Lender Taking Over Palmer House Retail with Foreclosure Sale

A lender is poised to take control of Thor Equities’ retail space in the Palmer House Hilton hotel as a years-long foreclosure lawsuit comes to a close with a sale that illustrates how much downtown Chicago retail assets have been devalued by the pandemic and climbing interest rates.

Miami-based LNR Partners, the special servicer of a $62 million debt tied to the property that’s owed by a Thor affiliate, emerged as the top bidder in a sheriff’s sale last week of the retail shops along the 100 block of South State Street, Crain’s reported. Its winning bid came out to $29.5 million.

The court-ordered sale was the culmination of a foreclosure suit filed over two-and-a-half years ago by Wilmington Trust, a Delaware-based lender acting as trustee for bondholders in the debt, which was packaged with other commercial real estate loans and sold off to investors in financial markets. The lawsuit was triggered by hotel owner Thor Equities’ alleged default on a $62 million loan tied to the retail space, which is separate from the 1,635-room hotel portion of the parcel.

Pending court approval, LNR is set to take control of the 60,000 square feet of retail shops and a parking garage on the property. The winning bid of $29.5 million highlights the hotel’s depreciation in light of the pandemic, which led to a significant drop in downtown foot traffic and forced numerous retailers on State Street, such as Old Navy and Urban Outfitters, to shutter.

The State Street retail corridor’s vacancy rate soared from 15.3 percent pre-pandemic to nearly 28 percent last year, as hiked interest rates exacerbated challenges.

New York-based Thor bought the Palmer House in 2005 and refinanced the retail portion with a $62 million loan in 2015, when it was valued at nearly $93 million, the outlet reported, citing Bloomberg data. In 2019, the property had a 98 percent occupancy rate, and its net cash flow exceeded $4 million.

However, the pandemic eroded the retail portion’s assessed value, dropping below $36 million by October 2020. Its occupancy rate plummeted to under 55 percent by July of this year.

Thor’s challenges extend beyond the retail space, as it faces a separate $338 million foreclosure lawsuit involving the hotel itself. It’s been one of Chicago’s largest foreclosure cases in years.

There have been delays in the case as Thor and a court-appointed receiver wrangle over the use of an “annex” property linked to the hotel that contains infrastructure for the lodging, such as mechanical systems, further complicating the resolution of the legal disputes.

— Quinn Donoghue