proactive

in practice M a lc o lm Riddell

Finding Chinese Investors

China is aiming its accumulated and operators have had to put hun- Bethany Group. Also, as part of the
wealth at the U.S. real estate market. dreds on waiting lists. deal, it acquired the existing sub-
These seven strategies will
Yet, tracking these activities and l Join one of the delegations of U.S. ordinated debt from lenders, con- help you identify Chinese
identifying the Chinese players is dif- brokers that go to China to show- verted that debt to equity through
ficult. These transactions are seldom case their properties, consistently the bankruptcy process, and then investors by sector—
reported outside their localities. Also, attracting large audiences. assumed the remaining $296 million
many Chinese buyers prefer to make l Associate with Chinese real estate of outstanding senior commercial residential, industrial,
their acquisitions under the radar, agents to list your properties in China. mortgage–backed securities (CMBS) commercial, and hotel—
investing through relatives and In multifamily housing, one of debt through a favorable restructuring.
friends living in the United States, the largest buyers this year is a Later last year, Standard Austin and Chinese banks that are
through partnerships with U.S. U.S. company named Standard bought another seven-property
players, or through wholly owned Austin—or perhaps Standard Port- Bethany Group portfolio of 2,759 refinancing commercial
U.S. entities they have created. folio; accounts differ, as do details apartments in Phoenix out of bank-
about the owner. What is known is ruptcy, paying $13 million in cash and
properties and working to
Residential that Standard Austin is owned by a assuming $120 million of restructured make construction loans.
Along with a growing and increas- Mr. Liu—no first name given—who debt. Also last October, the Wall
ingly wealthy middle class, China was born in China, made his money Street Journal reported that Stan-
has 875,000 millionaires, and, there in real estate, and is now a dard Austin bought an unnamed
according to Forbes, 64 billionaires; naturalized U.S. citizen. He formed apartment complex in Florida for
other sources put the number as Standard Austin in 2009 and engages an undisclosed price. There is no
high as 117. U.S. attorneys, works with U.S. invest- suitable strategy for locating the
According to the National ment banks, and has at least one next Mr. Liu. He or his professional
Association of Realtors, Chinese U.S. real estate adviser. services providers will find you.
directly invested over $323 million In January 2010, Standard Austin
in U.S. single-family homes during bought $360 million in equity in Industrial Real Estate
the 12-month period ended in the about 5,000 multifamily units in One of the best examples in the
first quarter of 2010, making them 16 projects in Texas and Maryland industrial real estate sector is the
the fourth-largest group of foreign previously owned by the bankrupt Wanxiang Group, China’s second-
homebuyers. The actual figure is
probably much higher.
Most of these purchases were on
the West Coast, but other parts of the
country are also beginning to see Chi-
nese buyers. In Miami, for example,
11 apartments in the 237-unit Artech
condominium were sold to Chinese.
These buyers can be found in
four ways:
l Attend and exhibit at one of many
U.S. real estate expos held in China
that introduce potential buyers to the
U.S. market—especially residential
real estate—and attract thousands of
Chinese participants.
l Contact the Chinese companies
organizing homebuying trips to the
United States and have properties
put on the itinerary; these trips
have become one of China’s most
popular package tours—so popular
that many tours are oversubscribed

M a r c h /A p r i l 2 0 1 1 U r b a n La n D 123
 in practice
largest privately held company and
one of the world’s largest auto parts
manufacturers. It began U.S. opera-
tions in 1995 and grew, in large
part, through acquisition of Ameri-
can companies. Today, from its
168,000-square-foot (15,600-sq-m)
plant in Elgin, Illinois, it generates
$1 billion in U.S. sales and employs
about 5,000 people. In August, it
diversified into the manufacture of
solar panels, opening a $12.5 mil-
lion, 40,000-square-foot (3,700-sq-
m) plant in Rockford, Illinois.
Among the ways to get a jump
on competitors in identifying Chi-
nese companies coming to the
United States are the following:
l Contact your state or city economic
development agency to determine
what, if anything, is being done to
attract Chinese companies—and
other foreign firms, for that matter—
to the area. If the agency has a
committee or a task force aimed at
attracting Chinese companies, join
it. If it does not, create and lead one.
