Hey, A.C. Gonzalez: Forget "Transparency." Here's a Tougher Challenge.

Categories: Schutze

Alice_Through_the_Looking_Glass.jpg
Sometimes City Hall is a little too through-the-looking glass for me. I get the willies.
Based on the City Council meeting yesterday where they appointed A.C. Gonzalez city manager, I now have a new least favorite word in the whole English language. Transparency. They kept saying it over and over like a weird chant. I've got something else for them to work on, way before transparency. Tell you in a minute.

After watching the council voted to make Gonzalez the next city manager (see my column about it in tomorrow's print product), I attended a meeting of the council's housing committee where they discussed a matter I have shared with you here before -- the big fancy real estate development you and I are paying for, not a brick of which has been laid, across Lancaster Road from the Veterans Affairs hospital on a very tough stretch of Lancaster Road.

See also: Maybe Yigal Lelah Did Spend $4.5 Million of Our Money on Dirt. Feel Better Now?

Over the last five years you and I have given Yigal Lelah, the developer, $4.3 million in city funds to buy an entire block of beat-up commercial properties and tumble-down shacks so he could put up a space-age combination retail, office and residential development with a veterans hospital theme. I guess the street names could be, "Wait Until You Die Avenue" and "Oops We Took Out Your Wrong Kidney" Lane.

Anyway, nothing is there. The money is spent. The City Council wanted to know how Lelah could have paid prices of more than $15 a square foot for land in an area where the tax appraisal district says most land is worth a dollar a foot. And, yes, the tax appraisal district often low-balls its appraisals, but not by 1,500 percent. C'mon.

Lelah says he did not overpay for the land, and he is not without his defenses. After the meeting he flipped some pages open for me in a file that he said contained an appraisal commissioned by the federal government. He said their appraisal found his purchases to be worth almost a million dollars more than what he paid for them as of November 7, 2012. That's interesting.

Of course, if the appraiser for the feds used the prices Lelah has paid over the last five years as a measuring stick, then, yeah, that land may be worth a ton more than it was before Lelah bought it. You know how they always say the rule of value in real estate is three words -- location, location and location. We here in Dallas know that's not always true. Sometimes it's three other words -- flipping, flipping and flipping.

I looked through the briefing materials provided to the council before the meeting, and I came across something I've just never seen before in my 200 years as a reporter covering incredibly boring real estate crap: The appraisals Lelah provided the city to justify the prices he paid for land are based on a principle that is new to me. Look, maybe I'm stupid. I just haven't ever seen it before. All the appraisals I'm used to are based more or less on what somebody could get for it.

You know, if it's some guy's house, what could the guy get for it if he put it on the market for six months? Say it's a rusted-out car wash where half the hoses are broken and anyway there's a crack house next door, but you want to buy it. What kind of a check would you have to write to get that guy to give up that car wash? Maybe you wouldn't even have to write a check at all, just give him a ride to Mineola.

You know. What's it worth sitting right there as is?

That's not what Lelah's appraisals are based on. Instead, he's using a technique that's brand-new to me, and shame on me if I should have known about it. His appraisals are based on "estimated hypothetical market value."

Wuzzat?

In the documentation provided to the city, estimated hypothetical market value is defined as "market value of the property with all proposed development, construction, conversion, and/or rehabilitation hypothetically completed, or under specifically proposed conditions, as of the date of the appraisal."

Wuzzat?

No, wait. You have the value when it's shacks and rusted-out car washes. That's what you pay for the shacks and rusted-out car washes. Then you spend a huge sum of our tax money, estimated at a total of almost $30 million if this thing ever does get built. And when you're done developing it, you have a much higher value because you spent $30 million improving it.

So here is where I am stumped. Before you develop, you don't buy the land at what its value will be after it's developed, because it hasn't been developed yet, so it doesn't have that value yet. That increased value is what you make, not what you pay.

OK, I have to stop with this, because when I go to City Hall, and they're all chanting "transparency, transparency" over and over again like Tibetan monks, and then they start doing one of these through-the-looking-glass routines on me about estimated hypothetical reality, I get the willies. I do. Then I lose sleep.

Here is my thought. The new city manager, Mr. Gonzalez, has promised us transparency like we've never seen before. So why not start with this thing? Hmm? At the end of the meeting, Councilman Rick Callahan, who is a commercial real estate broker by trade, said, "There's a smell test here, and I can't get my nose past it." He called for a full-scale investigation of the whole deal. How about that, Mr. City Manager?

I told you I can't stand that word any more. Transparency. You know what I'd like to see them go for down there before they even try for transparency? Sanity. That's my new favorite word. How about it, Mr. Manager? Could we just have sanity?

The council briefing documents are below.

