Lennar Corp. (LEN:US), the third-largest U.S. homebuilder by revenue, has signed a memorandum of understanding for a $1 billion loan from China Development Bank Corp. to fund projects in San Francisco, said four people with direct knowledge of the matter.
The loan being discussed would be extended in the next five years on the condition China Railway Construction Corp. (1186) is awarded a contract of at least $1.5 billion to build roads and bridges for a project at the neighboring Hunters Point shipyard and Candlestick Point and another on Treasure Island, said three of the people, who asked not to be identified because the talks are private. The terms of the agreement, which may be signed by November, are subject to change, the three people said.
The loan will help fund a $13 billion plan to redevelop the two locations, which were previously U.S. Navy sites, the people said. Sales at Hunters Point, in the southeast corner of San Francisco, are set to begin by late 2012 with homes starting at $525,000, according to FivePoint Communities Inc., which oversees the projects and in which Lennar is an investor. More than 8,000 homes may eventually be developed on Treasure Island, built on landfill in San Francisco Bay for a 1939 exposition, and adjoining Yerba Buena Island.
Marshall Ames, a spokesman for Lennar, declined to comment. Emile Haddad, FivePoint’s chief executive officer, and Kofi Bonner, head of Lennar’s San Francisco developments, didn’t respond to phone messages seeking comment. Michael Tymoff, Treasure Island project director for the city of San Francisco, declined to comment and referred questions to Lennar.
China Development Bank, based in Beijing, has completed its due diligence on the loan, three of the people said.
China Railway Construction has also signed a memorandum of understanding with Miami-based Lennar on the projects and recruited China National Technical Import and Export Corp. to provide technical assistance, the people said. A final contract for the construction work may be signed by November, they said.
Extending financing in exchange for contract agreements isn’t unusual or unique to Chinese lenders, Mark Goldman, a real estate professor at San Diego State University, said in a telephone interview. U.S. companies such as General Electric Co. (GE:US) and Boeing Co. (BA:US) have developed sophisticated financial operations to sell products, he said.
“Most banks in America don’t have a relationship with a contractor,” Goldman said. “Having said that, quid pro quos are common in all financing.”
A Chinese construction company fabricated the signature tower and span of the $6.4 billion seismic retrofit for the San Francisco Bay Bridge, which links Oakland and San Francisco by running through Yerba Buena Island. Shanghai Zhenhua Heavy Industries Co. (900947) won a $250 million contract for the 2,047-foot (624-meter) span in 2006.
“There’s industry in the U.S., but they couldn’t do it in the time frame we needed,” Bart Ney, a spokesman for the California Department of Transportation, said in a telephone interview. The bridge construction is slated for completion by early September 2013.
The Wall Street Journal reported earlier that Lennar was in talks with China Development Bank for a loan of about $1.7 billion for the projects in San Francisco.
Calls to the office of Feng Qihua, spokeswoman for China Development Bank in Beijing, and the China Railway Construction press department weren’t answered today.
Lennar, which tomorrow reports earnings for the quarter ended May 31, rose 3.1 percent to $27.39 today in New York trading.
An agreement to finance the construction is unlikely to have an immediate financial impact on Lennar because it will take years for most of the projects to come to market, said Megan McGrath, a homebuilding analyst with MKM Partners LLC in Stamford, Connecticut.
“I think it’s probably a sign of the times that credit is pretty tight, especially for real estate,” McGrath said in a telephone interview. “At the end of the day, it will help a project get off the ground and create jobs and housing, which are sorely needed in the San Francisco area.”
She has a neutral rating on Lennar, meaning she expects no significant change in its share price in the coming 12 months.
Home prices in San Francisco rose 3.4 percent in April from March and have gained 9.9 percent in the past three years, the biggest increase among the S&P/Case-Shiller index of property values in 20 cities, according to a report released today.
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