One of the most expensive real estate development projects in the country, a $10 billion ultra-luxury complex development in Beverly Hills, is drawing attention by utilizing a Korean-style pre-sale method for capital financing.
According to the Wall Street Journal (WSJ), Cain, a London-based investment firm, has been issuing a bond called ‘Founder Bond’ offering a 5% annual return since early last year to condo buyers of the ‘One Beverly Hills‘ development project in Beverly Hills.
The developer explains that purchasing the bond is not mandatory, but it presents an opportunity for buyers to earn investment returns while participating in the construction of the homes they will move into.
So far, all customers who have signed condo purchase contracts have also agreed to the bond investment, with the investment scale reportedly reaching about 30% of the condo’s pre-sale price.
The funds raised by Cain through this method currently amount to about $350 million, with a target to expand to over $1.6 billion in the future.
This financing method shares similarities with the apartment pre-sale system popularized in South Korea.
In South Korea, construction companies sign pre-sale contracts before apartment completion and utilize contract payments and intermediate payments received from buyers for construction costs.
While developers in Korea directly utilize pre-sale proceeds, regulations in California prohibit using buyers’ deposit funds for construction costs, leading the firm to adopt a separate bond-issuing method.
However, pointing out that this funding approach can pose significant investment risks to buyers has also emerged.
The One Beverly Hills development project already includes a $2.8 billion senior loan led by JPMorgan and a $1.5 billion mezzanine (middle-rank) loan provided by real estate investment firm VICI Properties.
On the other hand, the Founder Bonds held by condo buyers have a lower repayment priority than these loans. If the project stalls or the developer runs into financial trouble, buyers could fail to secure the condos they intended to move into and lose their separately invested bond principal as well.
The developer’s side maintains that they have secured sufficient funds to complete the project even without the bond investment funds. However, the bond funds raised from buyers are known to be used to replace some of the equity capital the firm initially planned to inject.
Meanwhile, spanning approximately 17.5 acres, One Beverly Hills is being developed with an aim for completion in 2029 as a complex featuring about 150 ultra-luxury condos, 78 hotel suites, luxury brand stores including Dolce & Gabbana, high-end restaurants, and a large botanical garden. The condos will be managed by Aman, a world-renowned ultra-luxury hotel operator.
Condo pre-sale prices in this complex start at $15 million, and last year in July, a buyer even reserved a penthouse expected to sell for $200 million. If the transaction is finalized, it will set a new record far surpassing the previous highest LA-area condo transaction price of $39.2 million.
