09/15/2010

Piedmont, Broadway Battle for Chicago Tower

Piedmont Office Realty's effort to wrest control of the distressed office building at 500 West Monroe Street in Chicago from Broadway Partners hit a speed bump this week.

Piedmont, which controls about $110 million of mezzanine debt on the tower, had moved to seize the property at a foreclosure auction scheduled to be held in New York on Tuesday. However, Broadway persuaded a state appellate court on Monday to block the auction, at least temporarily.

The battle is complicated by the fact that the property's roughly $180 million of mezzanine debt is divided into four tranches and is in the hands of five different parties. There is also a $150 million senior mortgage, putting the total debt package at about $330 million.

Broadway arranged the highly leveraged debt package from Morgan Stanley in July 2007, when it acquired the 966,000-square-foot building from Shorenstein Properties of San Francisco for $336.7 million.

At the time, the tower was 92% leased. But the occupancy rate has since plunged to 68%, largely because railroad giant GATX, which had rented 20% of the space, left when its lease expired in 2008. What's more, another 487,000 sf is set to roll over by November 2012, as leases to GE Capital and Marsh USA mature.

The building's value has plummeted below $250 million, according to estimates of local pros, jeopardizing the equity position of New York-based Broadway as well as the holders of junior mezzanine debt.

In addition to the senior loan, there is a $45 million senior mezzanine piece held by Deutsche Bank and Piedmont. Next in the debt stack is Piedmont's $50.3 million "B" mezzanine slice. That is followed by a $20 million senior "C" mezzanine piece held by CIT, a $20 million junior "C" mezzanine piece held by Washington Holdings of Seattle, and a $44 million "D" mezzanine tranche that was formerly held by Transwestern Investment of Chicago.

Piedmont, which is based in Johns Creek, Ga., is angling to take over the property. The two-year debt package matured in August 2009, when Broadway exercised the first of three one-year extension options. But when the extension fee for the second option wasn't paid in August, Piedmont claimed that Broadway was in default and moved to foreclose under the Uniform Commercial Code.

Piedmont has also acquired Transwestern's junior mezzanine stake in return for "hope note" that would provide Transwestern with a share of the profits if they reach a prescribed level.

Piedmont bought its mezzanine-debt stake in 2008, evidently with the idea of taking over the property if Broadway was unable to pay off its debt. The REIT's game plan is to lease up the building and make some improvements, according to market players. That's bad news for investors, who had hoped that a foreclosure would lead to a discounted offering in the open market.

But Broadway isn't going away quietly. It filed suit in New York State Supreme Court in Manhattan on Aug. 31 against Piedmont and Transwestern to block the foreclosure auction, charging breach of contract and fraud.

Broadway contended that Piedmont and Transwestern conspired to engineer a loan default and take control of the building. Under the original debt structure, Transwestern, as the most junior lender, was in charge of managing excess cash flow from 500 West Monroe Street and paying extension fees out of that money, Broadway said. After Piedmont bought out Transwestern's mezzanine position, the August extension fee wasn't paid, effectively putting Broadway in default, according to Broadway.

Piedmont and Transwestern asserted that Broadway was required to pay the extension fee.

The court declined to grant an injunction, ruling that Broadway had little chance of succeeding. But Broadway appealed, and on Monday a judge in the New York State Appellate Division issued a temporary stay blocking the auction until the full Appellate Court could review the matter.

Real estate pros think it may be only a matter of time before Broadway surrenders the property to Piedmont. It's unclear what steps, if any, CIT and Washington Holdings are taking in relation to their mezzanine-debt positions.

The Chicago building has several factors working in its favor that are likely attractive to Piedmont. It has a revenue-generating underground garage that can house more than 1,000 vehicles and itself is worth as much as $50 million, by some estimates. And the tower's West Loop location should position it well when office occupancy rates rebound. Once stabilized, the building's value should climb north of $300 million, brokers s aid.

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