Monday, November 25, 2013

ACFE Asia Pacific Fraud Conference and Observed Patterns of International Real Estate Fraud

I have been a member of the Association of Certified Fraud Examiners for 11 years now, and last week I attended their annual Asia Pacific Fraud Conference for the second time. I found it surprising that this year’s conference was held at the Marina Bay Sands casino hotel in Singapore, considering that gambling is a popular form of money laundering in Asia, but perhaps ACFE wanted us to see it firsthand.

I received useful knowledge from this conference, even if it did not directly relate to real estate. To this purpose, I thought I would summarize here the types of fraud and attempted fraud I have been encountering in my own international real estate work.

One of the things I learned early in my career at Jones Lang Wootton was that the dodgiest deals often had to travel the farthest in securing investors or financiers, so one must consider that international real estate transactions already present an elevated risk for fraud. Here are the types of fraud or misrepresentations I have personally witnessed:

Common scams:

1. Puffery regarding the quality of the distant real estate assets. “Resort land” is often no more than a sugar plantation or a mangrove swamp with or without development approvals. What is represented as “next door” to a prime area is often more distant than represented. Leaseholds about to expire have no value without documented proof of renewal in place. “Rental yields” often fail to stand up to scrutiny. “Substantially sold out projects” sometimes hang by a thread in the form of a minimal 5% deposit from would-be buyers (which buyers are willing to forfeit if the value of their lot declines by more than that). In this line of work, I am sometimes placed in the uncomfortable position of asking myself “they made me fly thousands of miles to see this?”

2. Bait and switch. One property is advertised or being pledged as collateral for a loan, but documents submitted to me are for another property. One particular ploy to watch for in Latin America is when documents refer to “Lote S/N”, which is an abbreviation for “Lote Sin Numero”, or “Lot without a number”. It may not be the same property, and professionals will need to be consulted to establish its proper identity.

3. No valid purchase contract. A foreign loan applicant must submit a valid, executed contract to purchase a property he does not yet own in order to receive purchase money financing. The purchase contracts I often receive are often submitted as a draft document in MSWord, with many blank fields, without proper signatories, and sometimes the seller is not the same party as the present property owner. These flaws do not allow me to consider the purchase contract to be valid, and they only arouse suspicion instead. Think about it -- how did you close on the purchase of your first home without a binding purchase and sale agreement? Yet these foreign buyers will tell me of impending purchase closing deadlines without even having ratified agreements in place.

There are two different scenarios in which I’ve seen this done:

a. There is another real purchase contract for a lesser amount of money, or

b. There is no proof that the legitimate owner of the property consented to sell the property or even knows about the phony purchase contract. This latter scam seems to be increasing.

4. Misrepresentation of ownership (similar scam to 3b). Foreign loan applicants sometimes attempt to pledge other people’s properties as collateral for a loan. One common ploy is when they present excuses as to why I cannot contact the rightful owner, such as “he is a high government official who is hiding his assets”. These scams quickly fall apart when the borrower cannot produce documents that an owner would be expected to have, such as a property tax bill or the actual development plan that has been officially approved. Government officials’ secrets are safe with me, any way; my job is to perform due diligence on a particular piece of real estate, not judge the integrity of government officials or violate principles of confidentiality. My job is completely apolitical.

5. Compromising the property inspection. Yes, I like to ride helicopters, but the proffered helicopter ride is often done to prevent me from discovering true ground conditions. Mangrove swamps can appear to be solid ground from the air, for instance, and rugged terrain can sometimes resemble terrain than it is flatter than it really is. In Fiji, I rented a hotel room a quarter mile’s walk up the beach from the subject property so that I could walk to the property that I was only allowed to see from a helicopter. It turned out to be a mangrove swamp. Likewise, after insisting in Belize that I be taken to the property’s edge, only then did I find out that the property could not even be reached by 4-wheel drive vehicle. I would have had to rent a tractor.

6. Tricking the appraiser by showing him or her the wrong property. I have seen MAIs from famous international real estate firms fall for this trick, which should not happen to any appraiser or valuer who has the ability to identify a property on a map or the ability to read a legal description. When will this skill be taught in real estate valuation courses?

7. Attempting to influence the lender or appraiser with biased feasibility or valuation reports from “experts”. Despite what is sometimes a long list of credentials of the expert, the biases are usually evident in the reports themselves, which are often revealed through disclaimers or “extraordinary assumptions”. I hesitate to be convinced by an expert who is being paid to be an advocate for a particular real estate transaction, especially if they are being paid to meet me or travel with me or pretend to be my new best friend.

Even scientific and engineering reports from other countries can be biased. I remember one environmental report that conveniently removed one legally protected mangrove location in between the first and second editions of their report, thereby reducing the number of mangrove locations from 3 to 2. Luckily, I saved a photo of the problematic mangrove location.