Yigal Lelah Sapphire Road Development Veterans Place City of Dallas City Council Housing Committee Briefing... by Schutze


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42 comments
mavdog
mavdog topcommenter

I've looked at a lot of property appraisals, and never have I seen one that is estimating a property's worth with an "estimated hypothetical market value" approach.

what I have seen utilized is the "prospective value", which makes a conclusion of value for the property once specific conditions are fact.

interesting to note the USPAP states "Hypothetical conditions are contrary to known facts about physical, legal or economic characteristics of the subject property".

It's also interesting the information packet you attached Jim shows the Appraiser applying some "Comparables", but those seem to be using some of the properties Lelah purchased as comps for the Lelah tracts being valued. that would be a bit odd to say the least.

The expenses should be looked at further, not only the $200K "consulting" item but also what firms have been paid and what actual construction plans have been completed for the $300K spent on A&E.

GrumpyDemo
GrumpyDemo

Big easy question: Who got the $200K (5% of the deal) consulting fee? What was done to earn it?


Regarding Mr. Lelah's resume:


Affordable Tax Credit apartments he's built: none.

Apartment complexes he's built: none.

Mixed use projects he's built: none.

Commerical real estate projects he's built: none.

Apartments or commercial properties he owns or invested in: none.


However he has build "hundreds" of homes, no detail provided.


No experience, no training, no background, no cash. 


Why did the City give $4.5MM to someone with no qualifications?


Montemalone
Montemalone topcommenter

The questions shouldn't really be why Lelah paid $4.5 mil for the land, but who sold it for that price? That's the biggie. Is this some council person's nephew in law?

oakclifftownie
oakclifftownie

So Who cashed the checks he wrote for the property ?  

holmantx
holmantx topcommenter

In Lelah's defense, he had to take out the holdouts, the cost of which has nothing to do with what the land is worth since he didn't have condemnation authority.  He couldn't force them to sell at what the property would appraise for, unlike what the City was fixin' to do to the car wash boys until you put a little light on them.

That's why the developer went the Land Residual route.  He could pay way over the market value for some of the pieces to be assembled, just so long as the total cost of the land acquisition didn't bust the economic feasibility (Market Value of the project once complete).

Of course, when you are playing with monopoly (Public) money, there is that moral hazard thingy.  The developer privatizes the upside but "socializes" the possible downside.  The taxpayer takes the hit if it loses.  Kinda like the Omni Hotel.  So there may not be sufficient "incentive" (as in your personal wealth exposure) to hold the costs down so as to make the project economically feasible.

WylieH
WylieH

From "Common Errors and Issues," published by the Appraisal Institute:

" According to SR 2-2 a (x), b (x), c (x), you must “clearly and conspicuously state all hypothetical conditions; and state that their use might have affected the assignment results.” The difference in reporting between a general assumption and a hypothetical condition is that the latter must be conspicuously disclosed, not buried in the back of the report or shown in tiny print. It may be appropriate to cite all hypothetical conditions in more than one place in your report, depending on their significance to the value conclusion."

http://www.appraisalinstitute.org/airesources/members_downloads/common-errors-issues.pdf

Anon
Anon

Be careful Jim. We don't want a 200 year old, crazy, sleep deprived white guy in a worn out, plaid bath robe waving around an equally ancient shotgun running loose in East Dallas!

MikeWestEast
MikeWestEast

Transparency is more than shoveling a lot of data towards the Council.  I expect a single sheet of paper available before each vote listing each parcel, Dallas County current value, appraisal, appraisal method and price plus some US Census data on neighborhood would have told the tale.  Instead I am sure the Council saw reams of something, completely obscuring what would happen if they approved the next tier of funds.


The Council seems to be only board I have heard that allows management to dictate the info presented and the form.  Do they even get it before the meeting?

Rumpunch1
Rumpunch1

I know this question is very hypothetical, but as a developer what would Mr. Lelah had spent if he was doing this with his own money?  What price would he have paid if he was trying to justify to himself the economic viability of the project.

HeywoodUBuzzoff
HeywoodUBuzzoff

Jimbo -- you need to learn political rhetoric.  'Transparency' means 'we got stuff to hide so will not be telling you about it in our blog'.  'It is for the children' means lots of adults will be getting paychecks off this and any money left over will go through some more layers of bureaucracy before they get anywhere near a kid. 'Estimated hypothetical market value' means the money charged to make sure we have enough left over for political contributions, consultancies, and retainers.  And when they say something about a bright future for Dallas it means they have put a down payment on a place in Colorado or New Mexico where they will not have to live with what they leave behind.

holmantx
holmantx topcommenter

HA!  Too funny.  They actually performed a land residual ( = estimated hypothetical market value; see formula in your previous piece).  It is the most you can pay for a tract (or assemblage) and the proposed project still be economically feasible.

