Appraisal of a 5-star hotel in Vancouver

This renovated 5-star hotel, the Rosewood Hotel Georgia, had recently been acquired by a publicly traded Chinese joint venture company for $145 million.  The purchase price was equivalent to a capitalization rate of 4.16% of the adjusted net operating income of the hotel in 2016, or CAD$930,000 per room, although NOI had reportedly quadrupled between the years 2014 and 2016.

This improvement in the hotel’s performance coincided with 3 years of double digit increases (10 to 12%) in RevPAR (Revenue per available room) in downtown Vancouver as Vancouver experiences steady increases in tourism, reaching an all-time high in 2016.  Every year in the last 25 years has shown an increase in tourism except, naturally, for 2009.

Tourism statistics for British Columbia continue to show that the leading country of origin for tourists is Canada itself.  With improving commodity prices since last year, this should be a secure niche.  The second largest tourist contingent is U.S. tourists, and the devaluation of the Canadian dollar relative to the U.S. dollar should increase U.S. tourism to Canada.  In third place are Chinese tourists, perhaps the most rapidly increasing tourist segment, with Chinese visits said to have increased by 94% from 2011 to 2015.

That being said, there is an ongoing increase in hotel room inventory represented by the following hotel projects:

·       J.W. Marriott, 350 rooms

·       Autograph collection – The Douglas, 188 rooms

·       Trump International Tower, 147 rooms

This marks a 6.5% increase in high-end downtown rooms.  HVS (Hospitality Valuation Services) forecasts RevPAR growth of about 6% in 2017 and flat growth in 2018 as this new inventory hits the market. They also anticipate more competition from AirBnb as visitors try to save money, and I have an investor friend doing just that.

Since such valuations are based mainly on the Income Approach (U.S.) or the “Profits Method” (Hong Kong), it was looking very difficult to support the $145 million price. Projecting next year with a 6% increase in RevPAR, and a smaller increase in expenses, I still forecasted a 9% increase in NOI, but there was no local data to support a 4.16% capitalization rate.  There had been no published transactions on capitalization rates in Vancouver in a couple of years, so I had to rely on a CBRE investor sentiment survey from the first quarter of 2017, in which investors in downtown Vancouver hotels were seeking rates of return from 5.5% to 6.5%, which were an all-time low for this particular survey.  Back in 2003 the expected rates of return for Vancouver hotels were 12 to 14%. Needless to say, I could not support any capitalization rate that supported a valuation of $145 million.

One problem is that a 4.16% rate of return is considered high in Hong Kong but low in Canada, and the investors were using Hong Kong investment expectations. In this sense, return on investment will meet investor expectations, but estimating market value is a different matter, as I needed to estimate a price that it could sell for.

The second problem was the sales comparison approach. Up to this date, the highest price per room achieved in Vancouver was the sale of the Westin Bayshore for $567,500 per room in September 2015. This waterfront hotel was built in 1960 and 1974 and in need of some upgrading, although some have speculated that this hotel was really bought for eventual redevelopment as condos in the prestigious Coal Harbor part of town. Nightly rates are similar to the Rosewood, though.

How was I able to justify a price of $930,000 per room and a cap rate of 4.16%?  I could not.

My valuation was done for Hong Kong Stock Exchange financial reporting purposes, and a market value appraisal was required.  I've been doing these since 2009. Unfortunately, this client did not want a market value appraisal but instead elected "to engage other valuer to conduct the valuation as its targeted figure could not be reached." They were kind enough to pay me, however, but this illustrates the point that public companies, even in Hong Kong, have the power to bias valuations in their favor, and that target values sometimes take the place of market values.

I was shown a Colliers International valuation with slightly higher rates of growth in earnings -- 13.5% in 2017 and 11.5% in 2018, but the most remarkable part of their report was that not one single comparable sale was from Vancouver, and most comparable sales were taken from Hong Kong and New York, also adding their contention that 5-star hotels anywhere in the world start at $1 million per room..

