RIDDELLTSENG

CHINA GOES for GLOBAL

OUTBOUND INVESTMENT IN AND Harbour FINANCING OF REAL ESTATE
a presentation to the

Securing Chinese Financing

ULI Recreational Development Council (Red Flight)

October 13, 2010
by

Malcolm Riddell
RIDDELLTSENG

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What Chinese Investment in U.S. Real Estate???

Google Chinese investment in U.S. real estate and you may get a few hits, like: China Investment Corp Invests $800 million in Morgan Stanley Real Estate Fund Jin Jiang Hotels in JV with Thayer Lodging Acquires Interstate Hotels and Resorts$307 Million Deal Chinese Search for Deals in U.S. Housing Market These headlines convey that China is beginning to aim its accumulated wealth at financing and investing in overseas real estate. But, most of usin the media or our businesssee little evidence of Chinese investment in U.S. real estate

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But, How Much are the Chinese Investing in U.S Real Estate?
The answer: Its impossible to tell, for two reasons 1. The Media Isnt Following the Story Hasnt focused on Chinese investment or financing (e.g. Google the China Ex-Im Banks $2.5 billion construction loan commitment to the $3.2 billion Baha Mar project) Chinese investment is fragmentedsome transactions are reported in local newspapers and trade publications but not picked up nationally 2. Secrecy Some Chinese are investing with funds that got around Chinas tight currency controls, and have found vehicles to hide their investment, or they dont want the Chinese government to learn of their international holdings Some, because of perceived U.S. opposition to Chinese investment in the U.S. (e.g. Socal and Maytag) want to keep a low profile These investors invest through
Relatives and friends residing legally the U.S. Partnerships with U.S. entities Wholly-owned U.S. entities

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Part One TO GET RICH IS GLORIOUS

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Exit Mao, Enter Deng

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Black Cat, White Cat. Its a Good Cat If It Catches the Mouse. Deng Xiaoping

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To Get Rich is Glorious Deng Xiaoping

Thirty years ago, Deng took China from a socialism to capitalism--and, ignited Chinas explosive economic growth China has over 875,000 millionaires; Forbes listed 64 Chinese billionaires, other sources say 117 China accounts for 28% of the worlds luxury goods purchases, second only to Japan Last year, Chinese bought about

500 Bentley s, making the company s fifth biggest market for and accounting for roughly 10% of sales

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Older Generation Entrepreneur and ManagerBorn Not Long After the Communist Victory in 1949Lived through the Cultural Revolution, Prospered in the Market Economy with Socialist Characteristics

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Young Entrepreneurs and ManagersBorn after the One Child Policy, Started in 1979, that Gave Birth to The Little Emperors

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Chinese Companies Operating in the U.S. Chinese Govt Push-U.S. States Pull
Today some 33 American states, ports, and municipalities have sent representativesto China to lure jobs once lost to China back to the U.S.: Besides affordable land and reliable power, states and cities are offering tax credits and other incentives to woo Chinese manufacturers. Fortune, May 7, 2010 Beijing, meanwhile, which has mandated that Chinese companies globalize by expanding to key markets around the world, is chipping in by offering to finance up to 30% of the initial investment costs, according to Chinese business sources. Fortune, May 7, 2010 These Chinese companies will need plants and offices for their own use, as well as housing for their Chinese expatriate staff

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But, the Largest Investments Have and Will Come from Chinese Institutions

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Part Two

CHINA GOES GLOBAL

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Chinese Outbound Investment is Greater than it Appears

At the right, Chinese outbound (non-bond) investments from 20052010 But many Chinese companies and individuals make investments that dont show up on such a survey because they dont want them to show up This is because these investments are made from money kept offshore against Chinese regulations, and are also hidden from the Chinese government to avoid taxes and other intervention They make them through entities registered in the other countries, through partners and intermediaries, and through other such means

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In Going Global Chinese Have the Sense that They are Quickly Reoccupying Their Rightful Place in the World

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Part Three

EXAMPLES BY SECTOR

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Chinese Financing of and Investment in the U.S. Real Estate

SINGLE FAMILY

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Chinese Have Begun to Buy Houses in the U.S.

