The Future of U.S. Redevelopment Financing: China?
If there is a silver lining from our economic roller coaster, it's that crisis often begets innovation, even in areas like real estate financing.
News reports from Beijing indicate that the China Development Bank is negotiating to finance a massive urban redevelopment project in San Francisco. This deal appears to be the first significant funding of a private U.S. investment by the CDB. We think it’s a promising sign of things to come.
The Bayview Hunters Point/Candlestick Point project is innovative on a number of fronts: social policy, technology, urban design, real estate and finance. By turning an old military base into an urban research-and-development campus that anchors an entirely new community, the project promises to create a virtuous cycle of innovation that can form the basis for lasting prosperity.
The Bayview Hunters Point/Candlestick Point project, courtesy: Lennar
Yet equally transformative is the proposed funding and finance package for the nearly $3 billion project.
The CDB is interested in contributing $1.7 billion for Hunters Point and the separate-but-related Treasure Island redevelopment. It was only after exhausting its attempts to get funding from domestic sources that the developer, Lennar Corporation and partners, undertook negotiations with the CDB.
Treasure Island, courtesy City of San Francisco
For the Chinese, an investment like this is attractive, in part, to diversify their holdings. While there is no precedent for this kind of Chinese investment in the United States, there are plenty of examples in other countries.
Barriers to Chinese investment in American infrastructure, however, are not inconsequential. Mutual concerns generally center on firms, workers, quality, and standards. For example, Chinese workers (not domestic workers) are often employed on their infrastructure projects in Africa and the Middle East, and contractors understandably come with a different culture around labor and production standards. From the Chinese perspective, there are concerns about America‘s lack of public-sector expertise in partnerships of this nature and trepidation over American national security policies that they consider protectionist.
Yet, the Hunters Point project shows there is significant potential for reciprocated benefit if reservations can be overcome and deals structured in ways that address the genuine needs of both sides.
Organized labor, which supports the project, and important local hiring provisions are addressed through contractual provisions. Plus, an $83 million agreement outlining benefits such as workforce development, community facilities, scholarships, and housing funds remains part of the deal.
If China can find a way to work in San Francisco — where community and labor rights are important priorities — the possibilities for the rest of the country are self-evident. Further integration of the Chinese and U.S. economies could also help alleviate tensions and improve relations. In the past three decades, the U.S. and Japan overcame similar (though not identical) suspicions, with that nation now a trusted foreign direct investor in the U.S. economy.
Also, it is important to note that this is not just a Chinese investment. The project is a true public-private partnership, with funding coming from a combination of private capital and land-secured public financing in the form of tax-exempt tools and bonds supported by special levies. Money from federal neighborhood and transit programs, as well as the necessary environmental remediation of the naval base, shows an extraordinary commitment from all levels of government.
While planning for the Hunters Point/Candlestick redevelopment has been in the works for nearly four decades, this latest package (and this project would not get done without it) brings a new level of excitement.
The long-term impact of this development will change the region and, we expect, will modernize the way redevelopment projects are structured. The new role fulfilled by the CDB also has the potential to change the business relationships and understanding of our different cultures of China and the United States.
But the big lesson here is that, once again, local leaders are out forging pragmatic solutions to issues that are ideologically stuck at national level. The Bay Area has always been a hothouse of new ideas and innovation and, for myriad reasons, the Hunters Point project is the latest example.