Trophy office landlord 601W Companies is the latest commercial real estate borrower to pin blame for a huge foreclosure lawsuit on securitized debt master Jeff Krasnoff’s Rialto Capital.
An affiliate of New York-based 601W that owns Chicago’s 45-story Civic Opera House, at 20 North Wacker Drive, is fighting Rialto’s attempts to take the keys to the property and force its principals to pay off the balance of more than $195 million in debt and interest that’s accumulated on the property’s $164 million loan taken out in 2015.
The loan fell into default after tenants stopped paying rent or moved following the start of the pandemic in 2020. But 601W claims it was proactive and reached out to Rialto, the special servicer of the loan, originated by Wells Fargo and sold off as securities, to try to work out a settlement that would avoid a foreclosure action.
However, the landlord alleges Rialto wasn’t receptive to 601W’s proposed solutions, negotiated “in bad faith,” and made repeated “unreasonable refusals” that could have resolved the debt trouble.
The landlord says its proposals included using loan reserve funds and rental income to pay for operating expenses and leasing costs, such as tenant improvements and broker commissions that would help lure tenants to the building and boost its financial performance. 601W proposed putting monthly debt service payments on hold temporarily while turning the property around. Rialto didn’t budge, though.
“Throughout this process, Rialto has been inflating its own financial cut of the proceeds of the loan,” 601W wrote in a counterclaim that targets Rialto, filed Friday.
Rialto and its lawyers didn’t return requests for comment and 601W declined, through an attorney, to comment.
The landlord also claimed that Rialto has a financial stake as a bondholder in the package of CMBS loans tied up with the Civic Opera property, part of what 601W called Rialto’s “well-documented playbook” to “engineer” loan defaults and “extract unnecessary and exorbitant fees for itself.”
Indeed, Rialto has been criticized by other borrowers since the pandemic sank many commercial real estate bets. The firm was sued by activist investor Carl Icahn, as well as other borrowers who have decried what they call Rialto’s attempts to claim a loan was in default long before the lender incurred any real financial harm, as a means of generating additional interest and pressuring landlords into surrendering their properties.
Meanwhile, 601W has been able to ward off foreclosures on loans that appeared troubled for the Aon Center and 1 South Wacker in downtown Chicago.
In the Civic Opera House case, Rialto claimed that 601W’s capital calls to investors to raise money for the property’s operating and leasing expenses had breached loan covenants preventing the borrower from taking on any additional debt. Rialto alleged 601W obtained “unauthorized indebtedness” and thus became personally liable to pay off the loan balance. Rialto has since sued investor Michael Silberberg, who has ties to 601W, in New York.
Rialto alleges Silberberg triggered a personal guarantee he signed for the Civic Opera House and owes the lender over $200 million. The New York case is on hold until proceedings in the foreclosure case play out in Cook County court.
601W, though, called Rialto’s moves an intimidation campaign aimed at getting the landlord to ditch its attempt to fend off the foreclosure. The landlord said it had no choice but to raise more capital from its investors in the property, because Rialto wouldn’t authorize the use of rental income to prioritize operating and leasing expenses ahead of debt service.
As of November, Rialto and Wells Fargo, which represents the bondholders in the package of loans tied to the Civic Opera House, said that 601W owes more than $56 million in interest and fees, while Rialto claims it’s owed more than $1.3 million by itself for its special servicing fee.
“Rialto has used this scheme across the country for years, exploiting lesser-capitalized borrowers and guarantors,” 601W wrote in its counterclaim.
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