Determining value becomes up close and personal

How much is a house worth?

The quick answer is whatever someone is willing to pay. The longer answer is whatever similar homes in the same area have sold for recently.

For Costa Rica, that second definition presents a problem because there is no public list of real estate sales. In fact, there is a strong tradition of faking the sales price to dodge the government transfer tax.

One fact is for sure. The value of a property is not the sum of its parts.

Expats faced the problem of property evaluation when the Costa Rican government instituted a luxury home tax. Dwellings worth over about $180,000 are taxed on a progressive scale. But to get the value, the government chose exactly the wrong method.

According to the new tax law, properties were evaluated by their area with certain adjustments for depreciation. The land figure was based on a square-meter value reported by the municipality with adjustments for the slope of the land.

The problem with this method is that a 400-square-meter (about 4,300-square-foot) home on a hill above the Pacific Ocean in Dominical would command the same value as the same building nestled in some slum, except for the land value.

But no one was really going to purchase or sell these homes for these estimated values, so, as they say, the amount was close enough for government work.

A formal appraisal is just an estimate of value. Professional appraisers are fond of calling their profession an art form.

But Costa Ricans prefer solid numbers, square meters of area and mathematical formulas.

The appraisal situation is much more than academic these days for former investors with Savings Unlimited.

This is the high-interest company operated by Luis Milanes Tamayo that vanished one weekend in November 2002. So did Milanes, but he is back now and has a deal for his estimated 500-plus remaining investors who are the civil part of a criminal action for fraud.

These former investors and others had $200 million in the Milanes firm when he pulled the plug and fled. Those who exercised their rights and filed with the courts have a date March 1 where they will begin to discuss the latest settlement offer from Milanes.

He has offered to turn over property to Banco de Costa Rica. The property would be sold and what remained after commissions, fees and lawyer compensation would be divided among those still active in the case.

If the former investors take the deal, Milanes will not have to go to trial.

The investors are now studying an appraisal presented to the court that says the property Milanes offered is worth about 5.2 billion colons, about $10.5 million at the current exchange rate. The major property in the package is the Hotel Europa in downtown San José, which the appraisal by Jaime Esteban Mayorga Marín says is worth about 2.8 billion colons or about $5.7 million.

Milanes has not offered to include any of his lucrative casinos or the many other holdings he has in Latin America.

This is a hard call for the former investors. If they decline the offer and Milanes goes to trial and is acquitted, they get nothing. If he is convicted, the judicial panel might award former investors much more money and assets. If they take the current deal, each could get up to $16,000 after lawyers and fees, depending on the amount of their lost investment.

However, that amount depends almost entirely on how close the appraiser has come to estimating the value of the Hotel Europa and 10 other properties that Milanes has offered. By using an estimate based on replacement cost new less depreciation, the appraiser did not determine the profitability of the hotel where Milanes occupies the penthouse suite.

Profitability or at least gross income would be critical when and if Banco de Costa Rica seeks to sell Hotel Europa. They would also have to explain away the lack of parking and the unsavory location.

Potential purchasers certainly would use another appraisal technique, that is the income approach that says something is worth a multiple of what it can net. That is why McDonald’s hamburger franchises do not sell cheaply.

Some investors want Milanes to sell the properties and put cash into his proposed trust account at the bank. That way they would have an idea of what the true value of the properties are.

The criminal court has blocked out the whole month of March for investors, Milanes and an army of lawyers to argue their points of view.

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