Tuesday, March 19, 2019

Financial Trouble at Oceanwide Plaza and the Effect of Chinese Capital Controls on Certain North American Real Estate Markets

Some Hong Kong appraisal firms subcontract North American appraisal work to me. The work is for financial reporting purposes, as the property owners are publicly traded firms, and I have gotten used to the writing reports in compliance with the Hong Kong Institute of Surveyors.

On January 28 I was asked to bid on an appraisal of Oceanwide Plaza being built across from Staples Center, a leading sports and concert venue in Los Angeles.  Oceanwide Plaza had just topped out with three towers of 40 or more stories. This was said to be a $1 billion project.

I was surprised by this request because just the previous week, Lendlease, the Australian general contractor, had rocked the LA real estate world by announcing that it had halted construction on Oceanwide Plaza. The interior remains to be built. There were rumors that the lender had pulled out of the project, but no explanation of why. 

In November 2018 the FBI served a search warrant to China Oceanwide Holdings in an investigation of local public officials and Chinese developers regarding bribery, extortion , money laundering and kickbacks relating to 4 prominent Chinese real estate developers, including China Oceanwide and Greenland Group (developer of the new Metropolis condominium/hotel project nearby). No charges have been filed against China Oceanwide or the others.

A press release from China Oceanwide explained the need for capital restructuring and that construction would resume in February. With my own eyes I saw the project still stalled as of March 18, 2019.

Here are some hypothetical explanations for the continued shutdown:

1.       Chinese capital controls, instituted two years ago, are preventing the necessary funds from leaving China. The purpose of the new regulations was to reduce “irrational outbound investment and to improve the development of China’s overseas investment.” China has been attempting to crack down on capital flight resulting from a slowing economy and downward pressures on the exchange rate. These same controls have caused other Chinese developers to place their North American assets for sale. Greenland, developer of a similar project called Metropolis, a few blocks north of Oceanwide Plaza, has placed one of their three residential towers plus their Indigo hotel for sale. There seems to be a pattern here of Chinese developers now placing their properties for sale, as Dalian Wanda sold its unbuilt One Beverly Hills project (valued at $444 million) last November, and Oceanwide itself placing its unbuilt 80 South Street project in Manhattan for sale for $300 million after buying it for $390 million 3 years ago. Meanwhile, the Chinese government has seized the insolvent Anbang Insurance Goup and will be selling off its U.S. hotel assets, acquired for $7.45 billion during 2014 to 2016, which includes the Waldorf Astoria Hotel in New York, which itself cost $1.95 billion.

2.       Lack of buyers. As local realtors speak of the residential sales slowdown at the Metropolis, the same forces may be working against Oceanwide Plaza. One realtor said that 60% of the residential sales at the Metropolis were to Chinese buyers who did not intend to occupy their units. A Chinese-American bank even asked me to appraise one of the units as a rental property, and I told them that if 60% of the units are placed for rent at the same time, there is no way of estimating how far market rent would fall. Downtown Los Angeles already has a 17% residential vacancy rate, the highest vacancy rate since the 1990s. Capital controls could be affecting these Chinese buyers, too. Some say their main reason for purchase was to remove capital from China, either because they do not trust their own government or perhaps to place ill-gotten gains away from capture.

More news came out in February about $62.5 million in mechanic’s liens on Oceanwide Plaza, but more intriguing was some private correspondence from general contractor Lendlease to some of its subcontractors, stating that Oceanwide “had failed to maintain the minimum contractually required payments for both your and our work”, yet Lendlease, with an $814 million construction contract, had not filed any mechanic’s lien yet.

Looking at the bigger picture, the Chinese capital controls law passed two years ago will be starting to affect certain North American real estate markets, such as Los Angeles, San Francisco, Vancouver and New York, which have been highly boosted by Chinese investment. The Chinese government measures net capital flow to the United States, which has been profoundly positive for a few years, but in the last quarter of 2018, the net capital flow was a huge $54.6 billion outflow of capital back to China. Forbes Magazine estimates that China has lost $3.8 trillion to capital flight during the last decade. They want their money back. One expert estimated that the ratio of outbound Chinese capital (back to China) to inbound capital is about 10 to 1.

As for the outcome of Oceanwide Plaza, there are various scenarios:

1.       A white knight lender from outside China will provide necessary funds to finish this well-located project,

2.       The property will need to be auctioned off to a more solvent owner,

3.       Or in the worst case, if building and safety laws were allowed to be violated, Oceanwide Plaza could end up being 3 decaying 40+ story hulks sullying the downtown L.A. skyline.

I told the Hong Kong appraisal firm that they should ask to be paid in advance, which is not the custom in this type of financial reporting work. They replied, "Noted, with thanks".

Thursday, December 20, 2018

Revisiting Jinbao Place and Beijing's Luxury Retail District

Jinbao Street is a premier luxury shopping street in Beijing, like Rodeo Drive in Beverly Hills. In its two-block stretch there are three 4 or 5-star hotels and Bentley, Ferrari, Maserati and Mercedes dealerships. In my return this time, I found an Aston-Martin dealership in the lobby of my hotel, The Regent.

