O.C. Developer Sells Chinese a Metropolis : Entrepreneur: After grueling negotiations, his firm is chosen by Beijing to coordinate planning and building of a $5.2-billion, state-of-the-art city.
For 14 months, John A. Jones crisscrossed the Pacific on more than half a dozen occasions to secure the biggest project of his career: to create a metropolis out of nothing on China’s booming south coast.
The toil has not been easy on the 45-year-old Orange County entrepreneur. The wrinkles around his eyes have nearly doubled, the stress has caused his skin to dry out and the gray in his hair is more pronounced. There’s also a thicker waistline, which Jones blames on “those long flights and rich Chinese food.”
But the effort finally paid off. His company, Largo Vista Inc., was chosen last month by Chinese government authorities to coordinate the planning and building of a $5.2-billion, state-of-the-art city--in a blended image of Hong Kong and Southern California--along the southern shores of Shenzhen. The area was once a barren patch of grassland across the Hong Kong border that Beijing designated as a “special economic zone” 12 years ago when it seriously began flirting with capitalism.
The creation of this community--simply called the New Central Business District--is the largest joint development project the Chinese have undertaken with a U.S. firm since the Tien An Men Square massacre three years ago, when scores of pro-democracy students were killed by the Chinese military. The events led to China’s brief economic and political isolation and stalled some of its modernization programs.
The Shenzhen project is among a handful of joint real estate ventures that the Beijing government has sanctioned in recent years as it shapes its regulations regarding foreign real estate investment in areas it has chosen for industrial development.
“This is the project of a lifetime,” said Jones, an Orange-based developer whose largest projects to date were building a tract of 325 single-family homes in Michigan and constructing a $22-million sewage treatment facility in Arkansas.
Largo Vista will oversee development of the master plan for a seaside community about the size of the Irvine Spectrum, a sprawling, 2,600-acre business park in south Orange County. Two aging factories the Chinese government shut down four years ago occupy the otherwise virgin 2,500 acres of port land, which hugs the shores of a bay 50 miles north from Hong Kong.
On this property, Largo Vista and the government of Nanshan--one of three districts in Shenzhen--intend to build a financial center, a commercial shopping area, at least two hotels, several residential apartment buildings, a marine animal theme park--not unlike San Diego’s Sea World--and a small water-sports complex next to a pleasure boat marina.
Largo Vista has a 50-year lease on a five-acre parcel within the project where it would build and manage a 31-story twin tower office complex that would become the hub of the city’s financial community. The company has a similar lease agreement on a seven-acre property elsewhere in the planned community to build and manage a theater and cinema museum.
The idea, said Chinese officials, is to create a self-contained city for the hundreds of thousands of people who work for a burgeoning group of joint venture companies in the area.
Nearly half of the 7,000 companies that dot Shenzhen are operating with some foreign investment, they said. This number is expected to rise rapidly in the 1990s as companies in neighboring Hong Kong--in a move to cut production costs--shift operation to the Shenzhen area.
The question is: Can Jones and his company pull it off?
Financing a project this size during a recession could be tough. Chinese ventures with foreign companies, such as one with Seattle-based MGM Development Inc., can be slow to complete. It took an excruciating six years after MGM’s initial agreement for a final contract to be signed in 1991. By then, financing had become scarce. And the project is now at a standstill while the company seeks additional financing.
In the case of the Largo Vista project, planning alone--estimated to eventually cost up to $700 million--should take a minimum of five years, according to architects at Langdon-Wilson Architecture Planning in Newport Beach. Langdon-Wilson, which designed the Richard Nixon Library & Birthplace in Yorba Linda, has been retained by Jones to improve on the original Chinese rendering.
Among the nation’s largest architectural firms, Langdon-Wilson is known for designing large projects, including the J. Paul Getty Museum in Malibu and several Koll Co. projects, such as the Koll Center Newport Beach.
Jones said the Nanshan project is far too ambitious for the Chinese and Largo Vista to develop alone. He has obtained permission from the district government to sign on other companies to jointly develop segments of the planned community.
The entire project will be financed by the Industrial and Commercial Bank of China and the Bank of China, two of that nation’s largest commercial lenders, Deng Shan, deputy director of the Shenzhen Nanshan District People’s Government, said in an interview during a recent visit to Orange County.
Also, the district government would allow Largo Vista to obtain bank loans using the entire property as collateral during the course of the development, which will take more than 15 years to finish, he added.
Shenzhen had nearly 81,000 acres designated as a special economic zone in 1980 as an experiment to draw foreign capital by cutting bureaucracy and allowing non-communistic companies to locate there. Since then, this once sleepy hamlet of 70,000 peasants has been transformed into a Chinese haven of capitalism.