And as for Transparency?  If City Hall wants transparency, just have the city manager hired/fired by, and report to, the Mayor.  See, we can get our hands on that guy.  As it stands, the CM can go rogue and he has is own 150-man law firm.

That and "invest" some tax dollars at Fry's Electronics.  Buy a few TERABYTE hard disks at $60 a pop (get as many as you need; probably only need one) and . . . dump all your email traffic each year instead of lamely claiming you had to purge because you were running out of electronic storage space.

I think the DO could provide the off site storage for free.

Use them as bookends until John Q needs to know what went down.

Of course, the NSA would want a back door to them.

dallasdrilling.wordpress.com
dallasdrilling.wordpress.com

I would really be interested to hear if you had a chance to interview Vonciel Hill. LOL! I hear the homes in her neighborhood in Red Bird are valued at $675,000. Knowing that she supports his financial theories, her neighborhood at Hampton Road and Red Bird Lane will easily become the new Highland Park.

Rumpunch1
Rumpunch1

While I believe that the value of the property should include some adjustment as to the potential value, it should be adjusted for contingencies.


Specifically, you have the value of the broken down carwash and each individual property.  The sum of the entire block, once cleared and made into a single development tract is worth more than the individual existing tract.  That should be the potential value - not what is will be if the proposed development happened.


Basically, what is the cost per square foot of land for a similar sized to the entire tract and situated piece of land ready for development. Maybe adjust that down for demolition or other clean up costs add back relocation costs if necessary.  That is its potential value.


Can we say for a straight face that we would paid approximately $600,000 an acre for open land in South Dallas, even with major street frontage?

ThePosterFormerlyKnownasPaul
ThePosterFormerlyKnownasPaul topcommenter

Forget it Jim, it's Chinatown.


Besides, just because you spend $1M on a house does not mean that you have a $1M house.

bvckvs
bvckvs topcommenter

@mavdog

It's not actually an appraisal.  The developer was simply lying when he called it that, and nobody called him on it.

This is a county where 1 in 5 adults cannot read well enough to fill out a job application or read a newspaper - and the city council accurately reflects that level of intelligence.


P1Gunter
P1Gunter

How many campaigns did he contribute to and how many preachers did he give "walking around money" to? The answer generally lies there.

ScottsMerkin
ScottsMerkin topcommenter

@GrumpyDemo because he got to keep a % of the money for acting on behalf of someone with connections a city hall who didnt want to be outed?

A-nony-mouse
A-nony-mouse

@Montemalone Going by DCAD, most of the previous owners seem to have sold their property to Sapphire Road Development LLC sometime in 2009 or early 2010 (though a few held out until 2011 or early 2012). Many of the owners had owned their property since at least 2000 (oldest year available in DCAD history). And some of the owners along Denley seem to have been living on the property.

My guess is that the previous owners didn't actually get that 100K+ "purchase" price, though that price might not be too unreasonable for some of those lots. However the 850k paid to NEO ARC DEVELOPMENTS LLC for three lots on Lancaster that had a market value of $75,900 seems a bit excessive.

WylieH
WylieH

And who received the $200,000 "consulting fee?"

holmantx
holmantx topcommenter

@WylieH That doesn't apply in this case since appraisers are not involved.

holmantx
holmantx topcommenter

@Anon Actually that is a street sweeper with an illegal magazine on it.

Unless, when checked by the TPW SWAT operator, it has a three shot plug in it.

But if an offensive unit like the SWAT team is on him, it probably would never get to the point where they had an opportunity to see if the weapon was legal or illegal.  The point would be moot.  Mr. Schutze would be ex post facto and in the supine position.

James080
James080

@Rumpunch1 

Mr. Lelah wouldn't put his own money in a project like this. Projects like this are subsidized by the government because they do not make economic sense.

JimSX
JimSX topcommenter

@holmantx But Holman, hep me out here. My understanding of the condemnation process -- and I realize there was no condemnation here, but bear with me -- is that governments typically are not even allowed to pay more than fair market value. And fair market value cannot include or entail the enhanced value after assemblage and improvement. It's what's on the ground today, before jack shit is done to it. So if that is the principle in a condemnation, does that principle just dry up and blow away where it's government-paid purchase without condemnation? 

kduble
kduble

@Rumpunch1 A property's value is what a stranger would pay you for it if you put it on the market. This isn't a deep concept.

WylieH
WylieH

Neo Arc Developments???? Tell us more ;)

Montemalone
Montemalone topcommenter

@A-nony-mouse@Montemalone 

Sorry, I'll need a flow chart. This is probably a good story for an investigative journalist. Now, where does one find one of those?

WylieH
WylieH

According to the attachment, appraisals were performed by "Appraisals Unlimited" and were signed off by George E. Jordan, MAI, Appraisal Institute #7279.

ThePosterFormerlyKnownasPaul
ThePosterFormerlyKnownasPaul topcommenter

@holmantx 

The three shot plug is required only if you are hunting game birds with it.


