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WSJ: Pacific Park condo revenue lags, Greenland underestimated project timetable, and Shanghai's cutting back

Yesterday, the Wall Street Journal's Esther Fung and Keiko Morris, taking off from Greenland USA's recent announced sale of three Pacific Park properties, published Chinese Developer Struggles in Brooklyn, Other Major U.S. Projects.

The WSJ called it "the latest sign that Chinese developers and investors are having a rough time in the U.S. property market." That's not definitive, because the financial terms of the deals with TF Cornerstone and the Brodsky Organization have not been revealed, but it's reasonable to think that, had the sale price signaled a hot market, it would have been announced.

Similarly, the terms of Greenland's deal with Forest City Realty Trust/Forest City New York, in which Greenland will control 95% of the project going forward (as opposed to 70% with the previous three towers and infrastructure), have not been revealed.

So it's possible that the pain from a discount Greenland offered TF Cornerstone and Brodsky, assuming it did, might have been softened by a discount Greenland got from Forest City.

Note that the joint venture Greenland Forest City Partners previously tried, without success, to sell three parcels (map), two of which (B12, B13) were among those recently sold. The other parcel up for sale block was B4, which Greenland Forest City, at the 95%/5% share, will now develop itself. Instead, B15 was recently sold.

Unnamed sources, three findings

The WSJ, quoting people "familiar with the matter"--who could be real estate brokers or, heck, former executives at Forest City--came up with three findings regarding Greenland.

1) The initial revenue from condo sales is "falling short of early projections." Indeed, if condo list prices have been lowered, as described in my article about Million Dollar Listing New York, well, they're not earning what they had expected.

2) Another is that Greenland "underestimated how long it would take to build and sell apartments in the U.S." Indeed, that was evident in a November 2013 WSJ report on Greenland, whose Chairman, Zhang Yuliang, claimed--absurdly in retrospect--before the Forest City deal closed that they could finish the project in eight years.

3) Perhaps the most interesting finding is that officials in Shanghai, where the parent company is headquarters, has cut back on financial support for Greenland's U.S. projects. That's presumably why Greenland has been selling part of the Metropolis project in Los Angeles and withdrew from a potential project in South San Francisco.

Other issues

The article also points to tension with Forest City over the project's pace. That's understandable, given that Forest City in November 2016 unilaterally announced a pause in the project, with no comment from Greenland. The year 2017 was apparently one for negotiation, in which Forest City's near-complete retreat was achieved, as the 95/5 agreement was announced in January 2018 (and closed in June 2018).

The WSJ also made the general point that Greenland and other Chinese investors came in when the market was more promising, even "frothy," to one real estate player.

Now conditions are less favorable. Not only has Pacific Park faced a glut of competition, the WSJ cited "rising interest rates, less favorable U.S. tax laws and tightened restrictions on capital outflows."

The last, at least, is China-specific, while the others are cyclical. It should be noted that Pacific Park, according to Forest City's November 2016 statement, also faced the loss of its project-wide 421-a tax exemption as well as higher construction costs.

I'd add that, along with rising construction costs, Forest City apparently underestimated (or low-balled?) construction costs, for example in 2005 estimating that a new subway entrance would cost $29 million but ultimately spending $72 million.

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