Lennar Corp. (LEN:US) is close to signing a term sheet with China Development Bank for a $1.7 billion loan package that would revive two stalled real estate projects in San Francisco, Mayor Edwin Lee said.
“We’re a couple months away” from agreeing on financial terms, Lee said in an Aug. 1 interview at San Francisco City Hall, his first public comments on the loan. “This is very important to our city, and we’re not letting it go.”
The funds may be used for a variety of real estate uses at San Francisco’s Hunters Point and Treasure Island development sites, including such infrastructure as roads and shoreline stabilization, said a person familiar with the projects who wasn’t authorized to speak publicly. The deal may lead to more U.S. property investment by Chinese banks, according to Lee.
Redeveloping the former U.S. Navy bases would create two new neighborhoods in a city strapped for housing. Plans approved by San Francisco’s board of supervisors call for 10,500 homes at Hunters Point and 8,000 residences on Treasure Island, along with commercial buildings, job-training centers, parks, trails and open space, Lee said.
Lennar, the Miami-based majority investor in the groups that control each development, has been bogged down in a search for infrastructure financing.
Kofi Bonner, president of Lennar Urban, who is overseeing the projects, declined to comment on a possible loan deal. Feng Qihua, spokeswoman for Beijing-based China Development Bank, didn’t respond to requests for comment.
Lennar, the third-largest U.S. homebuilder by revenue, has benefited from work done on its behalf by ChinaSF, an arm of the San Francisco Chamber of Commerce, according to Lee. The group has met with China Development Bank officials in Beijing to promote the city’s economic growth, including surging property investment and office occupancy.
“Lennar utilized some of our contacts, and I strongly backed them up,” he said. “It’s very fortunate because, at the same time, China has been looking at making long-term infrastructure investments.”
Chinese investors “aren’t interested in Treasury bonds anymore,” and see U.S. infrastructure investment as providing higher long-term returns, said Darlene Chiu Bryant, ChinaSF’s executive director, who travels regularly to China for the city.
A San Francisco commercial real estate boom that began in 2010 with increased leasing by technology firms may lead to more than $5.3 billion in office-building sales by the end of the year, the most since the market peaked in 2007 at $8.6 billion, according to a CBRE Group Inc. estimate. The downtown office vacancy rate fell to 9.6 percent in the second quarter from 13 percent a year earlier, said broker Cassidy Turley.
Financing sources for U.S. roads and other land improvements have been scarce following the 2008 financial crisis that left pensions and private-equity firms with steep losses, said John Burns, a housing consultant. The elimination of California’s redevelopment agencies removed another funding source, he said.
“The fact that Lennar had to go to China shows how difficult it has been,” said Burns, chairman of John Burns Real Estate Consulting LLC, based in Irvine, California. “The redevelopment agencies would have been the typical way to finance in California, but buyers of those bonds got stuck and aren’t interested in buying more.”
China is preparing to invest $1.2 trillion of equity in developed markets for “real economy assets,” including commercial property, in the next 10 years, said Thilo Hanemann of Rhodium Group LLC, a New York-based firm that tracks global equity flows.
The San Francisco loan would be linked to a contract of as much as $1.7 billion for China Railway Construction Corp., known as CRCC, according to Chiu Bryant. The debt deal, in principle, would provide funds to kick-start infrastructure development at Hunters Point and Treasure Island, and give CRCC a managing role in both projects, she said. The actual construction work would be done by local building trades, whose members would get paid from loan proceeds, Chiu Bryant said.
Final terms are up to Lennar and China Development Bank, she said.
China’s global ambitions include exposing its builders to Western markets where they can gain engineering know-how and practical experience in a “sophisticated regulatory environment,” Hanemann said. That’s different from the one-party rule and directed economy at home, he said.
A Chinese firm has already made its mark close to the Lennar sites. Shanghai Zhenhua Heavy Industries Co. (900947) fabricated a new 526-foot (160-meter) tower and 2,047-foot eastern span of the San Francisco Bay Bridge, between Yerba Buena Island, adjacent to Treasure Island, and the city of Oakland. That project is scheduled for completion next year.
California cities need funding for roads and public transit, and may find a ready source in China Development Bank, said Tong Li, a senior economist at the Milken Institute in Santa Monica, California.
“The bank would expand into a mature U.S. market that’s resilient in the long run, and these types of housing projects would add jobs to the local economy,” Li said in a telephone interview. “San Francisco and Silicon Valley are outperforming the rest of California, and infrastructure has become one of CDB’s main business lines.”
Regional job growth is a lure for Chinese investors seeking perceived safe havens in the U.S., Li said. The metropolitan areas of San Francisco and San Jose, which includes Silicon Valley, added about 60,000 new positions in the last year, said Stephen Levy, director at the Center for the Continuing Study of the California Economy in Palo Alto.
Lennar’s co-investors in Hunters Point include Hillwood Development Co. and Scala Real Estate Partners LP, both based in Dallas. That consortium, along with Stockbridge Capital Group, Kenwood Investments and Wilson Meany, all based in San Francisco, are investors in Treasure Island. FivePoint Communities Inc., based in Aliso Viejo, California, is the managing developer for both projects.
The potential China Development Bank loan is an example of Lennar’s “well-chosen, well-timed ventures,” Vicki Bryan, senior bond analyst at New York-based Gimme Credit LLC, wrote in a July 5 research note. Lennar was the only builder rated “improving” by Gimme Credit, with Bryan praising Lennar for its “prudent strategy” and ability to manage costs.
“This is the exact right time to start projects like Hunters Point and Treasure Island,” Burns, the housing consultant, said in a telephone interview. “There is widespread recognition that they’re ready for development.”
Home prices in San Francisco jumped 3.9 percent in May from the previous month, the third straight gain in the S&P/Case- Shiller home-price index for the area. The median price for houses and condominiums in the city surpassed $700,000 for the first time since August 2008, according to San Diego-based research firm DataQuick. The housing upswing may last for seven to eight years, Burns said.
The Hunters Point and Treasure Island funding “fits so nicely with what Chinese banks are trying to do,” said Lee, San Francisco’s first Asian-American mayor, who was elected in November after serving as acting mayor for most of 2011. “The Chinese would have not entered into final term sheet negotiations if it weren’t a very good deal.”
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