According to the National Association of Realtors, Chinese directly invested over $323 million in U.S. homes, in the 12 month period ending 1stQ 2010 The actual figure is probably much higher One motive for buying: place for children to live when they come to school in the U.S.
25% 20% 15% 10% 5% 0%

U.S. Residential Market: $907 Billion

Foreign Purchasers 4.45% Domestic Purchasers 95.44%

Purchases by Client Nationality--2010

23% 10% 9% 8%

7%

5%

3%

2%

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China-U.S. Real Estate Expos and Buying Tours

Home buying trips to the U.S. have become one of Chinas most popular package toursso popular that tours are oversubscribed and operators have had to put hundreds on waiting lists U.S. real estate expos in China introduce Chinese buyers to U.S., especially residential, real estate, and attract thousands of potential buyers Delegations of U.S. brokers going to China to showcase their properties consistently attract large audiences.

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Chinese Real Estate Financing and Investment in the U.S.

MULTI-FAMILY

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Multi-Family: Standard Austin

In January 2010, an unidentified Chinese investment group, doing business anonymously through its U.S. partnership entity, Standard Austin, purchased 5,000 multifamily units in 16 projects in Texas and Maryland Bought $360 million of equity from Bethany Groups out of its bankruptcy proceedings; debt remains in place Also has 7-property, 2,759-unit, Bethany portfolio in Phoenix under contract for $123 million Standard Austin acquired existing subordinate debt from lenders, converted that debt to equity through the bankruptcy process, and then assumed the remaining $296 million of out-standing senior CMBS debt through a favorable restructuring.

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Chinese Real Estate Financing and Investment in the U.S.

INDUSTRIAL

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Wanxiang America
Wanxiang Group, Chinas second largest privately-held company and one of the worlds largest auto parts manufacturers; also owns about $2 billion in real estate worldwide Began operations in the U.S. in 1995, grew, in large part, through acquisition of U.S. companies; around 5,000 employees; $1 billion in U.S. sales Completed 168,000 sq. ft. plant in Elgin, Illinois In August, opened a new, $12.5 million, 40,000 sq. ft plant in Rockford, Illinois, to manufacture solar panels

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Chinese Real Estate Financing and Investment in the U.S.

COMMERCIAL

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Wanxiang America Real Estate Group, LLC

In 2010, the Wanxiang Group established Wanxiang America Real Estate Group, LLC, in Elgin, IL, to acquire and develop commercial real estate This is not unusual; in China, most prosperous companies invest in real estate Recently made its first acquisitionthe abandoned, 330,000-square-foot Lucent Technologies office building, in Naperville, Illinois Paid $9 million, all in cash; plans to completely renovate the four-story structure at a total cost of $47 million, including the purchase price In making the purchase, Wanxiang formed a venture with two local suburban developers

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Chinese Real Estate Financing and Investment in the U.S.

HOTEL

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Los Angeles Marriott Downtown

Bought by Shen Zhen New World Investment (USA), an affiliate of Shenzhen New World Group, in March 2010 For $63 million out of bankruptcy (previous owner paid $115 million in 2007) Shenzhen plans to spend $13 million to renovate the 27-yearold, 469-room hotel Lynn Cadwalader, partner at Holland & Knight and a member of RDC (Red), represented Shenzhen

Lynn also reports that Shenzhen is currently pursuing two other acquisitions: A big-box branded four-star hotel in Southern California A winery in the Napa Valley to produce red wines for sale in China

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Strategic Investment with a Trusted Partner: Interstate Hotels

In 2010, Jin Jiang Hotels and Thayer Lodging Group, in a 50/50 JV, acquired Interstate Hotels & Resorts for $307 millionthe largest overseas acquisition ever completed in China's hotel industry Yu Minliang, chairman of Jin Jiang Hotels
To achieve an international presence and speed the growth of Shanghai's modern services sector, the Group and Thayer have completed the acquisition and merger of Interstate, the largest overseas acquisition ever in the PRC hotel industry, under the full support of the municipal government and various committees, offices and bureaus. This also marks a key step in our goal of international expansion. We are certain that our collaboration with Thayer and Interstate will set an example of an overseas acquisition by a domestic company that 'going global and importing foreign expertise', thus establishing a growth platform covering the international and domestic markets and enhancing asset investment and management of the mainland's hotels. It will also broaden Jin Jiang Hotels' capabilities and promote Interstate's business expansion in China.