Jinbao (translated as “golden treasure”) Street is the best-known destination for Beijing’s wealthiest shoppers.

Seven years ago, I reported on a struggling three-year-old, 40,000 square meter (430,000 square foot) luxury mall known as Jinbao Place which stood largely vacant on this otherwise busy street. Above the second floor in this seven-stories-above-grade mall, almost all the space was vacant. The seventh floor, the restaurant floor, had only a roast duck restaurant.

At that time, I thought the problem was that most luxury retailers had already saturated the Dongdan district that contains Jinbao Street and the famed Wangfujing pedestrian mall, anchored by the newly renovated Beijing APM mall, formerly known as the Sun Dong An plaza. There seemed to be an Omega watch store on almost every block.

What a difference seven years makes, though. I found the Jinbao Place mall to be at stabilized occupancy. I counted three vacancies and a good number of shoppers. This time I dined at a Japanese restaurant, noticing that their lobster dinner was priced at 2500 yuan (about $350).

The famed Wangfujing pedestrian mall, a few blocks west, was at full occupancy, as was the APM mall. This location seems to be at the epicenter of Beijing wealth. The only thing I can witness in several visits to Beijing is its continuing prosperity.

So I was wrong about this one in 2011.

Wednesday, November 14, 2018

Update on the Eminent Domain Case in Seoul

The dependent variable that the valuation algorithm solves for is the price per square meter of land area, not building area, because land in Seoul is worth far more than most buildings on it due to the shortage of land.
Notice that almost every input variable is a dummy variable. Dummy variables are binary variables with the value of 1 or 0, depending upon the presence or absence of a particular condition, such as being “adjacent to a narrow road”.
There are only two quantifiable input variables in this model: the land area and the distance to railways or highway. Missing from this model are so many quantifiable variables such as distance to subway stations, distance to shopping, distance to schools, quality of schools, floor area ratio (ratio of building area to land area), and land slope.

Public assessment agencies often conduct their own internal assessment/sales ratio studies (or sometimes sales price/assessment ratio studies) to calibrate their systems.  Some masterful studies have been published by the states of Washington and Virginia in the U.S.

The Korean client’s lawsuit against the private taking ultimately lost in Korean courts, but the treaty between the U.S. and the Republic of Korea mandates an international arbitration for a U.S. citizen.  We expect to be heard at the International Arbitration Centre in Hong Kong.

Sunday, October 21, 2018

Why I Don’t Appraise in Antarctica

Saturday, September 1, 2018

An Industrial Building Appraisal Done to both USPAP and RICS Red Book Standards

24) The observed condition of the foundation, roof, exterior walls, floors, heating system, plumbing, insulation, electrical service, and all other mechanical and constructions based on a casual inspection only and no detailed inspection was made.  The structures were not checked for building code violations, and it is assumed that all building components meet applicable building codes unless so stated in the report.  

Because no detailed inspection was made, and because such knowledge goes beyond the scope of this appraisal, any observed condition or other comments given in this appraisal should not be taken as a guarantee that a problem does not exist.  Specifically, no guarantee is made as to the adequacy or condition of the foundation, roof, exterior walls, interior walls, floors, heating system, air conditioning system, plumbing, electrical service, insulation, or any other detailed construction matters.  If any interested party were concerned about the existence, condition, or adequacy of any particular building or site component, we would strongly suggest that a construction expert be hired for a detailed investigation."

Monday, August 27, 2018

More Appraisals in British Columbia: How Helpful is USPAP in Preventing Mortgage Fraud?

An applicant for a loan from my client was about to bid on a court-ordered sale of an assortment of foreclosed British Columbian land properties scattered all around the province.  The foreclosing lender had been a victim of mortgage fraud, feebly assisted by a supposedly reputable Canadian appraisal firm. 

Remnants of the disaster 11 years ago at Lake Chehalis

Tuesday, July 24, 2018

Another EB-5 Regional Center Failure: Imperial Regional Center

The goal of the EB-5 regional center was to develop a 78-acre commercial center (“Imperial Center”), in the unincorporated town of Heber, in Imperial County, California, containing over one million square feet of building area, mostly focused on retail, wholesale and food and beverage operations, with a hotel, cinema, and public space. There are 135 Chinese investors who have supplied $67.5 million in funds in order to secure a U.S. green card. The first phase of the center, which was an ARCO gas station and AM/PM Minimart, has been successful.  The second phase consisted mostly of food and beverage operations, including 4 restaurants and a nightclub. All are open now. The third phase has not started, and an aerial map from March 21, 2015 shows no further development since that time more than 3 years ago.

If Imperial Regional Center is not paying its loans or property taxes or contractors, perhaps some of its income is being diverted to the Lo family through Veggie & Tea House.

The attorney writing the complaint for the cheated investors is Jing Wang, Esq., Kingswood Law, Diamond Bar, California. 

