Northwood venture buys troubled Chicago office

Northwood Investors, the New York-based private real estate investment firm led by former Blackstone Real Estate Advisors chief executive John Kukral, has entered into a joint venture to buy a Chicago office tower with a troubled and complicated history. 

A venture comprising Northwood and American Recovery Property Trust (ARPT), a newly-formed firm managed by San Diego-based Sovereign Capital Management Group, has purchased Congress Center in downtown Chicago. The venture bought the 16-story Class A office tower for $95 million. 

According to data provider Real Capital Analytics, the 524,800-square-foot property at 525 West Van Buren, located in the city’s West Loop submarket, currently is 74 percent occupied. Tenants include the US General Services Administration, North American Company for Life and Health Insurance, Amtrak and AkzoNobel.

This transaction resolved a troubled and rather convoluted situation. Todd Mikles, president and chief executive officer of Sovereign Capital, told PERE that, in 2007, Grubb & Ellis and Triple Net merged to create Daymark Realty Advisors, which became the asset manager of the building. In August 2011, Sovereign formed a joint venture with New York-based investment firm Infinity Group to buy Daymark. Then, as a means of recapitalizing on these properties bought under Daymark, Sovereign formed ARPT.

There was just one problem: no one thought to tell the building’s servicer, Irving, Texas-based C-III Asset Management. “The servicer was never notified that there was an indirect change in ownership,” said Mikles. That, combined with a tenant refusing to pay based on a dispute over capital improvements, forced the building into the foreclosure process. 

A report from Crain’s Chicago in June revealed that the lenders, tenants and contractors were all turning on the building’s many owners. Its lenders were alleging that the loan on the property was in default, and many tenants were alleging that they were owed money for improvements promised in their leases. Meanwhile, Chicago-based contractor Clune Construction was demanding that the building's owners pay $3.2 million in outstanding bills for building out office interiors.

Adding complications to the matter is that the property was owned through a tenant-in-common (TIC) structure. Under TIC deals, multiple investors buy into a property. During a dispute, however, the idea of having many owners can often be a hindrance to providing possible workout solutions. 

In an effort to straighten out this mess, Sovereign rolled the TIC investors into ARPT, bought out Infinity Group’s stake in Daymark a couple weeks ago and teamed up with Northwood for additional capital to buy the property directly from Daymark. “We saw Northwood as an attractive capital partner, and they offered us the ability to move quickly,” Mikles added. 

The venture plans to make major capital refurbishments to the building over the next 18 months. In addition, the new owners intend to lease up the property.