It is here that McDonald’s opened its first restaurant in China (a massive, 500-seat operation) and where Kentucky Fried Chicken located its only outpost in South China. This is the city where China launched its first stock exchange and, in February, held the nation’s first horse race since the Red Army took over China 43 years ago.
And it is here that China’s leader, Deng Xiaoping, made a rare public appearance in January to highlight his government’s commitment to creating a market economy and to signal his approval to speed up its already successful economic reform program.
With all its capitalist trappings, Shenzhen appears more like Hong Kong than the rest of China; in fact, the Hong Kong dollar, not the Chinese yuan, is the city’s preferred currency. It also boasts China’s highest annual per capita income of $2,500, compared to a national average of $320. And like Hong Kong, Shenzhen, too, has its problems.
As investments poured in and factories sprouted like mushrooms in the past 12 years, the greatest impact on this once tranquil border town has been an acute housing shortage. Shenzhen’s population grew from 70,000 in 1979 to 1.9 million last year, despite the city’s stringent immigration policy.
The population explosion created an enormous housing demand, said Shen Feng, assistant director of the Nanshan district government. And while Shenzhen’s manufacturing industries boomed in the 1980s, the growth of its entertainment and cultural industries lagged, he said.
The Chinese government hopes that building a cultural and entertainment center in Nanshan would discourage managers working at these businesses from spending their weekends--and their money--in Hong Kong. It would also provide entertainment for the zone’s multitude of workers, said Shen, who is also director of Nanshan’s Construction and Land Bureau.
The Largo Vista project would generate new income for the district through tourism. Nanshan, like its two sister districts, Lofu and Futian, is largely a manufacturing area for toy makers, electronic and computer assemblers, food and chemical processors and machine tool makers, as well as for the knitting industry, said Deng Shan in an interview during a recent visit to Newport Beach.
To help address the area’s housing shortage, Largo Vista will soon finalize a licensing agreement with Golden West Homes Inc., a Santa Ana manufacturer of modular homes, to build a 150,000-square-foot factory in the district.
Golden West would provide management expertise and technology to the venture, where components to construct 600 and 800 single-family homes would be crafted annually. Chinese officials said they will start building the factory this fall and expect it to be in full production by next spring.
Home buyers would have a choice of two- or three-bedroom houses, all single-level, of about 1,500 square feet. The homes would be located in five separate areas outside the planned central business district but within Nanshan district. The retail price for a two-bedroom modular home would be between $50,000 and $60,000, said Robert J. Henry, senior vice president of Golden West, one of California’s largest makers of manufactured homes.
This might seem pricey for many Shenzhen residents, but Nanshan district officials said that based on information from local banks, the savings rate of local residents is pretty high. Moreover, it’s a common practice for family members to pool their money to purchase homes. Deng, Nanshan’s deputy director, predicts per capita income in the city will continue to rise substantially in the future.
The government officials said Shenzhen should be prepared for the rapid housing production.
“Nanshan has a new power plant and we can easily expand its capacity to accommodate the new development,” said Shen. Nanshan’s construction and land bureau chief, between puffs of a cigarette.
Jones, too, is a heavy smoker, “like a chimney,” he said. This habit shared by Jones and Feng, along with their common appreciation for seafood and for R&B; and country western music, helped form the early foundation for their business relations.
Jones speaks his mind and is blunt, but the Chinese said they found his honesty refreshing. When the Chinese first showed him and Langdon-Wilson architect, Richard W. Poulos, a rendering of what they said would be South China’s grandest planned community since the Forbidden City, Jones said “the plan stunk.”
“It would be a sin to waste (your) coastal area,” he told them.
Architect Poulos agreed with Jones, but perhaps more diplomatically, suggested to the Chinese that “in viewing a project like this, where a central business district is adjacent to a bay, this provides an opportunity for a fantastic place for people to work and live.”
In contrast, when three other major developers from Singapore and Japan were shown the rendering, they politely suggested changes here and there, nothing more.
“We developed a friendship and trust for each other almost immediately,” Deng said. “We have a role before and after the project; we like his way of doing business and that’s why we picked him over the others.”
Jones and Daniel Mendez, Largo Vista’s executive vice president, also stressed early on that their company couldn’t handle the entire project alone, but that they could bring in top planners, architects and other developers to complete it. More important, once the planned community was finished, the Chinese and Largo Vista would jointly manage the 2,500-acre property, with the Chinese having the final decision about land use.
The Chinese government is touchy on the issue of foreigners managing large chunks of Chinese land. This resistance dates back to the last years of the Ching Dynasty in the mid-19th century. China was slowly partitioned by Japan and the great Western powers, which assumed control of China’s major ports. Britain, for example, controlled South China through Hong Kong and other parts of Guangdong Province.
