Thursday, April 6, 2017

California Investment Immigration Fund Busted: Another EB-5 Scandal

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 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,, 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.


Thursday, March 16, 2017

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?

Friday, February 3, 2017

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.

Tuesday, January 10, 2017

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

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.



Sunday, November 27, 2016

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.

Thursday, August 18, 2016

How Can Aggrieved Chinese EB-5 Investors Get Their Money Back?

Vine Street property in Cincinnati

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. 

In most cases, the Chinese investors are suing their own regional centers for fraud, embezzlement or mismanagement. Regional centers pool investors’ funds to develop real estate projects in most cases. Some were suing US Citizenship and Immigration Services for denial of their permanent visa applications, but with each denial, it was the regional center that failed to perform up to job creation expectations, which mainly require that each investor prove that he or she created at least 10 permanent jobs lasting up to 2 years.

For those investors who want their money back, navigating the U.S. Justice System can be tricky, as evidenced this week in a U.S. District Court for the Southern District of Ohio in the matter of Hu et al v. Chan et al.

Ten Chinese investors contributed $545,000 each to the Midwest EB-5 Regional Center based on false statements allegedly made by some defendants in the Private Placement Memorandum as well as in presentations made by some defendants in China. The job creation project was to renovate retail buildings on Vine Street in Cincinnati, Ohio in order to create a “restaurant row” consisting of 9 restaurants. Renovations started but never finished, and all of the Chinese investors’ money disappeared. The false statements in the PPM were that investors’ funds were guaranteed by the Ohio state government, that investors’ funds would be kept in escrow accounts and only released upon USCIS approval of an I-526 (conditional green card) for the investor, and that investors’ funds would be supplemented by bank loans and tax credit financing, none of which were true.

The lawsuit was dismissed “with prejudice” (preventing other suits on the matter) on August 16th by U.S. District Judge Sandra Beckwith on the grounds that the fraud claim lacked “sufficient particularity” as required by Rule 9(b) of the Federal Rules of Civil Procedure, stating “The complaint does not identify with any specificity the time, place, or identity of the speaker of the alleged false and misleading statements." This was a surprising ruling to me, given the falsehoods contained in the Private Placement Memorandum, which would seem to be prima facie proof of false and misleading statements, plus the fact that the investors lost all of their money and did not get green cards. The USCIS even terminated this regional center in February 2015 due to failure to create jobs and misuse of investor funds.

Rule 9(b) is as follows:
(b) FRAUD OR MISTAKE; CONDITIONS OF MIND. In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.

I should disclose that I am not an attorney and do not provide legal advice. I report this case as a cautionary tale to aggrieved foreign investors. One recommendation that comes to mind is to hire an experienced securities attorney who already knows these rules of procedure.

There has been a growing trend among attorneys to “just sue everyone”, but perhaps there is a lesson to be learned here, which is to document who said what, when, how and where so that guilt can properly be placed on the appropriate defendant without the complaint being dismissed.

The plaintiffs are still allowed to file suit in Ohio state courts, as this was a Federal court decision.

A reader may ask, “Who cares about Chinese millionaires?” Stereotypes abound of “princelings” and relatives of government officials who get sweetheart government contracts.

In the first three of my 5 trips to China, I brought a neighbor, a Chinese immigrant, to interpret for me. When I finally asked him how so many Chinese people became millionaires, his answer was disarmingly prosaic – “By investing in real estate”. Many who bought condos in Beijing and Shanghai 15 years ago are now millionaires on paper, but not necessarily in cash. The same can be said for most California millionaires. His mother, a seamstress in Shanghai, had also become wealthy that way.

Having obtained their wealth through real estate investment rather than entrepreneurial activity, such EB-5 applicants are naturally attracted to the regional center concept of gaining an EB-5 visa, which is to pool funds with other similar investors in order to develop real estate. About 90% of EB-5 visa applicants choose to invest in a regional center rather than starting their own business. They are not experienced businessmen.

Some Chinese EB-5 applicants are not truly wealthy people. There have been some hard luck stories where the investor had to mortgage his own home to raise the minimum $500,000 plus administrative costs investment. If that money is stolen by a crooked regional center, that can create desperate circumstances for the family, including foreclosure.

