“Borderline offensive”: Why Greenland lost $200M on its LA tower

A few months into the pandemic, Northland presented the Chinese developer Greenland’s U.S. subsidiary with an unattractive proposal.

The Boston-based private equity firm offered $550 million for one of Greenland’s trophy L.A. assets — a 59-story downtown apartment tower — considerably below the $695 million the developer was asking.

“It was borderline offensive,” Matthew Gottesdiener, Northland’s chief executive, said of the offer.

Rising interest rates and Greenland’s eagerness to sell the building eventually worked in Northland’s favor. The firm closed a $504 million deal to buy the 685-unit complex earlier this month, ending the owner’s three-year exhaustive effort to offload the luxury highrise.

Greenland declined to comment.

Despite the discount, the deal marked the most expensive sale for an apartment building in L.A. And Northland’s win became Greenland’s loss.

The firm spent about $715 million on the project that’s located within its larger four-building development called Metropolis, according to a source familiar with the matter. Greenland readied itself to take a loss based on its initial asking price, but instead of being underwater by about $20 million, the deficit was about ten times that.

“A commitment to Los Angeles”

In 2014, the U.S. subsidiary of Greenland Group — an entity partly owned by the Shanghai municipal government — spent $150 million to buy a full city block in Downtown L.A. The deal closed on Chinese New Year, shortly after paramount leader Xi Jinping loosened domestic policies to allow private companies — which dominated its real estate sector — to invest overseas.

The state of California was also trying to lure investors from China. In April 2014, former Governor Jerry Brown visited the country to promote an economic partnership between the state and China.

“We’re going to facilitate billions of dollars of investments,” Brown said at the time.

Greenland started planning a more than 3 million-square-foot development, aimed at attracting wealthy Chinese buyers to the condos along with an upscale retail component.

The same year, Greenland acquired a 70 percent stake in a Downtown Brooklyn mega project from Forest City Ratner.

By 2019, the developer had finished construction on the Metropolis by building out two condo towers, a hotel and the Thea at Metropolis apartment tower.

The completion was a “testament to Greenland’s commitment to Los Angeles,” Winston Yan, a general manager at Greenland’s U.S. subsidiary, said in a statement in 2019.

But, the firm wasn’t all that committed. It had already started shopping the Hotel Indigo and the apartment tower for sale.

The pursuit

By 2020, Greenland was facing financial issues due to the pandemic and China’s real estate woes, so it set its wheels in motion to sell off both the Hotel Indigo and the apartment tower.

Simultaneously, Northland was ready to strike in California. The firm stayed away from investing in the state for years, mostly because cap rates were higher in other regions, where pricing was also lower, Gottesdiener suggested.

“We thought California might be where developers that were willing to spend the highest levels and invest in the highest quality construction would find themselves in a tough spot,” he said.

Northland cast a wide net, bidding on more than 40 apartment towers across L.A. and San Francisco over the past two years as it looked to capitalize on distressed properties.

Other potential buyers eventually dropped out of the race for Greenland’s tower — mostly because of rising interest rates — forcing the firm to revisit Northland’s offer. Several “competitors” were relying on short-term debt and had shorter hold periods, according to Gottesdiener, making it harder for the financials to pencil out.

Interest rates were a strain on Northland, too. The firm could no longer agree to pay its initial $550 million offer and instead negotiated it down by nearly $50 million.

Northland might have offered even less, but Gottesdiener was impressed with the lease up of the property. When it first approached Greenland two years ago, only about 30 percent of the units were leased. As of this month, the property is around 91 percent occupied.

After it decided it would go forward with the purchase of Metropolis, Northland had to figure out financing at a time when the U.S. Federal Reserve started routinely hiking rates by 75 basis points every few months.

Eventually, Northland scored a $280 million, 10-year loan from Fannie Mae, which had partnered with Northland on deals before. Its fixed interest rate is just above 5 percent — 50 to 115 basis points lower than similar loans, according to data from loan servicer Northmarq.

The rest of the financing came from the proceeds of 1031 exchanges, with the bulk coming from the $178 million sale of a garden-style apartment complex in Tucson earlier this year.

Gottesdiener also leveraged a non-recourse component, meaning that the loan is secured by the property. In the event of a default, the lender would end up owning the financed property. Other banks were hesitant and backing out of issuing non-recourse loans, he said.

Unfinished business

Greenland is still working to sell off condos in two towers at the Metropolis complex, along with the Hotel Indigo, according to sources familiar with the matter.

The firm has sold about 500 of the 800 condos, grossing more than $450 million so far, one source added.

On the other side of the country, Greenland’s Brooklyn development project — Pacific Park — is still unfinished. After acquiring the majority stake from Forest City Ratner, the firm raised its stake to 95 percent two years later. Since then, it has sold off some of the property to other developers.

Greenland is also running low on cash. In June, S&P Global Ratings downgraded the firm to CCC, after it asked for an extension to repay $488 million in bondholder debt.

Whether the sale of the Thea at Metropolis will give Greenland enough capital to stave off future default remains to be seen.

Greenland is not the only Chinese firm struggling with liquidity. Evergrande, the poster child for beleaguered Chinese developers, has already defaulted on about $23 billion worth of offshore debt. Oceanwide is struggling to finish its 2 million-square-foot Downtown L.A. project, which is still sitting unfinished.

“All these Chinese companies were successful in their own markets and they all had the same mentality: build, build, build, and build big,” a former employee at Greenland USA told TRD in July. “But they overpaid for assets.”