Justin Fern pounces on distressed Elgin Tower for $6M

Justin Fern had an itch to take on the Elgin Tower — a 15-story structure built in 1929 that’s still the tallest in the northwest Chicago suburb — for nearly a decade. 

After buying the building this month out of a foreclosure lawsuit following its conversion from out-of-date offices into 44 apartments, Fern, the CEO of Rockford-based Urban Equity Properties, can finally scratch it.

His firm paid $6 million to buy the building from its previous owner, the St. Louis-based Capstone Development Group led by Bill Luchini, who spent nearly $17 million on turning the defunct bank and office property into a multifamily asset, according to public records.

Luchini’s troubles began last year when Midland States Bank alleged the developer defaulted on a $10.5 million loan, Kane County court documents show. The city of Elgin also put $6.5 million in tax increment financing incentives into the project, according to previous reports.

Midland allowed Luchini to extend the maturity date on the loan three times as it approached in 2020, but the lender claims he defaulted in February 2022. After the sale to Fern’s firm, the bank says $2.1 million in unpaid debt and fees is owed by Luchini and Capstone, which signed guarantees to pay back the loan on the building that was obtained by the LLC they controlled, court records show. A judge signed an order for Luchini and Capstone to pay that amount to Midland.

“This was the face of downtown. A lot of money went into the building. It never really cash flowed because the rents never moved,” said Richard Souyoul, a Chicago-based developer who had an interest in the property and helped spur its conversion. “There wasn’t a lot of room in the rubber band because you can’t push the rents that much in Elgin. It isn’t downtown Chicago.”

Luchini and an attorney who represented him in the foreclosure proceedings didn’t return requests for comment. Midland didn’t return a request for comment.

The deal’s eventual failure is a cautionary tale to other developers eyeing conversions of historic commercial properties into housing, such as those along South LaSalle Street in Chicago’s Loop being pursued by big-time real estate players including AmTrust RE, Mike Reschke and Quintin Primo.

And the Elgin property isn’t the first office-to-apartments in the Chicago area to go south. In the Loop, an affiliate of Barings filed a $74 million foreclosure suit that’s still moving through court against Aventura, Fla.-based DLC Residential for the 13-story apartment building at 29 South LaSalle Street. Foreclosures on apartment buildings have been rare both downtown and in the suburbs amid rising rents in recent years, and multifamily has been especially better off compared to the Loop’s office buildings.

Still, Luchini’s conversion of the Elgin property was much ballyhooed. The project received an award after it was completed in 2018 from Landmarks Illinois for the nonprofit preservation organization’s best adaptive reuse effort.

Fern considered buying and renovating the building before Luchini pursued the project, he said. Now, he plans to further upgrade the apartment units as well as its common areas at a cost that could exceed millions of dollars. Rents in the fully-occupied building are below market, so he suggested he will increase them over time. 

“We’re going to hold it for a long time,” said Fern, whose firm got a $5 million loan from Old Second National Bank for the purchase, records show. “We don’t sell anything. We buy, restore, rehab and keep.”