I used to be challenged by clients for rejecting reports from famous firms, but the reports from these firms provide all the ammunition I need to discredit them, such as disclosures of pre-existing conflicts of interest, mandatory indemnification agreements in the valuation of questionable projects, and other disclosures indicating a lack of due diligence or verification of borrower-submitted data.

Wednesday, November 13, 2013

Appraisal of Waterfront Lots in Bimini, The Bahamas


Several years ago, the real estate industry perceived a proliferation of “high net worth” individuals (HNWs) seeking second or third homes, and the development industry geared up to build 5-star vacation resorts with expensive villas or lots to prepare for the onslaught of the latest nouveau riche.
Then the Global Financial Crisis happened, creating the dual adverse effects of lessening the ranks and solvency of the nouveau riche and also leaving behind partially completed resorts that had no hopes of being completed according to their original scale because of a steep drop-off in sales.  Buyers became much more hesitant to provide cash down payments when they questioned whether the resort would not be completed or else completed without the promised amenities.
Tourism has been seriously affected by the crisis, too, which has resulted in less eyeballs exposed to these resorts under construction.
This situation has resulted in my traveling to many tourist destinations to appraise failed resorts in places such as Fiji, Mexico, Costa Rica, Puerto Rico, Brazil, and Barbados. 
Normally, when I see sales stop for a year or more, I never see a recovery.  New buyers are scared off, thinking that the resort might never be finished and they would be left holding overpriced raw land in a wilderness lacking services and amenities.
Against this backdrop I was sent to look at a waterfront lot sales program at a struggling resort in Bimini.  There were 41 lots sales initiated in 2012, but only one in 2013, although a previous phase of development produced a deepwater marina and over 350 condos and villas. These lots were typically sold as pairs, creating “sea-to-sea” parcels with a beachfront lot paired with a bayfront lot suitable for a dock. Sales prices were each over $1 million (USD or Bahamian dollars, which are equivalent).

Normally I would perceive the sudden drop-off in sales in 2013 as an indicator of another moribund resort, but these developers were able to find a savvy, deep-pocketed partner to bring back confidence and hope, and that partner was the Genting Group, the successful Malaysian casino and resort operator. For those unfamiliar with the Genting Group, their largest casino operation is their casino on Singapore’s Sentosa Island. Their Sentosa casino and the more visually prominent Marina Sands Casino Hotel are the two casinos that have catapulted Singapore into third place, behind Macau and the United States, in gaming revenues worldwide.  
They already built a casino in this resort and it is now operational.  Gamblers are ferried in from Miami (only 48 nautical miles west), where gambling starts on the boat when entering international waters and can proceed to the Bimini casino, which was built to showcase gorgeous views of the Caribbean rather than to shut out the outside world, as most casinos do.

There are many people who would not care to live near a casino, but the new casino is allowing the addition of more amenities, such as enhanced food and beverage operations, and a 300-room hotel which is currently under construction.  A tourist hotel can be a nuisance, but it can also offer management services for those who own high-end villas on their beach lots and need maintenance, security and domestic services while they are away.  A typical service might include the provision of fresh groceries and flowers in anticipation of the owner’s return.

Predicting the sale of these lots, and at what prices, is still a guessing game, but the shot in the arm by the Genting Group at least gave me hope that the lots could be sold as the number of visitors and amenities increase, and my assignment was to estimate a bulk sale value achievable within one year.  Without the fortunate game change for this resort, I might have had to value the remaining unsold lots as raw land, particularly since there were 106 more unsold lots that were not part of the collateral.

Monday, November 11, 2013

Critical Thinking Skills Needed for Real Estate Appraisers and Valuers

My posts on Scotland and Trinidad in September were critical of "chartered surveyors" who allowed false information to enter the valuation process with exculpatory phrases such as “the developer informs us that…” without verifying such information, even if it seemed preposterous. I did not intend to suggest that chartered surveyors were worse than valuers and appraisers elsewhere.  The same problem exists  throughout the world, including my home country of the USA.

Part of the problem is that “critical thinking” skills are not part of the valuer’s training in any nation where I have interacted with local valuers. 

In the English-speaking world, valuers are trained using “business school” methods.  Instructions in problem-solving start with set, unchallenged assumptions, and the question is not asked, “What if the information and assumptions are wrong?” or "What if the property owner is lying?" There is an intermediate step which is being neglected, the step that consists of verification, exemplified by such questions as "How do we know that the building measures 25,000 square feet?" Did we measure it? Did a government entity measure it?  Did we get the number off the rent roll? (Rentable areas are often inflated by landlords.) Or were we just "informed" by the owner?