Appraisal of a Fractional Interest in Acapulco





Most of the inquiries I get about my foreign appraisal services are of properties that are not large enough to justify the expense of my trip, such as individual lots or homes. The above home is a 12-bedroom home, used for vacation rentals, located in the prestigious cliffside neighborhood of Las Playas in Acapulco. This home was used in the film “Blow”, starring Johnny Depp and Penelope Cruz. I’ve visited this neighborhood before, too, as a tourist coming to visit the Quebrada, the famed diving cliff.

The actual valuation assignment was to appraise a one-third ownership interest in the home, which made it an even smaller assignment from the standpoint of a client’s cost limits, but a more difficult assignment because a partial interest has to be discounted for lack of liquidity, lack of control, lack of marketability and lack of mortgage financing. Finding comparable sales is very difficult, because only about one out of about every 500 property sales are of fractional interests.

When I appraised in Acapulco before, I collaborated with a local appraiser, Arquitecto Hector Huerta. (Most professionally recognized appraisers in Mexico are either trained architects or trained engineers.) To keep the cost down for the client, I suggested that they hire him to do the appraisal of the residence and then have them send the report to me for translation into English and application of the partial interest discount. The ultimate intended user was the Internal Revenue Service, so it had to be an English language report done by a “qualified appraiser”.

I used a technique known as “factor-based fractional discounting”, a technique developed by the Appraisal Institute, in which individual factors are quantified and discounted, such as asset risk, profitability, condition, liquidity, diversification, size of interest, lack of control, management and growth potential.

Liquidity was most difficult to measure. On the one hand, the ownership structure was corporate in nature, with any owner allowed to sell the shares any time. On the other hand, Acapulco has suffered through a shocking crime wave between the years 2009 and 2016, with drug gangs battling even in the tourist areas of the town, with about 3 murders per day. By comparison, Chicago, America’s murder capital and 4 times as large, averages less than 2 murders per day. The crime wave reduced Acapulco tourism by 85%. Local lodging occupancy averaged only 27% in 2014 but increased to 40% in 2015, as late in 2015 the governor called in the Mexican military to restore security to the city. So the liquidity situation was “easy to sell”, but “would there be buyers”?

As the security situation improves, there should be a return of travelers to this beautiful resort city, and vacation home ownership is conducive to fractional ownership.

And the client saved money on appraisal fees.

California Investment Immigration Fund Busted: Another EB-5 Scandal

Office of California Investment Immigration Fund







When visiting Chicago in 2013 I had a chance to visit the site of the largest EB-5 regional center scandal up to that date, “A Chicago Convention Center”, which I reported in blog post http://www.internationalappraiser.com/2013/05/attempt-to-defraud-261-chinese.html. This was at the same time that there was a proliferation of local (Los Angeles) realtor and appraiser seminars about how to profit from the EB-5 visa program.

After returning from Chicago I called a former neighbor, Marvin Vong, who is a former Chinese national and now a licensed immigration attorney in Los Angeles. I asked him if he steered clients towards EB-5 regional centers. He said no. I asked him why, and he said, “I don’t want to go to jail”. That was my first alert to the corruption going on in the EB-5 visa industry.

Not long afterwards I visited the San Gabriel Hilton hotel and found a plush office in the hotel lobby occupied by the California Investment Immigration Fund (CIIF), an EB-5 regional center whose purpose is to secure EB-5 visas for wealthy Chinese investors. Because of my Chicago experience I entered their office with some skepticism and asked them what projects they were trying to fund.

The young manager on duty explained that they were developing a commercial center in Indio, California, a low-income desert community, with an 82-room Holiday Inn Express, an office building, and 3 restaurants. 

Curious about why they were so specific about the hotel but vague about the office building, I asked “How large is the office building?” I did not get an answer. 

I called the Indio planning department to verify this project, and they explained that indeed a development plan had been submitted for their approval of a hotel and restaurants, but there was no office building in the development plan. At that time I surmised that this discrepancy was probably due to a lack of investors, not necessarily a fraud.  Lots of projects get downsized due to lack of funds.

