Tuesday, August 28, 2012

Appraisal of a vacation club timeshare in Thailand

This blog occasionally attracts inquiries from owners of foreign vacation timeshares.  They want their foreign timeshare appraised, but the remote location of their unit makes it not cost effective for an appraiser to perform a field inspection.  In many cases a desktop appraisal can be performed, however, as timeshare units are traded in a global market and there is a rich supply of data.

“Right-to-use” vs. Deeded Interest

In this case, the timeshare unit was not a deeded unit (a real estate interest), but simply a “right-to-use” share in a “vacation club”, entitling the timeshare owner simply the right to use a studio apartment unit anywhere in the resort network for one week annually during the “low season” for a period ending in 2049 .  Because the timeshare is not location-specific, this expands the selection of comparable units, as similar “right-to-use” shares in the whole network can be used as comparables. 

On the other hand, a right-to-use timeshare is inherently less valuable than a deeded unit because it is not a real estate interest.  If a timeshare resort company fails, the deeded owners still keep their ownership interests, but a right-to-use owner loses all rights. It is similar to the difference between a condo and a co-op apartment. Although deeded ownership is the preferred method of timeshare ownership, there are some reputable vacation club companies, such as Disney, that sell “right-to-use” timeshares only.
When a timeshare owner has been misinformed about value

When I receive a timeshare appraisal request, I warn the client that market value is not likely to be more than half of the original purchase price (unless it was purchased in the 1970s), just in case false expectations were created by untruthful salespeople or by fake resellers practicing advance fee frauds. 

An untruthful salesperson might promise that the timeshare investment will appreciate in value as an investment, as real estate has historically been a hedge against inflation. The unit could indeed appreciate in value if one considers that only 25 to 50% of the purchase price is the actual value of the real estate; the rest is just marketing and administrative costs – the costs of roping in the sheep with free breakfasts and fake prizes.  Even more so than with a new car, depreciation in the unit’s value will be significant and almost instantaneous.  For example, I see a Hilton Head resort still selling timeshares for $23,000 while resales in the same resort are simultaneously occurring at 10 to 15% of this price.  Depreciation will only get worse with time, too, as maintenance fees increase faster than the rental value of the unit.

Fraudulent resale scams

Fraudulent timeshare resellers are in abundance nowadays; many of them appear at the top of Internet search results.  They contact timeshare owners (including me) with bogus offers above original purchase price, but a substantial advance fee must first be paid. Then they disappear with the money. There were over 5000 such complaints to the Federal Trade Commission last year alone. (The last scam letter I received required me to act before September 12th; that must mean that the boiler room will be vacated on September 13th.)  This makes my job as an appraiser harder, as clients want to hold on to their inflated beliefs about the value of their timeshares.  It is hard for anyone to accept the reality that he or she has been conned. 
Two such resellers have already been shut down with 14 individuals sentenced to prison. Creative Vacation Solutions and Universal Marketing Solutions were shut down after bilking 22,000 victims in the U.S. and Canada of $30 million between 2007 and 2010.  Ringleader Brian Christopher Morris of Boynton Beach, Florida was sentenced to 14 years in prison. Another such firm, Timeshare Liquidators of Boca Raton, Florida, just received 5 indictments two weeks ago for a similar scheme, and Florida law enforcement is going after others.

In this particular case, the timeshare had been purchased for about $12,700 in 2006 and a reseller was promising $20,000, but comps supported a value no more than $2000. The reseller required the seller to make a $1750 deposit.  Perhaps the mystery buyer was a Nigerian prince?

One problem with timeshares is the ever-increasing maintenance fees that eventually overtake the rental value of the unit.  If the timeshare is not in a good exchange program, the unit owners will start defaulting on their maintenance fees to the point where the resort goes bankrupt.  Maintenance expenses always increase faster than consumer price inflation because they are subject to price inflation in maintenance costs as well as the accelerating deterioration of the buildings over time.

I remember appraising one such resort in the Poconos.  All of the timeshare owners had defaulted in a resort known as Mountain Ridge, which was developed between 1982 and 1989.  A developer had assembled the units all over again and renovated them to start the “fractional ownership” process all over again.

Five years ago I inherited a 1980s vintage timeshare at Fairfield Sapphire Valley in North Carolina with monthly maintenance fees of $40. Five years later, that maintenance fee is now $80, requiring me to pay $960 per year for a unit with a rental value of about $850 for one week. That’s a compounded 15% annual increase in maintenance costs over 5 years. I’ve never actually seen the unit; I exchange it each year through Wyndham, usually for a resort in Hawaii. The only saving grace to owning this unit is to participate in the Wyndham exchange program.

