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Cablegate: Hcmc Public Private Partnership Proposal - a New Direction

VZCZCXRO7686
PP RUEHHM
DE RUEHHM #0147/01 0450510
ZNR UUUUU ZZH
P 140510Z FEB 08
FM AMCONSUL HO CHI MINH CITY
TO RUEHC/SECSTATE WASHDC PRIORITY 3684
INFO RUEHHI/AMEMBASSY HANOI PRIORITY 2474
RUEHHM/AMCONSUL HO CHI MINH CITY 3904

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000147

SIPDIS

SIPDIS

OBO/OM/AM/NEA FOR LARRY BLACKBURN
OBO/REPM/AQD FOR KEITH WILKIE AND KATIE TROUTMAN
EAP/EX FOR DAVID LAMONTAGNE
RM/CFO FOR JOHN COYLE

E.O. 12958: N/A
TAGS: ABLD AMGT
SUBJECT: HCMC PUBLIC PRIVATE PARTNERSHIP PROPOSAL - A NEW DIRECTION

REF: (A) STATE 6918 (B) 07 HO CHI MINH 1269 AND PREVIOUS

1. Post thanks OBO and DS for conducting a thorough review of
the Public Private Partnership (PPP) proposal recently
submitted. While disappointed that we will be unable to utilize
the land at 8 Le Quy Don to construct a mixed-use building to
address post's office space crunch and skyrocketing commercial
real estate prices, post concurs with OBO's assessment (ref A)
that residential construction at the 8 Le Quy Don site is the
next best use of the property. Post proposes three additional
PPP options for OBO and DS consideration: option 1: a
residential tower with penthouse CGR; option 2: a residential
tower without CGR; option 3: a stand-alone CGR.

2. Post understands the concerns outlined by OBO and DS with
respect to construction of a new mixed-use (office) building at
the site. Post's preferred alternative is the construction of a
purely residential building at 8 Le Quy Don. Depending on OBO
and DS requirements, this residential tower could be designed to
accommodate a penthouse-level CGR with private entrance/exit.
Likewise, should security or other factors make adding a
penthouse CGR to the building unfeasible, the building could
also be constructed without the CGR.

3. The current residential property market in HCMC is as
intensely competitive as the commercial real estate market.
Residential leases signed in CY2006 averaged approximately
$42,000 annually; rates for renewing those leases this year
(CY2008) are between 18% and 29% higher than the original rates.
Our residential real estate sources tell us to expect rate
increases at a rate of 10% to 20% per year in the
short-to-medium term. Post fully understands that OBO's 7400
leasehold account cannot sustain this level of annual increase
in lease costs - post believes construction of a PPP residential
tower at 8 Le Quy Don represents a partial solution.

4. In the residential PPP strategy most often cited by
developers, the USG would transfer land use rights for the 8 Le
Quy Don site to the selected developer for a fixed period (30-50
years). The developer would then construct, at no cost to the
USG, a ten to twelve-story residential building on the site
containing 20-25 two- and three-bedroom apartments. The USG
would occupy 5-8 of those units at no cost for the duration of
the agreement in exchange for the developer collecting market
rate rent on the remaining units. In other words, the USG would
occupy 5-8 apartments rent free (at an estimated annual savings
of US$222,500 - US$422,000) and the developer's return on
investment would be based on the market rate rent charged to
non-USG residential tenants for the remaining units. At the end
of the specified duration of the agreement, ownership of the
entire building would be transferred to the USG. [Comment: As
noted above, this is the strategy most often cited by developers
- other options exist which could increase cost savings by
increasing the number of units per floor and decreasing the size
of each unit. End comment].

5. Based on the development strategy outlined above, a
residential-only tower could save the USG as much as US$422,000
in annual lease costs or $515,000 if the building includes a
CGR. In addition to substantial cost savings, such a building
would enhance residential security and reduce LGF expenses by
collocating the CGR with a limited number of residences for
other officers in a tower occupied by USG and non-USG
residential tenants. Post understands that DS requirements for
non-compound housing permit a maximum of 33% USG occupancy in a
given residential building. This proposal is designed to meet
that requirement.

6. Post believes that the `highest and best use' of the land is
construction of a residential tower with penthouse CGR. As OBO
and DS would work closely with any private-sector partner on
design and layout, separate security requirements (such as a
private entrance for the CGR) could be built in to the plans.
That said, should inclusion of a penthouse CGR present
significant obstacles to moving ahead with the project, the plan
for a CGR could be omitted.

7. Finally, should security or other considerations preclude
construction of any form of residential tower occupied by USG
and non-USG tenants, post believes construction of a stand alone
CGR at the site is the next best option. As outlined in post's
initial proposal, the current CGR is expensive, poorly located,
and has major structural deficiencies which, given the extremely
high demand for rental houses in HCMC, the landlord refuses to
address. Annual rent at the current CGR is over $93,000. While
the stand alone CGR would likely represent an under-utilization
of the land when compared with a residential tower, allowing a
private developer to construct a new standalone CGR (built to
OBO and DS specs) on the property at 8 Le Quy Don would achieve

HO CHI MIN 00000147 002 OF 002


a significant savings on annual rent while simultaneously
addressing the poor location and state of disrepair of the
current CGR.

8. In post's initial discussions with developers, there was far
less interest in building a CGR at 8 Le Quy Don than there was
in building a tower. However, several of the developers we
contacted indicated that some smaller investors in HCMC would
likely be willing to enter into a build-lease-transfer
arrangement with the USG to construct a new CGR on the site. The
scenario most often mentioned by our local contacts was a
ten-year lease agreement, after which the USG would own the
building outright.

9. Post's initial informal research indicated that construction
costs for a 500 sq. meter single-family representational
residence at the site would be US$200,000 - US$350,000, to be
borne by the developer. Annual lease costs, which the USG would
pay to the developer for the duration of the ten-year agreement,
are estimated at US$50,000 - US$70,000. This represents a
significant savings over the current US$93,000 annual rent.
After ten years, the USG would own the building outright. Given
local conditions, post's facilities manager estimates that CGR
construction could be completed in 9-12 months.

10. Post firmly believes that now is the time to develop 8 Le
Quy Don. We look forward to continued discussions with OBO and
DS to find a workable public-private partnership solution to
make use of this property. Post POC for this project is
Christopher Brown. He can be reached at +84 8 822 9433 x 2225 or
brownc22@state.gov.
FAIRFAX

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