Appraisal in Panama

Looks like rice cultivation

This was a litigation situation in Panama in which 3 different Panamanian appraisers had already appraised a group of agrarian properties which were near each other, with the highest appraised value more than 5 times the lowest appraised value. I was asked to make an independent appraisal.

Two appraisals had been done for the respective litigants, and one had been done by the Panamanian government. One of the litigant’s appraisals and the government appraisal quickly became suspect when it became obvious that these appraisers had not visited the properties. One property was actually a revenue-producing rice farm, and another was a residential property, but two of the three appraisers did not know this, casting doubt upon their inspections of the properties. If they had just consulted Google Earth, they would have seen the rice cultivation and the residence.

My appraised value came in second highest because I was only one of the two appraisers to notice a rice farm instead of a vacant agricultural parcel. I elected to use local comps (from the same “corregimiento” which translates as “township”) rather than use superior locations outside of town.

The International Appraiser completes expert witness testimony in a divorce case in Costa Rica

 

A recent marital dissolution trial had me establishing value for proposed luxury lodges near the beach in Puntarenas, Costa Rica, in the Santa Teresa area where famous rich people have also been recently seen vacationing or buying houses, such as Tom and Giselle Brady, Mel Gibson and Matt Damon and family. These types of properties consist of several luxury villas on site renting at $400 or $500 each night, and development restrictions in Costa Rica make these types of properties easier to develop. 

I represented the developer’s wife in the trial. The American husband chose an appraiser from a Costa Rican appraisal firm, although the trial was in Massachusetts. 

Sometimes hiring the local Costa Rican appraiser does not help, if the appraiser uses demonstrably inferior methods (such as not adjusting land prices for differences in zoning), or the appraiser cannot effectively testify in English. 

One point of contention in the trial was that a work stoppage during the COVID crisis signified the failure of the project, particularly since the construction permit expired. 

I pointed out that tourists were coming back to Costa Rica as early as November 2020, and that the architect/builder, Benjamin Saxe, is one of the most famous architects in Costa Rica. A very short distance from this property is Saxe’s famous “Floating House”, a group of three tree houses situated at the top of the jungle canopy near by beach, presenting the illusion of floating in air. Surely he could get a permit renewed. 

Even more surprising, every local lodge near the beach was 100% booked over the next three months.

Appraisal of Coastal Land on a Pacific Island

Notice the proximity of the cliffs and the calm, reef-protected waters. 

Some of my appraisal assignments call for “second opinions”. This one called for a third opinion, as appraisal reports had been respectively submitted by two MAIs who resided on the island. The estimates of value were more than $50 million apart. Who was right? Who was wrong? 

A survey measuring more than 250 acres had been done 8 years previously after an assemblage of smaller lots had been rezoned to hotel use. This survey was officially accepted by the local government, but the survey had a strangely unprofessional appearance. The survey was two-dimensional except for a central portion of the site which was described as “cliff face area” and drawn 3-dimensionally, including ravines within the cliffs, and this area was given a significant amount of site area, 63.5 acres, even though the cliffs appeared to be almost vertical. Had “vertical” become the “new horizontal” on this quaint island? Upland area had been measured at 110 acres and beachfront area had been measured as 105 acres.

Survey  

These cliffs are mislocated on the survey

Google Earth now gives us tools in measuring land, and the differences between the satellite view and the survey were quite apparent. The survey showed the cliffs by the shore at only the northernmost part of the property, whereas they seemed to be touching the shore in 3 different places from south to north in the satellite photo. 

Measuring all site area below 50 feet in elevation, I found only 36 acres of beach land, not 105 acres. 

Surveys of tropical beaches often have to be redone every few years due to beach erosion or accretion as a result of tropical storms, and this island experiences plenty of storms, but the loss of 70 acres of beach land seemed to be too much to be believable for a coral reef-protected beach like this one. 

I had to conclude that the survey was inaccurate to begin with, due to its strange measuring conventions, seemed almost to exaggerate this site's beach land and overall site area. 