Two years later, in November 2015, I revisited their office to inquire about the success of Victoria Center. There was a look of fear on the manager’s face when I asked that question. She then claimed no knowledge of Victoria Center but instead touted a project to be built in Rancho Cucamonga to be called “California China Town”. The illustration more resembled a 1970s government campus than a Chinatown. I called the Rancho Cucamonga planning department and they denied that there was a development application for any such thing and that they were not familiar with CIIF. 

Mythical project "California China Town" in Rancho Cucamonga

Strangely enough, when I contacted the City of Indio Planning Commission about Victoria Center, I was informed by assistant planner Laila Namvar that development of Victoria Center had been approved on January 14, 2015, but no development had started yet, two years later.

Victoria Center today, six years after soliciting investors

I did a search on Baidu, China’s leading search engine, and found that CIIF had a separate Chinese web site, www.ciif-eb5.com, which advertised several real estate projects not mentioned on their U.S. web site. These were projects in Ontario, Riverside, and Rancho Cucamonga, California. Calling the respective planning departments for these cities I found that these were all fake projects for which development plans had not been submitted. The Chinese web site even boasted that CIIF is the most successful EB-5 regional center in America.

I then wrote up a complaint to the SEC (Securities and Exchange Commission) about violation of securities laws. They contacted me shortly and asked me to contact their “embedded agent” in the FBI to provide useful information about their Chinese web site, the fake real estate projects that they were promoting in China and that the principals of CIIF, Tat and Victoria Chan, bought luxury homes within two weeks of each other after they started advertising Victoria Center. Tat Chan's home, bought for almost $5 million, is in the gated community of Bradbury, while Victoria Chan bought a Diamond Bar home for almost $1 million.

Yesterday, the CIIF office in San Gabriel was raided, in addition to homes owned by Tat and Victoria Chan, by the FBI for information pertaining to fraud and violation of immigration laws. 

As I have learned from my own work, and from the "A Chicago Convention Center" scandal, the quickest way to stop fraud at the start is to verify the project with the relevant local planners.  It is a phone call that takes only a few minutes, and if the planner is not in, they always call back.  Once I found all of the fake projects advertised on their Chinese web site and called the relevant city planners, I knew that CIIF was a fraudulent enterprise.

I also see an interesting pattern among fraudsters in this industry.  They go out of their way to get photographed with prominent politicians.  Anjoo Sethi of the Chicago Convention Center scandal aggressively pursued photo opportunities with the governor and senator from Illinois to provide the illusion of legitimacy for his fake project.  Here is Victoria Chan posing with Hillary Clinton in a photo on a big screen outside the CIIF office:

Hillary!  Be careful of who you're seen with!

The man in the photo is believed to be a brother of Victoria Chan. The big screen presents a slide show of poses with other public figures, such as former L.A. mayor and gubernatorial candidate Antonio Villaraigossa, and the front window is covered with letters of commendation from various local and state legislators for CIIF's contributions to local commerce or to the local community, but there is no record that CIIF actually did anything for the community or for commerce. They did make campaign donations, however.

  

Chinese Capital Flight Distorts California Real Estate Prices

Llano, California

I took this photo two years ago when my solar farm client asked me to estimate land values near their facility. These were actual platted residential lots nearby, in Llano, California, with rough-graded streets and electrical transmission lines, but no water or sewer. The surprising discovery about the recent sales in this area was that the buyers were Chinese, and no one was developing the lots, paving the streets, or bringing in water or sewer. These were absentee owners. There was no particular reason to live here, anyway.

Recently I received a request from a bank to appraise an unbuilt condo at The Metropolis, LA’s most extravagant new residential tower yet, as a rental property. 1500 condominiums are being built and offered for sale for prices ranging from $600,000 to $2,000,000. Luxury residences do not generally make profitable rental properties, though, and rentals are generally an interim use before the owner makes the decision to sell or occupy.

