EDITOR'S NOTE: Chinese property developer Z&L hasn’t had the easiest time speculating in the US market. The latest of its numerous failing projects comprises a condo tower in San Francisco; a city whose housing needs and income disparities combine to form one of the ugliest urban mismatches in supply and demand. Z&L can’t find enough condo buyers in a market where even rental demand is suffering amid rising cases of the “unhoused.” Though Z&L’s history of property speculation hasn’t always been smooth or successful, which is to be expected of any speculator, neither has its history been clean. From agreement violations and involvement with corrupt city officials to its contractual involvement with human traffickers, Z&L’s activities represent more than just China’s corporate sector gaining a foothold in an American market. In San Francisco, it represents the import of a culture of corporate greed into an urban environment whose municipal policies have left it vulnerable for the taking.
As the condo market is going south on you, you can always try to sell the tower to an investor to convert to rental apartments. But that’s tough too.
“Z&L continues to be interested in being part of the solution to the housing shortage in San Francisco and has been surprised to see such a soft market now,” Darlene Chiu, a business consultant who has worked with Chinese firms investing in San Francisco, told the San Francisco Chronicle.
It’s kind of funny actually, to put “housing shortage” into the same sentence with “such a soft market,” given that there over 40,000 vacant housing units in San Francisco, which has caused such an uproar that folks are now trying to put a vacant-home tax on the ballot. Add to these vacant housing units the completed but vacant and boarded-up 109-unit condo tower, The Oak, that Z&L Properties built.
Z&L Properties is a US entity of Chinese property developer Zhang Li, co-founder of R&F Properties in Guangzhou, China, which is now trying to restructure its debts and is negotiating with bondholders of its foreign-currency bonds. If these negotiations are successful for R&F, Fitch will consider this a “distressed debt exchange” and downgrade R&F to “restricted default.”
The tentacles of China’s collapsing property developers stretch deep into the US commercial and residential real estate market, particularly the trophy markets in San Francisco, Los Angeles, and Manhattan.
Unpaid subcontractors have filed mechanics liens on The Oak; and Z&L owes $2.05 million in unpaid taxes on the Oak, according to the San Francisco Chronicle.
Only 17 potential buyers have put down deposits for a condo at the Oak, and three of them cancelled. The remaining 14 might never get their condos.
The pace of absorption has been much slower than anticipated, Darlene Chiu told the Chronicle. Despite the “housing shortage” you mentioned, right? If I hear “housing shortage” one more time from the real estate industry, I’m going to scream.
The potential buyers got mortgage rate locks back when mortgage rates were in the 3% range. But those rate locks have expired, and now they’d have to get mortgages at current rates, at over 5%. The units are still listed for sale between $625,000 and $1.8 million. So a mortgage payment, when the rate jumps by 2 percentage points, would get very tough, if it ever gets that far.
Rather than continue with condo sales, Z&L has retained the brokerage Kidder Matthews to sell the entire property to a rental housing investor, sources told the Chronicle.
And converting the building to rentals would make sense if you can’t sell the condos because the condo market went south on you.
It’s just that rents in San Francisco aren’t so hot at the moment either, with the one-bedroom asking rent still down about 20% from the peak in 2019 due to the “housing shortage,” or whatever, as San Francisco has lost about 6% of its population since then:
Source: Wolf Street
The property development industry in China, tripped up by ridiculous speculation and leverage, has been in slow-motion government-controlled collapse. China’s Evergrande was the first big developer to shake up bondholders of foreign-currency bonds last year, and by now foreign bondholders have taken massive losses on their bets on China’s property developers.
And so, we here in the US are stuck with mega-projects that were in various stages of construction where lenders seized the collateral, or where projects ran into other difficulties, amid unpaid bills owed to contractors and subcontractors, mechanics liens filed on the properties, and unpaid property taxes.
Z&L acquired 12 projects in the Bay Area and Los Angeles in 2014 and 2015, during the peak of the China property mania, and was planning to build 3,400 high-end condos. Four of those properties are in San Francisco, including The Oak.
Z&L acquired the two parcels and plans for The Oak from Trumark for $23 million. Trumark had gotten the project approved by the City. In 2019, Z&L obtained $77 million in financing to build the tower.
There have been all kinds of issues with Z&L projects. For example:
The US Department of Labor investigated Z&L’s Silvery Towers project in San Jose for human trafficking and found that, under a contractor, workers were “forced to work without pay” and “lived in captivity in squalid conditions in a warehouse.” The case was settled in 2018. In 2019, a jury convicted the contractor to eight years in prison and to pay the workers back-wages of nearly $1 million. Years behind schedule, the units started selling in 2022.
The City of San Jose removed Z&L from two stalled projects in 2019 because it had broken the terms of its development agreement.
Z&L executive and R&F co-founder Zhang Li was tangled up in the corruption indictment of San Francisco’s former public works director Mohammed Nuru, who’d been investigated by the FBI and was convicted in 2020 on public corruption charges. According to the Chronicle: “The indictment states that Nuru had met Li in China on multiple occasions and that the Chinese developer had showered him with gifts and put him up for free at five-star hotels. In exchange, Nuru ‘used his official influence with other City officials to solve problems’ the developer encountered.”
San Francisco already has the giant Oceanwide eyesore.
The Oceanwide Center, which had an original budget of $1.6 billion, has been seized by creditors after construction was halted when it reached grade, years behind schedule. The mega project by developer China Oceanwide Holdings in Beijing is now a huge eyesore in the middle of San Francisco right by the Salesforce Tower. This is a portion of the project, seen from street level (photo by Wolf Richter, May 24, 2021):
Source: Wolf Street
Oceanwide’s huge project in Los Angeles, the Oceanwide Plaza, which is nearly complete, has been financially troubled but still hasn’t been seized by creditors. But Oceanwide’s Manhattan project has been seized by creditors. There are other projects in major US cities by property developers based in China that are now tangled up in the meltdown of property development in China that has been bleeding into the US real estate market.
Originally published on Wolf Street.