In addition, as I have constantly maintained on this blog, the most accurate technique for valuing beach land is the use of “price per lineal meter” or “price per lineal foot” as the unit of comparison. The use of price per square foot or price per square meter yields less precise results, as the value on the beach side of the property is so much more than the value of inland area. Every statistical analysis I have done indicates that price per lineal measure provides the least variance among possible beach land valuation results. 

Nevertheless, the appraisers were both using price per square meter as their metric. I asked one why, and the response was that there was no public data on beachfront or waterfront length on this island, so price per square meter is what they felt that they were limited to.

For certain comparable sales and listings, though, there were satellite photos, some of which were sufficient to make estimates of the beach length. Some times using the right metric requires some extra effort.  The comps for raw beach land were in a range of $1650 to $2500 per lineal foot of beachfront.

That's enough of today's lesson, but I want to discuss the politics I sometimes have to contend with on foreign assignments such as this. The politics typically comes from loan salesmen and/or jealous, mediocre appraisers.

1. "These are the acknowledged appraisal experts for this island! They are MAIs! How dare you challenge their expertise in their own land. You are geographically incompetent!"

First of all, these grand poobahs did not even agree on value. One estimate was almost three times as high as the other one.  They did not even measure the length of the beach, the most important part of the property. They used outdated sales from prior to the pandemic, and did not notice beach property listings at much lower prices than yesterday's sales. I have always wondered why The Appraisal of Real Estate, the most comprehensive real estate appraisal textbook in the U.S today, spends less than one paragraph explaining how listings can be used to estimate market value in declining markets.

I have had no prior experience with this island, but I have spent the last 15 years appraising beach properties in Fiji, Hawaii, Brazil, Barbados, Puerto Rico, the Dominican Republic, Costa Rica, Mexico, U.S. and Canada.  So that is my statement of geographic competency.

Where do U.S. retirees really emigrate to? It’s not what international real estate purveyors would have you believe.

  Harrison Hot Springs, British Columbia. Canada is the preferred destination of U.S. retirees.

While I have addressed International Living and Real Estate Trend Alert before, there are many other vendors of foreign real estate fantasies and get-rich-quick-schemes with their hyperbole about Costa Rica, Panama, Ecuador, Vietnam, etc. 

Every year, though, the U.S. Social Security Administration summarizes the number of Americans in other countries receiving social security benefits, and it paints a much different picture. These are retirees, spouses and those who are on disability. In 2019 the Social Security Administration was mailing checks to 682,888 Americans outside the U.S., an impressive number, but most of the destinations don’t seem to be the ones constantly promoted by Katherine Peddicord or International Living. 

Where in the Western Hemisphere have the most U.S. retirees moved to? Canada. There were 110,626 retirees receiving social security and SDI checks there, although some of these retirees may have already been Canadian, and were returning home with U.S. social security benefits. 

What about the Latin American hot spots constantly featured in the real estate fantasy magazines? Costa Rica – 2551, Panama --2799, and Ecuador – 3879 U.S. retirees. One exception is Mexico, with about 60,000 retirees, but some of these may also be Mexican citizens returning home after a career in the U.S. 

Thailand and Vietnam are mentioned as the hottest retirement hot spots in Asia. The number of retirees is 7262 in Thailand and just 556 in Vietnam. Where in Asia are the most U.S. retirees? Japan, with more than 90,000. 

Portugal and Spain get mentioned as the hottest European retirement hot spots, but Portugal has just 12,910 U.S. retirees and Spain has 12,732. The leading European nations in attracting Americans are Germany (40,000) and the United Kingdom (37,500).

Another appraisal in Seoul, Gangnam-style

 

The subject is a 14-story office tower in Seoul, built in 2006, with a height of 182 feet. Gross building area is 70,310 square feet (6532.81 square meters), covering most of the site.

