Tuesday, January 6, 2015

What is the Future for Bakken Real Estate?

 Dunn County "man camp" operated by Civeo, itself laying off 45% of staff

North Dakota and Canada's Bakken region can be considered a true boomtown economy, and with booms there are often busts based on changing economic circumstances.

The precipitous fall in oil prices is likely to whipsaw the Bakken economy, as shale oil production costs anywhere from $55 to $85 per barrel, and at this moment, West Texas Intermediate oil is trading on NYMEX for $47.88 per barrel. However, this figure represents the value of West Texas oil, not Bakken oil, which must be transported much farther than West Texas oil. The added transportation costs range from $11 to $19 per barrel of oil, meaning that the value of Bakken oil is much lower than for WTI.

This morning, the price offered at the pipeline for Williston Basin Sweet oil was just $31.69 per barrel and the price offered for Williston Basin Sour (meaning high sulfur content) was $22.58 per barrel.

Drilling activity in North Dakota has already been declining, with the number of drilling rigs declining 23% so far since this oil boom’s peak. The reason this number has not declined more is because much of the oil being produced at the moment is "hedged" or pre-sold at yesterday's prices. If current prices stay the same or decline more, the real bust might not occur for a few more months. That will be when layoffs accelerate and the man camps, motels and RV parks start experiencing significant vacancies.

The effect on real estate will be significant, and I have personally witnessed a similar collapse while working as an appraiser in Houston, Texas, from 1984 to 1987, when I lost my job in the Texas real estate collapse after oil prices fell to $9 per barrel.

Most affected will be the value of land previously considered to have development potential. There has been a proliferation of Bakken-area land parcels being advertised as ideal for business park, RV park or hotel development, at prices up to $200,000 per acre. Most of these are still raw, undeveloped land, and their highest and best use just may be a return to farming or ranching. It may be common to see commercial land values falling by more than 90% as highest and best use changes from commercial to agricultural.

RV parks will also be in jeopardy, as they typically house temporary oil workers who may be first to go as layoffs continue. Other “man camps” are already in trouble. Man camp operator Civeo, featured in the above photo, has announced layoffs for 45% of its total worldwide staff and saw its stock price plunge 50% yesterday. Its stock price is now $3.11 per share, an 89% decrease in the last year.

The lodging industry will also be severely impacted, as many hotel rooms were built to accommodate the boom in temporary workers, and there will be a consequent oversupply of rooms.

PS: Bakken update, January 14, 2015

The number of active drilling wells in North Dakota has fallen to 158 as of today, over 26% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet is $29.44 per barrel and $20.33 for Williston Basin Sour, representing further declines of 7% and 10% respectively in the last week.

PPS: Bakken update, March 5, 2015

The number of active drilling wells in North Dakota has fallen to 113 as of today, 47% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet at the Plains pipeline has risen to $35.19 per barrel for Williston Basin Sweet and $26.08 for Williston Basin Sour.

What this means is that Bakken oil producers are receiving 20 to 28% more for their oil in the last 2 months, as North Dakota drilling activity has dropped by 30% in the same time period and inventories shrink.

The consequences for the real estate sector will be negative.  Since the peak of Bakken drilling activity in mid-2012, the number of active drilling rigs has declined from 215 to 113, a drop of 47.5%.  Considering that each drilling rig employs 100 to 125 workers, this represents job losses of about 10,000 to 12,000 workers, workers who were living in motels and RV parks, and some who might have been renting apartments or even searching for a home to buy.  Despite the improvement in the price willing to be paid for Bakken oil, these benefits will go to the oil producers and not the real estate market.

PPS: Bakken update, March 16, 2015

The number of active drilling wells in North Dakota has fallen to 111 as of today, 48% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet at the Plains pipeline has plummeted to $28.44 per barrel for Williston Basin Sweet and $19.33 for Williston Basin Sour.

The most active driller in Bakken is Whiting Petroleum (WLL).  It put itself up for sale last week and the stock popped up to $40 per share after reporting interested buyers, at which time I sold this stock short. With current assets and a book value of property, plant and equipment (probably above market value) adding up to $13 billion, and liabilities of $8.3 billion, current market capitalization of $6.4 billion as of this moment seems at least 50% too high.

