Exclusive: Swinerton, Webcor quit Oceanwide Center as buyers eye imperiled project
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"Swinerton and Webor have informed San Francisco officials that they are no longer the general contracting joint venture behind Oceanwide Center, citing lack of payment for several months in city documents obtained by the Business Times.
News of their withdrawal comes as several groups are working to assemble financing to buy the 2 million-square-foot mixed-use project under construction in San Francisco, according to sources.
The efforts come in the wake of the project's Chinese owner, Oceanwide Holdings, announcing Dec. 31 that it was not able meet or extend a year-end deadline to close a deal with Hony Capital to buy the 2 million-square-foot office, hotel and residential development near Salesforce Tower.
Swinerton and Webcor's resignation from the project came shortly after Thanksgiving, just months after Oceanwide halted construction on the entire project in September. In an email, a project manager requested that the city's Building Inspection Department remove the joint venture from three active site permits associated with the project as the general contractor. A replacement general contractor has not been proposed, the project manager said in the email.
“We will continue to work closely with our District Building Inspector over the next few months as we safely demobilize and secure the project site,” the project manager wrote.
The joint venture declined to comment Wednesday. Oceanwide Holdings did not immediately return a message seeking comment.
It is unclear how the loss of the project's general contractor will impact a future sale of the project. At least one of the unidentified groups currently working on an offer for the project is local, sources told me, speaking anonymously because they were not authorized to share the information. It is unclear whether any official offers have been made for the stalled project, once hailed as San Francisco’s most coveted development project.
The sale of the partially completed construction site is perhaps the best exit scenario for Oceanwide Holdings USA Corp., the U.S. unit of Beijing-based conglomerate, Oceanwide Holdings Co. Ltd., that is officially listed as the project's ownerOceanwide bought the project for $296 million in 2015 and started construction in December, 2016, as part of a major U.S. real estate play that also includes a high-profile project in Los Angeles. But the project quickly ran into delays as costs soared and the Chinese government cracked down on capital ouflows.
All those delays might now work to the advantage of a buyer. Jeremy Thornton, a mortgage and structured financing expert for Colliers International, said a new owner would be able to resume the project and deliver it well after the pandemic is expected to have ended.
“The thinking is, ‘Get a deal now,’” Thornton told me. “There is obviously still a significant amount of risk. There is a lot of money that needs to go into development. If they can pick it up at a decent discount, by the time the project is completed the market will be ready for it.”
If Oceanwide is unable to come to terms and close a deal to sell the project, most likely at a significant discount, real estate experts tell me they expect the U.S. Oceanwide unit — and potentially other subsidiaries of the company involved in financing the project —
“It sounds like they’ve been down a couple paths and they haven't worked, which may make bankruptcy, receivership or some insolvency-type proceeding more likely,” said Ben Young, a partner in Jeffer Mangels Butler & Mitchell LLP’s bankruptcy group.
“Bankruptcy allows the owner to protect themselves from a forced sale of the property by one of its creditors so that they can control the disposition and maybe get more money for it rather than selling it in a distressed kind of way,” Young said.
Oceanwide Center, expected to cost $1.6 billion to build, was designed to feature two towers. The taller, at 910 feet, was to become the city’s second tallest skyscraper, with 1.2 million square feet of office space and 109 residential units. The 600-foot tower was planned to house a 169-room Waldorf Astoria hotel and 155 residential units.
Construction crews were originally supposed to be putting the finishing touches on Oceanwide Center this year, but the expected completion date was delayed, most recently when Oceanwide halted work on the shorter tower in late 2019 and the taller tower in mid-2020. The last estimated completion date available cited publicly 2023.
Real estate insiders say any new deal to buy the project and move it into vertical construction will almost certainly involve a new mix of product types to better match current market conditions. The pandemic has shaken the hotel industry to its core, with a return to 2019 levels not expected until late 2024. Office employees continue to work from home, and high-rise condominium sales and rents have suffered.
Prior to its deal with Hony to sell for $1.2 billion, Oceanwide Holdings said it had a deal with another potential buyer, SPF Capital International Limited, also based in Beijing. A records request last year revealed that SPF in March asked the city about making changes to the project, including dropping the hotel component in favor of more residential units. Hilton not respond to an inquiry about whether plans for the Waldorf Astoria on site still stand.
Oceanwide Holdings and the Swinerton-Webcor joint venture are facing mechanic’s liens for unpaid work valued at upward of $40 million from its subcontractors. Mechanic's liens grant the lien holder an involuntary security interest in the real property, often representing a red flag for potential buyers.
“Since the lien is filed against the property itself, as opposed to the owner, the lien holder will typically retain interest in the property, even after the property is transferred,” said Alex Benarroche, legal associate with Levelset, a money management and payment startup for contractors based in New Orleans. “So finding a purchaser willing to assume that debt will prove difficult.”
Several subcontractors have already filed enforcement actions against the development team in court. If a claimant is successful and the owner or general contractor cannot make good on the debt, Benarroche said foreclosure proceedings can be initiated.
Even with its construction contract terminated, the joint venture could be first in line to foreclose on the property depending on the financing structure for the project, said Young, the JMBM attorney.
"The general contractor would have a right to a mechanic's lien — someone would be entitled to assert that lien and foreclose on behalf of the general if it came to that. Whether that would be Webcor or Swinerton you can't know without reviewing the agreement," said Young. "They are still owed money, have a receivable and are entitled to collect what they are owed."
Sources familiar with the project’s financing structure say the bulk of it is equity raised from investors who purchased corporate bonds issued by Oceanwide Holdings that are not collateralized by the property — perhaps the only good news for the project.
“In most large development projects — and especially in this particular case with the issues that Oceanwide is having with the development — you would have a lender really turning the screws right now on you, threatening foreclosure and pulling the property back,” said Thornton, the Colliers financing specialist.
Oceanwide Holdings most recently blamed the pandemic for derailing the project’s construction and planned sales, but that notion has prompted skepticism among some in the city's real estate community.
“Few real estate deals get postponed because of Covid — they get postponed because the deal is not as sweet or they get postponed because due diligence turns out to show various problems,” said Martin Orlick, a real estate attorney with JMBM. “They may have found out that the (future) rent was not what it was represented to be — that’s just a guess, but it's possible. And it's very possible that whatever deal the seller thought they’d had with the potential hotel tenant, that they have fallen out. Then there could be issues with the buyer’s ability to get funding.”
Public records show that Oceanwide Holdings has continued to pay annual property taxes — currently valued at over $1 million — on the property. It has also paid a total of $44.9 million in impact fees and is due to pay $93.4 million more in fees once vertical construction begins. By way of its community benefit agreement, Oceanwide has also committed to paying a total of $650 million in Mello-Roos taxes over a 30-year period, which I am told it has been paying.
“It could be a hole in the ground for the next 10 years and they keep paying taxes on it,”real estate attorney Pamela Duffy.
Building permits, which were granted to the project in 2017 and 2018, have expiration dates, but developers can request an extension, Planning Department spokesperson Candace Sohoo said.
According to a spokesperson for DBI, Oceanwide's three building permits expire in December 2022, January 2023 and June 2023.
Mayor London Breed’s office said the city was committed to supporting Oceanwide Center’s development.
"We know how important the development of this site is for the future of the Transbay area and our downtown,” said Breed spokesperson Jeff Cretan. “As we look ahead and plan for our economic recovery, we need sites like this one developed to attract businesses and provide more housing in our city.”
He calling the failed deal with Hony a “setback,” he added, “We are hopeful it's only temporary.”
“We have heard there is other interest in this site, and as a city, we will do what we can to move a project at this site forward,” he said.