Jeff Krasnoff’s special servicing giant Rialto Capital put the landlords of some South Loop retail in its crosshairs.
The owner of the retail spaces at the base of two Michigan Avenue condo towers are facing an $11 million foreclosure lawsuit brought by Rialto on behalf of bondholders in a securitized loan offering.
New York investor Steven Waldman’s Crowd Realty Advisors owns the first-floor retail space for the condo buildings at 1400 and 1250 South Michigan. Waldman and Austin-based investor James R. Gatlin are guarantors of Crowd Realty’s purchase, which was bought from the condo buildings’ developer Russland Capital in 2015.
A fundraising brochure from the time of Crowd Realty’s purchase shows the firm sought accredited investors to buy into the property. Crowd Realty sought to raise $12.2 million, with $4.4 million in equity and $7.8 million in debt.
While the South Loop retail market is considered a little quieter than the River North scene on the other side of the Loop, its struggles have been less high-profile than the nearly 30 percent vacancy rates posted on the Magnificent Mile in the wake of the pandemic.
However, there have been multiple rough patches for South Loop retail landlords, including just to the north of Waldman’s property at 833 South Wabash Avenue, where a 75,000-square-foot retail and office building was seized through a foreclosure auction earlier this year by the bondholders in a separate CMBS deal after its previous owner’s default on a $9 million loan, according to loan data.
Over 9 months in 2024, the retail at 1400 South Michigan brought in about $640,000 in revenue with about $330,000 in expenses, according to Morningstar Credit. The property was not bringing in enough revenue to service the debt in 2024, and revenue fell by close to 40 percent between 2019 and 2024. Loan servicer notes compiled by Morningstar show the borrower intended to sell the property as the loan was reaching maturity.
The properties were purchased under a Delaware Statutory Trust led by Waldman called CRA 1250 & 1400 DST. The entity’s structure allows an investor or company to sponsor the purchase of a property, while other investors purchase fractional interests in the property.
Property records show the trust paid at least $9.6 million for the retail parcels between the two buildings in 2015.
Waldman and Gatlin did not respond to requests for comment.
The lawsuit alleges Crowd Realty defaulted on its $7.8 million loan tied to the two buildings. The owners first missed a payment in May 2020, and the loan was put into forbearance in October 2021. It reached maturity in March this year, at which point the debt had ballooned to $11 million in principal, interest, fees and deferred payments, the lawsuit said.
Russland Capital, operated by Alex Vaisman and Jacob Bletnitsky, developed 1400 South Michigan with 257 condo units and 1250 South Michigan with 229, in 2008 and 2005, respectively.
Retail tenants at 1400 South Michigan include a grocery store, a sushi restaurant and a breakfast restaurant called Chicago Waffles, while 1250 South Michigan is rented to Jimmy Johns, a cafe selling THC products, a nail salon, a spa and a dry cleaner. One retail space at 1250 South Michigan is vacant and available for lease.
Benjamin Lissner, a Baird & Warner dealmaker, said residential property values at the two buildings have remained relatively stable since they went up. Lissner has sold condos at both buildings.
Property values rose between 2015 and 2020, then took a hit during the pandemic, Lissner said. New construction around 1400 South Michigan has caused some unit values to dip, but there haven’t been major price fluctuations, he said.
“I haven’t seen dramatic drops in either building, or dramatic increases in value,” Lissner said.
Meanwhile, condos in high-end buildings on and near the Magnificent Mile on North Michigan Avenue have struggled to retain the values they achieved during the run up to the pandemic, with multiple units in the Bloomingdale’s building at 900 North Michigan, for instance, trading for prices seen back in the 1990s.
If the retail spaces do go into foreclosure, Lissner said he doubts that will have a big impact on the value of the residential condos in the buildings, even if the commercial values drop.
“If any of those tenants move out because of the foreclosure, I don’t think that’s going to have much of an effect on the property values on the building,” he said.