The owners of Chicago’s fourth- tallest building are running out of time to refinance debt taken on during the property boom, setting the stage for a takeover fight for the tower as firms including Blackstone Group LP (BX) try to gain the upper hand in lender negotiations.
Golub & Co. and Goldman Sachs Group Inc. (GS)’s Whitehall real estate fund have about $400 million in loans coming due next month on the 100-story John Hancock Center, according to data compiled by Bloomberg. The debt, including a $182 million mortgage that was packaged into bonds, financed their acquisition of the property in January 2007, when it was valued at $410 million, the data show.
Borrowers are struggling to refinance a wave of loans made at the market’s peak, allowing investors to acquire marquee buildings through debt purchases. Blackstone, based in New York, is close to completing a deal to buy $100 million of mezzanine debt on John Hancock Center so it can try to take control of the tower, according to two people with knowledge of the situation who declined to be named because the discussions are private.
Peter Rose, a Blackstone spokesman, and Andrea Raphael of Goldman Sachs declined to comment, as did Mary Ellen Smith, director of marketing for Chicago-based Golub & Co.
Buying slices of lower-ranking debt to take ownership of commercial properties has become a common strategy as defaults surged in the past two years.
‘Often a Race’
“Once a maturity default occurs on multiple loans securing a property, that frees the lenders up to go ahead and enforce their remedies,” said Kevin O’Shea, head of the U.S. real estate group at law firm Allen & Overy LLP, who isn’t involved in the John Hancock Center transaction. “It’s often a race to see who goes first.”
The Willis Tower, formerly known as Sears Tower, is the tallest building in the city, followed by the Trump International Hotel & Tower Chicago and the Aon Center, according to the Council on Tall Buildings and Urban Habitat, based in Chicago. John Hancock Center is 1,128 feet (344 meters) tall.
The building, completed in 1970, has an observatory on the 94th floor that is one of Chicago’s biggest tourist attractions. Besides having 896,980 square feet (83,332 square meters) of office space, the property at 875 N. Michigan Ave. includes 171,771 square feet of retail space, a parking garage and 49 floors of residential condominiums.
Shifting Tenant Tastes
A new owner may look to sell the property off in parts to maximize value, said Mark Zytko, co-chief executive officer of Mesa West Capital, a Los Angeles-based manager of more than $2 billion in real estate loan funds. While the building is an architectural icon, office tenant tastes are shifting toward properties with more space on each floor and campus-style buildings, he said. Distance from train transit also is a drawback, Zytko said.
Chicago’s property values relative to New York and Washington help make it attractive to buyers, said Dan Fasulo, managing director of Real Capital Analytics Inc. in New York. John Hancock Center would be valued at about $415 million today, based on estimated net operating income of $24.9 million and a capitalization rate of 6 percent, he said. At a 6.5 percent cap rate -- a property’s net operating income divided by purchase price -- the value would fall to about $383 million, he said.
“In markets one notch down from New York and D.C., like Chicago, we’ve seen the greatest amount of cap-rate compression” recently, Fasulo said.
John Hancock Center was the third tower in the world to surpass 1,000 feet when it was built, following the Chrysler Building and Empire State Building in Manhattan, according to property-data provider Emporis GmbH. The tower’s located in the Magnificent Mile section of Chicago, known for its shopping and high-end hotels.
The building was about 26 percent vacant at the time of the purchase, according to data compiled by Bloomberg. The current vacancy rate is 17.2 percent, according to Smith of Golub & Co.
About $55 billion of commercial property loans sold as securities come due in 2012, with $19 billion of those originated in 2007, according to Standard & Poor’s. More than half of the 2007 loans may fail to refinance, the New York-based rating company said in a Dec. 19 report. Sales of commercial- mortgage bonds reached a record $234 billion in 2007, fueling a boom in property values, Bloomberg data show.
Late payments on loans packaged into bonds were at 8.95 percent in December, down from 9 percent in November, according to S&P. The rating company forecasts delinquencies will rise to between 9.5 percent and 10 percent in 2012.