Friday, June 2, 2017

Commercial mortgage “straw buyer” scams

Future Bible theme park or flooded sand quarry?

“Straw buyer” mortgage scams are often associated with handwritten “real estate investors wanted” signs stapled to telephone poles. Call the number on the sign and someone might just offer you $5000 to buy an overpriced house for them, using your good credit and good name. After closing, just transfer the deed to them and they will take over the payments. Then they disappear before you can transfer the deed and you are stuck with a house you overpaid for and are legally obligated to make mortgage payments for. You can’t report them to law enforcement, as you have just become a part of the mortgage fraud. The FBI has already labeled the practice of using straw buyers to mislead a lender as illegal "nominee fraud".


Straw buyers are sometimes employed in commercial mortgage scams, too, but are likely to be knowing participants in the fraud. They may be recruited in a LinkedIn group by someone offering $50,000 to someone to help buy a commercial property that cannot sell. For a clever person down on his luck, this can seem like good money.

The straw buyer has to come up with a believable enterprise that would make a compelling story that would justify an unwarrantedly high offer.

In one such case, a hyperscale computing startup company sought a location at the edge of a southwestern city and chose a 70-acre parcel to build a 100,000 square foot headquarters building. Their CEO presented me with an unsigned purchase contract for $8.5 million, of which $4.5 million would be provided by my client as a first mortgage loan and the remaining $4 million would be seller financing. I am always on the guard against “soft second” financing, which is tacitly a forgivable loan, so I checked the preliminary title report and the listing history of the property for some answers.

Red flag no. 1: The preliminary title report ordered for the buyer requested only $4.5 million of title insurance coverage, not $8.5 million.

Red flag no. 2: The property had been listed for sale on LoopNet for 28 months and the sellers renewed their listing 8 days previously at a price of $6.9 million.

Red flag no. 3: The sellers, who were local, never tried to contact me or meet me at their site, a situation I find common in straw buyer scams. They count on their straw man or men, hired for their marketing skills, to do their selling. Most ordinary sellers want to be there when I visit and can be pushy as hell, but in straw buyer scams they never want to meet me or talk to me.

Red flag no. 4: The borrower’s company had no history. A check of LinkedIn indicated several employees scattered around the country, but way too few employees to justify a 100,000 square foot headquarters building. The company web site was supposedly under construction and had the cryptic statement, “We are in stealth mode”. This statement is now 6 years old.

When the appraised value ended up being too low, the CEO insisted on having the appraised value increased, even flying across the country to bother the lender. I told the lender to ask him why he does not make the same effort to have the purchase price reduced; after all, this shopworn property was already listed for sale at $1.6 million below the contract purchase price. The borrower responded that he didn’t want to bother the sellers. He instead ordered an MAI appraisal which claimed that the property was worth $10 million.

Then I ordered a background check on the CEO and everything became clearer. While I expected someone with perhaps a PhD from Cal Tech or Stanford, instead I found someone with a bachelor’s degree in political science who kept on moving around from apartment to apartment in various states, had a bankruptcy on his record, as well as a criminal conviction for check fraud – perhaps the type of guy who would respond to a “real estate investors wanted” ad.

In a more colorful straw buyer scam, I was sent to Texas to visit the site of a proposed Biblical theme park, seen in the above photo. The developer had a purchase contract for $3 million but stated that the property was really worth $12 million. Although this developer claimed to have an office near the airport, he insisted that I meet him at a Denny’s restaurant near the site. (I prefer to meet real estate developers at their offices just to prove to me that they are real developers.)

I had already tried to run a background check on this man, but his name was so common, I could not distinguish him from many other people. I found his LinkedIn profile, but he had no history that extended back farther than 5 months. He claimed to have an MBA from Harvard. I e-mailed the HBS registrar and they replied that there was no record of him as an MBA student.

After a one hour presentation at Denny’s of marked up surveys and a singularly unusual illustration,
he drove me to the site in a rented subcompact car. The site was an abandoned, flooded sand quarry. I commented that a lot of the land was under water, and he responded that much of Disney World was built on Florida swampland and that the water would suit his “Jesus walking on water” and “Moses parting the Red Sea” exhibits. But quarry water can be deep, and the only uses I have seen quarries repurposed for are agricultural or fishing uses. Perhaps he could have built a "Voyage to the Bottom of the Sea" exhibit?

(The above illustration, titled "Babylon", was located by Google search as created by Austrian artist P. Pirker in 2007 and is available for free download at fantasyartdesign.com . It has been downloaded 17,302 times since 2007.)

