Debt collector trims lease at Melohn’s distressed Loop tower

A debt collection agency is shedding office space while extending its stay at a Loop tower whose own landlord’s bills are overdue.

Chicago-based debt collection firm Harris & Harris is trimming its office size by a third at Melohn Group’s 24-story, 575,000-square-foot building at 111 West Jackson Boulevard. That’s down to about 50,000 square feet from the more than 73,000 it previously occupied, according to people familiar with the deal.

Harris & Harris extended its lease by four years until 2032, from a previous termination of 2028.

Many downtown Chicago office tenants have cut back on commercial real estate since the pandemic ushered in more remote and hybrid work arrangements. But Harris & Harris’ decision to stay put stands out, because the building’s landlord, New York-based Melohn Group, is facing a $105 million foreclosure lawsuit from its lender.

Other tenants whose landlords are in similar situations have been picked off by competing buildings to make moves, such as when the law firm Neal Gerber & Eisenberg left Two North LaSalle Street — a property that’s declining in value and has long struggled with its mortgage debt — for Onni Group’s 225 West Randolph Street. When tenants near the end of their leases, they can often negotiate allowances to improve or reconfigure their office space, or receive other concessions from their landlords, who normally fund such costs with debt.

At 111 West Jackson, Melohn lost the building’s second-biggest tenant Loop Capital, which exited its 40,000 square feet at the Jackson Boulevard property to move to a similar size lease at CIM Group’s 425 South Financial Place.

Some landlords whose buildings fall into distress get sidelined from making deals while disputes over debt play out, but that’s not the case here, as demonstrated by Melohn and its lender — a group of investors in a commercial mortgage-backed security loan — accepting the terms of Harris & Harris’ lease downsize and extension.

“This building is well positioned to keep taking down some deals,” said Bradford Allen’s Andy DeMoss, who represented Melohn in negotiations with Harris & Harris. “This deal isn’t concession heavy, but we don’t have restrictions on concessions through the lender. We have heard of other buildings where that is not the case.”

The building was about 65 percent occupied as of this month, ahead of Harris & Harris trimming its lease. The downtown Chicago occupancy average is 72.8 percent, a record low, according to brokerage data and loan servicer commentary on the Jackson Boulevard property. It’s one of a string of buildings along Jackson Boulevard whose landlords, including Brookfield Asset Management and Chicago-based Marc Realty, have ended up in financial trouble in recent months.

The foreclosure case alleges Melohn Group missed monthly mortgage payments ahead of the loan’s maturity in late 2027, but the lender is also working with the landlord on an alternative resolution, a person familiar with the building said. 

The Melohn Group’s former top executive Joseph Melohn died in June, leaving his son Joseph Melohn to take over the firm’s real estate operations. The firm wants to work out the debt to retain control of the property, the person said.

The property’s appraisal has declined nearly 60 percent from $163 million when its loan was issued in 2017, to $66 million this month, according to loan data compiled by Morningstar.

Ari Klein and Scott Shelbourne of Cushman & Wakefield represented Harris & Harris in negotiations with Melohn. Bradford Allen’s Alex Gordon also represented Melohn along with DeMoss.

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