Monday, May 31, 2010

Vernon Martin Wins Appraisal Institute Award for Article in The Appraisal Journal

The following announcement was made in the Spring 2010 issue of The Appraisal Journal, the peer-reviewed publication of the Appraisal Institute, by the Journal's editorial board:

Vernon Martin, CFE, is the winner of the 2009 AIET Armstrong/Kahn Award and a $1000 honorarium for his article, "Preventing Fraud and Deception," published in the Spring 2009 issue of The Appraisal Journal.

The AIET Armstrong/Kahn Award is presented by the Editorial Board for the most outstanding original article published in The Appraisal Journal during the previous year. Articles are judged on the basis of pertinence to the appraisal practice; contribution to valuation literature; provocative thought; thought-provoking presentation of concepts and practical problems; and logical analysis, perceptive reasoning, and clarity of presentation. This award is funded by the Appraisal Institute Education Trust.

In his article, Martin focuses on common methods of deception used in fraudulent schemes involving commercial properties and land, including deceptive purchase agreements; deceptive financial statements; misrepresentation of occupancy or tenancy; misrepresentation of property characteristics; undisclosed conditions negatively affecting value; and unrealistic projections of sales, income, or expenses.

Vernon Martin is the principal and founder of American Property Research, a real estate advisory and appraisal firm in Los Angeles, and has been a practicing commercial appraiser since 1984 and a certified fraud examiner (CFE) since 2004. Martin has served as the chief commercial appraiser at three national lenders and also teaches real estate valuation part-time at California State University, Los Angeles. He has studied at the College and the Graduate School of Business of the University of Chicago, and he received his master of science degree in real estate from Southern Methodist University's Cox School of Business.

Monday, March 15, 2010

Appraisal in Costa Rica

The property consisted of three parcels of raw land totaling 92 acres adjacent to a remote beach in Guanacaste, a northwestern province of Costa Rica. The owner wished to finance construction of a 5-star hotel, tourist hospital and wellness center. The owner had signed a management agreement one year ago with Barcelo Hotels, a Spanish-owned luxury hotel group with many existing hotels in Mexico and the Dominican Republic. There were Costa Rican appraisals estimating the combined property to be worth about $26 million “as is”.

Although written in Spanish, the Costa Rican appraisals seemed to contain too much hyperbole to be considered objective. For instance, what were described as 360 degree panoramic views were largely obscured by hills and protected mangroves. The appraisers also assumed that 25 kilometers of unpaved road leading to the project would soon be paved and they valued “protected” (unbuildable) land at 80% of the value of buildable land. (Twenty percent would be a more reasonable number, since nature preserves do add some incremental value to adjacent development land.)

The owners claimed to have full entitlements to build the project, but the submitted documents only indicated approval to build 12 seven-story condominium towers on one of the three parcels, and these approvals were from 2007. The owner had decided to turn the condo towers into hotel rooms, without creating architectural drawings or plans, and there was no documentation that a development plan for a hospital and wellness center was even under consideration by local authorities. There were no drawings, plans or specifications for the revised development plan, other than a generalizd aerial view of the proposed project. The only site work had been to drill two authorized wells.

There were factors that caused great doubts about feasibility, the first of which was the lack of paved road access. The closest paved roads were in Santa Cruz, 25 km away, and the 6-month rainy season and rugged topography of this region can make road travel difficult, as roads are occasionally flooded during the rainy season. Four wheel drive vehicles are needed for half of the year. This is not a good setting for a 5-star hotel, but for a hospital, the setting was particularly doubtful. Successful tourist hospitals are typically located near airports, indicating that accessibility is a strong selection criterion of a hospital. The notable tourist hospitals in Costa Rica are CIMA, Clinica Biblica and La Catolica, located in the capital of San Jose, and the first two are already developing similar facilities near the Daniel Oduber airport in Guanacaste, with La Catolica also considering a branch there.

The idea for this project is that the hospitals would specialize in cosmetic procedures and that patients had the choice of convalescing in a time-share wellness center or else in a room in a 5-star hotel. Get a face-lift, for instance, and spend a month recuperating while gazing at the ocean. Still, the concept of a hospital so far removed from paved roads seemed to be far-fetched. Imagine being sore from a tummy-tuck operation and then having to return to the airport over bumpy, gullied roads.

