[Inside Chodong] The Daejang-dong Scandal and SPCs (Special Purpose Companies)

The Daejang-dong development project in Bundang-gu, Seongnam City is causing quite a stir. With the presidential election approaching, the political sphere is on high alert over which faction’s corruption is involved, while even those who are not actively interested in politics are baffled by how an investment of 50 million won could yield dividends exceeding 50 billion won. Those who focus on their own work and live on daily wages or salaries have become “sudden paupers” despite their hard work, while so-called influential figures have become “sudden rich” through the development project, sparking outrage. A self-deprecating joke has even become popular, referencing the name of a former journalist who is the major shareholder of Hwacheon Daeyu: “Mr. ㅇㅇ earned ㅇㅇ, but what did you do?”

The astronomical returns of Hwacheon Daeyu’s shareholders stem from the leverage effect. ‘Seongnam’s Garden’ is a project finance investment company (PFV) established solely for the Daejang-dong development project. A PFV can be established with a minimum capital of 5 billion won. If it meets additional requirements such as investment from financial institutions, it can use project financing (PF) to push forward development projects worth trillions of won. This structure can generate leverage of hundreds to thousands of times. Hwacheon Daeyu, which acted as the actual project operator and developer, is an asset management company (AMC). It can be established with a smaller capital of 300 million won. If Hwacheon Daeyu invested in the PFV ‘Seongnam’s Garden’ using loans, the leverage effect would be even greater. Moreover, since ‘Seongnam’s Garden’ issued preferred shares with dividend priority and common shares that receive all profits after preferred dividends, and Hwacheon Daeyu invested in the common shares, it enhanced returns by utilizing double or triple leverage. PFVs also receive various tax benefits.

The extremely high leverage is also typical in development projects using special purpose companies (SPCs). Unlike PFVs, SPCs can be established with just 50 million won. Although they do not receive tax benefits, their capital requirements are only one-hundredth of those for PFVs. For this reason, most small to medium-sized private development projects worth hundreds of billions to trillions of won mainly use the SPC structure. During the current real estate boom, it is said that with just 500 million won of one’s own money, one can easily carry out development projects worth 10 to 20 billion won by leveraging borrowed funds. A PF official from a securities firm said, “The returns Hwacheon Daeyu achieved during the real estate upswing of the past 3 to 4 years are possible in any development project. On the other hand, financial institutions and construction companies bear a significant portion of the development risks, so the risk actually borne by the developer is not that large.”

The bigger problem with development projects using SPCs or PFVs is transparency. It is extremely difficult to verify who the actual project owners are for the multiple SPCs or PFVs established daily. The so-called ‘middlemen’ in development projects usually appoint figurehead CEOs for the SPCs or PFVs. The same applies to inside directors. It is very rare for the actual project owners to appear openly. They also evade financial regulatory oversight. Despite the movement of astronomical sums of money, these entities remain in a ‘blind spot’ of management. Because of this, they are known to be frequently used for illegal or unethical transactions such as disguised gifts through complex investment structures. The ongoing controversy over who the real owner of the Daejang-dong project is stems from suspicions based on this lack of transparency. Unless the excessive leverage, unfair profit distribution structures, and transparency issues of development projects using SPCs or PFVs are addressed, it seems certain that second and third Daejang-dong cases will emerge, discouraging those who work hard.

Lim Jeong-su, Deputy Head of Corporate Analysis Department

This content was produced with the assistance of AI translation services.