Inquiring with Chinese-speaking Los Angeles realtors, I heard the opinion that many of the buyers at The Metropolis, being built by Greenland, a developer out of Shanghai, did not intend to occupy their units, which reminded me of a famous saying by oft-quoted New York appraiser Jonathan Miller that similar condos in New York City serve as "safe deposit boxes in the sky that buyers can put all their valuables in and rarely visit." A National Association of Realtors survey a couple of years ago even measured that the percentage of Chinese buyers purchasing such homes for primary occupancy was only 39%.

Events about a decade ago showed what can go wrong, though, when a luxury residential tower has a low rate of owner occupancy, as seen in Florida and Las Vegas. They can become "ghost towns." Has the Chinese luxury housing bubble exported itself to California and New York?

A Gringo and His Money are Soon Parted in Costa Rican Real Estate

Gringos are often attracted to Costa Rica for its beauty and its claim to be the happiest nation on Earth. Some decide to buy real estate, but the result is not always happy.

My first awareness of the risks in investing in Costa Rican real estate came in 2004 from an old friend who decided to retire, sell his travel agency, and invest the proceeds in a cliffside restaurant/home in Costa Rica.  Being a Venezuelan national, he was fluent in Spanish and could competently read any document presented to him in Spanish. He hired an attorney to advise him on the purchase. After delivering his life savings to the closing of the sale, he then went to visit his property, only to find out that the seller did not have title to the property and that his own attorney conspired against him. 

He returned to the U.S., broke and reduced to sleeping on friends’ couches.

I first started appraising in Costa Rica in 2010, and I started hearing stories of foreigners cheated in real estate deals.  The best known story at that time was the experience of Sheldon Hazeltine, who created a YouTube video titled “Costa Rica land fraud”.  Hazeltine and his partners bought a coastal parcel near Los Sueños with the intention to develop it.  While he was outside Costa Rica, a nearby wealthy landowner organized squatters to occupy the land and then declare squatters’ rights.  In Costa Rica, a squatter can acquire a right to possession (not ownership) after just one year of occupation, unless it is an agrarian parcel, in which case, the Institute for Agrarian Development can expropriate the land and transfer ownership to squatters who are farming the land. Otherwise, after 10 years of occupation, the squatter can then obtain titled ownership, anyway.

After some time being occupied by squatters, though, a billboard was erected on the property advertising the development of a hotel on the site by the wealthy landowner.  He basically paid the squatters to take the land and enable him to obtain ownership through their squatters’ rights. The squatters were paid off to leave. Hazeltine had been trying to get back his land for almost 20 years.

This YouTube video is no longer available due to a defamation lawsuit against Hazeltine.  He accused a thief of being a thief.

I was told of squatters who have taken over properties previously belonging to Tropical American Tree Farms, a failed teak farm venture. A young attorney organized squatters to occupy the former teak farms, charging them for the privilege. They cut down the trees and planted crops. It is possible, now that the teak farms have been vacated for so long, that the squatters may have obtained title to the lands per agrarian law.

There is a logic behind these squatters’ rights laws that is antagonistic to absentee landlords living in other nations.  Possession is nine-tenths of the law; there is little sympathy for supposedly rich gringos that own land but do nothing with it when there are so many landless campesinos in Costa Rica who just want to earn a basic living.

But the problem of expropriation of land from foreigners gets worse.  There has been a proliferation of property theft gangs which use public notaries to record transfer deeds in their favor without the owner of the land knowing about it.  Any deed transfer by a notary public is accepted as true until a judicial proceeding establishes otherwise, and such litigation typically takes 5 to 7 years.

Property theft through fraudulent title transfer has become such a problem in Costa Rica that a legislative bill was introduced last August to quicken the pace of justice for defrauded landowners.  

Legislative bill number 19.968, the Law for the Cancellation of Irregular Entries in the Property Registrar (Ley De Cancelación De Asientos Irregulares En El Registro Inmobiliario Del Registro Nacional), would create an administrative mechanism to cancel fraudulent property documents that have entered into the Property recording system.   By bypassing the courts, the time frame to revert a fraudulent transfer would be significantly reduced.