Thursday, June 21, 2018

Another Budding EB-5 Scandal in California's San Gabriel Valley

An attorney retained me at the request of a skeptical investor in this EB-5 project sponsored by the America FX Regional Center, LLC, approved as an EB-5 regional center in 2016, well after it was understood that there was an ethical crisis in the EB-5 regional center industry. I was supplied with an initial Offering Memorandum, dated 6/1/16, and a restated Offering Memorandum dated 4/24/17 for the project "FX Boutix Duarte EB-5 Lender".

The goal of the offering was to develop a 318-room FX Boutix hotel across from the City of Hope, one of America’s top ten cancer research centers, in the middle-class Los Angeles suburb of Duarte, California. The total project floor and parking area was to be 445,000 square feet. So far, they have received more than $53 million from 96 Chinese investors, but have never received development approval for their oversized project, and the development application was withdrawn several weeks ago, according to City Planner Jason Golding.

The principals of this EB-5 regional center are Sherry Ho and Alvin Tzuen-chung Ho, former chairman of the Chinese hotel firm FX Hotels Group. He is also known as Hou Zunzhong, depending upon whether the name is pronounced in the Mandarin or Taiwanese dialect. The FX Hotels Group is a hotel corporation traded on the Taipei Stock Exchange, but with almost all its hotels based in the People’s Republic of China. This corporation has lost 95% of its share value since the beginning of 2014. As of today’s closing share price of 3.05 Taiwanese New Dollars (worth about 10 U.S. cents), this company’s market capitalization is equivalent to about 6.3 million U.S. dollars. One Asian stock analyst joked that FX’s only success was taking Taiwanese money and dumping it into bottomless pits in China.

Here’s the chart action in recent years, and consider that one U.S. dollar is approximately equal to 30 Taiwan New Dollars.

It seemed that the Mr. and Mrs. Ho misled investors in the America FX Regional Center by stating that Mr. Ho’s family owned the FX Hotels Group and that FX Hotels Group was interested in foreign development. Most of FX Hotels Group is owned by other Chinese hotel corporations such as Furama and Fu Lihua. Almost all FX hotels are in China.

The second Offering Memorandum for America FX Regional Center has no mention of Mr. Ho or any affiliation with the FX Hotels Group. This might be because Mr. Ho was fired in spectacular fashion at an FX shareholders’ meeting on 3/28/17, after another year of losses, which was video recorded and published on the China Times web site, including police called in to quell Mr. Ho. http://www.chinatimes.com/realtimenews/20170406001317-260410  He had not been notified in advance that he was going to be replaced on the spot by the leading shareholders.

Perhaps this news was behind Mr. Ho’s ouster:

“FX Hotels Group Inc. Auditor Raises 'Going Concern' Doubt
Mar 31 17
FX Hotels Group Inc. filed its Annual on Mar 31, 2017 for the period ending Dec 31, 2016. In this report its auditor, Deloitte and Touche LLP, gave an unqualified opinion expressing doubt that the company can continue as a going concern.”

Meanwhile, a new, restated Offering Memorandum for the America FX Regional Center was published less than a month after his ouster, and there is a disclaimer that investors should not expect FX Hotels Group to manage the property.

The most outrageous inaccuracy in the Offering Memorandum, stated on page 2, is the claim that the hotel would be built across the street from the City of Hope Medical Center, which includes a 217-room hospital with 40 extra rooms for visiting family members. Most patients are cancer patients.

The City of Hope is actually located 1.2 miles from the location of the hotel project, as measured in the Google Map below. The gold and red colors along the route indicate traffic bottlenecks due mainly to shoppers patronizing Wal-Mart and Home Depot in the immediate area.

Visiting investors must have instead been shown the closed Santa Teresita hospital across the street behind the discount retail center anchored by “Dollar Tree” and “Smart and Final” stores, shown in the top photo. Santa Teresita surrendered its surgical/acute care license in 2004, and the 5-story building in the background is composed of offices and vacant space, but there is also an adjacent 131-room senior care home.

The architect's drawing seem to have no compatibility with the L-shaped site, as seen below:

In terms of locational advantages, this project is also a miss because it is not located on the Gold Line light rail system serving the San Gabriel Valley, including a stop for the City of Hope. The nearest west stop on the Gold Line, Arcadia Station, includes several all-suite hotels such as Springhill Suites, Hilton Garden, 2 Extended Stay Americas, Residence Inn and Doubletree, all with a better restaurant selection than Duarte offers. Visiting families would not need to rent a car or deal with the Duarte traffic jams associated with Walmart and Home Depot. The subject hotel project, on the other hand, is not located on the light rail line.

So, there should be 96 Chinese investors asking, “Where’s our money?”

The actual City of Hope
The attorney writing the complaint for the cheated investors is Jing Wang, Esq., Kingswood Law, Diamond Bar, California. She also successfully litigated against the California Investment Immigration Fund, also previously reported on this blog.