It’d be fair to assume Kayne Anderson’s move to take on Chicago’s stalled $6 billion megadevelopment called Lincoln Yards is a vulture capital play.
There’s significant financial trouble with the project. The reasons for its collapse and potential revival became clear in May, as a real estate catastrophe that began years ago seemed to find a way forward.
Lender Bank OZK earlier this year seized more than half of the 53-acre project site along the Chicago River, after a $128 million loan fell into default. The assemblage was approved for 14.5 million square feet in new development back in 2019, but not one new lease has been signed, and the only new building on the site is a vacant life sciences workplace.
Los Angeles-based Kayne Anderson is moving toward a purchase of the entire site in partnership with Jim Letchinger’s Chicago-based firm JDL Development, The Real Deal’s recent reporting revealed. The transaction is in the ballpark of $160 million, according to people familiar with the negotiations.
“Jim is getting the land for incredibly cheap,” a fellow Chicago developer familiar with the negotiations said.
That price will deal a significant blow to the plan’s original visionaries, who spent hundreds of millions more acquiring and demolishing old industrial structures on the property and remediating the ground for new construction.
Would-be savior
A year ago, the project’s main proponent, Chicago-based Sterling Bay, needed a lifeline, and Kayne looked like a potential white knight. Kayne was willing to inject capital to buy more time for Sterling Bay’s vision, which needed expensive infrastructure work required by the city. New financial partners could kickstart this work and replace equity partners JPMorgan Asset Management and Dallas-based Lone Star Funds.
Some projects are too messy to be saved, and even interested parties will stand by, waiting for the opportune moment to come in. That’s not what Kayne did, however. The company made an offer to help, according to people familiar with the dealings. But Sterling and Kayne couldn’t come to terms, the insiders said, and eventually Sterling Bay couldn’t get off a treacherous path woven of political missteps, the pandemic, interest rate hikes and bold speculation.
“I feel terrible for Sterling Bay that JDL is now going to do what Sterling Bay was trying to do.”
Yet Letchinger and Kayne did get in a position to clean up the wreckage. How they got here and what they are planning for the site, its financing and its political positioning can explain the shifts in Chicago’s next big real estate project and where the previous proposal went wrong.
Sterling Bay didn’t comment for this story. Letchinger and JPMorgan Asset Management declined to comment. Kayne Anderson didn’t return a request for comment.
Appetite for Risk
From the moment Lincoln Yards gained approval six years ago, Sterling Bay and its partners faced an uphill battle. Aside from the pandemic subduing demand for much of the commercial office space planned on the site, they also had to front the costs for $490 million in infrastructure work for the first phase of the project alone, including the construction of a bridge over the Chicago River to connect the two sites, road extensions and more. The city promised to pay back the developer for its costs through a tax increment financing package.
Finding another financial partner to get on board to help bankroll the infrastructure costs proved challenging. Under former mayor Lori Lightfoot, who was skeptical of the Lincoln Yards development agreement, the city was politically unwilling to create a special service area that would have charged property taxes on Lincoln Yards that could back a bond package for the infrastructure work.
Sterling Bay hunted for another way to get into the bond market and made a request in 2022 to the Illinois Finance Authority, which helps local governments and nonprofits like universities obtain financing by offering tax exemptions to private investors. But the authority declined to get involved — the Lincoln Yards infrastructure would have been an atypical project for it to assist, and it was nervous about stepping on the city’s toes, emails obtained by The Real Deal show.
The hunt for bond financing looked fruitful for a moment, as Wisconsin’s Public Financing Authority put together a deal that would give Sterling Bay hundreds of millions of dollars to start unlocking the site. But the market collapsed as interest rates rose in the summer of 2023. Sterling Bay CEO Andy Gloor later blamed Lightfoot’s administration for delaying approval of the plan.
At the same time as the search for infrastructure financing, Sterling Bay also entered the market for rescue capital.
JPMorgan and Lone Star were growing impatient. They wanted to sell their stakes in the Lincoln Yards land at substantial discounts. Lone Star wanted out early for a specific reason: It had closed out every other deal in its fund that bought into Lincoln Yards, and investors were eager to redeem those transactions. As a result, Sterling ended up paying the carrying costs, including interest and principal to Bank OZK, on its own for a substantial stretch.
Kayne entered the picture as a potential suitor.
“Jim [Letchinger of JDL Development] is getting the land for incredibly cheap.”
Sterling Bay facilitated talks between city officials and Kayne, which was referred to as “our investor” in emails about Lincoln Yards in early 2024. But Sterling never took Kayne up on its offer to inject cash into the project. It’s unclear whether Sterling’s partners weren’t willing to walk away for the price Kayne offered at that point, or if Sterling felt it would be too burdensome to meet its own fundraising and performance obligations as part of the deal.
Whatever the obstacle, Kayne didn’t get a call for help when Bank OZK moved to seize the northern tract of Lincoln Yards from Sterling and Lone Star’s venture.
But once Letchinger started talks with city officials about getting involved with revamping Lincoln Yards, he called to gauge Kayne Anderson’s interest. The two parties had recently completed another recapitalization for a separate real estate project in which they were both involved, so there was familiarity.
And Kayne was still intrigued.
Now, the partners are on track to reimagine the project. It will likely be much smaller, reducing the infrastructure spending, and focused on residential development — JDL has specialized in luxury housing construction in recent years. While Sterling Bay had proposed over 6,000 housing units, much of the project was slated for office space. It also considered trying to shrink the project’s scale.
“I feel terrible for Sterling Bay that JDL is now going to do what Sterling Bay was trying to do,” a veteran Chicago commercial real estate professional said.
Sterling Bay had always needed to go big after paying such a high price for the land, but it miscalculated how to get the necessary nod from 32nd Ward Alderman Scott Waguespack.
The relationship between the developer and the politician was frayed after an episode early last year when, following Waguespack’s opposition to an apartment project near Lincoln Yards, Sterling Bay tried forcing a vote of the full Chicago City Council, a move that’s unheard of in a town where aldermanic prerogative reigns.
Meanwhile, Waguespack seems amenable to Letchinger’s plan, saying he wants to avoid a lengthy process for reigniting the development.
In other words, the financial problems mattered. But the politics might have mattered more.
As another person familiar with the revamp of Lincoln Yards said: “You have to go through the city in Chicago.”