If a foreigner wants to be an absentee landlord in Costa Rica, nevertheless, the risks are high.  The best way of having a defensible ownership is to buy within a gated community.  Otherwise, one must live in Costa Rica full time or else hire security, and there may be little to prevent your security guards from transferring the ownership into their names.

 

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Latest EB-5 Visa Regional Center Scandal in California, December 2016

The latest EB-5 regional center to face charges from the SEC (U.S. Securities and Exchange Commission) is the Z Global Regional Center, owned by PDC Capital, owned and managed by Orange County attorney Emilio Francisco, who took in $72 million from mostly Chinese investors and allegedly bought himself a yacht through $9.6 million stolen from the investors.

 As with any government program installed without the proper controls, this industry has attracted opportunists who would exploit or abuse this program for financial gain.  What makes this particular EB-5 scandal different is my involvement.  Almost a year ago I made a complaint about Mr. Francisco to the SEC, contending that Mr. Francisco was violating securities laws in soliciting investors by not disclosing his sordid legal history.  I performed a background check on him and found one bankruptcy and 38 civil liens and judgments against him. If such information was disclosed to you, would you entrust $500,000 to him?

The recent involvement of the SEC in this USCIS-administered program is the best effort so far in cleaning up this program, and chances are good for 144 Chinese investors to get back almost all of their $500,000 investments in this regional center, but the EB-5 program is still managed in a puzzling manner that defies logic. This is probably because USCIS was never intended or staffed to examine businesses but to examine immigrants.  Here are some of the errors being made:

1.       No background checks are done on the executives of regional centers. Instead, regional center approval is based mainly on the submission of an economic study produced by the econo-whore industry. USCIS is now adding additional economists to scrutinize these economic studies when they would be better off using an administrative assistant to perform background checks on the CEOs. $10 and 10 minutes each is all it would take to screen out scoundrels.  I have found many regional center executives with unfavorable legal histories.   The most common problem seems to be IRS tax liens, but civil judgments and foreclosures are also common, and recent bankruptcies of the executives are not uncommon.

2.       Misprioritization of effort.  Between August 2012 and December 2016 the number of USCIS-approved regional centers quadrupled to 865.  Meanwhile, in June 2016 the USCIS reported a backlog of 16.7 months for I-526 (temporary green card) petitions and a 21.3 month backlog for I-829 (permanent green card) petitions, while regional center applications were dealt with in an average of 10 months.  With a 38-month delay for each visa applicant on top of the 2-year period in which the I-526 petitioner creates at least 10 permanent jobs, the green card process has mushroomed from 2 years to over 5 years.  There are lawsuits against the USCIS for unreasonably delaying action on EB-5 visa applications. The U.S. already has too many regional centers.  Better to re-deploy staff resources to resolve the delays in visa processing times.

3.       Too many regional centers. Consider that only 10,000 visas are allocated annually for this program, less than 12 per regional center for the 865 regional centers.  A recent NES Financial conference indicated that the average regional center has $50.3  million in investor funds, corresponding to about 100 investors. 865 regional centers can thus accommodate 86,500 investors, or about 10 years' worth of investors considering that 90% choose regional centers for their EB-5 investments.

4.       Lack of transparency. The USCIS does not make regional center applications (I-924s) and annual status reports (I924A’s) public, making them very difficult to monitor.  Moreover, to make an FOIA (Freedom of Information Act) request, the USCIS requires me to secure the permission of the regional center.  A crooked or ineffective regional center would not permit such a request. 

5.       Disorganization of information.  Last year I made an FOIA request to the USCIS to find out how many regional centers had actually produced permanent green cards for EB-5 investors.  They responded that I needed to narrow my search parameters. I then requested  the number of I-829 (permanent green card approvals) accomplished in years 2013 through 2016.  It took them a week to compile the list, which had many duplications as well as some nonsensical entries such as “NonRegional Center NonTargeted” as well as “Non-Regional Center Non-Targeted” as well as “regional center”.  I counted just 48 unique entities, two of which have already been terminated for fraud (Luca Energy and the South Dakota International Business Institute).  This means that out of 865 regional centers, less than 6% have actually produced permanent visas for their clients in the last 4 years. What surprised me the most was that USCIS was not even measuring the success of its EB-5 program and that all of this data could have been at their fingertips with a properly maintained Excel spreadsheet.

