S.F.-China development deal falls apart $1.7 billion Hunters Point, Treasure Island projects lose China funding

Plans to build 12,500 homes on San Francisco's former Hunters Point Naval Shipyard are in limbo after developer Lennar Corp. and the China Development Bank and Chinese Railway Construction Corp. canceled their tentative agreement. less Plans to build 12,500 homes on San Francisco's former Hunters Point Naval Shipyard are in limbo after developer Lennar Corp. and the China Development Bank and Chinese Railway Construction Corp. canceled their ... more Photo: Michael Macor, The Chronicle Photo: Michael Macor, The Chronicle Image 1 of / 5 Caption Close S.F.-China development deal falls apart 1 / 5 Back to Gallery

A $1.7 billion deal between Lennar Corp. and a pair of Chinese government entities to construct 12,500 homes on the former Hunters Point Naval Shipyard in San Francisco and a string of high-rises on Treasure Island has collapsed.

Sources familiar with the deal - an effort more than a year in the making and involving the China Development Bank and Chinese Railway Construction Corp. - tell us it fell apart largely over demands by the Chinese for more control over the developments than Lennar was willing to give.

Word of the deal's collapse came Thursday, just after Mayor Ed Lee returned from a weeklong trip to China.

He had been hoping to trumpet news that Lennar and the Chinese had reached final terms on the landmark agreement. Instead, he got to answer questions about whether the two biggest development projects on the boards in San Francisco were DOA.

The timing was especially ugly, coming just a day after Gov. Jerry Brown, on his own trade mission to Beijing, announced a $1.5 billion deal with a different Chinese outfit to build a big residential project in Oakland.

"I had wished we could get the funding done, and I'm going to continue to try and help Lennar do it," Lee said, suggesting San Francisco's hot real estate market was ready to attract more domestic investment.

Lennar had secured a tentative agreement from the Chinese late last year to finance thousands of new homes and offices at the former naval shipyard, Candlestick Point and Treasure Island. Construction was set to start as early as the end of this year.

Lee said he was not privy to all the discussions between Lennar and the Chinese that led to their deal collapsing. But sources inside and outside City Hall privately tell us both sides had been uncomfortable with how the talks were proceeding.

Seeking better returns

For starters, under Beijing's recently installed new leadership, the Chinese continually sought assurances of a better return on their investment. That meant that if certain performance measures weren't met, they could take greater control of the project.

"They kept moving the goalpost," said one source, who declined to speak for the record.

The locals also had their doubts - not about the Chinese bank's financing, but about using Chinese Railway Construction Corp. as the general contractor, because the company wasn't familiar with San Francisco's local hiring requirements.

Add it all up, sources say, and it was simply time for Lennar to look elsewhere for financing.

"The housing market in San Francisco is hot, hot, hot, and moving with speed is incredibly important these days," said one source outside City Hall. "And waiting around for the Chinese central government to act probably is not the best way to capture a free-enterprise market."

Despite the deal's collapse, Lennar is still planning to begin construction on at least 200 homes at the Hunters Point shipyard this summer using a San Francisco-based contractor.

However, it wasn't immediately clear what the absence of deep Chinese pockets will mean for the rest of the shipyard project or for the development on Treasure Island, where Lennar hopes to build several 30- to 40-story residential towers.

Lennar's plan

Lennar issued a brief statement late Thursday, saying only that it is "continuing to move forward with development of Hunters Point shipyard" and that "lenders continue to have significant interest in financing the shipyard and Treasure Island, which they believe are extremely attractive projects."

As for the Chinese?

Well, they aren't talking. But it's worth noting that within the past couple of days, reports have appeared saying the longtime chairman of the China Development Bank, Chen Yuan - who only two months ago was reconfirmed by the new government - is being replaced.