“For us to do a deal in Chicago, it has to be almost perfect.”
As an Illinois boy, John Rutledge’s love for the Windy City is unconditional. Getting investors to share it is another matter. There’s the crime issue, and the perception that things are taking a turn for the worse. There’s the byzantine property tax regime, criticized by some investors for being too unpredictable, or the product of the sway held by a cottage industry of lawyers who challenge tax assessments.
And with real estate’s preferred mayoral candidate getting trounced last month in the race for City Hall, industry leaders have to figure out how to work with avowed progressive Mayor-Elect Brandon Johnson, who takes office May 15.
Rutledge has made a career out of capitalizing on uncertainty. During Covid, his Oxford Capital Group took advantage of depressed prices to expand its national footprint, snapping up five Bay Area hotels in late 2020 for $126 million, which Rutledge estimates was 40 percent lower than the portfolio’s pre-pandemic valuation. Meanwhile, with Chicago’s rental market still in doldrums, Oxford pulled off one of the city’s priciest multifamily deals in recent memory, selling a 56-story South Loop tower it developed with Quadrum Global for $190 million to Iconiq Capital.
The acquisition tear didn’t end there: In 2021, Oxford picked up the 247-room Thompson Hotel on the Gold Coast for about $70 million, took over the 453-room Westin Book Cadillac hotel in downtown Detroit by assuming a $77 million loan that fell into trouble, and opened the Godfrey Hotel in Los Angeles — which, it boasts, contains Hollywood’s largest public rooftop — and quickly recapitalized its debt.
Distress is a cruel mistress, however. Oxford lost two hotels in Chicago to foreclosures during the pandemic.
Rutledge predicts a new wave of bad loans that will force more hotels onto the market in the coming months and he’s licking his chops as lenders finally move on properties after holding off for much of the pandemic.
He sat down with The Real Deal at Oxford’s LondonHouse hotel on the corner of Michigan Avenue and Wacker Drive in Chicago — a 452-key property it converted from a 22-story bank and office building — to discuss his family life, his approach to dealmaking, his thoughts on Chicago’s new mayor-elect and his go-to Beatles song.
This interview has been condensed and edited for clarity.
Born: March 19, 1963
Hometown: Wilmette, Illinois
Lives: Lincoln Park, Chicago
Family: Married, two sons
Any advice for the new mayor, Brandon Johnson? Real estate had its hopes pinned on Paul Vallas.
I was and am a big fan of Paul Vallas. I think he had dramatically more leadership experience, intellectual and financial sophistication than any of the other candidates. And so I thought it was really an unfortunate loss.
I’m hopeful that he [Johnson] will recognize that he has to build bridges to the business community, the civic community, and that the economic engine is the heart of the city. Unless that heart is healthy, the tributaries, capillaries and the arteries won’t get enough blood and they’re not going to be successful. He certainly seems to be a charismatic, high energy, likable person. And relatively young. So I think a lot of us like that.
If he can be educated around how important business and financial success of the city is, and that we cannot demonize successful people financially and not divide people, if he can try to be a true uniter and be a mayor for all races, all religions and all variety of people, I think he can be and has the chance to be successful. But he’s going to absolutely have to hire more policemen and more detectives.
You can’t kill the golden goose. Transfer taxes above $1 million, that’s a terrible idea.
On the campaign trail, Johnson called for increasing taxes on hotel stays and more than tripling the transfer tax on real estate sales of more than $1 million.
The reality is you’re making Chicago less competitive than many of its peers. It’s already one of the highest in real estate taxes, and then the hotel taxes are already high. We’re competing with Las Vegas, we’re competing with Orlando, we’re competing with New York and many places. And you can’t put us at a dramatic disadvantage because they have attributes that we don’t have. Warmer climates, casinos in the case of Las Vegas, Disney World in the case of Orlando and other things.
You can’t kill the golden goose. You’ve got to protect it. So transfer taxes above $1 million, that’s a terrible idea. Additional hotel tax is a terrible idea.
I’ve heard some residential agents say they think wealthy buyers wouldn’t sweat a higher transfer tax bill.
I don’t think it’s a good idea generally. It ends up creating a materially less liquid real estate market. Even if it’s high-end residential, there are offshore investors, national investors and locals that say I’m not going to buy. Prices going down and less transaction activity is just not healthy for a market. But as a backup, having it be bifurcated, commercial versus residential, I guess that’s better than having it across the board. But I’m not generally an advocate.
How do you manage acquisitions in a time like this? Are your conversations with lenders different?