As a Certified Fraud Examiner, I try to help aggrieved investors find a solution. If you have been cheated by an EB-5 regional center, you may feel free to e-mail me about your complaint, and I can present some options to you at no cost, but I am not an attorney and cannot file a lawsuit for you. All I can do is catalog the bad players in the industry and notify authorities.

Friday, August 5, 2016

An Appraisal of a Commercial Property in Seoul, South Korea.

A wealthy Korean immigrant died in California and his will left a commercial property in Seoul solely to his only daughter, thereby disinheriting her brothers.  Two brothers traveled to Seoul to have a Korean court overturn the will and obtain partial interests in the building.  They succeeded.  The daughter, in turn, sued her brothers in California court for full ownership, as California Estate Law had been violated. She won.

My assignment was to review a translated Korean language appraisal that had been ordered by a Korean court, in order for me to figure out the damages her brothers had to pay her for stealing part of her inheritance, and testify to this in a California court.
I had been a speaker at a conference sponsored by the Korean Association of Property Appraisers in Seoul in 2008, and was familiar with some of their valuation methods and the differences there are with U.S. valuation methods.
Two differences are:
Land and improvements are valued separately.  This is similarly done in Germany and by U.S. tax assessors, and I’m finding it increasingly necessary in Los Angeles County, where land values are spiraling upwards, calling into question the highest and best uses of many older properties.

Because Seoul is built out and there is a lack of land sales, The Minister of Land, Transport and Maritime Affairs also compiles a “Officially Announced Price System”. I often find that such price announcement systems fail to keep pace with changing market conditions, especially if created by a government bureaucracy.
The Government's computer-generated land valuations are overly general, too.  Theoretically, the appraiser should adjust land values for accessibility, size, and developability. This appraiser made no adjustments.
In this case no adjustment was made for a 4-story. 7736 square foot building that had no road access (see photo).  It was situated on a 241.3 square meter (2597 square feet) lot in Jongno-gu, which is one of the wards that compose the central business district of Seoul. The building itself is situated behind and obscured by a taller building and thus had no street access or visibility.
The appraiser stated land value to be 12,210,000 Korean won per square meter, equivalent to $10,912 per square meter or more than $1000 per square foot.  I have seen such land valuations in Manhattan, and since Seoul is a city of 10.2 million people with twice the population density as New York, I did not immediately doubt such a figure.
Nevertheless, the zoning for the site allowed only one extra story of height, and the site was already fully covered.  Accessible only by alley way, there would have to be an assemblage of adjacent parcels if any type of redevelopment could be done, but this is done commonly in Seoul if 80% of property owners consent to join a "redevelopment union".
Although this building was classified as an office building, its employees were more likely to be employed as seamstresses than office workers.  The lack of vehicular access limited this property’s highest and best use. The size of the lot, less than 2600 square feet, was only about half the size of a typical residential lot, which is not conducive to high-density redevelopment, and the space between buildings was so tight that I could not get a photograph of the whole building in one frame.
To find comparable sales and listings I turned to the auction houses which publish details of their real estate auctions.  They typically publish the original reserve price, which is based on appraised value, and then subsequent reserve prices which are discounted by 20% each month until they attract bidders.  The subject property itself had failed to attract bidders at two auctions and the reserve price for the next auction is now set at 64% of appraised value.
In the end, the client was able to get compensation from her brothers based on the original Korean appraisal.

One hidden treasure in these alley ways off of the street are blocks of street markets and food stalls.

Thursday, July 28, 2016

Shameless Book Promotion

This week I received a $17.70 semiannual royalty check for my book, Fraud Prevention for Commercial Real Estate Valuation, published by the Appraisal Institute, which I have sometimes advertised in the sidebar of this blog over the last five years since its publication.  This royalty check is equivalent to the sale of about 3 books in the last six months.

If there was a New York Times “Worstseller List”, this book might be on it.  Last year’s royalties were equivalent to the sales of 18 books.

Now the Appraisal Institute is conducting a fire sale of my book, having reduced its price from $45 to $23, and $18 for Appraisal Institute members.  I suspect that they printed 1000 copies of my book and have a few hundred left to sell.

I admit that I have not properly promoted my book, mainly because I want readers to view my blog as an objective place to instruct and learn, and not a place to boast or hard-sell.  My expert witness practice thrives on credibility.

