The owners of a struggling Loop office building are ready to hand the keys back so they can end the financial pain of holding onto it.
A joint venture of Chicago-based Hearn and New York-based Fortress Investment Group are pursuing deed-in-lieu of foreclosure for 2 North LaSalle, Morningstar Credit reported.
The move to avoid foreclosure came after they failed to pay off $137.8 million in principal and interest on a CMBS loan that matured in July. Their debt on the 700,000-square-foot building came to about $197 per square foot.
Hearn and Fortress took a majority interest in the building in 2016 to help former owner Harbor Group International avoid defaulting on a $127.4 million CMBS loan originated by Column Financial. Harbor Group bought the building for $153 million in 2007. When Hearn and Fortress took over, the pair agreed to spend $42 million on renovations and securing tenants.
Representatives of the venture did not respond to requests for comment.
In 2021, Foundation Capital Partners was reported to be interested in buying the 26-story building for $180 million, or $257 per square foot, but the sale didn’t go through.
Deed-in-lieu of foreclosure allows owners to transfer the title without the lender filing a foreclosure action. In return, the borrower will want release from things like a payment or completion guarantee, and a commitment that the lender won’t pursue legal action to enforce the loan in the future.
But it’s not so straightforward. Many pieces of the agreement need to be negotiated, such as who pays some of the costs. As of Morningstar’s most recent report in March, the agreement was not yet finalized. Commentary from the special servicer noted the lender can pursue a traditional foreclosure lawsuit as well, if the deed-in-lieu of foreclosure agreement does not come to fruition.
As distress continues to reverberate through the market, this venture is not the only Loop office building owner to pursue this type of resolution.
Intersection Realty Group had been planning to convert 65 East Wacker Place into a mix of office and residential uses by adding 144 apartments. The firm’s goal was to complete the conversion of the 96-year-old building in 18 months. Instead, Intersection signed a deed-in-lieu of foreclosure in March.
While it’s not clear why the developer ultimately went that route, the conversion plan presented logistical challenges that many developers have faced while pursuing office-to-residential conversions.
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