Is a timeshare a good investment?

The market for timeshare resales has rapidly become a buyer's market, assuming a buyer can be found. Timeshare user web sites such as redweek.com and TUG (Tug2.net) report that FSBO (for-sale-by-owner) listings have more than doubled in the last year. Many timeshares cannot even be given away because they are not considered worth their maintenance fees over the long term. Timeshare owners are legally obligated to pay these constantly escalating maintenance fees into perpetuity.

In general, a timeshare is a depreciating asset that eventually costs more to maintain than its comparable rental value.  The timeshare concept made more sense in a day and age of high inflation; it guaranteed affordable vacations long into the future.  In today’s reality of overbuilt vacation condos and resort overcapacity, there is no compelling reason to buy a timeshare.

Next stop:  Belize




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Thursday, July 26, 2012

Appraisals of "View Land" in Costa Rica

Much of my work involves flying to faraway places and then being driven in a 4-wheel drive vehicle into the countryside, up winding dirt roads, to a parcel of land with sweeping vistas featuring bodies of water, and then being told “Just look at this view. It’s priceless.”

I often encounter misconceptions of what constitutes the value of a “view parcel”. There is no argument that a finished lot with a view commands a premium over lots with no views. I emphasize the word “finished”, as “raw” mountainside or mountaintop land with views is usually priced and valued less than flat land at lower elevations.

Why? Because of the extra costs to develop land in rugged terrain or higher elevations.

Let’s indulge in a reductio ad absurdum to make my point.

The top of Mount Everest offers spectacular views, but I offered to sell you a lot up there, you would say “How ridiculous! How could I get my Range Rover up there? How and when could I get utilities connected? Where would I buy groceries?” I would attract no buyers, despite the magnificent view.

Suppose that I had already graded the lot and just completed a 4-lane road to the top of Mount Everest, installed all utilities, including digital cable, and even supplied extra amenities such as a golf course, supermarket, and gourmet restaurant? Now that might be something somebody is willing to pay a lot of money for, and the value would be enhanced by the unequaled views from the top of the world.

The extra costs of land development at such a high altitude would probably not be compensated for by the view premium for the finished lot, so this hypothetical unfinished lot on top of Mount Everest would be comparatively worthless.

View Land for Rich Gringos
Developers all over the world have spent the last few years acquiring “view land” for subdivision and sale to rich foreigners, whether they are North Americans, Europeans or Australians. Costa Rica is crowded with numerous proposed “5-star developments” as developers compete to attract rich gringos. Most of the developers are foreigners, too. Many of the projects have impressive artists’ renderings and obligatory photos of female backsides in infinity pools, beautiful women getting massages, Caucasian families frolicking on the beach, and exotic fauna and flora.

The result in Costa Rica, as I’ve also seen in Mexico, Fiji, the Dominican Republic, Brazil, Canada, and Barbados, is a surplus of unstarted or unfinished (see previous post on Barbados) 5-star projects and declining values for raw land.

Such was the case with two land parcels I recently appraised in different parts of Costa Rica. The dome-shaped parcel below looks very difficult to develop because of steep slopes, but there are views at the top of the scenic Orosi Valley. Also limiting value was the lack of approved entitlements and a well report indicating a water flow rate (10.8 liters per second) which can only support about 16 households.

The Orosi Valley

The other subdivision had distant ocean views and was farther along in the entitlement process, still not having local approval, and the “will serve” letter from the municipal water utility read more like “we might serve in the distant future”, as was their commitment to waste collection. This project had pre-sold 9 out of 94 lots in the last 20 months, at prices ranging from $100,000 to $270,000, but pre-sales stopped in 2011, and once pre-selling stops, it is very difficult to get it going again, as foreign buyers fear that the project won’t get completed and they may lose their deposits. When existing buyers see land prices falling, moreover, they may be willing to forfeit their $5000 deposits.

The foreign subdivision projects I actually see succeeding, on the other hand, are the ones aimed at the local nation's burgeoning professional class, offering lots and residences at lower prices within reach of the upper middle class and within commuting distance of major employment centers.  In the Dominican Republic, for instance, when a new highway improved accessibility to the beach towns east of Santo Domingo, such as Juan Dolio, Grupo Metro made a lot of money building condos and villas for sale to professionals working in Santo Domingo.  Similarly, I've seen the Palm Springs community north of Natal,  Brazil, achieve enviable pre-sales as new roads and a bridge to downtown Natal are enabling Palm Springs to become an oceanside bedroom community for Natal commuters, with lot prices starting at $30,000, certainly within reach of the middle class.