Related story:  http://on.wsj.com/1BNWrPY

PPS: Bakken update, March 27, 2015

The number of active drilling wells in North Dakota has fallen to 97 as of today, 55% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet at the Plains pipeline has increased to $32.44 per barrel for Williston Basin Sweet and $23.33 for Williston Basin Sour.

The most active driller in Bakken is Whiting Petroleum (WLL).  I sold this stock short 2 weeks ago at $40 per share and it closed today at $30.50 per share, for a personal gain of 23.75% in 2 weeks.

PPS: Bakken update, July 15, 2015

The number of active drilling wells in North Dakota has fallen to 73 as of today, 66% below the peak of the Bakken oil boom. The Plains All American Pipeline is no longer publishing offering prices for Bakken crude, but oil prices in general are higher compared to March, and the offering price for Nebraska Intermediate, closest in proximity to Bakken, is $39.50 per barrel today.  This is better news for oil companies, but bad news for Bakken-area real estate, as a two-thirds reduction in drilling rigs means that some oil workers might be moving out of state. The effect on employment could be muted, though, because up until this year, many workers were working double shifts so that they could earn six-figure incomes.  Still, this hinders their ability to pay the inflated rents of yesterday.

Tuesday, December 23, 2014

Another appraisal in Puntarenas, Costa Rica

The subject property was unimproved, mountainous, ocean view land of about 160 acres, located on the Nicoya Peninsula. It has no utilities, paved road access or development entitlements.

A decade ago, ocean view land parcels were trading at much higher prices because of their value to real estate developers, as each had dreams of building luxury vacation or retirement communities for wealthy foreigners. This same situation prevailed throughout Mexico and the Caribbean, too.

The only problem with this vision is that Costa Rica, owing to its topography and coastlines, has tens of thousands of square miles of land with ocean views, and there aren’t enough homebuyers to take up all the possible lots, particularly when having to compete with many other tropical paradise nations. Partially completed subdivisions ended up competing with other partially completed subdivisions when the market went into decline in 2007, and other projects never moved forward due to the difficulty in receiving all the necessary permits.

The land development approval process can take years in Costa Rica, much like in California, and typically entails:

1. Approval by the “municipality” (similar to a U.S. county),
2. Approval by the national environmental agency, SETENA (Secretaria Tecnica Nacional Ambiental),
3. Approval of all architectural and engineering design by the Department of Professional Responsibility of the CFIA (Colegio Federado de Ingenieros y de Arquitectos) [Translated: the Federal College of Engineers and Architects], and
4. Approval from the Ministry of Health

Last time I was in Puntarenas, in 2012, it seemed that every ocean view parcel of land was for sale and nothing was selling. Little has changed since then, except that asking prices are slightly lower now. Many landowners can’t reduce their prices any more and pay back the debt they’ve taken on. A broker was able to supply one closed sale occurring at a price at only one third of the asking prices of nearby parcels, but no large development parcels have been acquired since 2007.

There are enough land parcels with development entitlements or paved road access or utilities that unimproved land like the subject has little chance in competing for buyers, except at highly discounted prices.

Saturday, December 20, 2014

Latest appraisal in Bakken

This  appraisal assignment was of a proposed 35-acre business park in the Bakken area in North Dakota in one of the most active counties for drilling. The owner planned to build a hotel on this site, but wished to sell off 25 acres to other users. Having a hotel on site would be a good draw for a restaurant, for instance, or perhaps offices serving as regional headquarters for an oil or oil service company.

The city with jurisdiction over this site had granted a permit to build a 2-story hotel with 290,000 square feet of floor area with the belief that it would be a 110-room family-oriented hotel. The developer plans to build a 3-story, 400-room hotel. Like many community governments in the Bakken area, the city was rather unsophisticated, not realizing that 290,000 square feet could fit many more than 110 hotel rooms. Nevertheless, the city expressed a desire for a hotel that catered to families whereas the owner/developer is known as a developer of “man camps” – lodging for single oil workers – with small rooms appropriate for single occupants, not families.

