n Nov. 19, Jonathan Thorpe, the Boston-based executive vice president of New York-based developer Gale International, spent an hour speaking with Site Selection about the unique and multifaceted financing that has backed development of the 1,500-acre (607-hectare) Songdo International Business District in Incheon, South Korea. The big picture included a US$1.5-billion financing package involving 27 different financial institutions that was hatched in 2005, to date
the biggest private real estate financing in Korean history.
On Nov. 20, history needed rewriting.
That’s the day Gale and partners secured one whopper of a refi package: a $2.7-billion syndicated loan deal with a 13-member consortium, led by Shinhan Bank’s direct funding of $1.7 billion. Shinhan Bank Vice President Lee Hyuwon went so far as to say, “Songdo IBD will be a growth engine for Korea’s next generation.”
It’s heady times for a site where a previous generation saw General Douglas MacArthur’s troops land in 1950, and which sits just 25 miles south of the DMZ today.
“This financing will enable us to purchase the remaining 300 acres [121 hectares] of land from the city and to jumpstart the next phase of our development activity,” said John B. Hynes, III, CEO and managing partner of Gale International, in a release.
By year end of 2008, Gale expects there will be 34 separate projects under way (13.5 commercial, 13 residential representing 9,789 units, and 6.5 others) totaling over 40 million sq. ft. (3.7 million sq. m.) and representing a capital investment of $12.3 billion.
Thorpe likens the whole process to the composing and performance of a symphony. Only rehearsals are replaced with an equally relentless focus on planning and permit attainment. A solid financial section keeps things anchored and moving forward all at once. And if something extraordinary comes along, it’s okay to stop and allow a cadenza to unfold.
“You try to create a platform that’s going to be responsive and flexible enough to adjust to conditions,” he says. After all, the best-laid plans often are those able to accommodate changes: “If Samsung came in and wanted to develop a headquarters location, if it’s in keeping with overall use, we’re going to do that,” says Thorpe.
Just as central to the project as its huge investment is its large green space, comprising 40 percent of the IBD’s acreage. Most of that green will occur in a $200-million, 4.3-million-sq.-ft. (400,000-sq.-m.) central park that is directly modeled on Frederick Law Olmsted’s masterpiece in Manhattan.
“A critical attribute was the funding of quality-of-life infrastructure, which includes our central park,” says Thorpe. “It’s probably the most valuable real estate in New York, so we figured it ought to work here in Songdo as well.”
It’s not just outdoor space that’s helped make Songdo IBD the first green urbanism pilot project of the U.S. Green Building Council. Gale, United Technologies Corp. and Hanjin Group in October pledged to make the district a model of sustainability. Gale and UTC will collaborate on the Gale International/U-Life Northeast Asia Headquarters, the first LEED-Platinum building in Korea and the centerpiece of the 800,000-sq.-ft. (74,320-sq.-m.) mixed-use U-Life Complex, where the “u” stands for ubiquitous technology.
Hanjin’s Korean Air and Inha University, UTC and Gale will collaborate on the formation of the Sustainable International Business Center (SIBC), a large-scale research facility aimed at the study and communication of green ideas, technologies and products, says Gale. SIBC will anchor International Plaza, which along with Gateway Center will comprise 7 million sq. ft. (650,300 sq. m.) and form the heart of the city’s commercial district.
Thorpe says the green component “has influenced financing in that there are added initial costs.” But at the same time, the fact of LEED makes it easier to finance, and “a lot of aspects of green design can help to transform a sense of place,” thus luring corporations bent on showing their green side.
“You always have to make something work from a business model,” he says. “It doesn’t do any good to have hunky dory environmental design if you can’t get it built.”
While Songdo’s green side derived from its owners’ principles, Thorpe says, “it serves as a better attraction for corporate tenants. Increasingly companies throughout the world are saying, ‘We need to minimize our environmental footprint.’ “
The project’s list of well-heeled partners was already significant, beginning with Gale’s 30-percent joint venture partner Posco Engineering & Construction (E&C), part of the eponymous global steel conglomerate. (Posco E&C itself could be gearing up for a cash influx, as it evaluates the possibility of an IPO in early 2008.)
Marketed as “The Gateway to Northeast Asia,” Songdo IBD will open in August, 2009, with 100 million sq. ft. (9.3 million sq. m.) of master-planned space, nearly half represented by the office space featuring the 65-story Northeast Asia Trade Tower. A new highway bridge will connect Incheon International Airport to Songdo IBD, a district which developers estimate will be home to 300,000 workers and 65,000 residents.
The linkage between work and life lies at the heart of the project’s sales pitch, and also at the heart of its cash flow. That’s because the up-front money Koreans are putting down on the condos is helping to finance the office component. The project’s first residential component, First World, saw 2,500 units pre-sell in one day, adding up to $1.3 billion in sales revenue. Thorpe says it’s a combination of a flight to quality, rising affluence and a mismatch between much of today’s housing stock and people’s aspirations. It’s just the latest sign of an economy that has evolved from a shambles 55 years ago to among the top dozen today, he says, led by a national culture that values hard work, industrial development and education.
So it’s no surprise that two private school sites that are part of Gale’s plan, given the importance of such institutions to both multinationals and Korean nationals.