One stigma that is currently complicating lot sales in Costa Rica to foreign buyers are some spectacular development project failures, such as Hacienda Matapalo and Wyndham Jade, which are alleged to have been fraudulent schemes all along. There have been development scams, teak farm scams (see my post entitled “Costa Rican teak farms for gringo investors), and squatter scams (see my post entitled “Latin American land grabs from absentee owners”) going on in Costa Rica, many of which are being perpetrated by foreigners, too, such as Americans, Canadians, British and Dutch. That does not mean that local developers are any more trustworthy, and the inherent problem spoiling confidence in the real estate market in Costa Rica is its slow, ineffectual justice system.

Meeting a Costa Rican appraiser

In this valuation assignment, the developer asked me to meet “the independent appraiser” to discuss his recent valuation of the two properties together for a combined value of $12.4 million. Finding the “independent appraiser” sitting across from me at the lunch table made me doubt his independence, and his valuation reports were addressed to the developer.

The developer invited me to ask the appraiser questions. My first question was “¿Qué es lo que utiliza para las ventas comparables?” (What did you use for comparable sales?) His answer was quite unexpected but interesting. There is some institution, perhaps governmental, which has mapped out real estate values, and a Costa Rican appraiser consults the map and then makes adjustments much as any appraiser would. This is not the same thing as researching comparable sales, though, although the map is probably based on previous sales; I just don’t know how long ago they occurred.

Incidentally, all professional appraisers in Costa Rica, as in Mexico, are either architects or engineers, and are expected to have a more rigorous education in quantitative methods than in the U.S., where one can major in Psychology or Religion and still meet the academic standards needed to get certified or designated.

I am not an architect or an engineer, but as an appraiser I am a traditionalist. I like to use recent comps and listings (if the listing prices are below previous closed sales prices, and there is no shortage of failed subdivisions for sale in Costa Rica). Unfortunately, my estimate of value came in lower.

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Saturday, July 21, 2012

Appraisal of Unfinished Condo Project in Barbados

My previous appraisal assignment in Barbados was in December 2009, at a time in which vacation residence projects were faltering, the most famous of which was the Four Seasons Resort at Paradise Beach, which had already pre-sold multi-million dollar villas to the likes of Simon Cowell and Andrew Lloyd Webber. Construction had halted in the spring of 2009.

                                Unfinished Four Seasons Resort

Fast forward to 31 months later, and the situation for vacation residence development is still a difficult one, with many stalled projects all over the island of Barbados, including the still-stalled Four Seasons Project. Mr. Cowell and Lloyd Webber must be livid by now, and I can just imagine Simon rolling his eyes and overusing the words “appalling” and “dreadful”.

The most highly developed section of Barbados is its west (“Platinum”) coast, home to 5-star hotels and restaurants, world famous golf courses and polo clubs, and numerous sightings of UK celebrities and princes. In my previous visit, I saw Simon Cowell’s yacht parked off shore and was shown his red Range Rover in the parking lot. This is an area with a rich tourist infrastructure.

This particular project I appraised is different in its isolated location along the Atlantic shores of the island near the town of Bathsheba. Because of high winds, rough waters, and rough topography, the Atlantic (northeast) coast of Barbados is the least populated and least popular with tourists except for surfers.

In an island oversupplied with resorts, the developer planned an end run around the competition by building the only approved condominium resort on the Atlantic Coast. There is certainly no oversupply there, but there is a question about demand.

The Atlantic Coast lacks tourist infrastructure other than its popular surfing area. But do surfers buy million-dollar villas? The proof is in the pre-sales, of which there have been none after one year of marketing. The developer has turned to fractional ownership sales, too, but once again, no sale.

I thought the problem was in the pricing of the units, and this was also the independent conclusion of CB Richard Ellis, who came up with remarkably similar appraised values.

This developer had based unit pricing on the island’s easternmost resort, The Crane, which is a much larger resort with many amenities on the eastern periphery of the tourist area of Barbados. The subject is a 43-unit condo project at least 20 minutes north of the Crane, quite off the tourist path, and lacking the resort-style amenities (such as an acclaimed restaurant) that the Crane has.

The sad conclusion to this story is that the final bulk sale value of the completed units did not justify the remaining $9 million of construction costs, and this was CBRE’s conclusion, too.
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Wednesday, July 11, 2012

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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Sunday, July 1, 2012

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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Thursday, June 21, 2012

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 20th 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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Tuesday, June 19, 2012

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.

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Friday, June 15, 2012

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 4th 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 5th 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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