Prolific real estate firms Fortress Investment Group and Chicago-based Hearn got squeezed out of their attempt to spare a LaSalle Street office building from foreclosure.
Hearn — owner of the former John Hancock skyscraper at 875 North Michigan Avenue — and New York-based Fortress have transferred ownership of the 26-story building at 2 North LaSalle Street to Torchlight Loan Services, a New York-based distressed debt specialist, CoStar News reported.
Torchlight took control of the building via a deed in lieu of foreclosure after the joint venture between Hearn and Fortress decided to surrender it over a year after a $137 million mortgage loan on the property matured.
The debt, bundled with other loans and sold to commercial mortgage-backed securities investors, was facing repayment challenges amid declining office demand and rising interest rates.
While ownership of the building has been surrendered to the lender, Steve Hearn, CEO of Hearn, says that the transfer doesn’t mean the end of his firm’s involvement with the property. He told Crain’s that ongoing talks with Torchlight have been focused on potential strategies for reviving the building’s fortunes.
“Nothing really changed, except the due process of transferring title to the property had to happen,” Hearn said.
Despite relinquishing the building’s title, Hearn continues to manage the property. Notably, Fortress is no longer seeking future control of the property. While the fate of the building remains uncertain, the partnership between Hearn and Torchlight opens the door for potential paths to regaining the property’s value.
“We’re working with the lender,” Hearn said. “They wanted to keep us on; we have a nice relationship with them.”
Currently, the building’s estimated value is significantly lower than its outstanding loan balance. Appraised at just $60 million in August 2023, the building’s value is less than half of its loan’s $127 million balance, according to loan servicer data.
Originally acquired by Hearn and Fortress in a 2016 recapitalization deal that staved off foreclosure against its former landlord, the 46-year-old office building has seen its share of market fluctuations. Still, Hearn remains hopeful about the property’s potential for a comeback, citing the recent $7.7 million in net cash flow the building recently generated, which comfortably covered debt service obligations.
Despite the financial challenges tied to the building, there are reasons for optimism. The city of Chicago has been a reliable tenant, having signed a 15-year lease in 2019 and recently expanding its office space to occupy nearly half of the 709,000-square-foot building.
Additional space will soon be available as law firm Neal Gerber & Eisenberg plans to vacate its 119,000-square-foot space next year in favor of Onni Group’s 225 West Randolph Street, offering further leasing opportunities on LaSalle. Moreover, Two North LaSalle’s strategic location could work in its favor. The building is situated just a block south of the James R. Thompson Center, which is being redeveloped into Google’s new Midwest headquarters.
Overall, the move by Hearn and Fortress is reflective of the broader challenges facing Chicago’s downtown office market, which has experienced a series of foreclosures and property handovers as landlords struggle with financial pressures, and lenders seek repayment or collateral secured by debts in default.
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Multiple other Chicago office landlords have signed deeds in lieu of foreclosure in recent months, including Jay Javors, developer of 448 North LaSalle, a River North building that became entangled in lawsuits concerning its anchor tenant CA Ventures, which ended up never moving into the property as planned.
Furthermore, Fortress is on the other side of another struggling Loop office building, and is now angling to seize — potentially through a deed in lieu — the 210,000-square-foot 145 South Wells Street after providing $57 million in debt to the property’s developer that hasn’t been repaid on time.
— Andrew Terrell