A lender that’s owed nearly $42 million by the landlords of three West Loop loft office buildings is ready to get the debt off its books, even if it comes with a loss, so it can move on from the properties facing big chunks of vacancy.
An affiliate of Truist Financial Corp. loaned the money to a joint venture of Chicago-based real estate investors Heitman and R2 Cos. for its $65 million purchase, in 2019, of the buildings at 641 West Lake Street, 901 West Jackson Boulevard and 130 South Jefferson Street, according to marketing materials and people familiar with the offering.
Truist hired JLL to market the debt, which has been labeled “sub-performing” and matures in August. That’s when it’s likely any buyer would move to foreclose on the properties — which collectively span 240,000 square feet — as their values and occupancy have declined with the drop in demand for brick-and-timber loft office space brought on by the pandemic.
The debt could trade for as low as half of the loan balance, people familiar with the offering and West Loop office market said, illustrating the bruising taken by borrowers and lenders who made pre-pandemic bets on mid-market offices. Many tenants that desired such spaces are still working remotely, and for those who are hybrid or in the office more often, they’re still not willing to pay rents high enough to support such big building values and debt packages.
R2 already had an ownership stake in the portfolio previously and decided to stay in the deal as Heitman’s partner when the properties last traded. Heitman didn’t return a request for comment and Truist, R2 and JLL declined to comment.
When Heitman picked up the portfolio in 2019, it was 90 percent leased. Now, it’s less than 52 percent, according to marketing materials.
The Heitman and R2 venture hasn’t technically defaulted on the loan, but it’s in cash management, meaning its excess cash flow is being used to cover debt service costs, people familiar with the offering said. The debt sale is an attempt by Truist to get ahead of the looming maturity date.
R2 has also been on the other side of office distress in recent months. The firm paid $60 million for the office tower at 150 North Michigan Avenue, a drop of about 50 percent from what the seller paid for it in 2017. Heitman in recent weeks also paid $47 million to buy a Brooklyn self-storage property.
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