An owner of a Central Loop office is expected to default on the building’s $105 million debt plan after losing some key tenants, as the trail of failed deals involving downtown commercial assets grows in post-pandemic Chicago.
The loan taken by New York-based Melohn Group in 2017 for the 24-story, 575,000-square-foot building is “on the brink of default due to cash flow problems,” according to credit rating agency DBRS Morningstar.
The report from Midland Loan Services and Rialto Capital Advisors, compiled by Morningstar, said lenders moved some debt programs into special services in March and earlier this month. Midland and Rialto are special servicers who work with borrowers to resolve problem debt.
Lenders have recently begun taking steps to limit their exposure to several large loans for distressed office buildings in the humble office environment of downtown Chicago. Next door to Mellon’s property, the CBOT building was purchased by Apollo Global Management via a deed of lien foreclosure earlier this year, as its previous owners were Chicago-based Glenstar and Los Angeles-based Oaktree. The joint venture, Capital Management, managed to avoid litigation over the property’s $256 million default on debt.
Elsewhere in Chicago, Blackstone is trying to secure a new loan for a challenging River North property, while a $678 million loan for the 83-story Aon Center received special servicing earlier this year.
Occupancy rates at properties owned by Melohn have been falling since at least 2018 and will drop further to around 60% when Loop Capital moves out in 2024 after early termination of a lease that was due to expire in 2027. The investment banking tenant has instead signed a new deal for 37,000 square feet at 425 South Financial Place at CIM Group.
“We’ve experienced a lot of space turnover due to lease expirations during the pandemic,” Melohn told lenders in March, according to Morningstar. “We are working with a new leasing group to aggressively market the building.”
Melohn’s loan program expires in December 2027. The landlord’s loan payments were delayed but less than 30 days in arrears, according to Morningstar. Rialto and Midland did not respond to requests for comment, and no one in Melohn was available for comment Thursday.
The property was appraised at $163 million in September 2017 and brought in nearly $9 million in net cash flow in 2020, according to Morningstar. However, the property’s net cash flow fell to less than $3.5 million last year after vacancy rates increased.
The building was 68 percent occupied at the end of last year, below the 78 percent average for downtown office buildings last quarter and an all-time low for Chicago.
Other tenants that have given up space in the building since the health crisis hit include Oracle, which has leased about 40,000 square feet; ThyssenKrupp, with about 25,000; and e-commerce consultant Gorilla Group, with about 24,000.
Melohn bought the building in 2013 for $135 million and spent an additional $38 million on renovations and tenant improvements. The company listed the property for sale in 2019, when it was 93% occupied, but it never sold, and several leases expired in late 2022.
French corporate and investment bank Nataxis initiated the loan to Melohn, pledging the Jackson Avenue building as collateral. The debt is then packaged with other real estate loans and sold to investors in the form of commercial mortgage-backed securities, making details of the property’s performance public.
If Melohn and the loan servicer that now handles the debt can sort things out, it won’t be the first time 111 West Jackson narrowly avoided foreclosure. The previous owner of the property, Michael Silberberg, bought the property for $35 million in 2011 after defaulting on a settlement of more than $23 million, according to published reports. term loan balance.
