LNR Foreclosing on AmTrust’s Illinois Center Loan

AmTrust’s grip on Chicago’s two-tower Illinois Center skyscraper is slipping, despite its efforts to stave off a lender.

The New York-based landlord was hit with a foreclosure lawsuit on Friday by Starwood’s special servicer LNR Partners alleging the property owner defaulted on its $260 million loan for the office buildings at 111 East Wacker Drive and 233 North Michigan Avenue.

The lawsuit was filed despite AmTrust CEO Jonathan Bennett claiming earlier this year that his firm was working toward a resolution to its debt trouble, which stems in part from the U.S. Department of Health & Human Services leaving its 170,000-square-foot lease in the 32-story property last year. The federal agency was the largest tenant at the 2.1 million-square-foot asset.

AmTrust failed to pay more than $871,000 in debt service payments that were due in January, amounting to a partial shortfall of the landlord’s loan dues that month, the lawsuit claims. Further, the claim states AmTrust hasn’t paid the full debt service due in any month since.

LNR’s foreclosure lawsuit indicates that so far AmTrust has been unable to strike an agreement for relief from the bondholders in the loan. The situation adds to the historic wave of distress rocking Chicago’s office market as post-pandemic work-from-home trends remain in effect and interest rates stay elevated compared to previous economic cycles.

LNR is the special servicer of the property’s commercial mortgage-backed security loan, which was originated by Citigroup in 2015, before the debt was packaged with other property loans and sold off to investors. Due to the defaults, LNR has demanded AmTrust pay the full amount due now, despite the loan maturing next year.

Bennett said AmTrust was committed to continuing to pour capital into the property to spark a turnaround of its performance earlier this year. AmTrust owns five other downtown Chicago properties, including the severely distressed 135 South LaSalle Street where it’s pursuing a conversion into residential use with the help of city subsidies and co-developer Jonatahn O’Donnell of Riverside Investment and Development.

During the pandemic, AmTrust committed to spending $100 million across its Chicago office portfolio to spruce up the buildings and make them more competitive in a market being led by the newest, most amenity-laden properties. Illinois Center was among those being prioritized.

“As vacancies have risen over the past few years, the property’s cash flow began to fall short of its loan obligations, but we are actively working on negotiating a workout with the lender,” Bennett said in April, when the Illinois Center was placed into special servicing. “We still see a lot of upside in the property, and have several concepts for significant value creation once we reconfigure the capital stack.”

Neither AmTrust nor LNR returned requests for comment on Monday.

Further complicating matters, LNR claims that the 2016 death of AmTrust co-founder Michael Karfunkel hasn’t been properly addressed by the landlord. Karfunkel had signed on as a guarantor of the loan, and AmTrust notified the lender it intended to substitute his wife, Leah Karfunkel, as a replacement guarantor.

But the lender alleges AmTrust never took the formal steps to do so, meaning that the landlord has technically been in default on the loan since 2016. That could amount to a lot of extra interest owed by the borrower, if the default rate, which is higher than the normal rate on the loan, gets applied to debt, which had a current balance of $241 million in principal as of June, according to loan servicing data compiled by Morningstar Credit.

The property was listed at 46 percent leased as of June, and had raked in $20.6 million in revenue so far this year, with expenses of $11 million and net operating income of $9.4 million, according to the loan servicing data. It’s unclear how much it’s falling short of its debt service requirements, but its revenue this year is on track to fall well below last year’s $51 million, which allowed for $22 million in net operating income.