“In the U.S., we give it a lot of lip service,” he says, “but there, as a proportion of income and time and sense of well-being, education is everything. All the residential development is centered around these two private school sites.”
Thorpe emphasizes that while the project aims to sweeten the environment for expats from the U.S., China and Japan, Korean citizens will be at its core.
“That’s the strength of Korea,” he says of the work force’s technological sophistication and work ethic.
The new financing is a continuation of the project’s previous strategy, says Thorpe, but it shores up several shortcomings of the previous loan facility, including financing now in place to purchase a crucial piece known as Parcel 4 – the next piece of the five-parcel Songdo master plan created by Gale and the City of Incheon.
Thorpe says the total scope of planned and approved development for the parcel is 12.8 million sq. ft. (1.2 million sq. m.) of residential, 11.5 million sq. ft. (1 million sq. m.) of office and retail and other space occupied by parking, the private school and cultural and fine arts uses, including a seafront esplanade. The purchase was due to occur in the final days of 2007 or early in 2008./
Other improvements are also part of the new package.
“One of the weaknesses of the previous loan was that, although we’d carved out a few residential parcels for linkage programs, we needed to create additional linkage parcels that would enhance and supercharge our commercial and office development efforts,” says Thorpe. “We are the beneficiary of a rising tide – as time has gone on, since June 2005, our land values have significantly increased over time. Moreover, we’ve moved the overall course of development along – there is a track record of success, approvals are further along – so we were able to ratchet up value, and carve out a number of parcels from the lien of this new loan facility.”
He says there is a misperception in Korea that Gale may be trying to take money out prematurely. He says taking out certain parcels for residential and commercial development allows for “incredible flexibility” in attracting multinationals to the area: “They don’t have to deal with prepayment or fixed payment on the land,” he says. “These are free of repayment.”
Furthermore, Thorpe says of the improved financing picture, the lenders in the 2005 agreement did not ascribe any value to the commercial and office parcels, which not only kept the loan amount lower, but slowed down potential negotiations with end users.
“We were unable, even for commercial proposals, to have fixed release prices, which meant any time we were going to enter into a negotiation with a user, we had to go back and get consent from the lender. That’s a problem when there are 26 lenders in a syndicate. It made approvals time-consuming, and didn’t lend itself to a fast-paced marketing program. Now, we have fixed release prices, which means, provided we meet a certain target number, we can structure a lease or a purchase transaction.”
Of the 13 institutions signed on to the new loan syndicate, eight are repeat participants from the 2005 package, and all eight have increased their participation, says Thorpe, including Kumho Life Insurance Co. and Industrial Bank of Korea. But that’s not all that’s going on. Kookmin Bank and Woori Bank, two longtime backers, continue to remain involved in the NSIC project, as does Morgan Stanley Real Estate. Most recently, Kookmin and Woori “jointly funded and closed a 400-billion-won [US$$434 million] construction loan facility for the NSIC/Morgan Stanley Real Estate Fund ‘Linkage 2’ project, which consists of the Northeast Asia Trade Tower and the Harborview residential developments,” says Thorpe. “The tent is just being opened up.”/
The primary challenge of the project always has been how to finance the commercial construction, he says. The publicly funded infrastructure improvements have certainly helped. But so has the innovative idea of “linkage,” built into that 2005 loan package, which allowed the partners to carve out a few residential parcels, “with the idea being they could be thrown into a pool of commercial assets, and in turn
Thus in August 2007 the Northeast Asia Trade Tower was spun into a separate joint venture, called Linkage Two, which consists of Morgan Stanley Real Estate and the Gale/ Posco E&C JV.
“We conveyed the land underneath the trade tower and two residential blocks. You had the residential projects, with a cost of about $500 million, and the Northeast Asia Trade Tower has a cost of $500 million. We knew that the $500-million Harborview project was almost assuredly going to generate a profit of $200 million. Just use that profit and build it into the returns, and reduce the net cost basis of the Northeast Asia Trade Tower. We take a home run and a single, combine the two to make a double, but it’s making that risky single into a much more bankable double.”
Thorpe points out that there are plenty of satellite cities around Seoul. Gale’s mandate is to do something that brings in multinational corporations and foreign direct investment. Putting the money together has served as a model for that future hope.
“By agreeing to reinvest residential profits, we’ve come a long way in terms of creating a vehicle that is underwritable,” says Thorpe, noting the unique nature of the Korean marketplace in allowing residential development to back commercial development. “What it means is we as an owner/developer are deferring the receipt of profits, and putting those profits at risk based on our belief in the long-term viability of this project, our own confidence in this location and our ability to develop a world-class project that will attract the users.”
He notes that Songdo IBD makes up less than half of a 3,500-acre (1,417-hectare) reclamation area within the Incheon Free Economic Zone, with that other portion having designated areas for uses such as R&D, including recent projects from biopharma companies Celltrion and VaxGen. As for Songdo prospects, he says the focus is on gazelle as well as established high-tech companies looking to be in South Korea without having to fight the congestion and traffic of present-day Seoul. He compares Songdo and Seoul to, respectively, Irvine, Calif., and midtown Manhattan.
“In terms of efficiency and quality of life, a lot of people are going to like Irvine,” he says. “I equate Songdo to an Irvine – a master-planned environment with amenities, but with this edge city, aerotropolis kind of feel.”
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