The developer's
survey indicated that the parking lot would extend into the adjacent nature preserve, and he said that the local town had approved this intrusion, although the nature preserve was state-regulated. When I walked on to the nature preserve I found four of these signs:
Imagine children and alligators in the same parking lot.  What could go wrong?

Researching comparable sales I found the perfect one just across the street, an abandoned sand quarry which sold for $225,000 to an organic farmer, which begged the question, how can one abandoned quarry be worth $3 million and the other just $225,000?


There was no development plan, not even a written plan that could be shown to me. There was no sewer leading out to this site and the road leading to its southern boundary was only two lanes, but then he told me that he had searched the world for the right location for a Bible theme park, and that this was it.

I had no credulity left, but since I now knew what he looked like I did a Google image search and found him as an alumnus of Tel Aviv University (an Israeli university). But when I re-ran the background search I found no history of the man after year 1987. No addresses, phone numbers, relatives, co-workers, places of employment, property ownership, etc. It was as if he had not been in the United States for more than a quarter of a century. Israel, perhaps?

His project did not get funded, but I learned some other amazing things. The man had two legitimate social security numbers. How can this happen? The Social Security Agency explains that it assigns sequential social security numbers to an immigrating family, but a minor is permitted to request his own unique SSN, which he did at age 17 while also having his name legally changed. A background search on the other SSN showed the use of both the old name and the new name and at least one alias name.


Here is the pattern of a commercial straw buyer scam:

1.
The buyer, not the seller, shows the property.
2. The seller does not contact me, and if I contact them they tell me "talk to the buyer."
3. The buyer inundates me with irrelevant and misleading data designed to inflate my estimate of value.
4. When the appraised value is too low, they try to either beg or bully me to increase the appraised value. 
5. Most buyers thank me when I tell them they are overpaying for a property and subsequently reduce the price (Yay!) or else terminate the deal. Then I suggest that the buyer gets the seller to reduce the price and they tell me that they can't do that, yet there are no other bidders on these undesirable properties. And there's no sale.

In some cases, the straw buyers have already acquired the property, such as acquiring the seller's LLC (not recorded as a real estate transaction) or establishing a private joint venture with the seller. If the appraised value comes in too low, straw buyers do not try to negotiate a lower selling price, but instead waste their efforts on discrediting me or begging me to increase the appraised value.


Here are some parting thoughts. Appraisers are trained to analyze the property only; whoever owns it is immaterial because the standard definition of market value asks us to estimate what the next owner would pay for the property. In real life, though, an appraiser can be misled by false representations. Doing a background check on a commercial mortgage applicant can often clarify the loan applicant’s real agenda and alert the appraiser to perform a higher level of verification of the facts presented.

Monday, May 29, 2017

Luxury Condominium Towers and Foreign Absentee Ownership



Pavilion Residences Tower No. 3 in Kuala Lumpur
Three months ago I received a request from a Chinese-American bank to appraise an unbuilt condominium as a rental property at The Metropolis, LA’s most extravagant new residential tower yet, which is being developed by the Greenland Group, a Chinese company. 1500 condominiums are being built and offered for sale for prices ranging from $600,000 to $2,000,000.
The Metropolis in downtown Los Angeles


Inquiring with Chinese-speaking Los Angeles realtors, I heard the opinion that many of the buyers at The Metropolis were Chinese and did not intend to occupy their units. I have heard similar rumors for Oceanwide Plaza.

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%.

I turned down the appraisal assignment, as once these towers open and owners place their unoccupied units up for lease, how far will asking rents fall? I don't want to be responsible for a loan loss.

One decade ago, downtown Miami had a problem with empty, see-through condo towers. Miami is not the same town as Miami Beach, an affluent oceanfront community on the eastern side of the Intracoastal Waterway. Downtown Miami has no beaches, and it fronts the Intracoastal Waterway, not the ocean. Capital flight out of South America, particularly Venezuela, took care of that vacancy problem.

With capital flight, the primary objective of the buyer is to move money out of the home country for its own protection into nations with secure property rights and stable political conditions, not necessarily with the expectation of profit.

In New York City, appraiser Jonathan Miller noted that similar condo towers in New York City serve as "safe deposit boxes in the sky that buyers can put all their valuables in and rarely visit."