This was yet another valuation assignment done for inheritance purposes as wealthy Korean immigrants to the U.S. pass on valuable real estate assets to their children. This particular building is situated in Gangnam-gu, one of the three major business districts in Seoul, and the most modern one. Most office buildings in Gangnam were built after 1990.

As luck would have it in this very active Seoul office market, two very comparable sales were found to have occurred in the last month within 2 blocks of the subject, and a third comparable sale was found about one mile west, having occurred three months ago. All were very similar office buildings less than 15 stories in height.

The last measured office vacancy rate in Gangnam was 4.2%, office building sales are amazingly active, and Seoul is a surprisingly easy place to appraise office buildings.

A Recent Appraisal in Costa Rica's Zona Maritima

Most of the real estate in Costa Rica consists of "freehold" or "fee simple" interests in real property, or in other words, properties with titles, estimated to cover about 85% of the country.

The remaining 15% is leasehold land known as “concession properties”. Concession properties are considered desirable because they are at the beachfront, where titled land is not available.

All Costa Rican beach properties are located in what is known as the Maritime Zone, a 200 meter strip starting from the average ocean high tide line. The ZMT (Zona Maritima) is divided into a 50 meter strip closest to the shore known as the public zone, which cannot be privately occupied, and the remaining 150 meters can be applied for “concession” in the corresponding Municipality. 

Think of “concession land” as a “concession stand” at a ball park or a fair. All Concession land is leasehold land, with lease payments going to the municipality; it cannot be privately owned, but real estate developers and wealthy homeowners can lease and develop these properties profitably.

The subject property was zoned as a “Hotel and Touristic Zone”, which is a valuable zoning classification to have, and the owners wanted to develop it with a hotel, but the key to maximizing the value of the land is to have an already-approved hotel development plan in place, as it can take years to get a hotel project approved. Otherwise the concession is only worth half as much

PS: Next stop, Greece, or maybe not so, with the Greek nation on Coronavirus lockdown. Non-EU citizens are not allowed to visit until after April 18 and I could not negotiate a later appraisal deadline.

Another Misleading Rental Property Offering From Global Investments Incorporated Through Mondinion (Global Investments)

My name is on many “real-estate-for-suckers” spam lists, and some it comes out of Britain from Mondinion, Global Investments Incorporated, PropertyO, NuBricks or whatever name they change to again. This is a group of British real estate salesmen internationally hawking rental properties in some of America’s most troubled urban residential markets, such as Detroit and St. Louis. The central problem with these cities is depopulation, and in 2017 CBS News declared St. Louis to be the fastest depopulating major city in the nation, with population declining by more than 1% per year.

One may wonder why they would go to such trouble to find and market properties in bad neighborhoods of America’s fastest depopulating major cities. It is because they can claim high initial rates of return on investment (“capitalization rates”) without disclosing such recurring problems as vacancy, low income areas, foreclosures, depopulation and crime in the neighborhood, instead describing these neighborhoods as “stable” and “safe”. These properties can be acquired quite cheaply and be flipped to naïve British pensioners and foreign investors.

High capitalization rates, such as return on investment > 10%, indicate properties with uncertain futures and high risk; thus the investor wants to get his return on investment much sooner before conditions deteriorate. There is also the possibility that the numbers are false.

I commented previously about them in 2017 (https://www.internationalappraiser.com/2017/11/lately-i-have-been-receiving-e-mails.html) when they were selling residences in the Detroit area, which they continue to do. They described the Inkster, Michigan neighborhood as safe although it ranked 93 percentile for crime in the state of Michigan.

This time Global Investments contacted me with a list of 6 homes in St. Louis. I chose to analyze one at random, 5752 Astra Avenue, an 1107 square foot, two bedroom, 1 1/2 bathroom home built in 1927 which they listed for $43,900 (about $45 per square foot) and described as “fantastic” and tenanted at a rental rate of $750 per month.