I know very little about the buyers of the book, but I have heard that the book is in the Cornell University Library, and the director of the MIT Center for Real Estate e-mailed me to compliment the book and to offer me free admission to the MIT World Real Estate Forum last May, which I accepted.  The knowledge that scholars are reading my book also encourages me to think that there is a new generation of real estate practitioners being better prepared than today’s generation for the seamy world of commercial real estate.

There is no book like it in real estate literature except for my previously self-published book, Lessons from Losses in Commercial Real Estate.  It is the opposite of the “Get Rich Quick in Real Estate” books you see at the bookstore; it is a book on how to prevent money from being lost in real estate.

One of the central precepts of the book consists of two words that are absent from other books on real estate or finance: People lie.

A typical appraisal assignment often involves mind games and factual errors from parties that have a vested interest in the results of the appraisal, such as owners, brokers, taxpayers, divorcing spouses, etc. What this book does is catalog all the deceptions I had seen over the first 27 years of my career and explain the due diligence needed to counteract the deceptions. I explain the conflicts of interest that exist. I finish the book with a fraud prevention checklist for real estate transactions.

One thing I learned when I began my appraisal career at global firm Jones Lang Wootton was that the farther a real estate deal had to travel for capital, the higher the risk of fraud, which makes international real estate valuation riskier than domestic valuation.  I worked in the JLW Houston office and remember twice receiving phone calls from JLW offices in Asia inquiring about Houston condo deals being marketed over there. I would visit these properties and find cheap construction and adult men loitering about on a work day. Once, when I arrived on the first day of the month, I found residents hovering around their mailboxes, waiting for their welfare checks, indicating that many of the condos were being rented to low income tenants.

The book is 120 pages long and is an easy read.  My mother and father even read it and understood it. But for those appraisers (or investors or lenders) who don’t have the patience or funds to read it, much of the advice can be condensed into 5 words uttered by two U.S. presidents. 

“Show me” – Harry Truman

For instance, if a developer claims to have his residential subdivision 70% presold, I ask “Show me the purchase contracts.”  In one of my previous posts, a Canadian developer had no presales, just expressions of interest recorded on her web site.  In domestic appraisal assignments, I sometimes see purchase contracts from LLCs and shell corporations from the developer’s home town hundreds of miles away from the property being built.  I view these with suspicion. When I started my private practice in 2006 I saw my best client wiped out by a condo development scam in which 95% of the contracts were not arm’s length.  The sale was either from the limited partnership to a partner or vice versa, but the sales were all at $500,000, well above true market value.

“Trust, but verify” – Ronald Reagan

I go to appraisal assignments with an open mind, and real estate developers tend to be likable, persuasive people.  They can feel like new friends. It’s often not until I get home that I complete my verification process and sometimes exclaim, “Wait a minute!  He:

1.      Doesn’t own the property or have a valid purchase contract.  A valid purchase contract needs to have the owner of record as the seller. Or

2.       Doesn’t have the entitlements he claims to have. Or

3.       Has the property listed for sale at much less than he claims the property is worth. Or

4.       Has been previously convicted or sued for mortgage fraud, embezzlement, etc. Or

5.       Is trying to finance a non-arm’s length, “pocket-to-pocket” transaction.

It disappoints me that so many appraisers and valuers have no interest in fraud prevention, instead trying to shield themselves from liability with lengthy Assumptions and Limiting Conditions.  For example, my book Fraud Prevention for Commercial Real Estate Valuation was based on my award-winning article in The Appraisal Journal in 2009, entitled “Preventing Fraud and Deception”.  It took six years to publish that article.  I submitted it three times to the TAJ review panel.  The first time it was submitted, it was rejected as inappropriate. The second and third times, the consensus of the review panel, consisting of practicing appraisers, was that appraisers are not responsible for fraud prevention, and publication of this article would set a dangerous precedent.

It was not until I presented the article to an international appraisers’ conference in Seoul, where the then-president of the Appraisal Institute, Wayne Pugh, was present, when he suggested that I submit the article to TAJ. I told him that I had already been rejected three times and that most of the editorial reviewers considered fraud prevention to not be an appraiser’s professional responsibility.  He responded, “But it is” and encouraged me to re-submit.  With his blessing, I finally got the article and the message published.

So, if you are an appraiser or valuer who cares about his or her clients, I strongly recommend this book.