Bondholders in a $105 million loan tied to a Loop office tower are seeking to take the building back, the latest in a wave of downtown Chicago commercial real estate distress.
Representatives of the creditors for the debt attached to 111 West Jackson Boulevard filed a foreclosure complaint against affiliates of New York-based borrower The Melohn Group in Cook County court on Friday, public records show. The move comes several months after the death of Alfons Melohn, the top executive of The Melohn Group.
Surging interest rates and sagging demand for offices coming out of the pandemic have put the landlord, along with others in Chicago, in an untenable position.
The legal action could set up a familiar storyline for the 24-story, 575,000-square-foot building on Jackson Boulevard. Melohn Group bought the property in 2013, paying $135 million to Michael Silberberg, who had plucked it out of distress for just $35 million two years earlier.
The most recent loan to become delinquent was originated in 2017 by French corporate and investment bank Nataxis, and then packaged up with other real estate debts and sold off to investors in commercial mortgage-backed securities.
Melohn’s loan wasn’t scheduled to reach maturity until December 2027, but the company stopped making payments in May, according to the lawsuit. The loan’s special servicers, Rialto Capital Advisors and Midland Loan Servicers, began supervising the loan when it became delinquent.
An attorney for the lender declined to comment and Melohn Group didn’t return a request for comment.
Alfons Melohn died in late June, according to an obituary and the loan’s servicer notes tracked by the credit ratings agency DBRS Morningstar. A son of Melohn has assumed control of the entity that owns the Jackson Boulevard property and holds its debt, according to Morningstar data.
The property’s performance was solid during the first few years after Melohn Group took out the $105 million loan, and it was appraised at $163 million in 2017. Its value nose-dived during the pandemic, though, and an appraisal this year pegged its value at just $66 million, according to Morningstar data.
At the end of 2019, 111 West Jackson was 94 percent leased and brought in $8.3 million for the year in net cash flow to the landlord, Morningstar data shows. By the end of last year, it was down to 60 percent leased and taking in only $3.4 million.
More tenants are on the way out of the building, too, with investment banking firm Loop Capital set to exit next year after exercising an early termination on a lease of about 37,000 square feet initially scheduled to expire in 2027. Loop Capital recently signed a deal for about the same amount of space at CIM Group’s 425 South Financial Place.
The foreclosure suit at 111 West Jackson is among at least $1.4 billion in real estate value accumulated over the last decade on office buildings along Jackson Boulevard that now face financial distress that risks major losses for their landlords and lenders.
Next door, for instance, Apollo Global Management early this year seized the 44-story, 1.4-million-square-foot Chicago Board of Trade building after a joint venture of Glenstar and Oaktree Capital Management opted against fighting a foreclosure suit over its $256 million debt package that was taken out right before the pandemic.
During Melohn Group’s ownership of 111 West Jackson, it spent another $38 million on renovations and tenant improvements on top of its acquisition cost, according to previous reports.