Journey 1995:Non-Stop

Chapter 404 A Boat
After returning, Yan Hui didn't pay much attention to what was going on with President Zhu until two days later when Sun Lei came to him with some materials, at which point he roughly understood what had happened.

It is said that this company's project in a certain province suffered a serious accident, with two buildings failing inspection, leading to a complete halt to construction. Meanwhile, another rumor suggests that the real estate development company offended a high-ranking official in the local area, and the project was halted because someone else was trying to take credit for it.

In any case, the company had to leave that place. The initial investment was discounted and the deal was closed. In the end, it was left with about 6000 million in cash, some fixed assets, and some financing.

Anyone familiar with real estate companies knows that the amount of cash mentioned above doesn't necessarily represent profits. Having so much cash after encountering problems often means the company still has hundreds of millions in loans, just not yet due for repayment. In this situation, the fact that the bank isn't in a hurry to take over the remaining funds indicates that the real estate company has strong connections within the banking sector.

Sun Lei couldn't verify whether the above premise was true or false.

After all, Yan Hui was only curious about this matter and did not spend any manpower or resources to fly to the company's registered address to investigate.

This amount of money is still too little for real estate development, but without continued investment, not only will the business not be able to turn things around, but the bank loans could also completely destroy the company.

To avoid being investigated, they wanted to find a project further away to invest in, and finally chose Jinan, the capital city of a northern province, and tried to acquire a cheap piece of land next to a foreign developer.

This plot of land is about 33 mu (approximately 2.5 hectares), less than half the size of Heng Hui Chemical's plot. The building area is 40,000 square meters. Because the location is very remote, the price per square meter of building area is 1700 yuan, and the total land transfer fee is 68 million yuan.

For residential land, this is already considered cheap.

The land transfer fee for this land can be paid in installments. According to the law, within one month of signing the "State-owned Land Use Right Transfer Contract", a down payment of no less than 50% of the transfer price must be paid, and the remainder must be paid in full within one year.

Originally, the company had enough initial funds to cover half of the down payment, and then it could gradually raise more funds for construction. Once it obtained the pre-sale permit and started receiving payments, it could get the project up and running.

However, it's clear that this company's problems are not so simple. They had just obtained the necessary permits and were preparing to raise funds to begin construction when a portion of their funds was frozen by a bank back home (a standard procedure).

This is extremely detrimental to real estate developers, because if they are unable to pay all the land transfer fees after one year, they will have to pay a large amount of late fees every day, and may even have the land reclaimed, resulting in all their efforts being in vain.

Left with no other option, the company decided to temporarily default on payments to its suppliers, extend the payment period to a year and a half later, collect the goods in one lump sum, and then use the cobbled-together funds to begin construction!
Everything can be resolved once we obtain the pre-sale permit!

Moreover, the suppliers didn't have any good solutions. In just one or two months, the construction site had fully commenced operations to meet the deadline, and many materials had already been used. The developer was also stubborn; they wouldn't give them money, and they weren't willing to risk their lives.

In short, once I get the pre-sale permit and start selling houses, I'll pay you all the money. If that's not possible, I can give you a bunch of houses as compensation for labor costs right now; you can keep them and resell them yourselves later. The point is, I don't have the money.

This phenomenon is actually very common in many real estate projects; housing purchased with construction work as collateral is not a rare occurrence.

The problem is that, like Mr. Zhou's project with the housing provided as compensation for workers' wages, the investment was voluntary, everyone had confidence in the project, and Mr. Zhou even made a fortune from it. But this project's housing provided as compensation for workers' wages was taken under duress; crucially, no one had confidence in the project.

The most critical issue here is that the real estate development company hasn't paid all the land transfer fees, so even if the suppliers protest, it's useless. If construction really stops, the land might be lost, and when the bank comes to collect payments, in the company's bankruptcy proceedings, the mortgaged loans will definitely be prioritized for repayment. At that point, all the suppliers will inevitably lose everything.

"This supplier is playing extremely aggressively; they're prepared to go all in. They said that suppliers who support them will receive priority settlement of funds after obtaining the pre-sale permit, and they can even pay bank loan interest, estimated at around 6% per year. Those who don't cooperate will have to wait until the very end to receive their money, and without interest. If they're not satisfied, they can sue. But once a lawsuit is filed, the real estate company will trigger its protection mechanism with banks back home, preserving all assets. The plaintiff will absolutely not get any money and will also have to pay time and court fees." Sun Lei explained for a long time, finally making things clear.

"The problem is, what's the use of getting a pre-sale permit after a year?" Yan Hui was familiar with the rules of the real estate market. "Once the money is obtained, it will go into the government's escrow account. Developers can't just use it all, can they?"

Here we need to explain the logic. Generally speaking, after the land is acquired, the foundation is laid, and a few floors are built, the developer can obtain a pre-sale permit for the commercial housing. With this permit, they can start selling the houses.

However, the problem is that this money doesn't go directly into the developer's account; instead, it's held in a government-regulated account until the "main structure is topped out," at which point the developer can access most of the funds. This is why many buildings are abandoned after reaching the top, because at that point, the developer can access most of the proceeds.

Here's a little-known fact: by the time the roof was topped out, the project was actually less than halfway complete.

Before the topping-out ceremony, the biggest financial cost was steel bars and cement, while after the topping-out ceremony, the cost became heavy labor and supporting infrastructure investment.

Generally, developers can only use 30% of the money obtained after pre-sales, but after the building is topped out, they can use a large portion, say 80%. Therefore, developers will spare no effort to top out the building. After all, for better projects, a significant portion has already been sold by the time the building is topped out, and 80% at that point is no small sum.

“I suspect they want to top out the project. The developer has managed to acquire all the steel and cement, and is using the two-month payment period after delivery for extensive use and secondary processing, minimizing their initial capital costs. After pre-sales, if they sell a lot, they can use the proceeds to pay part of the land transfer fee and interest, and even the government's late payment fees. I estimate they'll continue to delay payments to suppliers until the project is topped out. If the houses sell well after topping out, many problems will be solved,” Sun Lei explained. “However, this location is remote, and the suppliers aren't sure if the houses will sell well. So, they're all extremely anxious, but dare not say anything. Take Mr. Zhu, for example. He's forcibly taking back the unused steel, which is acceptable, but he'll lose at least half. Then, if construction stops and the developer goes bankrupt, he definitely won't get the remaining half back.”

"Understood, we've forced everyone onto the same boat." Yan Hui nodded.

(End of this chapter)