heads together".  I have possible upcoming assignments in Germany (a 1 million square foot logistics center in Norderheine-Westfalen), Costa Rica (residential development projects), or Ecuador (prospective solar farms) but bear in mind that I typically travel on short notice.

Guide to the most popular International Appraiser posts

Google Blogger lets me know which posts are read the most.  By far the most popular post has been “New South China Mall: World’s Largest Failed Mall”, having 12,503 pageviews so far.  Readers seem fascinated by spectacular failures, and this post goes into detail about all the mistakes made in planning this empty 9 million square foot enclosed mall, self-described as being “anchored by a KFC” restaurant.  Go, Colonel.

In second place is “Costa Rican Teak Farms for Gringo Investors”.  I thought the scams were already well understood, but the marketing of teak farms to foreigners seems to be on the increase and this post has been a surprise to many readers who were contemplating such an investment.  I hope that I helped them to make better informed decisions.

In third place is my post on Macau.  Americans do not realize how far ahead of Las Vegas Macau is in the amount of gaming revenues, 4 times as high at the time of the post. High-rolling Chinese gamblers, some who are laundering ill-gotten gains, are the life blood of Macau’s gaming industry.

In 4^th place is my “World Gaming Revenue Comparison” I wrote as a sequel to the piece on Macau, once I found that this was a heavily searched topic on Google. Particularly interesting is the rapid emergence of Singapore on the world gaming scene, closing in fast on Las Vegas in terms of gaming revenues.

In 5^th place is my post on the Perennial China Retail Trust, an IPO that went public on the Singapore Exchange in the spring of 2011.  My position on this REIT was that it relied on questionable “independent valuations” and feasibility studies in its IPO and misled readers and analysts.  Initially priced at $1 SGD per share, it went public at 70 cents per share and has declined to 47.5 cents per share as of June 21, 2012, a 52.5% discount from its original valuation.  Meanwhile, their first completed mall was last reported a few months ago as having lost 40% of occupied area as tenants fail.

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South African game farm values: A farm agent responds from the Waterberg

                                             Game ranch in the Waterberg

I had two posts last year about the decline in South African game farm values and openly wondered if farm buyers were scared off by the radical land expropriation rhetoric of Julius Malema, who was then President of the African National Congress Party’s Youth League, but has since been dismissed and disavowed by the ANC Party and President Jacob Zuma.  Malema specifically said:

“They (whites) have turned our land into game farms…We must take the land without paying. They took our land without paying. Once we agree they stole our land, we can agree they are criminals and must be treated as such.”

Farm agent Marius Willemse, who is active in the Waterberg Province which I visited, has this to say:

"As I’m not a wannabe politician, I won’t dwell on the political utterances. The words do not reflect ruling party or government policy. The rule of law prevails in South Africa. It is therefore unfortunate that once said such statements can not be undone.

I’m also not an economist or sworn valuator; I’m a farm agent servicing the Waterberg and believe game farm prices are influenced by many more factors. No single factor ever full explains a market’s performance.

Property prices in South Africa are currently still depressed as in many other parts of the World. It is partly a reflection of the money and capital markets and a result of the global economic fall out.

Many of the Buffet, Branson and sheik types of this World are currently off fighting other battles and not investing in what in a lot of instances is recreational property.

This lower level of foreign investment has a knock on effect. Local farm owners aren’t able to sell and then immediately reinvest the proceeds in another property, driving prices higher.

Current pricing also expresses normal cyclical activity. We’ve had an excellent run with year-on-year farm price growth as high as 47.5 % in the second half of 2008 (FNB National Farm Valuations Index). The market is simply taking a breather and if it is in negative territory then this will also only last a while. Before we know it the cycle will once again repeat itself.

The Waterberg area is special. It is malaria free, scenic and game rich, wild Africa at its best. It is close to the Johannesburg international airport and the heartland of the South African economy. It is easily reachable on a four lane highway and the road to its centre, Vaalwater, is currently being rebuilt.

The area is slowly but surely getting its act together. It is now a UNESCO-recognised biosphere reserve and there is a growing collaborative approach to marketing the area as tourist destination.

I think that as soon as the global economic dust settles we will once again see very significant farm price growth in the Waterberg".

I hope I didn't previously present a false impression of South Africa as seething with racial strife. What I witnessed was quite the opposite.  My Afrikaaner hosts seemed proud of the progress, both social and economic, that their nation has made in the last two decades, and never had anything disrespectful to say about black people. While riding the freeways of Pretoria I saw many German luxury cars being driven by young black people, much like Atlanta, suggesting an inclusive economy which allows all races to prosper. The closest thing to a racial conflict I saw was when one of the hosts had an argument with a black meter maid "My taxes pay your salary!"

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Tepotzotlan, Mexico, revisited: The Danger of Hypothetical Conditions in Appraisals

Maybe once a year I get feedback from a client such as this: “We hired an internationally famous brokerage firm to revalue the property you appraised and they estimated a value 15 times as high as yours. Explain yourself.”