If the agency sends delegations to
China, join them. When you find
a Chinese company interested in
coming to your state, contact the
company and offer your assistance,
and build relationships with the
owner and top managers.
l Determine whether your state or
city has an office in China through
the Council of American States in
China (www.casic.us/index_en.asp).
If it does, contact the China office
and let the staff know of your inter-
est in helping attract Chinese com-
panies, and check in regularly to
find out which Chinese companies
are considering locating in your
state. Then, contact those Chinese
companies and again offer your
assistance to establish relationships.
l Become familiar with the Depart-
ment of Commerce’s Invest in Amer-
ica program (www.investamerica.
gov), then contact program profes-
sionals in your state to discuss
what you can do to help attract Chi-
nese investment and ask them to
alert you about Chinese companies
124 U r b a n La N D M a r c h /A p r i l 2 0 1 1
that are considering establishing
U.S. facilities.
Commercial Real Estate
Like most successful Chinese
groups, Wanxiang also has substan-
tial real estate holdings—about $2
billion worldwide. Having established
its industrial foothold in the United
States, it formed Wanxiang America
Real Estate Group LLC in Elgin, Illinois,
in 2010 to acquire and develop U.S.
commercial real estate.
Wanxiang America Real Estate’s
first acquisition was the abandoned,
330,000-square-foot (31,000-sq-m)
Lucent Technologies office building in
Naperville, Illinois. It paid $9 million
cash and plans to completely reno-
vate the four-story structure at a total
cost of $47 million, including the pur-
chase price. In making the purchase,
Wanxiang formed a venture with two
local suburban developers.
The process of finding Chinese
investors in commercial properties is
very much like that for industrial real
estate: identify a Chinese company
coming to the area, and build a rela-
tionship with the owner and top man-
agers before your competitors do.
Hotels
Chinese investment in hotels can
be either opportunistic or strategic.
An example of an opportunistic
investment is the acquisition of the
Los Angeles Marriott Downtown by
Shen Zhen New World Investment
(USA), an affiliate of Shenzhen New
World Group. Shen Zhen bought the
hotel out of bankruptcy for $63 mil-
lion (the previous owner paid $115
million in 2007). Shenzhen plans to
spend $13 million to renovate the
27-year-old, 469-room hotel. It also
is currently negotiating to acquire a
large four-star hotel in southern Cali-
fornia and a winery in Napa Valley to
produce wines for sale in China.
An example of a strategic invest-
ment is the purchase of Interstate
Hotels & Resorts for $307 million
by a joint venture company owned
50-50 by Thayer Lodging Group
and Jin Jiang Hotels, one of China’s
leading hotel chains, constituting
the largest overseas acquisition in
China’s hotel industry.
For Jin Jiang Hotels, the acquisi-
tion had a larger purpose than entry
into the U.S. market. The day after
the deal closed, Jin Jiang announced
three agreements: with Interstate
to form a Chinese hotel manage-
ment joint venture; with Thayer to
establish a hotel asset manage-
ment company and an investment
fund focused on the Chinese hotel
and tourism sector; and with both
Interstate and Thayer to create mul-
tiyear training programs for Jin Jiang
employees.
There are three avenues for find-
ing Chinese investors in U.S. hotels:
l Contact U.S. law firms, accounting
firms, and real estate advisers with
offices in China and let them know
that your property or properties are
for sale.
l Engage a U.S. broker with offices in
China to market the hotel or hotels.
l Contact leading Chinese hotel
chains and investors directly to
determine which may have a stra-
tegic motive like that of Jin Jiang
Hotels, and then build relationships
with the chain.
Longstanding relationships count
in China. For example, in 2005, well
before the acquisition of Interstate
Hotels, Thayer and Jin Jiang Hotels
established Thayer Jin Jiang InterActive
Corporation Ltd., based in Shanghai,
to provide travel distribution infra-
structure and services to the travel
and hotel industries in China. When
Jin Jiang decided to make an acquisi-
tion in the United States, Thayer was
the natural choice for a partner.