Example of hotel operated as man camp by Target Logistics in Stanley, ND

The city’s prejudice against “man camps” and oil worker lodging is becoming common among community governments in the Bakken area. Williams County, generally considered as the locus of the North Dakota shale oil boom, with Williston as its county seat, has issued a moratorium on new man camps and RV parks, as has McKenzie County, with Watford City as its county seat. There is a shared perception that man camps demand extra law enforcement resources, as so many single, bored, lonely, uneducated men in their 20s and 30s increase the local crime rate in such categories as public drunkenness, disorderly conduct, assault and sexual assault. They are paid well, though, averaging about $32 per hour, with many taking advantage of double shifts and earning 6 figures, so theft and robbery is less of a problem.

Temporary worker housing that is needed but unwanted by many local governments

The Bakken area is known for shortages of real estate in certain categories, particularly housing and lodging, but one property type in abundance is raw land. Early successes with Bakken-area business parks have led to a proliferation of “me-too” business parks, often having not yet procured the permits or water necessary for development, listed for sale at inflated prices. The subject property seemed to be in this category. 

Another complicating factor is the recent drop in the price of oil, which closed at $57 per barrel on December 19th. It is estimated that 60% of Bakken’s shale oil wells are unprofitable at below $60 per barrel because of the expense of fracking technology. The cost to develop a new well, furthermore, is estimated to be as high as $85 per barrel. The number of drilling rigs in North Dakota is now 181, 16% below the peak of the shale oil boom.

The few commercial land sales which could be found were of single-user sites of half an acre or less, whereas there is a proliferation of large business parks with unsold lots. In this instance, I had to create a discounted cash flow model with an extended absorption period.

Thursday, November 20, 2014

Mainland China Property REITs to Multiply

Boundary between Hong Kong, on left, and Shenzhen, China, on right, photographed from Ramada Hotel
I’ve just returned from a recent trip to China, where financial deregulation continues onward. The week I arrived, the Chinese government approved a figurative “Through Train” that links the Shanghai and Hong Kong stock exchanges. And the first two days saw a massive transfer of capital from Hong Kong to Shanghai, with little capital flowing in the reverse direction. Part of the reason is because Mainland China is still perceived as the place where the growth opportunities are, and the Chinese Yuan currency has steadily appreciated relative to the Hong Kong Dollar, which is statutorily fixed to the U.S. dollar. The continuing trade imbalance between China and the U.S. continues to propel the Chinese Yuan slowly higher relative to the Dollar.

In this continuing Chinese financial deregulation, international real estate investors should take note of the proposal to organize mainland Chinese properties into REITs to be traded starting next year on the Shanghai exchange, with assets of these REITs estimated to top $6 trillion by 2020. This is an effort to support “the ailing Chinese property industry”. The Chinese government is also admitting a slowing of the economy as they announce reductions in taxes in order to stimulate business.

But if what ails the Chinese property industry is overbuilding, attracting more investors does not solve the fundamental problems of the industry, which is in need of more tenants, not more investors. More investors just pushes asset prices upward without improving net operating income, thus driving yields down, such as in Shanghai, where current yields were once over 7% but are now less than 5%.

Such compression of yields gives the appearance of improving real estate markets even when fundamentals are not keeping pace. For instance, I blogged last year about a portfolio of southern California industrial and retail properties I monitored over 11 years and found an average decline of 17% in net operating income but and average value appreciation of 28% in the same time period.

It remains to be seen how today’s investors will react to the new possibilities of investing in Chinese REITs. Such REITs often offer the prospects of instant dividends by the use of earn-out arrangements funded in IPOs, which serve as a return of capital rather than as a return on capital. Perennial China Retail Trust is an example, initially stumbling badly in the Shenyang market before finishing more successful projects in Chengdu and Foshan. Initial investors who bought at the 70-cent IPO price saw the stock price plummet to 40 cents before recovering to today’s 54 cents per share. Those buyers at 40 cents, including some insiders, still received dividends from the earn-outs funded in the IPO and profited enormously with the earn-out dividends and partial recovery in the stock price. Buyers will need to scrutinize prospectuses for actual net operating income sufficient to fund the advertised dividends.