Consider, for instance, that the larger the property, the less likely it is that the appraiser will measure it.  In a recent appraisal of a 44-structure industrial campus, the owner represented building area as 256,000 square feet, claiming the measurements to be from the county tax assessor's office. The assessor's measurements were 54% smaller.

In Latin America and some other nations, valuers enter the profession through the field of architecture or engineering, and their more scientific education is even more dependent upon problem-solving that starts with set, unchallenged assumptions. I find many of these architects and engineers overly rely on the Cost Approach and also lack skill in discerning current market conditions (which need to be known in adjusting the Cost Approach for “external obsolescence”, the loss in value due to unfavorable market conditions or external adverse influences).

Imagine if all appraisers and valuers verified the information about the subject property that they relied on.  The world would receive more accurate valuations.  Instead, trainers of valuers indoctrinate their students into providing multiple “Assumptions and Limiting Conditions” that merely serve as disclaimers that complete due diligence was not performed, and then they have the nerve to call this "good appraising"! Remember that "Assumptions and Limiting Conditions" serve to protect appraisers and valuers from liability and not to protect the client.  Take the following example:

In the Scotland post, (, I spoke of a former munitions site appraised as the site of a new, 5-star hotel, with the valuer stating the assumption that no environmental contamination was present (almost never the case with a munitions site), even with abundant metal scrap visibly leaching oxides into the soil, underneath signs warning persons to keep out due to ongoing asbestos removal. 
Making this assumption in the “Assumptions and Limiting Conditions” section of an appraisal is not good appraising; it is aiding and abetting fraud. Sure, a valuer is not professionally trained in measuring environmental contamination, but a valuer does not have to be an environmental expert to state visible evidence in his or her report.

Once I had a debate with another appraiser on an on-line appraisers' forum.  I mentioned that I had one client who insisted that I inspect the roof on every building that I appraised for them.  This other appraiser seemed angered by my remarks and insisted that roof inspections were outside the scope of an appraiser’s duties and it was dangerous to our profession to think otherwise. He even stated that it was even unethical to state my roof observations because it would infer that I was representing myself as a roofing expert. That had been what he was taught.

I remember a situation with a former Honeywell building in Minnesota in which missing or worn-out roof flashings resulted in rain and snow melt leaking down inside the exterior walls and destroying several hundred thousand dollars of computer equipment. Now which appraiser is more likely to get sued – the one who pointed out the obvious hazard, or the one who performed an incomplete property inspection and had the attitude of “That’s not my job”?

The truly concerned appraiser or valuer (who cares about his clients) needs to think about whatever may affect the market value of the property.  This includes being properly informed in matters of construction and design, environmental hazards, flood zones and protected wetlands, demographic analysis, and microeconomic analysis of the equilibrium between supply and demand.  Anything less could make the valuation a meaningless academic exercise and is an abdication of professional responsibility.  It can also hurt the client.

This also answers a question I occasionally get asked, which is why do I get sent overseas to perform valuations where local appraisers are available?  The answer is that I offer my clients extra due diligence that they have learned not to expect from other appraisers or valuers, who instead provide pages and pages of disclaimers and limiting conditions. When others say "That's not my job" I say "I will make it my job."

But let us take "critical thinking" to an even higher level.  Shouldn't we as appraisers and valuers also question valuation techniques that may be incomplete or unsound to begin with? 

The appraisal profession has been deficient in its use of discounted cash flow (DCF) analysis, for instance. Some appraisers and appraisal organizations teach that future expenses will grow no faster than future income, when in reality, a building is a deteriorating asset and expenses will almost always increase faster than the rate of price inflation. So many commercial loans have failed because reliance was placed on an unrealistic DCF analysis.

Appraisers have also been surprisingly resistant to the concept of looking at listings as comparable sales data. If listings are found indicating lower market values than most recent sales, this is the warning indicator to inform appraisers of a declining market. In that case, listings will indicate the new, reduced ceiling of value.

Some appraisers refuse to use comparable sales that are foreclosures or in foreclosure, even if the appraised property is also in foreclosure. Someone has taught them to do this. This can result in overvaluation.

Critical thinking can sometimes fly in the face of professional orthodoxy, which may not always hold up to logic. There is a status quo maintained by professional "Grand Poobahs" whose power is dependent upon a lack of change.  Professional orthodoxy is sometimes not that much different than a religion. Many years ago, religious leaders were asked the question, "What would you do if Science invalidates part of your religion?" (We all know that the Earth is not flat.) The answer that impressed me most was from the Dalai Lama. He said, "Then Buddhism would have to change." Likewise, the appraisal profession will also need to change with the times. 