If you are on land with the game birds present during hunting season with the appropriate gun, it is assumed that you are hunting the game birds.  You must then have a valid hunting license and the shotgun must have the plug in place.

holmantx
holmantx topcommenter

@JimSX @holmantx 

yep.

Without the power of condemnation, the buyer cannot compel the owner of the tract to sell.

Think of it like this - those tracts weren't for sale.  So the buyer is already behind the eight ball in trying to bet Market Price for the tracts.  Market Value (definition of) must have a willing seller and a will buyer, each under similar motivation to buy and sell.  If the property owner doesn't even have the lot posted for sale (has it listed on a public platform like the local MLS), then by definition he is not motivated to sell.  And the consummated sale does not represent a market-oriented sale and an appraiser should not use it in an appraisal to estimate Market Value of whatever they are appraising since it is not a market-negotiated sale.

The City may have a reg where by they cannot pay more than a property is worth in the marketplace but that's not what happened here.  The City gave a private developer the money to go forth and acquire and develop, but the City cannot grant the power of condemnation.  Now, Arlington set up a "sports authority" to take down land for the Ballpark and there was a lot of yelling over that when it happened but I think the City of Arlington owned the "sports authority", so they could condemn.

I bet those landowners in the block up did not get the Car Wash letter.  "Hi!  We want to buy your property!"  

"We offer you the market value (appraised value) for your real estate."

Love ya, City Dearest"

Then the City proceeds to attach all the "rights" afforded to the newly minted seller under condemnation law (under threat of, now materializes).  Also known as Just Compensation.  The City TAKES the car wash at appraised value (market value) and you argue after the fact at arbitration or in district court.  But the property is leveled and gone.

Check to see if the former owners of one of the tracts got the Car Wash letter or if they only got an offer they couldn't refuse from the developer.  After all, it is not like people were beating down their doors to get them to sell.  He probablu just gave them an irrationally high offer.

Which he could do that if the property taxes on the completed project have been waved (abated) for a period of years.

Which is what hte City did to make the Public Hotel more palatable, if not feasible.


mavdog
mavdog topcommenter

@James080 @WylieH

David Lee is a prominent player in the Asian District aka KoreaTown at Royal/Harry Hines.

James080
James080

@WylieH  

NEO ARC DEVELOPMENTS, L.L.C.

Texas Taxpayer Number 32015270989

Mailing Address PO BOX 702741
DALLAS, TX 75370-2741
Right to Transact Business in Texas ACTIVE

State of Formation TX Effective

SOS Registration Date 06/14/2004

Texas SOS File Number 0800356153

Registered Agent Name DAVID S LEE

Owner DAVID S LEE

Registered Office Street Address 2666 MANANA DR. STE. 100, DALLAS, TX 75220

bvckvs
bvckvs topcommenter

@Montemalone@A-nony-mouse

Many years ago, I was an investigative accountant for The Jersey Voice.  Before that, I was a payroll clerk in the navy.
One of the things I learned in those capacities is that if you need a flow chart to figure out what happens in these kinds of situations, you're overthinking it.

It's not complex, you're just trying to find logic where there is none - and that makes it seem complex.
It's just a case of one half-witted guy out-thinking a room full of retards.

holmantx
holmantx topcommenter

@WylieH 

Just read the attachment.

Looks like George screwed up.  While a client (the developer) can instruct George to estimate the value of a property by any other definition (in this case, Hypothetical Market Value Once Assembled), under the Uniform Standards of Professional Appraisal Practice - aka USPAP), he MUST also appraise it under the definition of Market Value (without hypothetical assumptions), and it must be the Value prominently displayed (instead of the Hypo Value he put on the cover).  This is required so as not to mislead the reader(s) of the report.

And the AI (Appraisal Institute) is a private organization that does not carry the weight of law.  That is assigned to the Appraisal Foundation (which the AI was kicked off of).  George may have invoked some kind of "Jurisdictional Exception" however, that does not apply since the City did not order the appraisal.  It is addressed to the developer but in any case, George appears to have misled the reader(s).

He is, however, generally certified in this state to appraise real property, and that is where the complaint should be filed if I am correct about the use of Hypothetical conditions as part of a value definition.

I noticed George DID include a Market Value definition but I do not see where he employed it, much less prominently displayed it on the cover or the summary page.  It is not a minor violation.

WylieH
WylieH

Great overview of the process...

holmantx
holmantx topcommenter

OH! I forgot to mention the obvious -

In Texas the City cannot "take" (condemn) the property of one private individual and convey it to another private individual for redevelopment unless it is "blighted" or a "nuisance".  

And they can't just make that up like they did in the Car Wash property.  That's why the City ran for the tall grass when you caught them.

"What's the project number, Kenneth?" ouch!

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