In a follow-up visit to Kuala Lumpur, I saw a similar phenomenon at work in the luxurious Bukit Bintang section of town, with numerous high-rise luxury condo towers under construction at once. I was already familiar with the 44-story Pavilion Residences towers at the Pavilion Mall; Tower 2 is said to still be only 40% sold, mostly to foreign absentee owners. There are still few lights on at night. Now Pavilion Residences Tower No. 3 is finishing construction.

History has not been kind to condominium communities with low rates of owner occupancy. Ten years ago a CPA friend urged me to buy Las Vegas condos “before it’s too late”, but too many units were bought by investors rather than occupants. The result was an oversupply of investor-owned units which could not pay for themselves, and tumbling condo prices. The more expensive the unit, too, the harder it is to find renters to cover the ownership costs. Wealthy people prefer to own rather than rent.

Flight capital is more patient than investor capital, which lessens downward pressure on prices, but there is another risk, instead, which is when the home country political conditions change enough for foreign condominium owners to bring their capital back home. This can create a sudden surge in condos for sale, such as witnessed in Vancouver at the turn of the century, when condos owned by Hong Kong investors were put on the market all at once.

There is a reason why lenders and Fannie Mae and Freddie Mac instruct appraisers to indicate whether the residence they are appraising will be owner-occupied or investor-owned, and whether the condominium building itself is primarily owner-occupied rather than rented out. Owner-occupied condos are more stable, and when real estate markets decline, investors are much more likely to bail out than owner-occupants.

Sunday, May 28, 2017

Macau vs. Las Vegas Gaming Revenues: A Reversal of Fortune



Lately, my post from 6 years ago, http://www.internationalappraiser.com/2011/05/macau-surpassing-las-vegas-as-worlds.html , has had resurgence in readership, but it is outdated now.

Back then I commented that Macau had 4 times the gaming revenues as Las Vegas and was growing rapidly (43% in the previous year) while Las Vegas gaming revenues were shrinking because of the U.S. recession.

Macau Casino gaming revenues topped at $45.27 billion in 2013 and have steeply fallen since then to $28.04 billion in 2016, a decline of 38%.  This may have been caused by:

1. A limit placed by the local government on the number of gaming tables (5500), and

2. Chairman Xi’s crackdown on government corruption. This made corrupt civil servants reluctant to visit Macau, and the rumor was that many of the high rollers were government officials.
Las Vegas Strip gaming revenues have recovered since then, with $6.35 billion in 2015, up about 8% from that time, as the city continues to reinvent itself.

Atlantic City continues to lose gaming revenues to new casinos in the New York and Philadelphia metropolitan areas. Both states have been experiencing about a 3% annual gain in gaming revenues, and Pennsylvania now ranks second nationwide in gaming revenues.

Meanwhile, there is a surprise third place in international rankings.

The U.S. ranks first, with $38.54 billion in gaming revenues, followed by China (Macau), with $28.04 billion.

In third place is Japan, with $12.845 billion in gaming revenues. This is a surprise considering that Japan just legalized casino gambling this year, but what I never thought of before is Japan’s Pachinko Parlors, which more resemble pinball arcades than casinos.  Nevertheless, each one is a place of gambling, and there are 1248 of them in Japan.


Wednesday, May 24, 2017

French Property Portfolio Valuation




Office condo near L'Arc de Triomphe

This was an investment portfolio of 8 properties scattered across France, acquired at various stages between the years 2008 through 2017, for which a nonprofit organization needed an update on portfolio value. The portfolio consisted of residences, office condominiums and a fractional interest in a motel.

Needless to say, real estate prices in France became quite volatile after 2008, with some areas recovering shortly, others experiencing a second recession, and the prices in far northeastern France, in Lille and Hauts de France, seem to have never recovered, with Lille having precipitously declined in the last year. This area north of Paris is known as France's Rust Belt, and Lille was particularly dependent upon the textile industry.

There were also certain metropolitan areas, Paris and Bordeaux, which had some 20+% price gains during their holding period. This has been attributed to foreign buyers. Paris is one of those world cities that attracts “flight capital”, money brought in by foreign investors who fear their own governments. London, New York, Los Angeles and San Francisco are other examples. Bordeaux has also attracted foreign buyers through its increasingly attractive quality of life and beautification, with accelerating price appreciation over the last year.

