11/16/2011

Winthrop Pushing Hard for Big Defaulted Loan

Winthrop Realty is seen as the leading bidder for a defaulted loan backed by a landmark office and retail building in Chicago’s East Loop.

Bidding has been heated for the $137 million loan on the 943,000-square-foot Sullivan Center, a century-old former department store that underwent a massive renovation over the past decade. Winthrop, a Boston REIT, has emerged as the leader with an offer north of 90 cents on the dollar.

CBRE is reviewing the final round of bids on behalf of PNC Bank, which leads a consortium of five lenders. The floating-rate loan was written in 2007 for local developer Joseph Freed & Associates to complete a $200 million remodeling of the 15-story building, at One South State Street. Despite the award-winning renovation, the property has struggled with occupancy. After modifications and a one-year extension, Freed was unable to refinance when the loan matured in March.

A wide range of fund operators bid on the note, hoping for a chance to win control of the collateral. The buzz is that bidders anticipate a struggle to foreclose on the property, but that Winthrop is willing to go either of two ways: negotiate a workout with Freed, or take control of the building and eventually sell it.

Last year, Freed went to court in an unsuccessful effort to hold on to a nearby retail and entertainment building after defaulting on a $178 million construction loan. In March, Bank of America foreclosed on the 277,000-sf property, called Block 37, at 108 North State Street.

Sullivan Center’s 744,000 sf of office space is about 83% occupied, while the 200,000 sf of retail space is vacant, for an overall occupancy rate of 65%. Target has signed a 15-year lease for 124,000 sf, beginning in October 2012. DSW Shoe Warehouse has agreed to rent 26,000 sf, beginning in May. Once those leases start, the building will be 82% occupied. Office tenants include Art Institute of Chicago (157,000 sf) and Walgreens’ e-commerce division (48,000 sf). The developer occupies 68,000 sf itself.

Designed by renowned architect Louis Sullivan, the building has been a Chicago icon since it opened in 1899. The structure has a terra-cotta facade that curves around the corner onto East Madison Street, with cast-iron ornamental work on the lower two floors. Until 2007, it was the flagship location for the Carson Pirie Scott department store chain.

Freed bought the building in 2001 and immediately began a phased renovation. The loan now up for sale was originated in 2007 by National City Bank to refinance the property and fund construction and carrying costs. The three-year syndicated loan had an initial commitment of $133 million, which was increased in 2008 to $148 million. That year, Pittsburgh-based PNC acquired National City and took control of the loan. The debt was partly paid down with the help of $8.5 million of tax increment financing through the City of Chicago.

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