6.       Approving regional centers operated by unqualified people.  The four most common types of regional center owners I see are real estate developers, immigration lawyers (such as Mr. Francisco), securities salesmen and real estate salespeople.  Of these four types, only real estate developers actually create jobs.  The immigration lawyers, securities salesmen and real estate salesmen attracted to the EB-5 program are typically underemployed and lack the capacity or knowledge to create jobs. They serve merely as opportunistic middlemen siphoning off fees while searching for job-creating enterprises, sometimes at a leisurely pace. The EB-5 program would be better served if regional center approval was restricted just to job-creating enterprises, of which real estate development is the most common in this program (86% of projects). 

7.       Allowing the sale or rental of existing regional centers to unvetted entities. The Z Global Regional Center falls into this category.  Its regional center ID number indicates that it was approved by the USCIS in 2010, but there is no record that they accomplished anything prior to selling their regional center to Emilio Francisco in March 2015. He's not the only shady buyer of regional centers that I have seen.

Indeed, some regional centers are created and approved without intention of following up on their fake business plans and instead immediately shop around for buyers or renters, but nobody keeps track of who the buyers and renters and what their intentions are.  These regional centers make their presence known at EB-5 trade conferences. For an example, go to eb5affiliatenetwork.com.

Some regional centers are even sold to foreign entities. I’ve seen one sold to an entity in Mauritius (off the coast of Madagascar), another rented to a Canadian company whose CEO has a criminal history in the U.S. (Canadian criminal records are private), and the Seattle Area Regional Center, an active real estate developer, sold a 20% stake to a Chinese real estate developer and the CEO then bought a $2.9 million Thunder Jet boat.  This is all supposedly legal.

 Baidu Baike (Baidu Encyclopedia) published an interesting statistic on litigation against EB-5 regional centers:  Between February 2014 and August 2015 there were 5539 EB-5-related lawsuits from Chinese investors.  That amounts to more than 300 lawsuits per month just from China, or about 3600 per year.  Some suits were against the USCIS for unreasonable visa processing delays or unfair visa denials, but most were against regional centers or their agents.

And for the Chinese investor, remember that USCIS approval of a regional center does not vouch for the integrity of the operator or the soundness of the business plan. It just means that the regional center paid a fee and submitted an economic study.  By my calculation, only 6% of regional centers have produced permanent green cards for their investors.

My advice to foreign investors seeking the EB-5 regional center route towards a permanent green card is  to consider the following criteria:

1. Look for a regional center with approved projects ready for construction.  The term "project exemplar" indicates a project specifically approved by USCIS.  Do not be swayed with vague verbiage such as "we only select the best projects", which sometimes is an excuse to do nothing but use your money for other purposes.  Your response should be "Name those projects!".

2. If you are conversant in English, make a telephone call to or e-mail the local government planning department about the project you will be funding.  In a few minutes you can ascertain that the project is approved for construction.  The most ready-to-build projects will have both development approval and building permits. Too many foreign investors, however, are stuck in limbo regarding projects which have not yet had development approvals. Development approval and building permits can take years, and you will not be able to apply for the I-526 temporary green card until afterwards.

       3. Look at the track record of the regional center.  This is easier said than done because some regional centers make false claims, such as "100% approval of green cards". If in doubt, one can make an FOIA (Freedom of Information Act) request to USCIS to verify that the regional center has had I-829 applications for the permanent green card approved.   Needless to say, EB-5 regional centers are not monitored for truth in advertising.

If you are already an EB-5 investor and you think that you have been cheated by your regional center, please feel free to contact me for a free consultation.  You may not have to hire an attorney if I can persuade the U.S. Government to file a complaint.