Meanwhile, a recent Cushman & Wakefield report shed light on where Mainland real estate capital is headed -- out of the country, to "mature markets", with the U.S. being the favorite destination and United Kingdom in second place, and Hong Kong and Singapore as the preferred destinations for real estate investments in Asia.

Monday, October 13, 2014

The Issue of Client Pressure on Valuation Results in International Appraisals

Costa Rican subdivision overlooking the Gulf of Nicoya

It has been almost 3 months now since I’ve done a foreign appraisal assignment, and there are a couple of reasons for this.

1. I’ve had a large increase in business in appraisals of domestic “solar farms” (photovoltaic energy generation) in the U.S. Southwest, and

2. Foreign appraisal assignments have been offered to me with “conditions” that would compromise the ethical code most appraisers follow, conditions which would require me to deceive lenders or the U.S. Internal Revenue Service.

Here are some situations:

1. An owner of a high-end condo on Grand Cayman Island was fishing for an appraiser who could guarantee that his condo was worth $2 million in every year that he has owned it since 2006. But the Caymans have had the same rise and fall as every other Caribbean condo market, and it would not seem reasonable to anyone, including the Internal Revenue Service, that it had been worth the same amount in every year since 2006. The fact that he did an e-mail broadcast of these appraisal conditions to other appraisers could also end up getting him into trouble with the IRS, who provides rewards to whistleblowers.

2. Developers of ocean view residential subdivisions in Brazil and Costa Rica wanted to me to provide current market value opinions on their subdivisions without having me visit their properties. Yes, I was already familiar with their subdivisions, but a determination of current market value requires me to know current market conditions in these respective localities, requiring that I visit and analyze competing subdivisions, too.

“Desktop appraisals” (appraisals done without a property inspection) have limited reliability for overseas properties and are not likely be taken seriously by lenders, either. I also need to see if amenities, such as the guardhouse, pools, recreational areas are operational and that infrastructural development is continuing.

Thursday, August 7, 2014

Shelf corporations in international real estate transactions

Grand Cayman's famous Ugland House, the address of 19,000 corporations

Most readers know what shell companies are. Many offshore locations, such as British Virgin Islands, Cayman Islands, and Cyprus are known for harboring shell companies because of their privacy laws, and shell companies are sometimes used for illicit purposes, tax evasion and money laundering.

But wait! This Wyoming office building houses 60,000 corporations.

A “shelf corporation” is an aged shell company that has a multiyear history of being in business and may also have a credit history and bank account, but no other assets or income. Shelf corporations are created by third party vendors to sell to buyers seeking a misleading history of credit and longevity for their own new enterprises. These shelf corporations are offered for sale on the Internet. Just do a Google search of “shelf corporation for sale” and you will find many shelf corporations that are legally created in the U.S., in states such as Nevada, Wyoming and Delaware, which promise privacy, secrecy, and protection from litigation. Named directors of these corporations are often down-on-their-luck individuals who consented to sell their names just like they would sell their blood to blood banks.

There are legitimate uses for shelf corporations, too, such as the ability to rapidly start up a business in a state that has a lot of red tape for start-ups.

Since most of my work is for lenders, though, I see the seamier side of this business. If the lender has made a loan to a shell or shelf corporation, and the loan defaults, the lender ends up trying to recover their money from a corporation which has no assets, no income and no accounts receivable.

I am sometimes confronted with purchase contracts in which the seller or buyer, or both, are LLCs, shell corporations or shelf corporations, leaving me unable to judge whether the purchase is an arm’s length transaction (a sale to unrelated parties). As an appraiser, however, I can only estimate a value supported by market data, and if the transaction is not arm’s length, it will become obvious. Many other appraisers will try to “hit the purchase price”, any way, with strange selection of or adjustment to comparable sales.

Every state in the U.S. has either a Secretary of State office or Department of Corporations office from which one can obtain names of the principals of LLCs and corporations, and it is helpful in determining whether a purchase transaction is arm’s length (different names on each side of the transaction), unless those entities are located in Nevada, Wyoming or Delaware.

