A pair of Chicago real estate titans and their California-based partner on a 57-story Loop office tower investment are the latest to face a massive foreclosure lawsuit as vacancy and interest rates rise in tandem, crushing borrowers.
A venture of Chicago-based firms Hearn Company, GEM Realty Capital and San Francisco-based Farallon Capital Management have defaulted on a $305 million loan taken out in 2018 against 70 West Madison Street, a 1.4 million-square-foot building, according to a lawsuit filed last week in Cook County court. The loan amount comes to almost $218 per square foot.
Representatives of the 57-story building’s landlord didn’t return requests for comment, and neither did an attorney for its lender, which is a group of banks that pooled the $305 million together to distribute to the landlord.
Bank of America is owed the largest chunk out of the loan, alleging it’s due more than $135 million in principal and nearly $2.3 million in interest for the Madison Street loan, court records show. The other lenders that put money into the loan are PNC Bank, which is owed more than $56 million, Raymond James at $36 million and two ventures of Germany-based financial institution Aareal Bank that are owed a total of $45 million. The lawsuit alleges the Hearn-GEM-Farallon venture owes more than $275 million total.
A CBRE team has been shopping the Madison Street building for sale since January, when it was reported it would likely fetch bids of less than $150 million. That would equate to a discount of more than 60 percent from the Hearn and GEM venture’s $375 million purchase made in 2014. It’s 68 percent leased, and the landlords have spent $53 million on upgrading the property since they bought it.
It’s the latest trouble encountered by the landlords in the struggling office sector.
Another Hearn bet, made with Fortress Investment Group on the 26-story office building at Two North LaSalle Street, went sideways recently after the property lost law firm Neal Gerber Eisenberg’s 119,000-square-foot lease to a relocation to Onni Group’s 225 West Randolph Street. The landlord of the LaSalle Street property failed to pay off a $127 million debt tied to the property by its extended maturity date last year, and has been discussing handing it back to its lender, according to loan data collated by Morningstar Credit.
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And GEM Realty in August defaulted on a $24 million loan for a downtown San Francisco office building.
Buyers seeking distressed office turnaround projects in Chicago have multiple choices.
In the Loop alone, the options range from the very large 161 North Clark Street, where lender Societe Generale is foreclosing a $237 million debt owed by a venture of the South Korean postal service; to the $105 million troubled loan at 111 West Jackson Boulevard owned by Melohn Group; to the nearly $19 million debt owed by Alvarez & Marsal for 205 West Randolph Street, a 199,000-square-foot property.
Clarification: The address of Melohn Group’s distressed Loop property has been updated.