Friday, May 13, 2016


It was in 2013 that this blog first started discussing the risks to foreign investors when investing in so-called “regional centers” approved by the US Citizenship and Immigration Services agency for the U.S. EB-5 Visa program.

A regional center is usually a private enterprise organized to pool invested funds from foreign investors seeking the EB-5 visa, the visa that grants permanent green cards to immigrants that invest a minimum of $500,000 in an enterprise that creates at least 10 permanent U.S. jobs.  The normal minimum is $1 million, but “targeted employment areas”, areas having unemployment greater than 50% above average, have that threshold reduced to $500,000.

Many investors have mistakenly believed that approval of a regional center by USCIS means approval of the soundness and integrity of the regional center.  The USCIS was never given the mandate or the resources to vet these regional centers, however.  Nor have they been given the authority to terminate regional centers for malfeasance, only for failure to submit paperwork on time.  According to Baidu Baike (a Chinese on-line encyclopedia), there were 5539 Chinese EB-5 investor lawsuits filed in U.S. courts just within the 18 months between February 2014 and August 2015, or more than 300 investor lawsuits per month. That’s a large number considering that only 10,000 EB-5 visas are allocated per year.

When first studying EB-5 regional centers, I cynically suspected that a lot of these EB-5 regional centers were founded by real estate developers who couldn’t find funding elsewhere -- turned down by all the banks. 

As I looked into the backgrounds of these regional center executives, however, I found that I had not been cynical enough.  Many have no real estate development experience and were instead underemployed immigration lawyers, securities salesmen and realtors appointing themselves as middlemen in search of worthy real estate projects.  At my first EB-5 conference, when I introduced myself as a commercial appraiser to regional center exhibitors, I was often asked if I knew of any projects that needed funding.  I said yes, all of the many projects that had been rejected by my lender clients, such as a proposed Biblical Theme Park to be built in a flooded Texas sand quarry.

Worse yet, when I conducted background checks on regional center executives, many had histories of civil liens and judgments against them, foreclosures, and even bankruptcies.  Background checks were not part of the USCIS vetting process in approving I-924 applications from prospective regional centers and their founders.  One of the regional centers represented at OPIE did not disclose to investors that the CEO had gone through bankruptcy 12 years ago, recently sold 20% of his regional center to a Chinese company (these are all investor funds) at about the same time he bought a $2.9 million power boat, and then went into default on his primary home loan last October.  Yet he is soliciting $443 million for a large luxury residential project.  What investor, knowing this, would trust their funds to such a man?

USCIS investigators were not trained to vet business enterprises wishing to operate regional centers; they traditionally investigate visa fraud, such as fraudulent marriages for green cards.

In the last 3 years the SEC (U.S. Securities and Exchange Commission) has been assisting the USCIS by investigating regional centers that violate U.S. securities laws, yet USCIS keeps on approving new regional centers faster and faster, with 824 approved regional centers as of today.  This surplus of regional centers will spell the ruin of many existing centers that can no longer find enough investors for worthy projects.

One of the first major actions by the SEC was against “A Chicago Convention Center” and founder Anjoo Sethi, described in my post  If USCIS had had a proper vetting process, this 29-year-old pharmacy technician would have probably not been given the authority to take $156 million from investors to supervise construction of 5 hotels and a convention center.  His claim of 15 years of development experience would have been quickly derided.  No one in the U.S. thought to verify permits with the city of Chicago (it only takes one phone call) or verify hotel management contracts with the three major operators, including Starwood and Intercontinental Hotels Group. Instead, it was a rival exhibitor at a property exhibition in China who blew the whistle on Mr. Sethi.  In my own observations, fraudulent regional centers tell much bigger lies in China than in the U.S., and China is the source of 83.5% of EB-5 applicants. This was the reason I went to China. 

At this point, I think the most important issue to consider is how to repatriate the funds of thousands of foreign investors who have been defrauded.  The SEC is on the case, as is the FBI (Federal Bureau of Investigation), but justice is slow and meticulous, and there are hundreds of regional centers, with more added all the time without proper due diligence.  All that is required for regional center approval is an economic report from one of the econo-whore consulting firms. 