Other posts about EB-5:

http://www.internationalappraiser.com/2013/05/attempt-to-defraud-261-chinese.html

http://www.internationalappraiser.com/2016/05/overseas-property-and-immigration.html

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投資者警告-利用移民投資項目的投資騙局

https://www.sec.gov/investor/alerts/ia_immigrantch.pdf

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我的建议，外国投资者寻求EB-5区域中心路线永久绿卡，考虑以下标准：1.寻找一个已批准项目准备建设的区域中心。术语“项目范例”表示USCIS特别批准的项目。不要用模糊的语言，例如“我们只选择最好的项目”，有时是一个借口，做什么，但使用你的钱用于其他目的摇摆。你的回答应该是“命名这些项目！”。2.如果你熟悉英语，请打电话或电邮地方政府规划部门你将资助的项目。几分钟后，您可以确定该项目已获批准建设。最准备建造的项目将有发展批准和建筑许可。然而，太多的外国投资者对尚未获得开发批准的项目也陷入困境。发展审批和建筑许可可能需要多年，您将无法申请I-526临时绿卡，直到之后。


            3.查看区域中心的记录。这说起来容易做起来，因为一些地区中心提出了虚假的声明，例如“100％批准绿卡”。如果有疑问，可以向USCIS提出FOIA（信息自由法案）请求，以验证该区域中心已获得I-829申请永久绿卡的批准。不用说，EB-5区域中心没有监测广告的真实性。如果您已经是EB-5投资者，并且您认为您已被您的区域中心欺骗，请随时与我联系，免费咨询。如果我能说服美国政府提出投诉，您可能不必聘请律师。

Appraising Vacation Home Subdivisions

New subdivision near San Pedro de Macaris, Dominican Republic

 

If you have read my previous posts, one common observation is that there continues to be a worldwide oversupply of uncompleted vacation home subdivisions, condo projects and proposed subdivisions whose developers continually search for lot buyers and financing. I get to visit some of them for my lender clients.

I sometimes fly thousands of miles to see a project, only to find a mangrove swamp, jungle forest, steep hillside or a sugar plantation.

Sometimes the developer has obtained development approvals, sometimes not. The development approvals can be valuable in areas of land scarcity, but more often I am driven into a wilderness with pretty views but awkward access and a lack of local services.

It is useful to remember that market value depends upon what can be sold, not necessarily what can be developed.

I also see the same developments marketed to consumers with unrealistic photos of bikini babes in infinity pools, colorful tropical birds, the smiling faces of the grateful local natives, and cocktails at the beach.

Sometimes appraisers and valuers are confronted with the task of evaluating pre-sales contracts for lots. Should these prices be considered as market value?

Here are some things to consider in analyzing the sales:

1. What percentage of lots are currently sold or pre-sold? If the subdivision contains 900 lots, but only 20 are sold, this would represent an oversupply situation in which lot prices would have to be discounted.

2. Where are the buyers coming from? If the developer is from Omaha and the buyers are, too, this is cause for suspicion. These might not be real buyers and real sales. Another cause for suspicion is if the buyers are LLCs (limited liability corporations).

3. Read the sales contracts. Is the transfer of ownership conditional upon improvements completed by the developer? How much cash down payment is required? In some cases it might be only 5%, but if buyers perceive that their property has decreased by more than 5%, they might default on their payments.

4. What has happened on the lots that have been sold? Have they been developed or are there For Sale signs on them?

5. Are there lots already listed for sale in the secondary market? Check brokers and ads.

6. What infrastructure (roads, utilities, promised amenities) has been completed?

The preferred method of valuing a subdivision is a discounted cash flow analysis commonly called “The Subdivision Method”, in which all revenues and expenses are forecasted over time and discounted at a market rate of return. Witnessing very low rates of absorption of lots, however, I presently discourage this method for most vacation home subdivisions.

Whenever possible, I look for actual sales of incomplete subdivisions. These can be very hard to find, however. If such properties are listed for sale, though, that is a good place to start before applying appropriate market-based adjustments.