Leland Pillsbury, CEO of Thayer

The collaboration will provide opportunities for Interstate to enter the China market, while we can bring into full play in China our substantial experience that we have accumulated from years of international hotel asset management.

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Jin Jiang Group Immediately Announced a Series of Strategic Initiatives

Agreement with Interstate for setting up a hotel management joint venture, and instilling Chinese elements into the joint venture to help it develop an independent hotel management business in China Agreement with Thayer for the establishment of a hotel asset management company to improve asset enhancement ability and boost asset liquidity Memorandum with Thayer for setting up a Chinese hotel & tourism sector investment fund, the first hotel & tourism investment fund in China Memorandum with Thayer and Interstate for training programs in United States for one hundred middle or senior management over three years; after the training, the trainees shall serve at Interstate China or the Fund Manager JV for of at least two years

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Relationships Count: Thayer and Jin Jiangthe Back-story

In 2005, Thayer and Jin Jiang Hotels established Thayer Jin Jiang InterActive Corporation, Ltd. based in Shanghai, to provides travel distribution infrastructure and services to the travel and hotel industries in China The products include:
HUBS1CRS system, a Web-based platform that acts as a real time central reservation, distribution, management, and account settlement system for the hospitality industry and 1-Link, a Web-based management platform, tailor-made for independent hotels in China, which provides hotels an exposure to various hotel distributors and wholesalers, including call centers, hotel-booking Websites, business travel managers, and corporations. Customized Website design and search engine marketing services.

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Chinese Real Estate Financing and Investment in the U.S.

CASINO

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Revel Entertainment, Atlantic City

February 2008: Morgan Stanley invests $1.2 billion in $2.2 billion Revel Entertainment project September 2009: Revel
lets $1.7 billion construction contract to joint venture company formed by China State Construction & Engineering Corp. and Tishman, with China State Construction owning 51% enters a framework agreement with China Exim Bank for a $1.2 billion construction loan on the project

April 2009: Morgan Stanley decides to sell its 95% ownership and write-down most of its $1.2 billion investment The deal now seems to be dead

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Chinese Real Estate Financing and Investment in the U.S.

RESORT

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Baha Mar, The Bahamas

April 2008: Baha Mar begins discussions with the China State Construction & Engineering Corp. [CSCES] and the China Exim Bank about its $3.2 billion project March 2009: In Beijing, Baha Mar president signs a formal agreement with CSCEC and MOU with China Exim Bank for a construction loan September 2009: During visit of Chinas top legislator to The Bahamas, Baha Mar signs, at Bahamian government offices:
$1.9 billion contract with CSCEC as sole contractor framework agreement with China Exim Bank CSCEC agrees to invest $99 million for 2.75% share [now $150 million]

March 2010: China Exim Bank signs a $2.6 billion construction loan for Baha Mar.
The Chinese government has approved the deal; still awaiting Bahamian government approvalone major hold-up: visas for 8,000 Chinese workers

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Chinese Real Estate Financing and Investment in the U.S.

REAL ESTATE FUNDS

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Chinas sovereign wealth fund, with over $300 billion invested in companies, securities, and funds No direct real estate investment in the U.S.; invests through funds:
$1 billion to Brookfield Asset Management $1 billion to Cornerstone Real Estate Advisors $1billion to Oaktree (to buy PIPPs?) $800 million in Morgan Stanley Real Estate Fund VII Global Tried but failed to buy stakes in U.S.focused real estate funds from Harvard endowment fund for $500 million

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Chinese Real Estate Financing and Investment in the U.S.

REFINANCING

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Chinas Banks, Among the Worlds Largest, are Going Global in Real Estate: Bank of China
Several of Chinas banks are among the largest in the world Most had few losses during the global financial crisis, are awash with cash now because of tight regulation and a fastgrowing economy, and are seeking lending opportunities in real estate outside China Both Bank of China and the Industrial & Commercial Bank of China are active in major refinancings of U.S. commercial real estate Bank of China Leads Lenders for US Real Estate Xiaojing Li, Bank of Chinas general manager for the US, says: Our Beijing head office is encouraging overseas branches to get into the local lending business as long as we control the risk. Bank of China actively seeks larger positions and holds them. For example, Bank of China provided $120m for the New York Times building, near Times Square. FT January 2010 [Also led syndicate for the $475 million re-financing of 1515 Broadway in New York City.]

