Hearn, Fortress Opt for Deed-in-Lieu on $137.8M Loop Building Debt

Key Takeaway

• Hearn and Fortress are pursuing a deed-in-lieu for 2 North LaSalle to avoid foreclosure after failing to pay off $137.8 million in debt.
• The building's debt amounted to approximately $197 per square foot, with the venture initially taking over to prevent a default on a previous loan.
• This move reflects broader distress in the Loop office market, as seen with Intersection Realty Group's similar resolution for 65 East Wacker Place.

A Shift in Strategy for Loop Office Buildings

In a notable shift within the Chicago real estate market, the owners of the struggling Loop office building at 2 North LaSalle are preparing to hand over the keys through a deed-in-lieu of foreclosure, aiming to alleviate the financial burden of holding onto the property. This decision by the joint venture of Chicago-based Hearn and New York-based Fortress Investment Group underscores a broader trend of distress within the office real estate sector, particularly in the wake of failed financial obligations. The venture's inability to pay off $137.8 million in principal and interest on a CMBS loan that matured in July highlights the financial challenges faced by property owners in today's market.

Financial Distress and Market Dynamics

The financial woes of 2 North LaSalle, with debt amounting to approximately $197 per square foot, reflect the broader challenges within the Loop's office market. Hearn and Fortress's decision in 2016 to take a majority interest in the building, initially to help Harbor Group International avoid defaulting on a $127.4 million CMBS loan, was accompanied by ambitious plans for renovations and tenant acquisitions. However, despite these efforts and a potential sale that fell through in 2021, the financial viability of maintaining ownership has become untenable. This scenario is indicative of the larger market dynamics at play, where even well-intentioned investments and improvements are not immune to the volatile nature of real estate valuations and market demand.

The Deed-in-Lieu of Foreclosure Process

The pursuit of a deed-in-lieu of foreclosure by Hearn and Fortress is a strategic move to avoid the more damaging impacts of a traditional foreclosure. This process allows the owners to transfer the title back to the lender without a foreclosure action, potentially offering a cleaner exit from a challenging financial situation. However, the complexity of such agreements, including negotiations over costs and legal protections, underscores the intricate dance between lenders and borrowers in resolving distressed properties. The situation at 2 North LaSalle is emblematic of the broader challenges facing office building owners in the Loop, as they navigate the legal and financial ramifications of the current market downturn.

Broader Implications for the Loop's Office Market

The case of 2 North LaSalle is not isolated, as evidenced by similar moves by other Loop office building owners, such as Intersection Realty Group's deed-in-lieu of foreclosure for 65 East Wacker Place. These developments signal a potential shift in the Loop's office market, where owners facing financial distress and logistical challenges in property conversions are increasingly considering deed-in-lieu of foreclosure as a viable option. This trend could have significant implications for the future of office real estate in the Loop, potentially leading to more conversions of office buildings to mixed-use or residential properties as developers look for sustainable paths forward in a changing market landscape.