Checking the local Multiple Listing Service I found that the home was still vacant and listed for sale, but a sale was pending, maybe to Global Investments, the company that is marketing these homes. The brochure begins by describing the house as a 3-bedroom house  (not 2 bedrooms as actual) and already tenanted. The brochure itself shows the house to be vacant, with the only furniture being a dining table. They also neglected to disclose that the home is next to a mosque.

These groups have the habit of marketing their properties as rented, but the photos they show are of empty properties. If they do have a tenant waiting, why would a tenant wait when there are other vacant homes ready to move into?

From an appraiser’s point of view I searched for the 3 most proximate sales to the property this year and found two similar but larger homes at 5980 and 5984 Astra which sold for $10,000 and $20,000, respectively. The next closest sale was on a cross street, 5756 Vivian Avenue, a 2504 square foot duplex that sold for $52,000. The prices ranged from $6.86 per square foot to $20.52 per square foot.

As for the neighborhood, the Census Bureau’s information for this census tract as of 2015 was that it had a median annual household income of only $24,519 and a housing vacancy rate of 19.2%. This is about as bad as urban neighborhoods get.

The property was represented as tenanted, although vacant, so it is hard to say whether it would earn $750 per month, but more importantly, neighborhoods like this have poor tenant quality, so the new owner would have to scramble around to rent the home again before too long. When there is depopulation, filling homes can sometimes be like a game of musical chairs. This home is also adjacent to a mosque, which may be considered an adverse influence.

I was later telephoned by Global Investment’s sales director, who also advised me that they also charge a fee of $4000 in addition to the purchase price, to compensate their efforts in turning around the property. Had they actually been to St. Louis?

I have seen other rental home opportunities marketed by Global Investments Incorporated for cities such as Chicago, Cleveland and Memphis. These are all depopulating cities. CBS News, for instance, compiled a list in 2017 of the 12 major U.S. cities fastest losing population:

1. St. Louis

2. Baltimore

3. Milwaukee

4. Buffalo

5. Detroit

6. Cleveland

7. Hartford

8. Rochester

9. Chicago

10. Memphis

Here’s the reason to avoid such investments:  Depopulating cities experience decreasing property values and rents. Investing in older buildings in depopulating areas is a prescription for failure.  The Rust Belt, for instance, has many cities that have lost half their population in the last 50 years, including Detroit, Cleveland, Youngstown and Dayton.  This usually means increasing vacancies, despite gallant leasing efforts.  Rents are so low that only the lowest cost renovations make any sense, too.  Even then, other new space gets built, hastening the demise of the older buildings. 

So beware of rental properties being offered at high returns; these returns might not be long lasting.

Update Dec. 5, 2019:

A list published on AOL today indicated that the 6 fastest depopulating U.S. cities, in absolute numbers, are:

1. Chicago
2. Los Angeles
3. Detroit
4. St. Louis
5. Cleveland
6. Memphis

Tropical American Tree Farms Update, 2019: A Guest Post

One of the new homes being built on former TATF properties

 I encourage guest bloggers offering topical content on issues that concern my readers.  I have received this guest post written by an anonymous source who lives in the vicinity of some of the many teak farms owned by Tropical American Tree Farms. I have received more e-mails and comments from TATF investors than on any other post on this blog. This anonymous writer is telling the story of a sibling in Costa Rica who has witnessed the destruction of Tropical American Tree Farms. For the many of you who write to me on how to tell your IRA administrator that your investment in TATF is a total loss, perhaps this blog post may help.

"My sister lives in Costa Rica and for the last 3 years has been trying to protect the trees and land , of several farms of TATF. In her efforts to stop the illegal invasión and stealing of the land and trees she was viciously assaulted, as a retaliation for seeking legal means through MINAE 

(ministry of Environment), to prevent the environmental damages and unlawful activity.

Cear-cutting of part of the teak farm

 

Squatter home built from TATF timber

"She does not or did not, know the Brunners and cannot speculate if TATF was a fraud. The Brunners certainly did benefit from the money of the investors over the many years. But to her knowledge, the Brunners never received any money from the harvesting of the teak wood. 