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Chinas Banks, Among the Worlds Largest, are Going Global in Real Estate: Industrial & Commercial Bank of China
ICBC Pushes Into U.S. Market in a Large WayChina Bank Targets Commercial Real-Estate Owners Needing Loans Exceeding $100 Million; Lack of Name Recognition Industrial & Commercial Bank of China, China's largest bank, is rolling out a "large-loan" program targeting U.S. commercial real-estate owners in need of loans that exceed $100 million, a category most U.S. banks now avoid. The move by Beijing-based ICBC, which is 70% owned by the Chinese government, is part of a broader push into the U.S. market and comes as China's regulators are encouraging domestic financial institutions to expand overseas. The Chinese bank is offering to lend no more than 65% of a property's value. ICBC says it could consider loans that are even higher than $500 million, and it intends to hold loans on its books. Early this month, ICBC closed its first commercial-property loan in the U.S. It contributed $150 million to a $355 million loan made to a partnership led by private-equity firm Carlyle Group. The venture used the loan to refinance the existing $325 million mortgage on 650 Madison Ave., a 27story office-and-retail tower in midtown Manhattan. The rest of the loan was provided by Wells Fargo. WSJ June 29, 2010

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Chinese Real Estate Financing and Investment in the U.S.

CONSTRUCTION LOANS AND PROJECT FINANCE

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Construction Loans for Baha Mar and Revel Entertainment Both engaged a Chinese construction company, China Construction America Through CCA, approached the China Ex-Im Bank

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Chinese Construction Construction Companiesand LoansGo Global

In 2000, China officially announced its Go Global policy within its 10th five-year plan (2001-2005). Among the industries encouraged by the Chinese Central Government to Go Global was Chinas construction industry. Backed by construction lending from Chinese banks, Chinas construction companies undertook numerous infrastructure and real estate projects in developing companies of strategic interest to China.

Now, Chinese construction companies and Chinese banks are using the same model to enter the real estate markets in the United States and elsewhere around the world.

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Chinas Construction Companies are World-Class

In the ten years since China officially announced it Go Global policy, China has developed a world-class construction industry. More than 50 Chinese construction companies are on Engineering News-Records 2010 list of the:
Top 225 Global Contractors Top 225 International Contractors.

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Chinese Banks Make Construction Loans to Foreign Projects to Support Chinese Construction Companies Winning ContractsAll Part of the Central Governments Go Global Policy
Foreign Development Projects St. Kitts

Chinese Construction Company

Formal/Informal Cooperative Agreement

Chinese Bank

Central Govt

Go Global
policy

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For more information about Chinese investment in and financing of U.S. real estate, please contact:
Malcolm Riddell
941 321 5000 malcolm.riddell@riddell-tseng.com

Steve Manolis
971 917 3201 steve.manolis@manoco.com

We look forward to hearing from you

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Securing Chinese Financing

Thank you Harbour

for

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Malcolm Riddell RIDDELLTSENG

Malcolm Riddell is president of RIDDELLTSENG, a boutique investment bank that advises leading international financial services and real estate companies on investment and joint ventures in China, and on winning financing from Chinese investors and lenders.

A board-certified international lawyer, he is also strategic advisor to DLA Piper on China.

He is senior visiting fellow at Peking University; associate-in-research at Harvards Fairbank Center for Chinese Studies; and former Harvard Kennedy School Asia fellow. He regularly lectures on China issues at Harvard.

Formerly, he was an investment banker at Salomon Brothers; a US delegate to the UN; and a CIA case officer and a Special Operations Group reserve officer.
A Mandarin speaker, he lived fifteen years in China and Taiwan. Malcolm is a member of the Council on Foreign Relations

For more information about Chinese investment in or financing of U.S. real estate, please call 941 321 5000 or email: malcolm.riddell@riddell-tseng.com