The other factors that made me believe that this was not a serious project were:

1. The property is listed for sale for $8,500,000, entitlements included.
2. The property was previously listed for sale in 2008 for $5,500,000 and marked sold.
3. The construction cost estimates were quite incomplete, as were designs, drawings, plans, and specifications.
4. The lack of housing in the area for hospital or hotel support staff.

Considering that the owner had originally conceived of condo towers and townhouses on his property, the change to hotel and hospital seemed like an afterthought. This was a parcel of land in search of a profitable use, not a hospital enterprise in search of an ideal location.

As in Mexico, comparable sales are hard to come by in Costa Rica. There is no rule that the sales price recorded has to be accurate, and there are other circumstances that induce sellers to record false prices. I turned to listings of entitled land and unentitled land to set a ceiling of value for the property, and there are getting to be more fully entitled projects put on the market today just as in U.S. beach communities, too. I found entitled projects priced as low as $20,000 per developable unit, and unentitled ocean-adjacent land in Guanacaste priced as low as $10,000 per acre. I valued the hotel parcel as entitled land and the other two parcels, with no proven entitlements, as unentitled land.

Unfortunately, when looking at lending opportunities in Latin America, I see too many deals like this one, with the property listed for sale at a fraction of the value estimated by local appraisers, with the owner meanwhile spinning a fanciful story of a world-class development project. Lender beware!

My observations about international real estate deals are essentially this:

The least desirable properties must travel the furthest to find buyers or lenders. Good real estate opportunities tend to get picked off by local investors and lenders.

Sunday, February 21, 2010

Appraisal in Fiji

The assignment was to appraise one square mile of swampy, beachfront land, as seen above, adjacent to one of the primary resort areas of Fiji, known as Denarau.

Nearby Sheraton Fiji Resort on Denarau Island

Denarau Island isn't actually an island, but a peninsula separated by a river with only one bridge, guarded by security, thus effectively restricting access to all but vacationers and those who serve them.

Denarau is considered quite a successful development today, with 5 star resorts by Sheraton, Westin, Hilton, Wyndham and Sofitel, but according to former University of the South Pacific real estae professor Matt Myers, the first developer failed and it took the second developer about 20 years to turn this former mosquito-infested mangrove swamp into the resort paradise it is today.

One of the issues to consider in this appraisal assignment was that none of the appraised land was "fee simple" or "freehold". Only 8% of the total land area of Fiji is freehold land. 88% of the land area is owned in common by indigenous Fijians, and is leased to prospective users by the Native Land Trust Board, typically for 99-year periods. (This is similar to landownership in the Hawaiian Islands, for instance.) The remaining 4% of Fiji’s land area is owned by the state and is known as “Crown Land”. It is also leased by the government to prospective users for 99-year lease terms. Freehold is the preferred form of ownership, but ground lease terms are not usually onerous, thus creating positive leasehold value for possessors of leasehold interests.

208 acres consisted of "crown leased" land with 97 years remaining on the lease, but another 53 acres were land that was "native leased" with less than a year remaining on the lease. There was no way that my lender client was going to accept an expiring lease as collateral, and I thus could not assign it value, with the leasehold interest expiring so soon.

A second complicating factor was the physical developability of the land itself, which had a high water table, making landfill necessary. Most of the site is heavily wooded, with mangrove being the main species near the beach. Mangrove swamp is expensive to deal with, for several reasons:

• Significant landfill would be required.
• Mangrove swamps produce dark sediments which foul beaches (see above photo), thus requiring the importation of new beach sand and are impossible to drive on.
• Mangroves are a protected species and the government will require the developer to relocate the plants.
• Flood prevention measures would be needed (river dredging, etc.).

Utilities have not yet been extended to this part of Fiji, either.

The third complicating factor was economic. Tourism to Fiji has been affected by the recession, causing discounting of already existing hotel rooms in Denarau. Denarau is just 20 minutes away from the failed Momi Bay Resort that was originally to be managed by JW Marriott, and the other major Nadi-area resort development, Naisoso Island, is struggling.

