04 November 2010

Tishman Speyer grabs $380M Bargain in Chicago

Crain's NY

Developer agrees to buy year-old, 45-story tower for less than the cost of construction; deal seen as stark warning for those considering building or financing new office towers.

Tishman Speyer Properties has agreed to purchase a new office tower in downtown Chicago for less than it cost to build it, according to sources. The developer will pay owner Mesirow Financial $380 million for its headquarters at 353 North Clark St., marking the first time in more than a decade that a building has been sold for below its cost of construction in Chicago.

The agreement came as an affiliate of Mesirow was running up against a deadline to pay off its construction loans on the building, according to people familiar with the transaction. Those sources say the price is a little less than the debt on the nearly 1.2-million-square-foot tower, which opened about a year ago.

The sale sidesteps an ugly foreclosure suit that might have been filed by Munich, Germany-based Hypo Real Estate Holding, which financed the project with a construction loan that comes due Monday.

The sale would wipe out tens of millions of dollars in equity invested in the 45-story tower, built by a venture led by veteran Chicago developer Richard Stein, a Mesirow senior managing director. Mr. Stein did not return calls requesting comment.

Chicago’s office market hasn't seen a new skyscraper sold for less than the construction cost since the collapse of the commercial real estate market in the 1990s, when billionaire investor Sam Zell scooped up 161 N. Clark St. and 1 N. Franklin St. at bargain prices.

Now, as developers start pushing plans for another round of new office buildings, the woes of 353 N. Clark could serve as a warning to investors and lenders that might back those future projects.

“A lender would be out of their mind to provide financing for new construction when prices are depressed as much as they are, and the (leasing) market is still in the early stages of recovery,” says Zaya Younan, chairman and chief executive of Woodland Hills, Calif.-based Younan Properties, which has a 1.6-million-square-foot office portfolio in Chicago.

Initially leasing at 353 N. Clark went well, with Mesirow and law firm Jenner & Block agreeing to take more than 60% of the building before construction started in 2007. But the leasing effort subsequently stalled at about 80% occupancy, according to real estate data provider CoStar Group Inc.

The price Tishman has agreed to pay for the building, about $324 a square foot, stands in sharp contrast to the record-breaking $503 a foot that a Southern California investment firm paid this summer for the nearby skyscraper at 300 N. LaSalle St. That building also was completed last year but it is 95% leased.

The Hypo loan has an outstanding balance of roughly $330 million and has been extended until Tishman closes on the purchase, sometime before the end of the year, sources say.

The project was also financed with a $44-million mezzanine loan from Chicago-based real estate firm Transwestern Investment Co.

Transwestern could recoup as much as 90% of its loan, which is similar to a second mortgage. A Transwestern representative declined to comment.

How much equity was used to finance the project could not be determined, but most of that money is probably lost. The project is a joint venture between Mesirow and Chicago-based Friedman Properties Ltd., which originally controlled the site.

Albert Friedman, CEO of Friedman Properties, did not return a call requesting comment.

The Mesirow venture also put up a multimillion-dollar letter of credit that would have become payable in the event of a loan default.

As part of the deal, Tishman is paying a couple million dollars to the development venture, sources say. And the venture avoids the costly expense of surrendering the letter of credit, sources add.

Tishman already is one of the largest landlords in downtown Chicago, with a portfolio that includes 10 and 30 S. Wacker Drive and Franklin Center in the West Loop. Tishman's financial partner in the deal for 353 N. Clark could not be determined.

A Tishman spokesman declines to comment. The deal was previously reported by Real Estate Finance & Investment, a trade publication.

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