PS:  For younger or foreign readers, the above illustration is of a television character named "Sergeant Schultz", an incompetent prison guard played by John Banner in the 1960s television sitcom "Hogan's Heroes". His stock phrase was "I know nothing, NOTHING!" even though he sometimes knew that his prisoners were up to no good, but could be persuaded to look away by a piece of chocolate.  

Thursday, November 7, 2013

Appraisal in Abaco, The Bahamas

The appraisal was for refinancing purposes, but the subject property was the largest on a cay with only 110 homes, a substantial number being second homes for wealthy foreigners. This was the former residential estate of a well-known American commercial family dynasty.

Complicating the situation is that 37 of these homes on this cay are currently listed for sale. Just as elsewhere in the Caribbean and Latin America, the supply of vacation homes for sale is currently greater than demand.

Also complicating the valuation was the high value of land as well as the high cost of construction in the Bahamas, which forces an appraiser to segregate each home sale into components of land value and improvement value. On the continental mainland, the abundance of land makes land values cheap, but on a cay which measures about 2 kilometers by 100 meters and is surrounded by the sea, the constrained land supply makes land much more valuable, similar to Manhattan and San Francisco, where natural barriers also constrain the supply of land, making real estate more expensive.

Likewise, labor and materials are usually brought in from other islands and sometimes other countries, such as Haiti, adding to construction costs in the Bahamas.

Rather than using a normal adjustment grid, I performed a multiple regression analysis based on nine sales. From a statistical point of view, the sample size is not good, but still better than the classical adjustment grid method of valuation. The two variables which proved to be statistically significant were land area and finished living area, and I also tested variables for lineal feet of beachfront, number of docks, number of bedrooms, and a dummy variable for presence of a protected harbor (useful during hurricane season).

For this particular cay, for instance, the coefficient for land value was shown to be $745,286 per acre, while the local appraiser had already been using $750,000 per acre in his adjustment grid. The results were remarkably similar.

PS:  A $5,170,000 loan was subsequently made by Kennedy Funding of Englewood Cliffs, New Jersey.

Thursday, October 31, 2013

Appraisal of land near Cancun, Mexico


This is the second time this has happened to me in Mexico.  The borrowers wanted to take me to a distant spot and then point to their property without having to take me to the actual property being appraised.  I hope this is not how land is usually appraised in Mexico.

I was told that the property was adjacent to a prestigious beach resort with $500 per night rates, which I verified through  The land was actually across a lagoon to the west and took about 20 minutes to reach by car, but the biggest surprise was that the land was composed almost entirely of dense mangrove swamp (known in Spanish as "mangle" or "manglar").  From the air it appears as green fields, but when inspected more closely one finds that it is all swamp and no solid ground.  Furthermore, mangroves are legally protected in Mexico, as are the crocodiles that inhabit them, and I witnessed at least one crocodile warning sign.  (For more info on why most governments protect mangroves from destruction, read .
Adjacent properties were also undeveloped mangrove swamps, and the only human activity appeared to be the presence of squatters.
In a previous appraisal assignment in Acapulco, a parcel was represented as being along the road to the airport.  The owner took me to another parcel along this road and then pointed to his property in the distance.  I asked him if his property was landlocked, but he assured me that there were roads leading to his property. I said “Let’s go there,” and found the property to be an ecological preserve covered with mangrove swamp, situated next to a garbage dump. Moreover, we were politely accosted by residents, either squatters or ejidatarios, who claimed the land as their own. Furthermore, the water had been polluted by a former Pepsi manufacturing plant.  The property also had crocodiles.
Landfill next to appraised property in Acapulco

In a recent post I was critical of an appraiser who performed her property inspection in the Dominican Republic by helicopter.  This is not the way to appraise land. From the air, dense mangroves can appear to be lushly vegetated solid ground. Here is what the property near Cancun looks like from above:
Here is what the property looked like from below:
Nothing substitutes for “boots on the ground” when conducting land appraisals, and one should wear boots for land inspections. They keep your feet drier and also protect you from snake bites.

This was not the only trick these loan applicants tried to play.  The deed showed that they were not the owners, nor did they possess a purchase contract.  Rather, they claimed they had the owner's permission to mortgage this property to finance an unrelated venture, but the contract supporting this claim seemed to be hastily and amateurishly prepared, and stated the property owner's attorney as the owner of the property.

When questioned about this, they stated that the attorney was a Mexican government official who really owned the site, using the registered owner as a proxy in order to hide his assets.  I googled the attorney's name but did not find any information on his government position. I never met or communicated with him or the registered owner. 

