More than $240 million worth of multifamily debt tied to bigtime real estate investors is in hot water in Chicagoland due to floating interest rates.
Borrowers for three large apartment complexes in the area have been failing to cover debt costs on loans with floating rates, landing each on lender watchlists where deals showing signs of financial trouble are monitored.
While some landlords have scored refinancing deals in recent weeks to exit tough positions with their previous debts, ongoing conundrums involving some normally savvy investment firms highlight how distress driven by interest rate hikes is still filtering into Chicago’s historically strong multifamily market.
In suburban Lombard, borrower Torchlight Investors is having issues with a $74 million floating rate loan for its 403-unit City View at the Highlands complex at 2720 South Highland Avenue. The loan was originally issued by JLL in late 2021 and is now backed by Freddie Mac. The borrower in recent months had to pay $2.4 million in additional interest due to rate hikes, taking its costs beyond what it expected when it entered the deal, according to a credit ratings agency Morningstar Credit.
As a result, the property didn’t generate enough revenue to cover debt service costs last year despite being 94 percent leased, a drop from 2022 when it did make enough to get by, loan data shows.
Representatives of Torchlight, JLL and Freddie Mac did not respond to requests for comment.
Torchlight, which bought the Lombard property for $104 million in December 2021, has some time to find a solution, however, because the loan doesn’t mature until 2032. Other borrowers aren’t so lucky.
Heavily scrutinized multifamily lender MF1 watchlisted its $130 million floating rate loan taken out by investor Amit Goel for a 417-unit Aurora apartment complex and it’s scheduled to hit its maturity date May 9. The landlord Goel has the option to extend the loan but has been hammered by its increasing cost of interest.
The loan was issued in 2022 for the property completed in 2018 at 500 Station Boulevard in Aurora. Having an adjustable rate with a floor of 5 percent and a cap of 7 percent has put Goel in a precarious position. The property only generates enough income to cover 58 percent of its debt service costs, according to the loan servicer’s latest reports on the property.
MF1 has run into similar problems with other landlords after gaining a reputation for issuing floating rate loans dependent on the borrower’s ability to substantially raise cash flows.
While interest rates were low between 2020 and 2021, the debt fund, led by Scott Waynebern, originated at least $7.4 billion in debt, giving high-leverage loans to multifamily syndicators looking to act on aggressive fix-and-flip plans.
Waynebern declined to comment and Goel did not respond to requests for comment.
In Chicago, another floating rate loan for a 133-unit apartment tower at 2625 North Clark Street is on its lender’s watchlist after its revenues also fell short of debt service in recent months. The $37 million loan was issued to an entity controlled by Shaul Kuperwasser of Strategic Properties of North America.
It is unclear how much protection the loan’s rate cap offers, but in any case it hasn’t been enough to keep the building’s revenue high enough to cover debt costs.
“(The rate cap) is doing little to ease the interest rate pressure on debt service,” a recent loan servicer report collated by Morningstar said. “If current trends continue, this could present significant forward risk.”
Kuperwasser and Greystone, which services the debt, did not respond to requests for comment.
Meanwhile, residents of a condo in downtown Chicago at 200 North Dearborn have been questioning the financial viability of Kuperwasser’s firm after his plans to buy and convert the property to apartments have stalled for over two years.
Together, the three apartment complexes add to several other properties in the area struggling with floating rate debts as interest costs have soared since 2022.
In Oak Park, that suburb’s tallest building, the 21-story Vantage apartment complex owned by Goldman Sachs and Chicago-based Magnolia Capital, had its $67 million floating rate loan flagged in December after its debt costs started exceeding its revenues.
And Chicago landlord CedarSt is still in a similar position with The Otis apartment property in the Pilsen neighborhood, even after the firm this month recapitalized its West Loop property The Duncan to exit a previous, costly floating rate loan.
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