Working in the United Kingdom last year, I was thrilled with the functionality of the UK Companies House web site – one web site for all of the corporations in the UK, so much easier than working in the U.S. It provided addresses, directors’ names, and dates for and changes of company names or directors. It also allowed me to easily establish that the sale contract I was looking at was for the sale of the property from one shelf corporation to another shelf corporation sharing the same directors — in other words, a completely bogus transaction.

The ICIJ, International Consortium of Investigative Journalists, has been documenting known offshore shell companies and their addresses. If in doubt about an address, one can check it out on their web site, https://offshoreleaks.icij.org/ They also have a list of the nations having the most offshore shell companies, which is helpful in its own right. For instance, a few weeks ago I was looking at a deal in Mexico in which the developer was a company in Cyprus. Red flag. Cyprus is not known for its real estate developers, just its reputation as a haven for shell companies.

Clues that you’re dealing with a shell or shelf corporation include:

1. No web site.
2. The principals of the organization have only hotmail, gmail or yahoo e-mail addresses.
3. The web site is “Under construction”. Sometimes there is verbiage about “amazing things to happen”.
4. No present location for company staff.

For example, in a situation I encountered in 2012, in which a piece of raw desert land was being purchased for $1.6 million above the price it had been listed at for two years, the buyer claimed to be looking for a location to build a 100,000 square foot corporate headquarters building for an unknown high-tech company. They had a web site under construction with the words:

“Company is in stealth mode while we develop the team, the infrastructure and the technology. Details to follow in Fall 2011.”

The corporation had no current location. A search of LinkedIn showed about 4 employees scattered all over the country, hardly enough for a 100,000 square foot building. No plans, specifications or blueprints were presented for the building, only artists’ renderings.

When he was unable to show established business operations, the CEO then talked about “secret government contracts”. Suspecting that my client had not performed due diligence on this loan applicant, I ordered a simple $25 on-line background check on the CEO and found:

1. Two criminal convictions, one for check fraud
2. Two bankruptcies
3. Two legal judgments against him
4. No background in high technology, but a bachelor’s degree in political science.

I could go on and on, but I quickly came to the conclusion that his company did not exist and his lack of recent accomplishments suggested that he may have been the kind of person typically recruited as a “straw buyer” in a fake purchase scam. If you participate in certain LinkedIn real estate groups, for instance, you may sometimes see offers of up to $50,000 to participate as a front man in a commercial real estate purchase. This is called “nominee fraud” by the FBI.

Wednesday, July 23, 2014

Appraisal in Lima, Peru

An interesting cityscape resulting from upzoning approved in the 1990s. Many of the office buildings erected then have a lack of windows.

This was a one-acre site, improved with an old mansion from decades ago, situated in Lima’s main financial district, San Isidro. Per JLL (Jones Lang LaSalle), the office vacancy rate in San Isidro was measured at the end of 2013 at just 1%, so a site such as this one would have great value to commercial real estate developers.

Many Latin American cities are divided into municipios, or municipalities, which are similar in concept to the boroughs of New York City. During the 1990s, the municipio of San Isidro, a sort distance south of Lima’s central business district, was upzoned to building heights ranging from 4 to 32 stories, and most of the banks relocated to this district, making San Isidro Lima’s de facto financial district, but also home to many embassies, too. This is one of the nicest areas of Lima.

Lima and Peru have in recent years undergone rapid economic expansion, averaging 7% per year and predicted to be 6% this year, and the supply of office and residential space has been unable to keep up with rapidly increasing demand from redevelopment ventures. This has resulted in urban land values spiraling upward, quadrupling since 2006.

In places like Manhattan, New York, such land is often appraised on a “value per square foot of allowable building area”, which is based on land prices divided by site area divided by FAR (Floor Area Ratio). Such a method does not work quite so well here in Lima because many lots are so small that high density construction is not efficient, partially because of required setbacks. There are many lots of less than 400 square meters (4280 square feet) zoned for 7 stories of construction, and perhaps their main value is to serve as part of an assemblage of a larger site, which is being done all over the financial district in San Isidro.

The Lima office of Colliers International, which seems to be the most active global broker in Latin America (based on seeing their signs), was generous in providing comps. However, I found that price per square foot of FAR was not working as a unit of comparison; it was seriously undervaluing many sites with allowable building heights of 7 stories, which are selling for more than $3000 per square meter.