But since Beijing launched its modernization program, it has eased its policy on letting foreign companies jointly develop Chinese property. In return, the partnerships are required to develop the infrastructure of the areas, thus saving the Chinese government from spending billions of dollars on roads and other infrastructure.
This development policy was implemented even while Beijing was still devising the nation’s real estate regulations. Many development projects faltered as newly crafted regulations contradicted earlier contracts between foreign investors and local governments.
Such was the case of a major U.S.-Chinese real estate development project in Tianjin Province, which is 60 miles southeast of Beijing. The local government agency--Tianjin Economic Development Center--entered into a deal with MGM Development Co. of Bellevue, Wash., for a 70-year lease on 1,300 acres of harbor property along Bohai Bay. The lease documents were finally approved in 1991 after seven years of negotiations, according to president and chief executive, Mohammad G. Malekpour.
Unlike Jones’ venture, where two of China’s biggest banks are providing financing, MGM Development obtained a Chinese government loan guarantee to help it seek money for its project. Despite the guarantee, Malekpour said political developments since 1986 have made it tough for his company, including friction about China’s lax patent regulations and Chinese restrictions on U.S. exports.
“The Chinese didn’t understand the value of property when they signed the agreement with MGM Development in 1986, said Bill Abnett, a former director for Chinese affairs in the Office of the U.S. Trade Representative. He is now a Seattle consultant to MGM Development, which has already spent $33 million on planning and infrastructure development.
“They basically let MGM lease the property for roughly $3 per square foot. Now, the property is assessed for $20 per square foot,” he said. “The Chinese are just now realizing that the property in major urban areas in the south and the north and the Shanghai area are worth considerably more than they were five years ago.”
With government real estate regulations beginning to firm up, foreign investors are becoming interested in China. Recently, New World Development Co. of Hong Kong has agreed to jointly develop about 1,033 acres of Guangdong real estate, which includes a golf course and residential complex on a site in Foshan, two residential complexes in Canton, and a residential and commercial complex in Huizhou.
But even with the new real estate regulations, developing large projects in China may not be the way to go, cautioned Robert Taylor, a China specialist at the U.S. State Department.
“What has to be considered is that all these grandiose projects are not always attractive because there is a cost-effective way to have Chinese labor process your product and you can cut cost and undercut the competition” without having a presence in China, he said.
There are alternatives to companies developing property in China, he said. Foreign companies can “simply go to a little village anywhere in China and contract with the local village chief to have him allocate a factory or land, and the foreign company brings in the materials, machines and management for the development.”
Alwin Ning, an Oklahoma City residential real estate developer, said affordable housing is among the top priorities of the Chinese government in the next 20 years. Most home building to date has involved constructing expensive housing for China’s new upper class. The government has not addressed the demand for less-expensive housing for China’s working class, he said.
“Many more (real estate) laws are still being drafted by the Ministry of Construction,” said Ning, who meets quarterly with ministry officials to help the Beijing government implement real estate reform laws in China. As more real estate laws are enacted, they could lead to additional confusion, he said.
Despite this uncertainty, Jones of Largo Vista is confident of his project’s success. He said Shenzhen officials have made this project a priority.
“I learned that there are certain things that you have to wait for and let happen,” Jones said. “I was only interested in (developing) the twin tower project and the Chinese offered those other projects without us asking for them.”
China’s First Planned Community The Project in Shenzhen:
* Developer: Largo Vista Inc., Orange
* Architect/Planner: Langdon-Wilson Architecture/ Planning, whose projects include the Richard Nixon Library & Birthplace, Sports Club Irvine, Irvine Spectrum, Koll Center Newport Beach and Newport Place, J. Paul Getty Museum
* Density: Would have building densities of downtown Los Angeles, but the community would be patterned after downtown San Francisco or San Diego, where buildings decrease in size as they approach the shore. Core buildings could be as tall as 70 stories
* Facilities: Office buildings, retail, cultural facilities, library, movie museum, aboveground monorail, water sports area, marina, convention center, hotels, financial district, residential area
* Location: Shenshen, 50 miles north of Hong Kong, is 779.9 square miles; the special economic zone takes up 126.5 square miles
* Estimated value: $5.2 billion
* Size: 2,500 acres, about the size of Los Alamitos
At a Glance: People’s Republic of China
* Size: 3.7 million square miles; the third largest nation in the world behind the former Soviet Union and Canada
* Government: Communist dictatorship
* Population: 1.15 billion ; the country has more than one-fifth of the world’s population; 79% live in rural areas, 21% in urban areas
* Economy: About 76% of all workers are farmers, 11% are in manufacturing and mining; the rest work in service industries and the government
* Gross national product: $360 billion
Sources: Collier’s Encyclopedia, World Book Encyclopedia, Nanshan District government, Xinhua News Agency, U.S. State Department