Overall portfolio value increased 4.1% over the holding period, with the winner being Chatillon, a southwestern suburb of Paris, which appreciated by about 25%, and the loser was Lille, a northeastern industrial city, with a depreciation of 18%.
Loser: Lille



Winner: Single family dwelling in Chatillon, suburb of Paris
PS: It seems that the French and American peoples have been the best of friends during the worst of times -- The American Revolution, World War 1 and World War 2. In more recent years there have been complaints that Americans are rude and that French are rude. In 5 days in France I encountered only 2 rude Frenchmen, but one taught me an important lesson -- that I had failed to learn the rules of French courtesy.


I walked into a Parisian bar and asked for a glass of Armagnac. The bartender looked indignantly at me and sarcastically said "Bonjour!" It seemed that I had offended him, so I asked "Pardonnez-moi, je suis américain. Qu'est-ce que c'est le problème?"



He then explained that in France, bartenders and waiters are considered professionals and expect to be greeted as equals, not servants, and the proper greeting is Bonjour or perhaps Bon Soir.

That's good to know, and I will henceforth greet all servers in whatever nation I am working in.


On the other hand I have seen more than one American tourist boorishly ask "Where's the Eiffel Tower?" The French refer to this landmark as "La Tour d'Eiffel." It seems that the French would like us to learn a few words of French before we visit their country.





Tuesday, May 23, 2017

Another appraisal in Seoul: Eminent Domain in a "Property Price Announcement" system

This US citizen is suing for better eminent domain compensation

Imagine having your property taken by the government and not being fairly compensated.  The 5th Amendment to the U.S. Constitution guarantees Americans and others “just compensation” for the taking of their private property, usually at market value or maybe value in use. Article 23(3) of the Constitution of the Republic of South Korea also provides that  expropriation, use, or restriction of private property for public necessity and compensation therefore shall be governed by law, provided that in such a case, just compensation shall be paid.

Suppose a U.S. citizen has her residence taken in a foreign country and is offered unfairly low compensation for the taking.  If the foreign country has a free trade agreement with the USA, such as South Korea, that U.S. citizen has the right to a hearing of her grievance at ICSID, (International Centre for Settlement of Investment Disputes)an arbitration subsidiary of the World Bank. Most hearings take place at their Washington, DC offices, but other closer venues are being made possible.

As I explained in a previous blog post about a Korean appraisal assignment,(http://www.internationalappraiser.com/2016/08/an-appraisal-of-commercial-property-in.html), a Korean appraiser separately values land and building, similar to what is done by U.S. tax assessors or German appraisers.  Government-ordered appraisals, however, are not allowed to estimate the land's market value. Instead, appraisers must consult a "Officially Announced Land Price" system in which land values are annually determined by the Minister of Land, Infrastructure and Transport. This is a departure from the concept of market value that underpins the concept of "just compensation" in the U.S. and Korean constitutions, to a "price announcement system" in use by other countries with high urban land price inflation, such as Costa Rica, where appraisers consult a map to determine the land value. The government therefore prevents property owners from receiving market value in their own misguided efforts to control land prices.

Korea’s Officially Announced Land Price system was enacted in 1990 as a countermeasure against land price inflation. It was designed to act as a price control, but price controls are often counterproductive, as seen during the Nixon-era price controls enacted in the U.S. in the early 1970s. It only proves the scarcity of land or goods, which in itself is what enhances value. This concept is usually presented in the first chapter of any appraisal textbook.
The irony of the heavy use of eminent domain by the Seoul Municipal Government for redevelopment projects is that the government itself is creating the land scarcity that drives up land prices.

Seoul is a rapidly growing city that now has twice the population density as New York City.  Land prices have consequently skyrocketed, and there is nothing a price announcement system can do about that.  One example: last year Hyundai bought a 20-acre site in Gangnam for more the $10 billion ($500 million per acre) to build their new corporate headquarters. Samsung was the rival bidder.

While this particular condemnation lawsuit I am involved in might seem just like a chance for a property owner to get rich, there are hardships involved for the family who has to relocate. They explain that the approximately $700,000 offered to them is inadequate to find a substitute residence in an area where comparable houses are now priced closed to $2 million. So this becomes a hard luck story, too.

For all other U.S. citizens, including naturalized citizens, who fail to get fairly compensated for government-seized properties in other countries, this is an example that justice can still prevail.  Please feel free to contact me with your situation.


Other related posts:

http://www.internationalappraiser.com/2016/08/an-appraisal-of-commercial-property-in.html
http://www.internationalappraiser.com/2011/05/oversupply-shock-wave-hits-seoul-cbd.html




Thursday, April 27, 2017

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..

Monday, April 10, 2017

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.

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 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.







  

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.