Because of the number of available comps, I performed a regression analysis on the data in order to isolate possible adjustments to comparable sales for both building height and for site area. Because of low sample sizes in commercial real estate markets, such regressions cannot meet the high standards of the scientific community, yet they are better than pulling adjustments out of thin air, the last resort of many appraisers. The regression suggested an adjustment of $170 per square meter of site area for extra floor allowed to be built. The adjustment for site area was more understated, a premium of $60 per square meter for every extra 1000 square meters of site area.

This assignment reminded me of a similar assignment in San Jose, Costa Rica last summer. The shortage of land within the central cities of prospering Latin American cities is resulting in a profound amount of redevelopment, and it must be an exciting time to be a real estate developer in many Latin American cities.

Saturday, July 5, 2014

Common Denominators Seen in Mexican Land Scams

After six years of appraising in Mexico I’ve seen the following patterns that warn me when I am being deceived.

1. My favorite one is when the loan applicant’s representatives take me to a prime location and then point to their property in the distance. “There it is,” they tell me. I tell them that my client requires me to set foot on the property, which is not really true (setting foot on the property is my requirement), but wouldn’t I look foolish and my client be harmed if I didn’t know find out that the land is a mangrove swamp? Sometimes it’s hard to tell from above, as can be seen in the following photos from Isla Mujeres:

2. Another pattern is when excuses are made as to why I cannot meet the property’s true owner. A common response is “We have power of attorney; it doesn’t matter,” but the document supposedly conveying the power of attorney is not convincing, either that is excessively old, it conveys power to yet another individual who is not present, or it does not actually convey power of attorney and the loan applicants are just hoping that I can’t read Spanish. Some feel compelled to provide a photocopy of the owner’s driver’s license or passport, hardly a standard of proof.

3. The borrower’s representatives all have business cards labeling them as marketing or public relations consultants, yet they claim to be real estate developers. “Show me your development plan” is a good question to flush out fake real estate developers.

4. When I request a current predial (property tax bill) for the property, deceivers instead supply a predial from years before. Years 2008 and 1993 are favorite years. Year 2008 is the year before Mexican tourist land values started crashing. Year 1993 was the year that the peso was devalued by 1000:1, so every assessed value appears 1000 times larger than it actually was. The inability to obtain a current predial might also indicate that the borrowers do not actually currently represent the true land owner.

On a related note, Citibank announced in February fraud-related losses in Mexico of $400 million in their Banamex subsidiary and has also experienced hundreds of millions of dollars in losses in previous years in ill-fated Mexican residential subdivisions.  In 2011, I pitched my own Latin American appraisal services to their chief appraiser for Latin America, who is actually a gringo in Atlanta. I was then told that I cannot serve Citibank because I am "not a national firm", even though the first three years of my career were spent at international firm Jones Lang Wootton, now JLL.

Next year, a client hired me to appraise a proposed residential subdivision outside Mexico City and also hired the local Cushman and Wakefield Valuation and Advisory Services office in Mexico City.  C&W came up with an appraised value 15 times as high as mine and the client got us on a 3-way conference call to resolve this discrepancy. The C&W appraiser was a young girl right out of college.  I noted that her report had incorrect zoning for the site.  She said that she did that because the broker told her to, but there was no documentation that a change in zoning was occurring and the neighboring subdivision had only been able to sell less than 20 lots. My client told her "Don't assume anything".

Perhaps Citibank's insistence on using "national firms" is what has caused them so many losses in Mexico? Perhaps this also explains why Cushman is facing over $10 billion in appraisal malpractice claims.


Sunday, June 29, 2014

Appraisal of a proposed resort project near the Canadian Rockies

Curiously dead ground vegetation for a proposed vacation resort

These were 130 acres in a town west of the Canadian Rockies popular with snowmobile enthusiasts. Local leaders want to make their town the “Next Canmore”, an expensive vacation community about one hour's driving distance west of Calgary and the first town east of Banff, Alberta's most famous ski destination. This town, though, was 300 miles west of Edmonton.