Such was the case recently with my previous valuation of land at the periphery of Mexico City. The appraisers were from the Mexico City office of an international appraisal firm being sued for malpractice for billions of dollars in the U.S.

Presented with the new valuation report, I found the reasons for the difference in value to be obvious. The appraiser made an assumption that the property would be rezoned at 12 times its current allowed density, permitting development of 1206 dwellings on a 26-hectare site. Such an assumption would be labeled as a “hypothetical condition” in a U.S. appraisal report, but it wasn’t in this Mexican report. (The neighboring subdivision built 18 homes before going bankrupt.)

My client never instructed them to assume such a hypothetical condition. I wondered if the loan applicant instructed them to make such an assumption, although the loan applicant never asked me to. In discussing the zoning, I even asked him, “So the current zoning allows you to build 104 dwellings, right?” to which he responded, “Yes, but because of the topography we can only physically build 80 homes.” Forced into a conference call with the appraisers, two things became apparent:

1. The appraiser never met the borrower or owner of the property, but only the mortgage broker, who told the appraiser that the property was about to be rezoned.

2. Although three appraisers signed the report, including an MAI in Chicago, it was only the most junior appraiser who actually visited the property.

I had a similar situation earlier this year, in which a brokerage firm’s appraiser did her inspection of raw land in the Dominican Republic from a helicopter and photographed and described the wrong property, possibly due to being steered by the property owner. It almost seems that the major brokerage firms do not care about their valuation clients.

My hard money lender clients always instruct me to appraise “as is”. The municipality of Tepotzotlan issues “Certificates of Zoning Information”, and the position I made in the teleconference is that I appraise according to present Certificate of Zoning Information until a new Certificate of Zoning Information is issued. This particular client agreed, stating “Please don’t assume anything”.

This post is not meant to criticize Mexican appraisers, as the problem is the same in the USA. Appraisers are too quick to believe statements such as “we will be getting final subdivision approval any day now” or “the elevators will all be fixed tomorrow”. It places lenders at risk and the appraisers at risk of being sued. Also see my post on "professional responsibility".

Appraisal of a Condo Project in Harlem

I normally limit posts on this blog to my international work, although 60% of my work is domestic. I do not expect most readers to be interested, though, in California trailer parks or failed residential subdivisions. Sure, there are some interesting stories to be told, as each trailer can have a story of human misery or else a meth lab waiting to explode, and the subdivision was a possible flipping fraud that contributed to a Utah bank failure. But if I wrote about these things I could no longer call this blog “International Appraiser”.

I do think that New York’s Harlem neighborhood is worth talking about, though, as it is world-famous and one of the brightest spots I have recently seen in the U.S. housing market. Harlem is a neighborhood in northern Manhattan with a tough reputation.

I was born in New York City. My father studied at Columbia University, next to Harlem, and one of my early childhood memories was often waking up in the middle of the night to find my mother staring out my bedroom window at the bus stop, waiting for my father to return home safely. She told me that gangs in Harlem had initiation rites that included shooting or maiming a white man. This was only a few years after West Side Story had become a hit Broadway musical.

Fast forward to year 2001, and that is when the world first got a glimpse of a Harlem renaissance. That was the year that former president Bill Clinton established his office on 125th Street in Harlem.

New York City has been blessed with a period of good government and good policing, and Harlem has become a neighborhood secure enough for anyone to live in. As I watched out my window at the Aloft by W Hotel in Harlem, I saw a rich diversity of residents, from poor to prosperous, black to white, all walking at night without fear or conflict. I walked by the famed Apollo Theater to find the sidewalk in front mobbed by camera-wielding tourists and a line of white people waiting to get into this historic Black theater. I dined at a French restaurant where there were many men in suits.

I recently appraised a failed condo project in Harlem. This was partially completed new construction, with the exterior façade already finished. The loan applicant in this instance was actually the foreclosing lender, a very entrepreneurial firm which had the staffing resources to complete the development of the project.

This was not a case, though, of Harlem being not yet ready for condos. There have been a number of condo projects already completed and sold out, including a large project across the street from the subject, where the last sale was a one bedroom condo selling for $365,000. A check of the MLS showed only 3 units for sale in this zip code, with prices starting at $329,000.

It should come as no surprise, though, that Harlem has become a seller’s market for condos. You can’t keep a good location down forever, and Harlem fits the urban geographer’s classic model of decay followed by renewal. Harlem is just a few minutes farther by subway from Midtown or Downtown jobs than the Upper East Side or Upper West Side, yet where else in Manhattan can one buy a new condo for $365,000? This is about half the price one would pay for a comparable-quality unit in one of Manhattan’s established white collar neighborhoods, and the shortage of affordable housing in Manhattan has been a constant complaint of middle class professionals working there.

The prevailing shortage of housing in Manhattan and Harlem’s gentrification and convenient location has thus created good residential development and investment opportunities.

PS: The construction loan was funded by Kennedy Funding of Englewood Cliffs, NJ.

