In the last week of February, China Vanke announced its latest victory in a quest to expand in the US market, the $116 million purchase of a vacant nursing home in Manhattan for conversion into 100 luxury condominiums.

However, February’s milestone has already turned into this month’s nightmare, as the acquisition –- which was Vanke’s fifth New York deal – has now become embroiled in an investigation.

The city comptroller – New York’s top auditor – has already subpoenaed city hall for details of how a deed on the 118-year-old Rivington House on the Lower East Side was changed last year to allow Vanke and two local partners to purchase the former AIDS clinic for conversion into luxury condos.

The Chinese developer, which is the country’s largest by sales, has not been directly implicated in any wrongdoing. However, the current controversy could make local firms cautious about partnering with Vanke, and the nursing home conversion deal now joins a growing list of troubled overseas projects by mainland builders.

Chinese Developer Involved in Controversial Property Conversion

In announcing the acquisition last month, Vanke USA and two New York partners, Slate Property Group and Adam America Real Estate, touted the 150,000 square foot (14,000 square metre) property’s 12-foot ceilings and the building’s history as the PS 20 grammar school.

What the three developers, who have also partnered on projects in Brooklyn, did not announce was that the seller of the property, for-profit nursing home operator Allure Group, had paid the city a $16 million fee less than three months earlier to receive permission to develop the erstwhile school (which had since been repurposed as an AIDS clinic) into a for-profit nursing facility.

Allure originally purchased the property at 45 Rivington Street in February 2015 for $28 million from a non-profit community organisation. The Brooklyn-based company then signed a contract in May of 2015 to sell the building to Manhattan-based Slate Group, which last year, along with Adam America partnered with Vanke on two other residential projects in New York.

After signing the contract with Slate, Allure agreed to pay the $16 million fee to the city to allow for the facility to be developed as a for-profit facility, with the company assuring city officials that their intentions were to operate their own nursing home on the site, according to a report in the Wall Street Journal.

Lobbyist Instrumental in “Misleading the City”

Anthony Shorris, Deputy Mayor of New York now says that the Allure Group “misled the city” about the intended use of the property. The Brooklyn-based company profited $72 million on the sale of the former home for AIDS victims in less than nine months.

Accounts in the New York media implicate a local lobbyist who was hired by both Slate and the original non-profit owner of the facility, in helping the parties involved to persuade local officials to change deed restrictions on the property.

According to an account in the New York Post, the lobbyist, “James Capalino has collected $40,000 in checks for de Blasio’s 2017 re-election bid and personally wrote a $10,000 check in May to Campaign for One New York, the non-profit de Blasio uses to promote his causes.”

Vanke’s Latest Project with Local New York Partners

Whatever promises Allure representatives may have made to the city, Vanke’s partners in the deal pointed out that their agreement with Allure was contingent on the nursing-home operator changing the usage rights on the property so that they could build condos.

“At the time,” Slate executive Martin Nussbaum told the Journal, “there was a deed restriction on the property, but our contract was to purchase a property that was of residential use. To the extent that it was not residential use, we would not have purchased the property.”

Slate and Adam America have been useful local partners for Vanke as the Chinese developer looks for opportunities in New York which still have significant upside.

Last year the real estate company started by billionaire Wang Shi entered into two new projects in Brooklyn with Adam America Real Estate and Slate Property Group – one at 8-16 Nevins Street in Brooklyn for $47.75 million, and a second in Brooklyn’s Park Slope neighborhood.

In Vanke’s earlier ventures into the US market, it had teamed up with large scale developers, choosing to work with Tishman Speyer on the Lumina project in San Francisco in 2013, and teaming up with New York’s RFR, and Houston-based Hines, for a luxury high rise at 610 Lexington Avenue in Manhattan in 2014. China’s CINDAT Capital was also an investor in the Lexington Avenue project.

China’s “No Bribe” Developer Trips Over Manhattan Scandal

In China, Vanke has frequently proclaimed its “no bribery” policy in an industry known for under the table agreements and collusion with local governments. Now the Shenzhen-based giant has crossed over into the seemingly more transparent US environment, only to become caught up in a case of subpoenas, lobbyists and questionable changes to land use rights.

Being the lead backer of a project where developers have been accused of misleading government officials could make potential partners leery of working with Vanke on future projects, and this case appears to be one of a number of high profile challenges for Chinese companies developing real estate overseas.

Just last week, China’s second-largest developer, Greenland Group announced that it was pulling out of an 1100-unit condo development in Melbourne, Australia after the local government criticised plans for the project, and citizens in the area protested the plan to put a high density tower block in the suburban district.

Another mainland development giant, Dalian Wanda, backed away from plans to redevelop a 1950s vintage skyscraper in Madrid after the local government objected to plans to tear down and then rebuild the historic structure. The commercial development arm of Wang Jianlin’s aspiring conglomerate chose Chinese New Year’s day to put the Spanish project up for sale after reportedly paying €260 million (then US$358.6 million) to acquire the skyscraper in March 2014.

A more costly mis-step involved China’s largest construction firm, CSCEC which was the general contractor for the Chinese government-funded $3.5 billion Baha Mar resort in the Bahamas. The resort was put up for sale by court-appointed receivers last week. The developer of the still unopened resort filed for bankruptcy last year after accusing CSCEC of failing to finish on schedule and shoddy building practices.

Guangzhou-based Country Garden Holdings, which has projects underway in Australian and Malaysia, was forced to delay construction until it could scale back a proposed 2000 hectare project in Malaysia’ Johor state after authorities in Singapore lodged diplomatic protests. The Forest City development, which involves building a new city on reclaimed islands in the straits dividing Malaysia from Singapore, is now back under way after the Chinese developer reduced the size of its island-building ambitions by 25 percent.

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