The local authorities, eager for economic development, had granted entitlements to a developer to build 183 condos and 70,000 square feet of commercial space. To impress how much political support she had for this project, she invited the mayor to have lunch with us. I ordered a “moose burger”, but I was also informed by the two that the restaurant didn’t really serve moose meat.

No feasibility study had been done, but I was told that there was a waiting list of 250 for the condos, and substantial "verbal interest" for the commercial space (meaning no leases or letters of intent). It turned out that the waiting list for the condos was just as real as the mooseburgers. It was just a collection of names and addresses of people who had responded to ads in snowmobile magazines, and there had been no discussion of prices, nor had there been any contracts signed.

The condos were priced quite steeply, from $430 to $455 psf Canadian, with prices ranging from $350,000 to $680,000, in one high density building. The town itself, though, had 21st century homes on their own lots for sale for less than $270,000. Per Landcor, the data service I use in BC, the highest priced home sale in the last year had been at a price of just $225,000, a new log home of 1068 square feet on a conventional-sized city lot.

124 of the 130 acres were a former rail yard previously used by the Canadian National Railway. Railyards are often heavily contaminated through years of washing out tank cars. Rail ties, too, were treated with arsenic to resist rot before being set in place. The photo demonstrates a mostly grey area of dead ground cover, punctuated by young pine trees, a tell-tale sign of contamination.

The properties had been acquired at the peak of the market in 2007, and in my previous valuation assignment in BC, I noticed that the sale of vacation properties began to considerably diminish after 2007. Yet, in this situation, the developer had appraisals done by Canadian appraisers estimating land value several times as high as the acquisition price in 2007. It gives me the impression that the Canadian appraiser profession is less effectively regulated and policed than in the U.S.

Tuesday, June 17, 2014

Another appraisal assignment in Nayarit, Mexico raises red flags of possible fraud

This was the appraisal of nearly 1000 hectares (over 2000 acres) of beachfront land, my third appraisal in Nayarit. There were many red flags to cause me to be suspicious:

1. The borrowing entity was a company in Cyprus, a country known as a hotbed of offshore shell companies (2267 identified so far by ICIJ). Shell companies are notorious for straw officers and directors and untraceability. Think of Cyprus as another Cayman Islands.

2. The borrowing entity had no history and no web site.

3. The borrowing entity did not own the land but had a JVA (joint venture agreement) with the landowner, a Mexican national.

4. The principal of the Cypriot company consistently misspelled his own name throughout the JVA.

5. All the bank account information of the Cypriot company had the company name misspelled.

6. As with Mexican land scams I’ve uncovered, the borrower’s representatives extolled the development possibilities for the land, but their credentials were not as real estate developers, but as marketing or public relations consultants.

7. No credible development plan was presented, but I was told that there was an agreement with the “Canadian Retirement Association” to build thousands of vacation homes for Canadian retirees. I have been unsuccessful in verifying the existence of the Canadian Retirement Association.

8. The Toronto phone number I was given for the Canadian Retirement Association connected me to a man who seemed to be more fluent in Spanish than in English and who bragged about his 75 “advertising awards”. This is not the talk of someone who would be trusted to manage a Canadian pension fund.

9. Similar to the Mexican land scams I’ve seen, I never got to meet the actual property owner, but I was given a document that assigned the right to mortgage his land to one of the borrower’s representatives. As I learned today at the ACFE Fraud Conference in San Antonio, identity fraud is a growing problem in Mexico as it is here in the USA, so I have to be careful.

10. As with Mexican land scams I’ve seen, my request for a current predial (property tax bill) instead yielded a predial from 2008, raising the possibility that the property has diminished in value since then or even the possibility that there was no affiliation with present owner such that a current predial could be provided.

Having been collecting listing data on this part of Nayarit for the last two and a half years, I noticed that asking prices on beach land in this area have declined up to 60%. Regardless of the suspicions I had about the loan request, the appraised value fell short of what was needed, any way.

Land loans are an ideal conduit for fraud in Mexico, by the way, because the value is so hard to determine, accurate information is so hard to come by, and it is easy to hire a Mexican appraiser to appraise the land for $100 million.