Loan Trouble Brewing on West Loop Office Tower

David Werner and Joseph Mizrachi have already incurred two strikes on their West Loop office tower, with a couple of sales that failed to close. Now, an expensive ground lease and some loan trouble on the horizon could end their at-bat with the 23-story, 1.1-million-square-foot building at 300 South Riverside Plaza.

New York-based Werner and South Florida-based Mizrachi appear to have defaulted on a $175 million loan, according to reports on securitized debt compiled by DBRS Morningstar. The move could be just the first shoe to drop in the complex financing tied to the asset, with the potential for a messy battle between a South Korea-based lender and high-profile investors in the air.

A joint venture of Werner and Mizrachi bought the entire property for $190 million in 2010, and split the building from the land beneath five years later. They sold the land in 2015 for $220 million in a lease-back deal with a joint venture of well-known New York real estate player Rubin Schron’s Cammeby’s and David Lowenfeld’s World Wide Group.

The deal has added significant debt to operations. The ground lease move came after Werner and Mizrachi tried selling both the building and the land but pulled the property from the market after bids fell short of their target of $335 million. They tried to sell just the building again in 2019, when one estimate in trade publication Real Estate Alert put the asset’s value at $280 million while it was 96 percent leased and had the ground lease in place. But once again, they never made a deal.

The land sale came with a lease that had Mizrachi and Werner paying Schron and Lowenfeld nearly $10 million a year, with annual increases. Schron’s and Lowenfeld’s firms borrowed $167 million from Morgan Stanley to buy the land. Morgan Stanely later sold off the loan into securitized real estate debt markets. With the rent hikes, the ground lease is now covering Schron’s and Lowenfeld’s debt service by a margin that’s grown by 10 percent since the loan was issued in 2015, Morningstar data shows.

The loan against the ground lease has nevertheless been watchlisted by debt servicer Wells Fargo, although not because of a default by Schron or Lowenfeld. Instead, the concern seems to be whether Mizrachi and Werner can make good on their payments on a separate loan.

Mizrachi and Werner borrowed $175 million against the leasehold — the building portion of the property — from South Korea’s Shinhan Investment Corp. on a five-year fixed rate term in 2017, and now are in default on that deal, according to a Morningstar report on the ground lease debt.

Shinhan’s Eddie Lee confirmed the borrower missed its repayment and that it is working on a resolution to the debt.

Requests for comment were not returned by Werner, Mizrachi, nor Lowenfeld. Cammeby’s declined to comment. Wells Fargo, the loan servicer for Cammeby’s and Lowenfeld’s debt against the ground lease, also did not comment.

For now, Werner and Mizrachi are still paying the ground rent on time, according to the Morningstar report. But it could be much trickier to refinance the leasehold interest than when they obtained the $175 million debt. That was well before the pandemic sapped office demand by forcing companies into remote and hybrid work routines and federal regulators began jacking up interest rates in response to inflation, squeezing many commercial real estate owners facing upcoming debt maturities.

“The ground lease was a very gimmicky structure in my view, doomed to fail from the beginning, unless the building executed with a perfect 10,” an office sales broker familiar with the property’s debt stack said.

In some respects, the property did have a strong performance over the last decade. Werner and Mizrachi refilled it after J.P. Morgan Chase exited the building in 2016, leaving 45 percent of the tower’s space vacant. It was 98 percent leased late last year when public relations firm Cision took 25,000 square feet there.

But some of that occupancy is on paper only, as the National Futures Association is leaving its current 70,000-square-foot space in the Riverside Plaza property for a 55,000-square-foot spot in the newly built BMO Tower.

The Riverside property is also home to one of the city’s biggest sublease listings. Health care consultancy Evolent is trying to shed about 122,000 square feet there, most of its office space. In fact, Cision leased its chunk from the firm on a sublease.

Should a battle over the property ensue amid the loan default, mounting ground lease payments and a slow office leasing market, it would add to the many fights underway already on office buildings in Chicago and across the nation.

Aon Center landlord 601W had its struggles to refinance the 83-story office tower’s $678 million debt package highlighted in recent months, too, as rising borrowing costs prevent real estate players from accessing enough capital to retire debt obtained in the last economic cycle without surrendering equity.