Tuesday, September 17, 2013

Appraisal of a residential subdivision in Trinidad

The story was as follows:  A bank was about to foreclose on this struggling hillside subdivision with upscale hopes, although the developer had received “Town and Country Planning permission” (entitlements) for a change to multifamily development, which might appeal to a broader market than these expensive residential lots (each > $100,000 USD, pricy even by U.S. standards). 
The developer had a recent valuation from an MRICS chartered surveyor for $7,225,000 for a slice of land having a total of 11 lots plus roadways, including two lots required to serve as open space and a preschool/community center.  The appraised value worked out to about $14 USD per square foot for total land area before subdivision. Numerous residential lots are listed for sale in the neighborhood at prices of about $14 to $15 USD per square foot, so the chartered surveyor did not discount for the time and expense to sell out all of the lots, as required in U.S. appraisals -- these lots won’t fly off the shelf on Day One of marketing.  In fact, there have been no lot sales this year.
As with many other Caribbean and Latin American nations, developers here have crowded the residential submarket catering to the affluent class, which during better times has higher profit margins than land developed for affordable housing.  The result has been similar in each nation – a dearth of affordable housing for the masses but an oversupply of upscale residential projects – as each nation competes to attract North American and European millionaires.
Two lot resales occurred in this subdivision last year, at prices of $4.30 and $11.84 per square foot for lots of differing sizes. The buyer of those lots is now selling all holdings in this subdivision, though.  Part of the problem for developers is the very slow response time of the Trinidad and Tobago government in granting building permits.  Developers all over Trinidad and Tobago have been complaining about this.
In this case, the purported Town and Country Planning Grant of Permission document for rezoning to multifamily use turned out to be for a different site and a different owner, with the document truncated before it even explained the approved new land use.  The developer did not provide any documented approvals nor plans and specifications for the proposed townhouse development, which would have been required to obtain Town and Country Planning permission.
Just as last week in Scotland, this borrower assumed that a foreign appraiser would not check names on documents and would become overly reliant on a local appraiser who is hired only as an advocate.  This particular appraiser also scoffed at my decision to visit the Land Registry office to find comps, but he left me with no choice; his report had no comps or market data or analysis.  I found comps, and a lower value was indicated.

Tuesday, September 10, 2013

Appraisal of a former naval base in Scotland

According to HVS, this might become Scotland's next 5-star resort

This abandoned and derelict munitions facility outside a village of 2000 people has been vacant since the 1980s. A prospective developer of a 5-star hotel resort with vacation residences, marina and destination spa presented my client, a private lender, with a glowing HVS feasibility study describing the location as “enviable”, “impressive”, “magnificent” and “excellent”, not exactly the parlance of objective analysis. He had even collected elated (alleged) testimonials from Scottish VIPs. I was to appraise the property “as is”, though.

I called the developer to arrange an inspection. I started with the question, “Who owns the property now?” His answer was “We do,” referring to the limited partnership he directed, which turned out to be a "shelf company" (an aged shell company which is sold to scammers wanting to appear legitimate). I requested documents, including a title report [“report on titles” in the UK]. His solicitor [attorney] sent a current title report indicating another entity in possession of the property.

In my second communication with him I told him that if he does not own the property like he said, he needs to present a valid purchase and sale agreement before he can get funded. He followed up with a draft agreement in MSWord of a sale between two different shelf companies, designating the purchase price as £6.5 million. The selling entity in this contract, though, was not the registered owner of the property, nor was this an executed contract. Looking up both limited partnerships in UK Companies House, I saw similarities, such as a common former director, recent name changes from similarly named limited partnerships, and a distant location in Aberdeen, Scotland’s third largest city, on the opposite coast of Scotland. I judged this to be a suspicious, non-arm’s length transaction.

The HVS report said that the developer owned the property and had all the necessary entitlements [“planning permission” or “planning consent” in the UK] to develop the project without any additional conditions [there were plenty, such as improving the local highway at the developer’s own expense]. I asked him to send all the planning permissions by e-mail, and found that the permission was limited to the hotel, a café, and vacation residences, but that there was no permission for a marina, spa, or the 2 restaurants and 3 bars he proposed. There was no particular permitted amenity that would make this abandoned brownfield [“contaminated land”] into a 5-star destination resort.

When I finally met him in Scotland I once again reminded him that I needed a valid sale agreement. He seemed surprised that his draft agreement in MSWord between two shelf companies was insufficient, so I had to remind him that the lender needs proof that title will pass from the registered owner to the borrower on the day that the loan is funded. Otherwise, the loan will not be adequately secured and a mysterious shelf company with no recorded assets or financial reports could just walk off with my client’s money. Three weeks later I still have not received a valid sale agreement.

My visit to the site gave me mixed feelings. The loch and mountains made good scenery, but there was rubble all over the site, including a lot of oxidizing metals leaching into the soil, as well as signs forbidding entry due to asbestos removal. Then he had the nerve to tell me that he had already accomplished full environmental remediation on the site.

