A Central Loop office owner is projected to default on a building’s $105 million debt package after losing some crucial tenants, as the trail of failed deals involving downtown commercial assets grows longer in post-pandemic Chicago.
New York-based Melohn Group is on track for an “imminent default due to cash flow issues” on the loan it obtained in 2017 against the 24-story, 575,000-square-foot building at 111 West Jackson Boulevard, according to credit ratings agency DBRS Morningstar.
Portions of the debt package were moved into special servicing in March and earlier this month by the lender, reports from Midland Loan Services and Rialto Capital Advisors that were compiled by Morningstar said. Midland and Rialto are the special servicers tasked with working out the problematic debt with the borrower.
Lenders as of late have initiated moves to limit their exposures to several big loans on struggling office buildings amid downtown Chicago’s rough office scene. Next door to Melohn’s property, the Chicago Board of Trade building early this year was snagged by Apollo Global Management through a deed-in-lieu of foreclosure, as its former owner, a joint venture of Chicago-based Glenstar and Los Angeles-based Oaktree Capital Management, managed to avoid a lawsuit over a default on the $256 million in debt against the property.
Elsewhere in Chicago, Blackstone is trying to get a new loan on a challenged River North property, and the $678 million loan on the 83-story Aon Center hit special servicing earlier this year.
The Melohn-owned property’s occupancy has been declining since at least 2018, and is set to dip even even further to around 60 percent, when Loop Capital moves out in 2024 after exercising an early termination on a lease initially scheduled to expire in 2027. The investment banking tenant instead signed a new deal for 37,000 square feet at CIM Group’s 425 South Financial Place.
”We experienced large turnovers of space due to lease expirations during the pandemic,” Melohn told the lender in March, according to Morningstar. “We are working with a new leasing group to actively market the building.”
Melohn’s loan isn’t scheduled to reach maturity until December 2027. The landlord’s payment on the loan was late but less than 30 days delinquent, according to Morningstar. Rialto and Midland did not return requests for comment, and no one from Melohn was available to comment Thursday.
The property was appraised at $163 million in September 2017, and brought in nearly $9 million in net cash flow in 2020, according to Morningstar. Last year, though, the property’s net cash flow declined to less than $3.5 million after vacancy increased.
The building was 68 percent leased as of late last year, below the 78 percent average for downtown office buildings notched last quarter, which marked an all-time low for Chicago.
Other tenants that have given up their space in the building since the health crisis struck include Oracle, which leased about 40,000 square feet; Thyssenkrupp, which had about 25,000; and e-commerce consultant Gorilla Group, which leased about 24,000.
Melohn bought the building in 2013 for $135 million and spent an additional $38 million on renovations and tenant improvements. The firm put the property up for sale in 2019, when it was 93 percent leased, but it never sold, and several leases expired by the end of 2022.
French corporate and investment bank Nataxis originated the loan to Melohn, with the Jackson Boulevard building put up as collateral. The debt was then packaged with other real estate loans and sold off to investors in commercial mortgage-backed securities, making details about the property’s performance public.
If Melohn and the loan servicers now handling the debt are able to work things out, it won’t be the first time 111 West Jackson has narrowly evaded foreclosure. The property’s previous owner, Michael Silberberg, bought it for $35 million in 2011 after the previous owner before fell behind on a loan that had a balance of more than $23 million due, according to published reports.
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