Lenders, Taxman Squeeze Mid-Market Office Owners

When finances are tight and location is everything, smaller office properties in outlying Chicago neighborhoods and suburbs have their owners in a vise.

Though having less space to fill than owners of skyscrapers can be an advantage in a fading office market, several midmarket landlords have become delinquent on loans or turned over their properties in recent months after tax increases and tenant departures. Their lenders became dissatisfied as rental revenue dwindled and debt payments were missed, according to securitized debt tracking service Morningstar.

Delinquent or watchlisted loans on properties from Wicker Park to the northern suburbs totaling at least $62 million show the office market’s troubles extend beyond the classic Central Loop towers facing distress on nine-figure debts. Though these smaller assets’ lack of proximity to downtown or transit could be one source of the problems, another may be a philosophical shift in property tax assessments by Cook County Assessor Fritz Kaegi that’s delivered bigger bills to commercial landlords.

“Buildings that aren’t well-located will never lease well,” Avison Young’s Chad Bermingham said.

Loans on two Humboldt Park office properties — the $16.5 million debt on 700 North Sacramento Boulevard and a $3.5 million note on 627 North Albany Avenue, both owned by a venture of developer Greg Gienko — are delinquent and were put in special servicing in May. The borrower cited a “large increase in Cook County taxes” for the missed payment and is working on a proposal to pay off the loan, according to a report from the special servicer.

The property’s tax bill jumped to $763,000 last year, up 52 percent from the prior year due to a reassessment, public records show. Gienko didn’t respond to a request for comment.

Even though many small business tenants aren’t demanding gyms or coffee shops within their office building, strong leasing activity is limited to areas with buzzing retail scenes, brokers said.

“The neighborhood is the amenity,” SVN’s Chad Schroedl said.

Solid retail surrounding an office won’t protect every landlord, though.

In Wicker Park, a Chicago neighborhood with a trendy shopping and dining scene, the $16 million loan on the 75,000-square-foot converted office and retail building at 1200 North Ashland, which is also secured by three other properties, was watchlisted in April due to a decrease in the building’s rental revenue compared to when the loan was first issued. The owner, Chicago’s RDM Companies, attributed the decrease to rising expenses, including from real estate taxes. The property’s tax bill was $331,400 last year, up 18 percent from the year prior, records show.

In Lake Forest, the $12 million loan on the 47,000-square-foot Deerpath Plaza was put in special servicing in 2020 and drew a foreclosure complaint the following year after revenues compared to debt service payments fell below the lender’s required ratio, according to Morningstar. The borrower was a venture of Richard Klarchek of Capital First Realty, public records show — Klarchek pleaded guilty to bank fraud in 2020 related to a separate mobile home park business. A court-appointed receiver has been looking for tenants at the Deerpath Plaza property and has been able to lease almost 7,000 square feet, per a report from the special servicer.

A building of the same size, the MacNeal Medical Office building at 6804 West Windsor Avenue in Berwyn, was sold out of a foreclosure lawsuit in May, following Pennsylvania-based owner Patriot Equities’ delinquency on a $6 million loan after the departure of the property’s sole tenant.

And the owner of the 63,000-square-foot Arlington Green Executive Plaza in Arlington Heights has been delinquent on a $9 million loan for more than two months, according to a special servicer’s report.

While offices in some pockets of the Chicagoland suburbs are seeing strong leasing activity, not all submarkets are created equal, and tenants are demanding recently updated product outside of downtown, too, Cawley Chicago’s Justin Harris said.

“There’s pockets doing strong leasing-wise [and] your pockets that activity just isn’t what it used to be,” Harris said. “On the individual building side, if you’re looking into Class B stuff, updated Class B stuff is doing well. The stuff that’s gotten a little dated and didn’t get a refresh in the last 10 to 15 years, they’re struggling.”