Real Deal: projects from Greenland et al. threatened by "China's debt cataclysm." Now: financing challenges, development partners, & a bailout from Shanghai?

China’s debt cataclysm threatens US real estate projects, the Real Deal published yesterday, citing several firms, including Greenland USA, master developer of the Atlantic Yards/Pacific Park complex in Brooklyn and owner of the Metropolis complex in Los Angeles.

The parent companies are struggling in China, defaulted on or postponed debt,  and have seen their credit ratings plummet--Greenland Holding Group has flirted with default--which constrains their ability to invest in their overseas projects.

So such "desperate" (according to the publication) firms have cut prices and sold assets. As cited in this article and previously noted, Greenland USA has put a hotel in Los Angeles up for sale; it had previously been marketed for $280 million.

And in Brooklyn

Unmentioned by the Real Deal, but clear to Atlantic Yards/Pacific Park watchers, Greenland USA has raised money by selling assets: development leases to the B12/B13 sites (615 Dean St./595 Dean St.) to TF Cornerstone and a development lease to B15 (662 Pacific St.) to The Brodsky Organization. It also pursued a joint venture at B4 (18 Sixth Ave.) with Brodsky.

In those cases, Greenland owned 95% of the joint venture Greenland Forest City Partners, nominally involving the original Atlantic Yards developer, which is today owned by Brookfield.

Also, before commencing work on the first phase of the platform for the Vanderbilt Yard, and the B5 tower (700 Atlantic Ave.), Greenland Forest City Partners sold the B14 (535 Carlton Ave,) and B3 (38 Sixth Ave.) "100% affordable" towers to Avanath Capital. 

Those were two of the three towers built by the joint venture in which Greenland had a 70% share.

The $315 million sale was seemingly at a loss, but even so, it would've raised $220.5 million (70%) for Greenland USA, which it could then invest in future construction.

The back story

After Xi Jinping took his leadership post in 2013, according to the Real Deal, China made it easier for private companies to invest overseas by eliminating red tape in loans to foreign subsidiaries, which often bought distressed properties.

That meant Chinese companies were "the most aggressive foreign buyers" of U.S. properties. But they didn't necessarily know the markets, or how design and construction worked.

Greenland's tangled path

A former Greenland USA employee--apparently most familiar with Los Angeles--was skeptical, telling the publication: “All these Chinese companies were successful in their own markets and they all had the same mentality: build, build, build, and build big. But they overpaid for assets.”

It's not clear to me whether and how much Greenland overpaid for Atlantic Yards--after all, its cash infusion of $200 million to enter the project was a loss for Forest City and, later, essentially recouped in 2019 (not counting financing costs) by selling the three sites to Brodsky and TF Cornerstone. 

That said, Greenland--whose Chairman in 2013 unwisely estimated that Atlantic Yards would be finished in eight years!--surely overestimated the complexity of getting the project done.

The former Greenland employee told the publication that the company unwisely wanted to build all three Metropolis towers at once, rather than in phases. although U.S. developers typically build in phases. 

The company wouldn't answer specific questions about its projects in Los Angeles and Brooklyn:

“We look forward to continuing to meet our commitments and help build great communities,” a spokesperson said.

That, of course, is belied by the fact that Greenland continues to be unwilling to provide any timetable for completing Atlantic Yards/Pacific Park or, crucially, the 877 (or 876) affordable housing units required by May 2025.

Finding funds, and buyers

From the article:

Greenland and Oceanwide were also relying on condo buyers coming from China and leasing to luxury retailers like Gucci and Prada to attract Chinese shoppers. But tensions between the U.S. and China started to rise when Donald Trump became president and Xi Jinping placed restrictions on buying in the U.S., crimping Chinese investment.

Note that Atlantic Yards/Pacific Park was approved with 1,930 condos, plus 4,500 rentals (half of them income-targeted "affordable"), but only one condo tower, 550 Vanderbilt, has been built, with 278 units.

That constraint relates more on changes in the 421-a tax break, which essentially preclude condo construction as previously envisioned. That said, the first round of buyers at 550 Vanderbilt--"pre-sales"--came from China, and presumably Chinese buyers were part of the previous business plan.

From the article: 

Then the pandemic hit, stalling construction on both Chinese and U.S. projects and slowing luxury condo purchases. Congress started scrutinizing the EB-5 program, which developers had relied on to attract investment.

Indeed, the developers of Atlantic Yards/Pacific Park raised three rounds of low-cost EB-5 financing: $228 million, $249 million, and $100 million, but not since 2014. (Hmm--I don't know whether the second and third round of investors have been, or will be, paid back.)

What now?

Now, according to a Real Deal source "familiar with Chinese policy," Chinese companies will prioritize domestic bondholders and homebuyers, which means foreign real estate holdings get short shrift, even as interest rates rise.

So financing won't be easy. Remember, Greenland was once said to have been able to bring its own equity, but that's clearly no longer the case.

The spectrum is mixed, according to the Real Deal, with some companies defaulting on loans and losing properties to foreclosure, rather than pursue bankruptcy to stave it off.

Those plowing ahead may either wait to find development partners--that's been a pattern with Atlantic Yards/Pacific Park--and maybe see some Chinese governmental aid.

From the article:

Many developers, including Greenland USA, are partly owned by municipal governments, meaning it’s up to local officials to bail them out. These governments are running low on cash, as the developers who typically provide most of their revenue are now reporting losses.

So the future of Atlantic Yards/Pacific Park, including the affordable housing deadline, might depend on the generosity of the government of Shanghai?