Arizona land deal involving Sam Katz doesn't make sense: real estate experts
Armik Babakhanians paid more for land after housing crash than Katz and Phil Sheegl did in real estate boom
Arizona real estate experts say they don't understand a Phoenix-area land deal between a Winnipeg construction company owner and the city's former mayor and top bureaucrat.
"It makes zero economic sense," said Mark Stapp, Arizona State University professor and director of the school's master of real estate development program, about the $327,000 sale of property about 70 kilometres west of Phoenix, Ariz.
Stapp was one of the Arizona experts who said they can't make sense of the price Armik Babakhanians paid former mayor Sam Katz and former chief administrative officer Phil Sheegl for land in an area hard hit by the U.S. housing crisis.
Details about the land deal were made public in response to RCMP allegations in court documents. Those allegations say that Sheegl committed breach of trust by accepting $200,000 for showing favour to Babakhanians, whose company built Winnipeg's police headquarters.
Sheegl shared the payment with Katz, but RCMP have not alleged any criminal wrongdoing against Katz.
The court documents were filed in June 2016 as part of an RCMP request to view bank records for Sheegl and Katz, all part of an investigation into the $214-million purchase and renovation of the downtown police HQ.
No charges have been laid and none of the allegations have been proven in court.
The lawyer representing Sheegl and Katz said the $200,000 payment was not a bribe, but was actually a down payment in the Arizona land deal.
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While none of the Arizona land experts suggested there was a secret commission involved, they did question the sale price of the land.
"I have no idea how you would derive that kind of value estimate for a piece of property out there," Stapp said. "I don't know how you would get to that number."
In 2005, around the height of the real estate boom in Arizona, Katz, Sheegl and other investors paid what CBC News calculated to be about $107,000 US, or about $125,000 Cdn per acre, for about 25 acres of raw land in Tartesso, a planned community west of Phoenix.
Robert Tapper, the lawyer representing Katz and Sheegl, said Babakhanians made a deal with his clients in 2011 to pay $327,000 Cdn for interest in what the CBC has calculated to be about an acre of the land.
The three originally shook hands to seal the deal in May or June 2011, then put it on paper in 2012 in the form of a handwritten trust agreement, Tapper said.
The deal was for "FMV [fair market value] at that time, which they agreed was $327K," Tapper wrote in a February email. "We have demonstrably proven there was a legitimate real estate transaction and payments supporting it."
But Stapp and other Arizona land experts say land values plummeted during the housing crisis of 2008 and land values in Tartesso only started to recover last year.
Price tag 'doesn't make sense'
The price paid for a piece of undeveloped land outside Phoenix puzzled Paul Johnson, a Phoenix land appraiser and Arizona State University educator who owns a consulting company and has worked in real estate as a broker, appraiser, teacher and counsellor for 50 years.
"That doesn't make sense," said Johnson.
Land values were 50 to 75 per cent lower in 2011, the year Babakhanians bought in, than in 2005-06, he said.
Johnson wouldn't put an exact dollar value on the Tartesso land without conducting an appraisal, but he and his colleague Thomas Carson searched for similar sales in and around Phoenix in 2011. They found no raw land sold for as high a price as was paid by Babakhanians.
"That would equate into a land price or land value that would be far higher than would be justified for building houses under that particular land use and zoning," Johnson said.
The Maricopa County Assessor's Office used mass appraisals to peg the latest full cash value at about $230,000 US for tax purposes for the entire 25 acre plot — roughly the same value as 2011. Taxes paid on the land were $33 last year because there is currently a cattle grazing lease in effect which significantly reduces property taxes.
According to Business Real Estate Weekly, land developers in September 2016 paid an average of $7,453 an acre in Tartesso — $4,723 an acre for raw land and $12,127 an acre for land where infrastructure was already in place.
Handwritten document 'done in great haste'
Tapper gave CBC a bank statement showing a $127,200 deposit to Samuel Michaels Properties Inc., a Nevada-registered company owned by Katz. He said that represented the balance Babakhanians owed for the land purchase. Tapper said the statement, which also includes a debit for a cheque written to an unspecified person for $63,600, demonstrates Katz gave Sheegl half of the proceeds.
Tapper initially showed CBC a copy of the handwritten trust document with only Sheegl's signature and a blank space for Babakhanians to sign, explaining he needed time to get a copy of the document with both signatures, which he provided two weeks later.
Grady Gammage Jr., a real-estate lawyer and senior research fellow at Arizona State University's Morrison Institute for Public Policy, said the handwritten agreement used to document the deal is also unusual.
"The fact that it is handwritten and is not notarized, does not appear to be written up by a lawyer, makes me wonder if this was done in great haste in anticipation of doing a more formal document later on," Gammage said.
Gammage has practiced real estate law for 40 years and said an unnotarized handwritten land deal has never come across his desk.
"Phoenix is a very big, sophisticated city. This is not the way we do legal documents," said Gammage. "Maybe Canadians are a lot more trusting than Americans, but this would not be how we would document a deal."
Gammage also commented on the wording used in the handwritten agreement.
"The vagueness with which it purports to transfer interest in the property and the extent of that interest — highly unusual by our standards to do something like this," he said.
Babakhanians to get back at least what he paid
Tapper, when asked about the real estate experts' valuation of the Arizona land, said Babakhanians is supposed to get a return of at least what he paid when the land sells.
"Babakhanians purchased the greater of $327K or 25% of profit upon disposition based on then current values," Tapper said.
He said the land will be held until critical mass is achieved for multi-family housing in Tartesso.
"Developers of multi-family product are paying in excess of $30,000 and up to $60,000 per unit for land," said Tapper in an email. "These will be the minimum values they will be looking for."
But referring to the same area, Mark Stapp said, "Multi-family in particular, in that part of the valley, I'm not sure there will be demand for that in decades."
Armik Babakhanians had no comment.
Katz Bank of America statement (PDF KB)
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