I have currently complained to the SEC about three dozen EB-5 regional centers.
Here are the red flags I have noticed in researching these regional centers:
1.       Fake mailing address.  If the regional center has no personnel at the advertised mailing address, how much confidence would you place in them?
2.       No mention of the persons managing the regional center.  Don’t you want to know who you’re entrusting your money to?
3.       No projects advertised.  Many times their web sites claim that U.S. Securities Laws prevents them from disclosing their projects within the U.S., but when I go overseas, I either see no projects or fake projects on their web sites.  EB-5 applicants should look for “shovel-ready” projects and not projects that do not even have development approvals.
4.       Unqualified executives.  If one wants to invest in a real estate development, the regional center should be managed by a successful real estate development company, not immigration lawyers, securities salesmen or realtors.
5.       Fake projects.  A phone call to the local planning office will disclose whether the development project is real and approved.
6.       False representation of success.  For instance, one regional center crows about all the Wal-Marts they’ve built, but these stores were built in 1992, long before the regional center existed. Claims that 100% of applicants have received green cards, particularly from regional centers only two years old, are very doubtful.
7.       Regional center executives who have not properly disclosed their unfavorable legal histories. I can do a $10 background check on a regional center executive and often find a history of 1) civil court judgments, 2) tax liens, 3) foreclosures and 4) bankruptcies.  If these events were not disclosed in the offering document, typically a PPM (Private Placement Memorandum), the regional center has violated the Securities Act of 1933.
PS: October 4, 2016 update
As a result of my Freedom of Information Act Request to USCIS, I have received names of all EB-5 regional centers that still exist and have obtained permanent visas for their investors.  There are 46 of them out of the now 863 regional centers in operation.  In other words, only about 5% of regional centers have fulfilled their purpose in getting their investors permanent visas.
Here is my assessment of the landscape of the 863 EB-5 regional centers:
20% are fraudulent
  5% are effective
75% are ineffective for various reasons:
1. They are too large in scope and will never become fully invested because they are competing for investors with 862 other regional centers.
2. The leaders are not qualified to create the jobs.  Many are opportunistic middlemen that founded a regional center before they even find a project to build or fund. They pay themselves salaries.
3. Some will not be able to prove that they created 10 jobs per investor.
Worried investors are welcome to contact me privately about concerns about their regional centers, as are their attorneys.  Feel free to contact me if you have been cheated.

Monday, March 28, 2016

On the Subject of Flipping Foreign Beach Lots for Profit

A failed Brazilian beach community visited in 2012. Notice that most lots are more than one kilometer from the beach.

I get occasional e-mails or phone calls by or about someone contemplating buying a vacant lot in a waterfront subdivision in Latin America or the Caribbean, and these would-be buyers have probably not read some of my older posts.

I recently received two inquiries related to Belize and Panama. Both inquiries related to oversized subdivisions (as large as 1000 lots), of which only a handful of homes have been built. Both would-be buyers, though, were not planning to relocate soon to these communities. One just wanted to flip. The other wanted to “buy before it’s too late”.

For several years, private lenders have sent me to appraise such planned communities in Costa Rica, Belize, Mexico, Brazil, Barbados, St. Maarten, the Bahamas, Jamaica, and Trinidad. The situations were approximately similar in that homebuilding or lot sales had stalled and the whole subdivision was reeling in debt, yet each community had glossy brochures and dazzling web sites. Sometimes there were many lots sales having occurred several years ago, but these were to flippers who put 20% down and got financing from the developer, as they sometimes disclosed in on-line investor forums. They often responded to advertisements such as “Own your own beachfront lot for only $200 per month!” Few homes were built compared to the number of lots sold.

Then, when buyers realized that their lots had declined in value by more than 20%, they stopped making payments, and the lots reverted back to the developer through foreclosure. Meanwhile, the developer may be still be advertising that his planned community is 70%+ sold. For some developers, this has become a racket: Collect the down payment and monthly payments, foreclose, and then start the selling process all over again while crowing about the number of lots sold.

In communities like these, I see nothing but falling land values. The developer is having to compete with lot owners who want to sell their own lots, which is a classic oversupply situation that only depresses lot values.