The majority of the teak has been harvested- but not by the Brunners. 

The government of Costa Rica has turned a completely blind eye to the illegal invasión and stealing of this wood and land - bought and paid for by foreign investors dollars. Many of the locals, who worked and benefited for years from TATF money are the same ones now stealing the trees and the land. Please be assured that these are not needy people. Sadly the locals are also invading the primary forests and destroying land the Brunners had left in conservation.

This is in complete violation of environmental laws in Costa Rica."

Appraisal in Quebec: A Lesson on the difference between “Aggregate retail value” and “Market value”

The properties consisted of scattered land parcels of almost 2000 acres zoned for recreation and tourism, including a golf course and a lodge, in a rural part of Quebec in the vicinity of the Ottawa and the Coulonge Rivers. The rivers and lakes provide boating, fishing, and waterfalls that attract a moderate number of tourists, and second homes are sometimes built or bought by urban residents from Ottawa or Gatineau, about 150 km away.

There had been a few lot sales over the last 12 years at prices sometimes exceeding $100,000 (CAD) for the best lakefront lots. The developer had employed a Canadian residential appraiser to appraise a few lots between 2008 and 2012, but never ordered an appraisal of the entirety of the property holdings, which would have required a commercial appraiser. Instead of ordering new appraisals, the developer just had the original appraiser (from Gatineau, 150 km away) send annual letters expressing his opinion that values had not changed. This does not quite meet the standard of a current market value appraisal, though. When lots don’t sell as predicted, an appraiser must always consider that the market may have changed.

More important to understand, though, is the common mistake that laymen make in assuming that market value of the entirety of lots is the sum of the retail lot values, or “aggregate retail value”.  This would only be true if the entirety of the lots could be sold in less than a year. In a slow-moving market like rural Quebec, though, the absorption would take many decades. The American Uniform Standards of Professional Appraisal Practice (USPAP) and U.S. federal banking regulations are clear that “market value” is not aggregate retail value but must be discounted for time and holding costs to be considered “market value” for lending purposes.

From a lender’s point of view, “bulk sale value” is the more acceptable estimate of value. If the lender must foreclose, they want to know how much money they can get back in a reasonable amount of time, usually no more than a year. A lender is not going to wait 36 years for all the lots to sell out. That requires an appraiser to do a lot of discounting for holding costs, marketing costs and expected rates of return on such an investment. For this reason, there are often great disparities between “aggregate retail value” and “market value” for such large properties.

As beautiful as rural Quebec is, I was disappointed in my search for French cuisine. Staying in Bryson, Quebec, I asked the front desk clerk if there was a restaurant in town. She said yes. I asked “So, what’s its name?” She said “Restaurant”. As with the other Quebec restaurants in the area, the menu items were confined to sandwiches, burgers and pizzas. It seemed like any American restaurant, except when the waitress stopped by to ask “C’est bon?” [Is it good?] This question took me by surprise, as the whole order had been taken in English, and being on the border with Ontario, most people in this area spoke to me in English.

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Financial Trouble at Oceanwide Plaza and the Effect of Chinese Capital Controls on Certain North American Real Estate Markets

Oceanwide Plaza, March 18, 2019

Some Hong Kong appraisal firms subcontract North American appraisal work to me. The work is for financial reporting purposes, as the property owners are publicly traded firms, and I have gotten used to the writing reports in compliance with the Hong Kong Institute of Surveyors.

On January 28 I was asked to bid on an appraisal of Oceanwide Plaza being built across from Staples Center, a leading sports and concert venue in Los Angeles.  Oceanwide Plaza had just topped out with three towers of 40 or more stories. This was said to be a $1 billion project.

I was surprised by this request because just the previous week, Lendlease, the Australian general contractor, had rocked the LA real estate world by announcing that it had halted construction on Oceanwide Plaza. The interior remains to be built. There were rumors that the lender had pulled out of the project, but no explanation of why. 