Abandoned munitions sites are almost brownfields by definition, as the ones operated during the World Wars typically have high amounts of toxic and volatile trinitrotoluene (better known as TNT) and its degradation byproducts (such as benzene, a carcinogen) in the soil. Traditionally, these soils have had to be removed and incinerated before replacement, although modern remediation methods include composting or bioslurry treatment, but the soil still needs to be removed.

Naturally, seeing all the rubble present, and having already discovered his untruths about ownership and planning permissions, I concluded that he was lying again. Unlike most appraisers and valuers, I do not bury a disclaimer in the Assumptions and Limiting Conditions stating that my valuation assumes that the property owner is telling the truth; that is too high an expectation. I care about my clients enough to verify.

On the other hand, this was not to be a valuation of raw land only, but raw land with entitlements that take years to obtain in this bucolic and environmentally sensitive locality. There can be a value to the right to build a hotel and vacation residences when such rights are in short supply in an “as is” valuation.

My valuation was based on local comparables, including a nearby, new, 5-story hotel
which was curiously almost vacant on a summer day, whereas HVS chose 5-star Scottish hotels, most of which are golf resorts, as comparables, and both valuation companies ignored any local competition including the nearby new hotel. They projected nightly rates more than twice that of any of the local hotels. What whores! HVS even put a disclaimer in its reports that the subject site was assumed to be free of contamination despite contaminants visually oozing into the soil.

HVS has a long history, being founded by Steve Rushmore, the father of modern hotel valuation and author of the Appraisal Institute’s textbook on hotel valuation. I’ve been reading their reports for most of my career and have become increasingly concerned about their deference to the hotel development industry to the detriment of the lending industry. The resumes of their appraisers indicate most of them to be recent hotel school graduates and not particularly experienced in real estate. When I was working 10 years ago at Bayview Financial Trading Group, now a subsidiary of Blackstone, I found HVS on their banned appraisers list. My very first post on this blog was a proposed 5-star hotel in Barbados, which I appraised at $17 million “as is” (not knowing that two other appraisals were being done), CBRE appraised for $18 million “as is” and HVS appraised for $50 million “as is”.

Lately, HVS has been aggressively expanding worldwide and licensing its name to other appraisal firms, and I question the level of due diligence being done. The HVS-branded appraisers in this assignment were from a Spanish appraisal firm licensed to carry the HVS name, and they included the HVS logo and boilerplate [canned comments] in their report without following up on the promises made in the boilerplate. As the loan applicant has not yet produced a valid sale contract and has made major misrepresentations about the subject site, and HVS has repeated his misrepresentations, it created the appearance that HVS is complicit in a scheme to defraud my client, unless they are just plain incompetent.

Am I the only one to notice the HVS credibility problem?

PS:  Scotland does not participate in the UK Land Registry, but has its own land registry as part of the "Registers of Scotland".  I ordered data as part of my research and was surprised to find a hefty price tag of   £300 + VAT (value-added tax of either 17.5 or 20%) for data of minimal value, equivalent to about $600 USD. I've often bought data from other land registries in British Commonwealth nations, such as the provincial registries of Canada and Australia and most recently in Trinidad and Tobago, where I spent the equivalent of $23.19 on data for an upcoming appraisal assignment, a price which is more typical of government registries that charge a fee for data, and many don't. I asked a Scotsman why Scotland would charge so much for public data, and the answer I got was "The Scottish government likes to make a profit."

Monday, August 26, 2013

Updated Guide to The International Appraiser’s Most Popular Posts

The two posts still drawing in the most readers, the post about the failed New South China Mall and the post about the mass marketing of Costa Rican teak farms to international investors, are two years old now.

The New South China Mall seems to be a source of endless fascination for journalists all over the world, having opened as the world’s largest mall in 2005 and going bankrupt soon afterward. I posted about my visit to the mall and my assessment of the reasons for the mall’s failure in May 2011. (

I published “Costa Rican Teak Farms for Gringo Investors” ( in August 2011, and received more e-mails about this post than any other one, discovering that thousands of American, Canadian and British Investors had already invested in such teak farms or were considering investing. My post focused on the misinformation and deceptive marketing used to sell such farms and the perils of real estate and/or development done to satisfy investor demand rather than consumer demand.

The third most read post is one of the first posts from 2010, “Appraisal in Costa Rica” (, which examined the feasibility of a tourist medical hospital project in a remote coastal area without paved roads.

The fourth most read post, about La Riviera Maya (, was a farcical post on the modern ruins left by speculative real estate developers in this area of ancient Mayan ruins.

The fifth most read post has been the recent post on Ronan McMahon, International Living, and Real Estate Trend Alerts ( I subscribed to both publications and found the investment advice (as opposed to travel, relocation, or retirement advice) offered by this publisher to be of questionable value, particularly the continued promotion of raw land parcels in failing subdivisions. Most of the recommended investments or brokers appeared to have already been repeatedly advertised in International Living.