We have a lot of institutional investors and lenders that know we’ve been to this show before. When everybody runs away, we tend to run right at it and do distressed acquisitions, developments, repositioning.
When we move into these dislocated markets, we usually have an investor following ready to move with us. Some markets have more interest than others. Chicago is a higher bar. Part of it is its real estate taxes here. The lack of transparency around property taxes is a real challenge.
Has that issue been compounded by Cook County Assessor Fritz Kaegi?
I believe he’s correct in trying to modernize the technology and coming up with a more transparent formula for real estate tax assessments in Chicago. I think he has the right goal in mind. But he doesn’t control the levy, which is what has to be controlled. High real estate taxes as a percentage of value and revenue, coupled with lack of transparency, that really, really mutes the transaction market in Chicago.
There are a lot of large institutional investors and lenders that don’t want to do business in Chicago, because of that lack of consistency and transparency, historically, on the property tax side. So Chicago gets a higher bar for us.
There are going to be a lot of transactions, office buildings and hotels, that are going to finally trade in Chicago and in most of the major cities over the next 12 to 24 months, because floating rate loans are running out. Defaulted CMBS deals are going to finally get coughed up, and finally these assets are going to trade. Between Covid, this sort of lender deferral during Covid, and then a little extra time, a lot of stuff hasn’t cleared the market. Now things are going to start clearing the market. There’s going to be a massive change of ownership in office buildings and hotels.
I told my kids whatever sport you end up doing, you’re going to ski from the time you’re three years old.
You seek out distress as a buyer. But you’ve been on the receiving end of it, too.
We have a cumulative GPA that is very high, but it’s not a 4.0. We had refinanced two small properties here years ago and pulled our money out. We had record revenues and record profits at the Hotel Felix and Hotel Cass from 2013 through 2018 or 2019. But real estate taxes quadrupled, amortization kicked in on the CMBS debt, and then Covid hit.
Out of our eight Chicago hotels, five we filled up with first responders, policemen, firemen, nurses in the early pandemic days. We offered the same for Hotel Felix and Hotel Cass, but the special servicers turned it down. We could have generated cash flow for those two small assets during Covid the way we did with several others. We reluctantly did a friendly give back of those two small assets. Those are the two bugs on the windshield, but 99 percent of our stuff has been successfully navigated and resolved and we went on offense with acquisitions.
What keeps you up at night?
I don’t get too freaked out about things. But I definitely am acutely aware that all the big cities of America have to solve the crime problem. I worry that that isn’t happening fast enough.
And then all the economic tumultuousness globally: the war in Russia, and a lot of the financial volatility that we’re seeing. I think the Fed is overdoing this inflation [battle], it’s already down dramatically. I think they way overplayed their hand during Covid, and now they’re overplaying their hand the other way. And so we’re dealing with the consequences of that.
What gets you excited outside of work?
To me, there are three great natural highs I really enjoy. One is powder skiing, heli-skiing. No wind, beautiful fresh powder in the Canadian Rockies with my earphones on listening to the Beatles’ “Here Comes the Sun.” That’s a great nirvana moment for me. The other is sailing downwind, on a broad reach with a spinnaker up, planing on the sailboat — just flying. They’re both very pure, they’re very quiet, they’re peaceful.
And the third one is going to a fantastic concert with my wife and kids and maybe their friends or girlfriends or close friends, and just being in the moment. You know, everybody’s happy. Everybody’s listening and singing along. Last summer at Soldier Field on a beautiful August night, Elton John sang beautifully. His instrumental accompaniment was top of the line, just world-class musicians. My wife was there, my kids were there, their girlfriends were there, and it was like, wow. My younger son looked at me and said, “Dad, I’m just so happy.” That says something.
How did you meet your wife?
I married my college sweetheart, a girl I met in Ann Arbor, Michigan. We have two boys, both of whom are in college on the East Coast, Trinity College in Connecticut. They’re both on the tennis team there. They’re student athletes, which I’m a big believer in, sort of disciplined, purposeful work ethic.
You grew up playing tennis.
I grew up playing a lot of sports: hockey, baseball, basketball, football. My favorites as a kid were probably skiing and ski racing. I played a little bit of tennis. Then in high school, I played soccer and lacrosse, but I always played a little club tennis. And then as I got older I got really into tennis.
Did you pass your love of skiing on to your kids too?
That was a non-negotiable. I told my kids whatever sport you end up doing, you’re going to ski from the time you’re three years old.