When the historic Jewelers Building at the corner of Wabash Avenue and Wacker Drive hit the market in May, it had little chance of selling, with just two months before its lender would file a $65 million foreclosure lawsuit. But Draper & Kramer’s Scott Ward took the listing and searched for buyers anyway.
As distress deepens in the Chicago office market, firms with troubled debt are listing properties with almost no shot of finding a buyer willing to shoulder the burden.
Over the past year, a handful of massive Chicago-area office complexes — the Jewelers Building, Manulife’s 200 South Wacker, the Central Loop office tower at 161 North Clark Street as well as the 20-story Schaumburg Towers complex in the northwest suburbs owned by Skokie-based American Landmark — have hit the market despite foreclosure proceedings on the horizon. Together, their owners have $536 million in outstanding debt, lawsuits allege.
So why do brokers, who only get paid when a deal closes, take on these listings when it’s clear to the market that they’re a long shot to sell before the lenders demand the keys?
There are several possible motivations, said Draper & Kramer’s Ward, who was hired by the longtime owner of the Jewelers Building, Canada-based Dorchester Corporation, to try and find new debt to refinance the asset. When that didn’t work, he started searching for a buyer before lender John Hancock Life Insurance filed to foreclose.
Despite not finding a deal, Ward said there’s almost no situation where he wouldn’t go to bat for Dorchester because of the strong relationship and success he and the company have had over the years.
Brokers are willing to take on the risk if it means strengthening their rapport with an existing client. Or they might want to establish credibility with a new one who will have better deals in the future. There’s also an outside chance that working on a listing and getting familiar with an asset gives a broker a shot at being hired by its lender to oversee the property during the foreclosure process, and eventually sell it on the other side.
Yet the lenders on all of the aforementioned properties declined any offers, and opted to foreclose instead.
“A lot of buyers are asking the lenders if they’re willing to recast at least a portion of the existing debts on these buildings, and many of the lenders are responding, ‘Under no circumstances,’” Ward said.
“A lot of buyers are asking the lenders if they’re willing to recast at least a portion of the existing debts on these buildings, and many of the lenders are responding, ‘Under no circumstances.’”
But the Jewelers Building’s future as an office property is in question. Draper’s listing marketed it as a potential office-to-residential redevelopment play, with a strategy to pitch housing on the upper floors of the historic structure like what Golub and Company and CIM Group did with the Tribune Tower right across the Chicago River.
It’s a different case for 161 North Clark, where France-based lender Societe Generale recently filed a $237 million foreclosure suit. The court action came shortly after Eastdil Secured began marketing its loan for sale to buyers that would take over the building from a venture of the South Korean postal service that agreed to walk away from the asset.
The Clark Street property will likely remain an office building for the foreseeable future. So extending a portion of the loan by allowing a new owner to assume the debt and pay it off over the next few years is on the table, said David Camins, whose colleague at Xroads, Wes Rehwoldt, was just appointed by the foreclosure court as the receiver for the building.
Lenders are “standing their ground,” Camins said, and waiting for a buyer with a business plan they’re comfortable with. What really matters is whether the lender thinks there is any value left in the building. “Is the asset obsolete? Or is it going to continue to operate as it always has, and will it continue to be successful?” Camins said.
As commercial real estate listings without a real chance of selling at market value pile up, they’re changing the nature of relationships between downtown Chicago’s brokers and landlords.
Buyers have to perform deeper investigations into the inner workings of listings when they suspect there’s troubled debt tied to the asset. That’s because a mortgage lender can reject offers made to a borrower if it isn’t going to get fully repaid through a sale, and lately, lenders are exercising that option.
“A good broker is going to know what kind of situation lenders are in,” Ward said. “Think about a lender that has massive pressure on them because of a tidal wave of foreclosures they’re facing, with assets coming back to them. That lender is going to be much more motivated to not have to take back the property, so perhaps a deal at a discount to debt is possible before foreclosure.”
By shooting down offers that come in ahead of or during foreclosure, lenders are betting that by the time they’re through the court process, property values will have moved to a higher level than they’re at now and they’ll retrieve more of their troubled credit than they would by selling today.
“The lending community is very sophisticated. They’ve gotten really smart,” said Keely Polczynski, a JLL capital markets broker. She sought buyers for the LondonHouse retail space across the street from the Jewelers Building at Wacker and Michigan this year, right before a Starwood debt vehicle took the keys from former owner Oxford Capital through a deed-in-lieu of foreclosure.
“We’ve started counseling them very early in this cycle, and it’s been much more hands-on than in 2008,” she said.
It’s not a slam dunk that property values will begin to rise anytime soon. And buyers are keen enough to realize that in some cases they can get a lower price than they would today if they wait for the lender to take title to a property.
“People do sense distress when it’s lender-owned, and that can have an impact on value,” Polczynski said. “We’re not in an environment anymore where it’s taboo to hand back a property. Sometimes it’s just the wisest decision.”