For those who bought lots with the intention of actually building and occupying them, they are also at risk of loss in value and loss of promised amenities. I have seen so many subdivisions which were advertised as gated communities with luxury amenities, but ended up with abandoned guardhouses and no security from outside intruders.
If you really want to live in “Paradise”, I would advise to buy in a community which is mostly built out, with actual homes built and occupied, and with a history of recent sales. If sales have stalled, some of the promised amenities, such as spas, clubhouses, and golf courses may not get built after all.

Also beware of marketing tricks. If the developer claims that “Phase One has already sold out!”, ask to see Phase One. Are there any homes built? I saw a situation in Brazil where there was no Phase One developed before they started advertising Phase Two. I saw a situation in North Carolina where all but one duplex in the sold out Phase One was a non-arm’s length sale between a partnership and its partners at the inflated price of $500,000. These looked like mobile homes on stilts. Most of the units had “For Sale” signs in front. Despite my warning, a client of mine went out of business lending $17 million on future phases. Even if homes are built, the subdivision can still fail if most of the homes are still empty.

If the advice to "buy before it's too late" comes from Ronan McMahon, consider the source and my previous post about him.  I have similar suspicions about Katherine Peddicord.

Flipping foreign properties is a dangerous sport, best left to clever local investors. And if you want to live in a new “foreign paradise” community, make sure that there are people actually living there.

Thursday, March 24, 2016

Appraisal of a Resort near Victoria, British Columbia

This was an appraisal done for financial reporting purposes for a Chinese corporation that acquired the resort 2 years previously.
Chinese investors have already bid up the Vancouver housing market to prices unaffordable to most Canadians. I even have a Chinese friend who owns three Vancouver condos while he lives in the San Francisco Bay Area.
Some Chinese investors are now competing with Canadian investors for commercial real estate. Capitalization rates for British Columbia hotels have dropped by half since 2003 (from 12 to 14% to 6 to 8%).  The BC tourist industry has particularly benefited from the until-recent growing oil wealth of western Canada, particularly Alberta.
View from my room
The subject property is a 5-star bayside resort on Vancouver Island with a restaurant, bar, spa and marina. Guests were observed to be middle-aged couples, presumably Canadian (who else would vacation in Canada in March?), and the ambiance of the resort makes it a good place for “second honeymoons”. Management is by Canadian professionals. In the two years under new ownership, net operating income has increased by almost 5%, with higher gains in gross revenues, occupancy and operating profit.
What is unique about this resort, though, is that only 30% of revenues come from room revenues. 53.5% of revenues come from food and beverage operations, which for most hotels normally have low profit margins or are even loss leaders. In this case, though, the profit margin on food and beverage operations exceeded 28%; the food was excellent, and the hotel often serves as a venue for weddings and other community events. The spa contributed another 12% of revenues and the marina contributed about 6% (but was the department with the highest profit margins).
I found it unusual that I was hired by an appraisal firm that was hired by another appraisal firm. Perhaps the Hong Kong Stock Exchange is intent upon truly independent valuations, which I would applaud. On this blog I have been critical in the past about the Singapore Stock Exchange, which seems to let corporations hire any appraisal whore that they choose.
The financial statements seemed to conform to the new Uniform System of Accounts for the Lodging Industry. I was presented, however, with excerpts from another appraisal done by an unknown appraiser as of the same valuation date. This appraiser was of the opinion that the hotel had appreciated 48% in value in the previous two years, despite only a 5% increase in NOI. I had no details of the appraiser’s income approach, which is the approach I generally rely on for profitable hotels, but I suspect that this appraiser did not adjust the income and expense statements for “reserves for replacement” for FF&E (furniture, fixtures and equipment) and other building components, which I generally see estimated at between 3 and 5.5% of gross revenues for hotels. The general manager of the subject hotel even estimated 4% “CapEx” for the subject resort.
The other appraiser’s sales comparison approach was an abomination. The simplest way of comparing hotels is on a “price per room” basis, but this works best for limited service motels which earn their revenues substantially from room rentals. All of the comparable sales prices he used were inflated and incorrect, which would have been easily verified by going on-line to British Columbia’s free land registry web site: , where real estate sales are publicly recorded. Although publicly recorded sales of BC hotels have been as high as $275,000 per room in the last two years, this appraiser made awkward adjustments (up to 100%) to justify a value of $533,333 per room, without considering that this resort’s restaurant, bar, spa and marina operations accounted for much of the value of the resort.

