Beltway Capital Seizes West Loop Offices With R2 Still Aboard

Office properties hit hard by the pandemic often end up in the hands of their lenders or bargain-hunting buyers before they get a chance at a revival.

Yet for a West Loop office portfolio that plunged from 90 to 50 percent occupied, co-owner R2 has managed to remain in the drivers’ seat and go debt-free through a new partnership. Public records show its joint venture with Beltway Capital Management — finalized last month with a deed-in-lieu of foreclosure that took its former co-owner Heitman out of the picture — also adds a fifth building to the 350,000-square-foot portfolio.

R2 bought six West Loop loft office buildings in 2016 for $86 million in a joint venture with Chicago-based Walton Street Capital. R2 later recapitalized a four-building portion of the portfolio in a joint venture with Chicago-based Heitman in 2019. The Heitman venture paid $65 million for the portfolio with a $42 million loan from Truist Financial. It’s unclear how much R2 paid to maintain its stake in the properties.

The joint venture struggled to hold onto the four assets, located at 641 West Lake Street, 901 West Jackson Boulevard and 130 South Jefferson Street, after the pandemic hit.

Maryland-based Beltway, which specializes in buying distressed debt, bought the loan note from Truist last May, when the properties and their owners faced a murky path forward. The loan was labeled nonperforming at the time of its sale, meaning it likely traded for less than its face value.

It’s not uncommon for distressed debt buyers to file foreclosure actions shortly after acquiring a struggling loan.

When Truist put the $42 million debt on the market, R2 and Heitman hadn’t technically defaulted on the loan, but it was in cash management, people familiar with the offering said. That means its excess cash flow was being used to cover debt service costs.

In this case, Beltway tapped R2 as its partner in managing the assets. R2 CEO Matt Garrison declined to share how much the firm invested into the portfolio to maintain its stake or what terms dictated Heitman’s departure from the joint venture.

Representatives of Heitman did not respond to requests for comment.

Garrison said R2 will be investing in “aggressive retention efforts for existing tenants,” and upgrades to common areas.

It was worth it for R2 to hang onto the assets because loft offices are often the type of buildings targeted for residential conversions, he said, meaning the number of competing properties could dwindle. Others aren’t in a position to fund the costs of competing for tenants.

“Many of the (loft office) owners are undercapitalized or lack a rationale to invest capital in new leases, because their properties are worth less than the debt,” Garrison said. “This makes the effective inventory even smaller. We think there will always be demand for well executed loft buildings in the West Loop, and supply and demand looks better today for the right buildings than it has in a long time.”

A few months before it bought the distressed note from Truist, Beltway also pounced on another struggling loan issued by Sun Life Assurance Company of Canada to the Feil Organization for a loft office building at 730 North Franklin Street. Beltway also partnered with R2 to take over that asset.

Now the firms co-own all five properties outright. Debt-free buildings have emerged as an appealing strategy for office investors seeking flexibility in making significant building upgrades and attracting tenants with competitive lease terms.

“Debt is just financial engineering. It isn’t required from this entry basis to generate great returns,” Garrison said. “One of the first questions tenant reps ask is about debt. Is the building in trouble, etc. Owning a property in all cash is the best answer to this question.”

Whether the new approach will kickstart a turnaround for the full portfolio remains to be seen.

The office at 901 West Jackson is 90 percent occupied but the offices at 641 West Lake and 130 South Jefferson are 50 percent occupied. Garrison said the firm is negotiating several leases across the properties.

“In the office business, it is hard to stay flat,” he said. “You are either growing or you are declining. The Chicago office market is really two markets today, with almost half of the buildings effectively offline.”