Winning Chinese
Investment in U.S. Funds
Chinese institutions, companies,
and wealthy individuals are begin-
ning to invest or explore investment
in U.S. real estate funds. Among
Chinese government institutions—
the China Investment Corporation
(CIC) with $300 billion in total
assets, the National Social Security
Fund with $160 billion, and State
Administration of Foreign Exchange
with $350 billion—only the CIC is
known to have made investments
in foreign real estate. The CIC has
not yet directly acquired U.S. real
estate, but has invested indirectly
through funds. With U.S. funds, it
has committed $800 million in the
Morgan Stanley Real Estate Fund
VII Global; $1 billion to Brookfield
Asset Management; $1 billion to
Cornerstone Real Estate Advisors;
and $1 billion to Oaktree Capital
Management, reportedly to invest
in the Public-Private Investment Pro-
gram and other distressed debt.
The CIC also tried but failed to
buy from Harvard Management Com-
pany, Harvard University’s endow-
ment fund, its limited partner stakes
in U.S.-focused real estate funds.
Chinese insurance companies,
which have total assets of $590
billion, are not yet permitted to
invest in foreign real estate. But that
permission could come within two
years, and when it does, the insur-
ers will likely invest in funds initially.
Other potential Chinese investors
include banks, securities compa-
nies, corporate pension plans, and
provincial plans, each of which is
subject to varying restrictions on
outbound investment in real estate.
Chinese companies are also explor-
ing investment in foreign real estate
but are hampered by various regu-
latory approvals. Some, however,
may make investments outside the
regulatory process.
Given the size of the potential Chi-
nese investors, competition among
foreign fund managers of all types
is intense. The most committed
have set up offices in China, hired
Chinese-speaking staff, provided free
services and advice, and undertaken
to build relationships with key man-
agers in target Chinese entities. This
is by far the best strategy.
If you choose not to go this route,
you should focus your resources
on identifying a few specific pools
of capital that are most likely to
be interested in your fund’s sector.
From among these, you should
target those pools that your com-
petitors are not yet pursuing. Even
this strategy requires you to do
careful research and make frequent
trips to China. But, given the mas-
sive allocations that will be seeking
investment in U.S. real estate funds
over the next few years, your effort
should prove worthwhile.
Chinese Refinancing of
Commercial Properties
Several Chinese banks are among
the largest in the world. Most
had few losses during the finan-
cial crisis, and because of tight
Chinese regulation and China’s
fast-growing economy, they are
awash with cash. With Chinese
government encouragement, they
are seeking lending opportunities
in real estate outside China.
In the United States, two Chinese
banks, the Bank of China (BOC)
and the Industrial & Commercial
Bank of China (ICBC), are seeking
to make loans in gateway cities
of $100 million to $400 million,
although the ICBC, China’s largest
bank and 70 percent–owned by
the government, has stated that it
could consider loans of more than
$500 million. They will not lend
more than 60 to 65 percent of a
property’s value, and they intend
to hold the loans on their books for
their full term.
In New York City, BOC provided
$120 million to refinance the New
York Times building, near Times
Square, and led a syndicate for the
$475 million refinancing of 1515
Broadway. ICBC contributed $150
million to a $355 million loan made
to refinance the existing $325 mil-
lion mortgage on 650 Madison
Avenue, a 27-story office and retail
tower in midtown Manhattan; Wells
Fargo provided the balance.
Currently, only these two Chinese
banks are doing refinancings and
then only for large, established
properties. But, as they become
more comfortable with the U.S.
real estate market and lending
environment, and as they face
increasing competition from other
foreign banks as well as U.S. banks
reentering the market, they are
expected to begin making smaller
loans in cities across the United
States. Other Chinese banks operat-
ing in the United States—the Bank
of Communications, the China
Construction Bank, and the China
Merchants—may follow the BOC
and ICBC and also begin refinanc-
ing commercial real estate.