I apologize to readers for rehashing old posts because of a lack of new international work in the last few weeks. I have recently bid on appraising an affordable housing project in Santo Domingo, Dominican Republic and a tourist development in Scotland, so I hope to have something interesting to report soon.

Wednesday, July 17, 2013

Appraisal of an Industrial Property in San Jose, Costa Rica

Urban real estate appraising sometimes yields pleasant surprises, as the shortage of land in growing or geographically constricted cities can create situations in which a property’s land value can exceed its value as currently improved. I appraised a similar situation in San Francisco, California immediately before flying to San Jose, Costa Rica to appraise the property of a bankrupt boatbuilding company.

I stayed at the charming Hotel de Bergerac in the Los Yoses barrio of San Jose while making a two-kilometer walk to and from the subject property, located in the rapidly urbanizing suburb of San Pedro in the canton of Montes de Oca. Vacant lots were few to be found, and new, upscale retail stores were often built next to dilapidated, corrugated steel structures, as often occurs in Latin American cities concurrently experiencing prosperity and land shortages. Moreover, much of San Pedro had been upzoned, permitting building heights of up to 7 stories and site coverage of up to 85%.

Montes de Oca has a particular attribute contributing to its growth. It is also known as Costa Rica’s “Cradle of Higher Education”, including the Universidad de Costa Rica, Universidad Latina and Universidad Fidelitas, all located in or near San Pedro.

Arriving at the subject property, I was initially disappointed to see the physical deterioration of the various structures, most of which were aging metal buildings with rusting steel roofs. This is one of the common letdowns of foreign appraising – traveling many hours and thousands of miles to find a property that is far less than as described. It makes me anxious that someone is going to be angry with my report. The remaining physical life of these particular buildings was rather limited, although San Jose’s 96% industrial occupancy rate does prolong the usage of older buildings.

What was encouraging to see, though, were two neighboring industrial sites that had already been redeveloped with attractive new multifamily housing. San Pedro has a housing shortage and has been encouraging multifamily development.

In one of my posts last year,, I described my lunch with a Costa Rican appraiser in which I asked what Costa Rican appraisers use for comparable land sales. He said that because of the lack of publicly available land sales data, the San Jose provincial government has created a map system for appraisers known as La Mapa de Valores de Terrenos, which sets a baseline value per district, which is then adjusted by appraisers for site factors such as size, zoning, commercial street frontage and terrain. The base rate for this section of San Pedro is 180,000 colones per square meter, equivalent to $358 per square meter (or $33.25 psf) at today’s exchange rate. These land values are comparable to CBD land values in many U.S. cities.

When the comparable improved property sales and listings and land sales and listings were compared, it became clear that the subject property was no longer improved at its “highest and best use”. The land value of the site, even adjusted for demolition and remediation costs, still exceeded the “value in use” of the current improvements, and there seems to be enough collateral value to support the requested loan, which, ironically, is going to be used to restart boat production.

More later, when the loan is funded.

Friday, July 12, 2013

A Warning to Chinese EB-5 Visa Applicants about Investing in Real Estate through U.S. “Regional Centers” 警告通过美国的“区域中心EB-5签证中国投资房地产申请人”

Advertised as "suitable and qualifies for multiple EB-5 applications"

Twenty years ago the U.S. government began a program to grant permanent resident visas, or “green cards”, to immigrants who invest at least $1 million to create an enterprise in the U.S. that creates or preserves otherwise-lost jobs for at least ten Americans outside the immigrant’s family. The threshold investment was reduced to just $500,000 in “targeted economic areas” of unemployment; 50% above the national average or in metropolitan areas of less than 20,000 inhabitants.

While the EB-5 visa program was slow to gain popularity, the number of applications has gone way up in recent years in response to the following three forces:

1. The proliferation of “regional centers”, private projects that pool the resources of multiple EB-5 investors,
2. The explosion in the numbers of Chinese applicants for the EB-5 visa, which now exceed all other countries combined, and
3. The desire of the real estate industry to find new sources of low cost capital, particularly “dumb capital”.

The EB-5 visa program is administered by USCIS (U.S. Citizenship and Immigration Services), who approves applications from visa applicants as well as projects wishing to be approved as “regional centers”. An approved regional center is allowed to solicit investments from EB-5 investors, but the USCIS continually issues the following caveat regarding investments in regional centers:

USCIS approval of an EB-5 Regional Center application does not in any way:
• Constitute USCIS endorsement of the activities of that Regional Center;
• Guarantee compliance with U.S. securities laws; or
• Minimize or eliminate risk to the investor.