Sunday, March 1, 2015

International investment heats up in the renewable energy sector

Solar-paneled roof of National Stadium in Kaohsiung, Taiwan, producing 1 megawatt of electricity

My appraisal practice has changed significantly in the last year. Whereas I spent the last few years visiting struggling or proposed luxury home subdivisions, hotels, tourist projects and golf communities in foreign countries, my clients have reduced their appetite for such risky ventures. Nowadays more than half of my work involves the valuation of land for solar photovoltaic energy production, AKA solar farms.

There seems to be a great appetite for cross-border investments in renewable energy infrastructure projects. Such projects are able to attract capital from investors not needing high returns, but focused rather on steady, long-term yield from contractual government or utility company payments that reimburse them. Renewable energy infrastructure seems a safe and easy investment compared to foreign casinos and luxury vacation resorts.

Each week brings one or more announcements of cross-border renewable energy deals. Last week, Swiss-owned Adiant Capital Partners sold a 37 megawatt UK solar farm to UK-owned Foresight Group. Canadian-owned Northland Power has announced a $177 million IPO for wind farms in Canada and Germany. Australian fund AMP Capital is entering the Japanese renewables market. The Blackstone Group (U.S.) has announced that its second energy fund, $4.5 billion in size, focusing on renewable energy assets worldwide, has been oversubscribed.

There is construction risk, of course, but many transactions are also structured as sale-leasebacks of the land the renewable energy projects are built on. And management risk of renewable energy infrastructure is nothing compared to commercial real estate, unless you have Homer Simpson pushing the buttons.

Renewable energy infrastructure is now so mainstream that Google and Apple are investing, including a Norwegian-owned project in Utah that I recently appraised, in which Google will be partially financing the development of a $157 million solar plant.

Another example of a multinational solar farm venture I evaluated was a duo of Ecuadorian solar farms to be developed by a German manufacturer financed by private money from the U.S. The deal fell through because the German CEO didn’t understand that his firm had to own or buy the properties they would be mortgaging and that licensing and power purchase agreements had to be finalized before the investor would commit funds.

Valuation methods for solar farm land

The approach of choice is the sales comparison approach, which works well in California due to the large number of publicly recorded transactions. Solar farm appraisers are not always so lucky to find verifiable sales, though, in foreign countries and “non-disclosure” U.S. states (such as Utah, New Mexico and Texas) and sometimes must turn to a land residual approach to valuation, in which land values are imputed by valuing the completed project and then subtracting development costs and expected entrepreneurial profit. The recent reduction in development costs has justified rising values of land with power purchase agreements and public approvals.

The role of technology in increasing solar farm land values

The last few years have seen escalating land values in the U.S. southwest for land which has secured conditional or special use permits for solar photovoltaic energy production as well as power purchase agreements with utility companies. The reason for this land price appreciation has been because the value of such land is a residual of the cost to develop it for solar PV use, and the cost of PV technology has fallen more than 50% in the last several years, but rates for electrical usage have not fallen.

Much of the deflation in solar PV development costs is the result of cheaper technology being imported from Taiwan and China. I have recently been on a research trip to Taiwan, for example, to study their solar PV and wind power innovations.

There may be a temporary halt in falling solar PV development costs, however, as the U.S. government in February has imposed “antidumping” penalties on Chinese and Taiwanese manufacturers. The antidumping duty on Taiwanese solar cells is now 20%, and the new duties on Chinese solar panels will range from 39 to 52%.

Wind-powered park at Cijin Beach, Kaohsiung, Taiwan

Also, with the price of oil falling more than 50% in the last year, there may be less public pressure to subsidize renewable energy projects. These combined forces may temporarily stop the tide of rising values for solar farm and wind farm land.

This may be a temporary hiccup, though, in a long-term trend of renewable energy sources to replace fossil fuel technologies as our predominant power production technology, as production costs are likely to continue to fall as technology advances. Compare these advances to shale oil hydraulic fracturing technology, which is only more expensive than conventional on-shore drilling. Ten years from now, the world of energy production is likely to be quite different than today.

Solar-powered golf course in Chiba prefecture of Japan, near Inba, as seen from my plane flight
Wind-powered business park in Kamisu, Ibaraki Prefecture, as seen from my plane flight

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:

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, 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.