As in the Barbados assignment, most of my market data came from local journalists or real estate brokers. (One thing I like about these former British Commonwealth nations is that people write well and abundantly). I tried to hire a local appraiser to help me, but I did not find one with the same sense of urgency that my client had.

Appraising in Fiji seemed much like appraising in the Caribbean. The two dominant industries are Tourism and Sugar, and the island is a former British colony. Tourist develoments are kept removed from native communities, and the government is pro-development, despite the frequent coups d'etat, which are never violent.

Fiji has considerable natural beauty and posh hotel resorts. I would highly recommend mosquito repellent if you go there; there are occasional outbreaks of Dengue Fever, which causes painful bone inflammation.

Next stop: Playa Azul, Guanacaste, Costa Rica.

Sunday, January 17, 2010

Appraisal in Barbados

I got called on Dec. 17th with an intriguing appraisal assignment--the valuation of about 250 upland acres in Barbados with entitlements for a 5-star golf resort and 124 luxury villas.

Normally, such a project in a tropical upland location would be a long shot (in terms of feasibility), but this project had secured a hospitality contract with Banyan Tree Hotels and Resorts, known for their 5-star resorts in Asia, Mexico and the Middle East.

One of the international development trends of the last few years has been to pair luxury residential development with a 5-star hotel, a pairing that creates a value-enhancing synergy. The developer plans to use Banyan Tree's management to provide services to the villa owners, such as housekeeping and room service, so that they are not burdened with having to hire their own staff. Such a concept has great appeal to the rich, such as Simon Cowell and Sir Andrew Lloyd Webber, who have pre-purchased villas each worth over $20 million (USD) in another Barbados project to be managed by Ritz Carlton.

The photo shows the raised foundation of the hotel-to-be and pools for private villas which are carved out of calcified coral bedrock, which is much like limestone.
I found real estate prices in Barbados to be higher than in any other Caribbean destination I've been to. There is a reason for that which goes back at least three decades. Barbados was the only Caribbean island to receive Concorde flights (the supersonic Lockheed SST). The flight from London took only 3.5hours, and for the busy, accomplished, British multi-millionaire, Barbados became the most convenient and preferred vacation destination. Since then, the Island has built an impressive industry catering to the super-rich, with world class golf courses, fine dining and luxury shopping. The week I was there, the following celebs were in town: Simon Cowell, Siena Miller and Gerard Butler.

There are two successful inland luxury residential developments in Barbados: the Royal Westmoreland, which has a world class golf course, and Sugar Hill, where Tony Blair resides, and which has a world class tennis resort. Both are not far from the beach, and Royal Westmoreland also has impressive ocean views from its upland location. Apes Hill is a new project farther inland and has recently completed a magnificent golf course and claims to have sold out lots in its first phase (not quite evident in my personal visit). One of the residents will be pop star Rihanna, who was given a free lot. No homes have been built yet, though, and there are rumors that the first phase has not actually sold out, with further development temporarily halted.

Barbados has not been isolated from the world's economic troubles, and has felt an impact from a decline in tourism of more than 10%. The leading source of tourists is the United Kingdom, which has suffered from an almost 25% decline in the value of the Pound relative to the Barbadian Dollar over the last two years. Whereas luxury residential development was considered a sure thing in Barbados not long ago, projects are now getting suspended. The Ritz Carlton project, for instance, shut down last February but is said to be reopening soon as a result of new ownership and a partnership with the Barbados government.

Other appraisers might ask how one goes about finding comparable sales data in a situation like this when Government offices were closed Christmas week. The appraiser profession in Barbados seems to be focused on individual residential properties, and the brokers on the big deals, such as Knight Frank and Saville's, seem more likely to be located in London than in Barbados.

I used journalists and bloggers, who are in abundant supply in Barbados and write in English. Moreover, the press is more likely to write about high profile comparable sales than about run-of-the-mill properties. I also perused real estate listings of large, entitled, resort-quality parcels.

In any event, it appeared that entitled resort-quality land was being marked down close to about $100,000 USD per entitled unit (hotel or residence), although the most recent listing to hit the market, the shuttered North Point Surf Resort, is listed at $71,875 per unit, suggesting a free-falling market for resort development land.
Enhanced by Zemanta