In other words, “Investor Beware”. This is particularly problematic since USCIS states that more than 90% of EB-5 applicants are choosing to invest through regional centers rather than opening their own businesses. These are typically immigrants without entrepreneurial backgrounds, possessing more money than business skills.

I asked my Chinese associate who accompanied me in 3 of my last 4 business trips to China why there are so many Chinese millionaires choosing the regional center route rather than opening their own businesses.  How did they become millionaires in China without being businessmen? What was their source of wealth?

His answer was disarmingly simple – they became rich through real estate speculation. Being early in buying new condos in Beijing and Shanghai made many ordinary Chinese people rich without needing to learn the skills of starting and running a business. And having made their money through real estate, they are particularly attracted to regional centers which are real estate developments.

Although real estate developments have been approved by the USCIS as regional centers, they face a challenging task of proving that they have created 10 permanent jobs per investor, and there has been a lot of confusion as to what can be counted as qualifying jobs for purposes of earning the visa. Here are some of the misunderstandings:

1. Construction jobs to build the project are not considered eligible permanent jobs unless they are full time (35 or more hours per week) and provide 2 years of continuous employment for U.S. citizens. 

2. From the time of initial EB-5 visa application, the investor has two years to demonstrate that 10 jobs were created. Larger real estate developments can take sometimes take 2 years to start, beginning from the concept stage, then soliciting government approvals while ordering and submitting costly studies relating to traffic impact, environmental impact, and economic impact before finally being able to start construction. Finding protected animal and plant species or Native American burial grounds can indefinitely postpone the project.

3. Once complete, commercial real estate itself is not always labor-intensive enough, with the exception of hotels, restaurants and senior care centers, to produce 10 jobs per investor.

4. Normally, the jobs produced by tenants moving into the commercial property, such as a shopping center or office building, cannot be counted as jobs created by the EB-5 investment, unless it can be proven that there was such a shortage of space in that area that these jobs would otherwise not have been created or else that other qualifying jobs were indirectly created.

What about the people hired by the restaurant that moves in? Those are normally considered jobs created by the restaurant, not the real estate project, unless it can be shown that the restaurant would have never opened in that community unless this particular shopping center was built, and the standard of proof would require an expensive economic study. Restaurateurs usually have a selection of locations to choose from.

In response to a Freedom of Information Act (FOIA) request, USCIS delivered 895 pages of I-829 requests (the final application for the visa) that had been challenged or denied. The most prevalent issue was job creation, occurring in 65% of all cases. USCIS places the burden of proof of job creation on applicants. In many cases, the visa applicants had only created ineligible part-time jobs or had created an insufficient number of permanent jobs.

What is most concerning, however, is the data published by USCIS on May 31, 2017, indicating that only 61 out of the current 866 regional centers had actually gained I-829 approvals for their investors allowing them to get permanent residency.  In other words, only 7% of regional centers have been effective so far in getting their investors permanent green cards. 

Real estate developers applying to be regional centers

According to USCIS statistics, more and more of these developers are being turned down for regional center status, but some applications have gotten through, possibly due to the vagaries of USCIS staff, who are typically not trained in real estate economics, or else due to the persuasiveness of the developers who applied, and real estate developers can be very persuasive people. I meet one almost every month. Some fraudulent regional centers have been approved. See

Exploitation of Chinese investors

Also troubling is the proliferation of seminars and services on how to finance real estate development with money from Chinese EB-5 investors. The focus is not on how to gain visas for these investors, but on how to fund a project that has been turned down by all the banks and private lenders. This is a risky environment for EB-5 investors.

The top photo, for instance, is an intersection next to a 320-acre agricultural property in Imperial County, California, being marketed as “For EB-5 regional center…currently suitable and qualifies for multiple EB-5 applications”. It was once approved for mixed-use development and is advertised as having been appraised for over $15 million in 2006 “as is” and close to $26 million if development approvals were granted. What isn’t said is that the project never started and the current owners purchased it at foreclosure auction for $5,565,000 in 2007. The asking price is now $12 million, or $37,500 per acre in a county where irrigated farmland sells for $7000 per acre.

Farms do produce jobs, I must admit, but in this part of California, just across the border from Mexico, the likelihood is low that most of the farmworkers are U.S. citizens or permanent residents, who refuse to work in the 115-degrees-Fahrenheit heat of a summer day in Imperial County. Once the farm is up and running, investors will then have to prove to the USCIS that the workers are legal residents of the U.S., and that will be hard to achieve.

The recruiters

Situated on both sides of the Pacific Ocean is an industry of recruiters, most of whom are also ethnically Chinese, for EB-5 regional centers. They have been paid commissions up to $125,000 (A Chicago Convention Center) to land one of these Chinese millionaires, and they often make extravagant promises in China, promises that they wouldn't dare to make in the U.S.