A Chicago hostel that is closing after nearly 30 years in business traded hands this month in a complicated deal marking a discount from its last sale.
DRW’s real estate investment arm, Convexity, sold The Getaway Hostel at 616 W Arlington Place in Lincoln Park at a discount to New York-based Validus Capital. Convexity bought the hostel for $13.75 million in 2013 with a $10.3 million loan from Bridgeview Bank, later taken over by Old National Bank.
Convexity ended up with a balance of $2.9 million after modifying the loan multiple times over a decade. Validus bought the property for $6.5 million in a seller-financed deal, borrowing $2.5 million from Convexity to complete the purchase, rather than taking out a traditional loan.
It’s unclear if Convexity has paid off the $2.9 million balance on its initial loan for the property. An assumption or termination of the loan has not yet been recorded in public records. Alternatively, Convexity could be using the proceeds from its loan to Validus to pay off the debt.
The transaction hints that Convexity and Validus entered into a partnership agreement of some kind. A lease agreement referenced in the new deed states that Convexity will be considered a tenant, while Validus will serve as the building’s landlord.
Representatives of Convexity and Validus did not return requests for comment. The property has 119 rooms and can accommodate 459 guests, according to Hostel World.
The hostel, which charges about $100 a night, is a rarity in the upscale Lincoln Park neighborhood. A message on the hostel’s website states it will close July 20 but does not provide further details. Representatives of the hostel did not return requests for comment.
It’s unclear what the future plans are for the property, but the hospitality market is undergoing a gradual recovery from the pandemic. Revenue per available room in Chicago grew 6 percent year-over-year in the first quarter, according to JLL, though inflation has cut into revenues.
The transaction sheds light on some maneuverings of prominent Chicago trader Don Wilson. Wilson, of Convexity’s parent company DWR, has faced scrutiny from federal regulators over the past decade. Wilson was directly involved in the hostel deal at some point, as he signed the $10 million mortgage to purchase the property in 2013.
The Commodities Futures Trading Commission accused DRW in 2016 of illegally manipulating the market to benefit interest rate swaps in 2011 that generated $20 million in profits. A judge dismissed the case two years later.
Wilson also recently dodged a crypto crackdown. In March, the Securities and Exchange Commission dropped a case against Cumberland DRW, another subsidiary of DRW. The SEC had accused Cumberland of operating as an unregistered cryptocurrency dealer.
Meanwhile, in Bucktown, Validus is facing default on an apartment building at 2219 North Hamilton Avenue. The building’s effective gross income has fallen 14 percent, pushing its debt service to income ratio below 1, according to CBMS loan tracking platform Morningstar Credit. A DSCR below 1 means the property is not taking in enough revenues to cover debt costs.
Commentary from Morningstar states that despite the building being 100 percent occupied, Validus is struggling to turn a profit on the property because of problems with property management and higher-than-expected property taxes.
Validus has been behind on loan payments since April but said a capital call and an incoming tax refund from Cook County should help the building’s bottom line, according to Morningstar.