The International Appraiser in the press – Germany, Costa Rica, Canada

In the March 2012 issue of Canadian Real Estate Magazine, reporter Sarah Megginson interviewed me for advice to Canadian investors about purchasing individual residences in the U.S. My comments were that the most satisfied Canadian buyers were the ones buying residences for their own use (typically winter vacation use) and to be careful to avoid “guaranteed rental income” scams for investment properties in poor or vacant neighborhoods of overbuilt cities in Nevada, Arizona and Florida.


German architectural magazine Detail published one of my many photos (see above) of the New South China Mall in Dongguan, China in their April 10th story, “Die 10 größten Shopping Center der Welt” (“The 10 largest shopping centers in the world”). My post on the New South China Mall continues to be my most read post. If you look to the right, there are thumbnails of my posts in rank order of weekly popularity, from top to bottom. Another popular post is "Costa Rican Teak Farms for Gringo Investors".

Tico Times, the English-speaking newspaper of Costa Rica, recently interviewed me for a story published today (May 18), entitled “Investors: Where’s Our Money?”, which discusses the litany of investor complaints against Tropical American Tree Farms, an American-owned company in Costa Rica that sold individual teak trees with “certificates of ownership” having no legal standing in Costa Rican courts, and because the company purports to sell “trees” rather than “investments”, it is not subject to securities regulators in Costa Rica or the U.S.

Shenyang and PCRT update

As reported in the April 25th edition of Retail Traffic, “Shenyang, China was the most active market for new development [in the world] in 2011 with 10.76 million sq. ft. [1 million square meters] of new retail space completed.” CBRE ranked Shenyang as second in the world in retail construction last year, with 2.18 million more square meters under construction in 18 separate projects.

Shenyang is a city of 5.7 million residents and ranks as the 11th most populous “urban area” in China (“urban area” being the term most analogous to the western concept of “city”.)

What this means is that Shenyang has increased retail space at a more rapid pace than most other large Chinese cities, which are themselves no slackers in building malls. Yet GDP per capita (the predominantly used statistic since household incomes are not measured) is less than half that of Shanghai. I have not heard the story yet on why Shenyang should have significantly higher hopes than other Chinese cities.

I have visited and focused previously on Shenyang because of it contains the only operating assets in the portfolio of Perennial China Retail Trust. Shenyang seems particularly at risk of retail overdevelopment, particularly the Dadong district containing the Shenyang Longemont Asia Pacific City development. The 2011 Market Study suggested a quadrupling of shopping center space in this area. Moreover, PCRT is designed to enrich its sponsors regardless of the success of its properties (such as compensation based on valuations performed according to blatantly unrealistic "extraordinary assumptions" dictated to the valuers), and the normal feasibility study process was thus compromised. 

The PCRT share price began sinking in February, possibly as a result of unfavorable news of a 39% decline in occupancy at the Red Star Macalline Mall as of December 11 (which had opened at 91.8% occupancy but was down to 56% as of December). The report to shareholders acknowledges that Chinese government initiatives to cool down the housing market have had an adverse impact on the sale of home furnishings, thereby hurting the tenants of Red Star Macalline Mall. PCRT has reported that they have relocated remaining tenants into one half of the mall, while the other half of the mall will be re-tenanted with conventional retail tenants, thus competing with their own Longemont Mall next door.

One surprising claim, though, was that the slow leasing performance of the Longemont Mall was due to a 3-month delay in the opening of the mall until October due to fire department regulations. My visit occurred in September and was instigated by the news that the mall had opened on July 1st. Furthermore, DBS (one of the IPO underwriters) published a favorable report on PCRT on November 14, 2011, with the title "Perennial China Retail Trust - Execution on Track", also informing the readers that the mall had opened in July. They set a 12-month price target of 83 cents. I noticed that their cameras carefully avoided photographing any vacant space, though.

It should be understood that the property inspectors and independent valuers are the paid advocates of PCRT management, hence explaining the wildly optimistic price targets and valuations.

Last week, the share price popped from 49.5 cents to 52 cents on news of Kuok Khoon Hong, the founder of Wilmar, a palm oil company, raising his stake in PCRT to 16.9%, seen as a vote of confidence. The purchase was at a price of only 44.6 cents per share, though, by a purchasing consortium 49.5% owned by Wilmar and 20% owned by CEO Pua Seck Guan. There is no buy that happens without a sell, however, and it should very concerning that the seller was Shanghai Summit, the local development partner in the Shenyang PCRT properties, effectively reducing their ownership stake from 14.9% to 0. When the developer in charge of the project bails out like this, shouldn't investors be concerned, particularly at a price of 44.6 cents per share? When the co-owner with the most local knowledge bails out, that is never a good sign.

PCRT is currently at 52.5 cents per share, creating a 17.7% two-week gain for buyers Kuok and CEO Pua Seck Guan.

Meanwhile, the latest "independent valuation" valuation still valued the entire PCRT portfolio as of the end of 2011 as completed and leased to 95% occupancy. I don't know why such fiction is permitted in Singapore, but if such a valuation report had been published in the USA, this would invite a class action lawsuit from disgruntled investors.

Disclosures: None. I have no short or long position in this stock and have no plans to initiate such a position.

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