In November 2018 the FBI served a search warrant to China Oceanwide Holdings in an investigation of local public officials and Chinese developers regarding bribery, extortion , money laundering and kickbacks relating to 4 prominent Chinese real estate developers, including China Oceanwide and Greenland Group (developer of the new Metropolis condominium/hotel project nearby). No charges have been filed against China Oceanwide or the others.

A press release from China Oceanwide explained the need for capital restructuring and that construction would resume in February. With my own eyes I saw the project still stalled as of March 18, 2019.

Here are some hypothetical explanations for the continued shutdown:

1.       Chinese capital controls, instituted two years ago, are preventing the necessary funds from leaving China. The purpose of the new regulations was to reduce “irrational outbound investment and to improve the development of China’s overseas investment.” China has been attempting to crack down on capital flight resulting from a slowing economy and downward pressures on the exchange rate. These same controls have caused other Chinese developers to place their North American assets for sale. Greenland, developer of a similar project called Metropolis, a few blocks north of Oceanwide Plaza, has placed one of their three residential towers plus their Indigo hotel for sale. There seems to be a pattern here of Chinese developers now placing their properties for sale, as Dalian Wanda sold its unbuilt One Beverly Hills project (valued at $444 million) last November, and Oceanwide itself placing its unbuilt 80 South Street project in Manhattan for sale for $300 million after buying it for $390 million 3 years ago. Meanwhile, the Chinese government has seized the insolvent Anbang Insurance Goup and will be selling off its U.S. hotel assets, acquired for $7.45 billion during 2014 to 2016, which includes the Waldorf Astoria Hotel in New York, which itself cost $1.95 billion.

2.       Lack of buyers. As local realtors speak of the residential sales slowdown at the Metropolis, the same forces may be working against Oceanwide Plaza. One realtor said that 60% of the residential sales at the Metropolis were to Chinese buyers who did not intend to occupy their units. A Chinese-American bank even asked me to appraise one of the units as a rental property, and I told them that if 60% of the units are placed for rent at the same time, there is no way of estimating how far market rent would fall. Downtown Los Angeles already has a 17% residential vacancy rate, the highest vacancy rate since the 1990s. Capital controls could be affecting these Chinese buyers, too. Some say their main reason for purchase was to remove capital from China, either because they do not trust their own government or perhaps to place ill-gotten gains away from capture.

More news came out in February about $62.5 million in mechanic’s liens on Oceanwide Plaza, but more intriguing was some private correspondence from general contractor Lendlease to some of its subcontractors, stating that Oceanwide “had failed to maintain the minimum contractually required payments for both your and our work”, yet Lendlease, with an $814 million construction contract, had not filed any mechanic’s lien yet.

Looking at the bigger picture, the Chinese capital controls law passed two years ago will be starting to affect certain North American real estate markets, such as Los Angeles, San Francisco, Vancouver and New York, which have been highly boosted by Chinese investment. The Chinese government measures net capital flow to the United States, which has been profoundly positive for a few years, but in the last quarter of 2018, the net capital flow was a huge $54.6 billion outflow of capital back to China. Forbes Magazine estimates that China has lost $3.8 trillion to capital flight during the last decade. They want their money back. One expert estimated that the ratio of outbound Chinese capital (back to China) to inbound capital is about 10 to 1.

As for the outcome of Oceanwide Plaza, there are various scenarios:

1.       A white knight lender from outside China will provide necessary funds to finish this well-located project,

2.       The property will need to be auctioned off to a more solvent owner,

3.       Or in the worst case, if building and safety laws were allowed to be violated, Oceanwide Plaza could end up being 3 decaying 40+ story hulks sullying the downtown L.A. skyline.

I told the Hong Kong appraisal firm that they should ask to be paid in advance, which is not the custom in this type of financial reporting work. They replied, "Noted, with thanks".