To secure Chinese banks as a
source of refinancing, you should
select the bank that will be most
amenable to lending on properties
of your type and location, either
now or later as lending criteria
loosen. You should begin a long-
term relationship with that bank
by making a sizable deposit and
running a substantial part of your
banking through it. Through this
relationship, you should introduce
yourself, your company, and your
properties to the Chinese bank’s
loan officers.
Construction Loans
The Chinese Export-Import Bank
and possibly other Chinese banks
are interested in making construc-
tion loans—or, more properly, sup-
plying project finance—to major U.S.
development projects. The origin
lies in China’s “Go Global” policy,
officially announced in 2000. The
construction industry was among
those encouraged to Go Global long
before the policy was announced.
Backed by lending from Chinese
banks, China’s construction com-
panies undertook numerous infra-
structure and real estate projects
in developing countries of strategic
interest to China.
The result: today, more than 50
Chinese construction companies are
on Engineering News-Record’s 2010
lists of the Top 225 Global Contrac-
tors and the Top 225 International
Contractors. Now, Chinese con-
struction companies and Chinese
banks are using the same model
to enter the real estate markets in
the United States and elsewhere
around the world, as illustrated by
two projects—Revel Entertainment
and Baha Mar.
In February 2008, Morgan Stan-
ley invested $1.2 billion in Revel
Entertainment’s $2.2 billion casino/
hotel complex in Atlanta City. In
September 2009, Revel awarded
a $1.7 billion construction contract
to a joint venture company formed
by China Construction America and
Tishman Construction Company,
with China Construction America
owning 51 percent. It also entered
into a framework agreement with
China Eximbank for a $1.2 billion
construction loan. Negotiations with
China Eximbank on the construction
loan collapsed when Morgan Stan-
ley announced in April 2010 that it
was pulling out of the project and
writing down its investment.
In September 2009, Baha Mar
gave China Construction America
a $1.9 billion construction contract
to act as sole contractor for its
$3.2 billion resort project in the
Bahamas and signed a framework
agreement with the China Exim-
bank for a construction loan. In
March 2010, the China Eximbank
committed to a $2.45 construction
loan for the project. The Chinese
government has approved the
construction contract and the loan.
The Bahamian government also
gave approval, which included
visas for 8,000 Chinese workers.
Because Chinese banks are
making construction loans to sup-
port the international expansion of
the Chinese construction industry,
the key is to first hire a Chinese
construction company for your
development project. Be certain
that the Chinese construction com-
pany has relationships with Chinese
banks interested in providing and
permitted to provide a construction
loan. And, to the extent possible,
M a r c h /A p r i l 2 0 1 1 U r b a n La n D 125
involve your state government and
the U.S. government to support and
help close the loan.
Common elements
These seven strategies have three
common elements:
l The Chinese government is
always indirectly involved. It may
be encouraging outbound invest-
ment and financing through the Go
Global policy, it may be restricting
investment, or it may be the reason
that Chinese investors have to work
around their country’s currency
controls to make investments. In
any case, you have to understand—
and monitor changes in—Chinese
government policy on foreign invest-
ment in and financing of real estate.
l You have many resources at hand
to help, whether it is the state eco-
nomic development agency and its
China office, the U.S. Department of
Commerce, or professional services
providers with offices in China or
expertise in Chinese business. You
should use all who can assist you.
l The Chinese business environ-
ment is more relationship oriented
than transaction oriented. You will
have to devote much more time to
getting to know potential Chinese
investors and getting them to trust
you than you do to engage with
investors from other countries. This
means many trips to China and also
inviting and hosting Chinese com-
panies to visit your properties. But
once you establish and maintain
solid Chinese sources of invest-
ment, you will have them for many
years and many projects.
Obtaining Chinese investment
and financing takes commitment
and persistence. These seven strat-
egies point the way. The rest is up
to you. UL
Malcolm Riddell is president of
RiddellTseng, a boutique investment bank. Since
1988, RiddellTseng has advised leading financial
services and real estate firms on business and
investment in China and on winning Chinese
investment.