New Appraisal Hammers Hearn, Fortress on Loop Office

A new appraisal of a 26-story, 700,000-square-foot Loop office building owned by a joint venture of Chicago-based Hearn and New York-based Fortress Investment Group indicates that a long-delayed haircut is likely at hand for bondholders.

The appraisal of Two North LaSalle Street surfaced last week, chopping its estimated value by 40 percent, down to $60 million from a previous mark of $100 million, according to DBRS Morningstar loan data. The prior appraisal was already down from a $127 million loan secured by the building in 2007.

At that time, it was 99 percent leased and appraised at $162 million; its occupancy is now 70 percent, slightly below average for downtown Chicago’s overall rate.

Since the loan’s origination, it has run into trouble multiple times, with each obstacle eventually getting temporarily sidestepped through complex financial maneuvers meant to give Hearn and Fortress a chance to save the deal. The firms didn’t respond to requests for comment.

Hearn and Fortress first swooped in on the building as partners in 2016, pledging to spend $42 million on renovations with an eye on landing new tenants to turn the asset around. The building owner at the time was Harbor Group, which paid $157 million to buy the property in 2007 right before the Great Recession and faced a likely default on a 2017 maturity.

Harbor was able to hold onto a stake in the LaSalle Street building, but the venture led by Fortress and Hearn — the latter being known in Chicago as the owner of the former John Hancock Center — took over a majority interest and the maturity date on the loan was pushed out to 2019.

A comeback looked to be on the horizon in 2019, when the property lured the city of Chicago into a 223,000-square-foot lease with a plan to expand up to 300,000 in 2023. But the added costs of building out the space for the city made it hard for Fortress and Hearn to catch up on the troubled loan payments.

The loan on the property was split, with a senior note of $100 million and a $27 million chunk put at the back of the line of creditors and equity owners to be repaid upon a sale. That move indicated the bondholders in the loan were braced to take a loss of that size, and the maturity date was extended again to July 2023.

It appears ready to end up an even more costly transaction, considering the new appraisal and recent leasing moves in the building.

While the city commenced its larger lease this year, bringing the building’s net cash flow up to $9.6 million, well more than enough to cover its annual debt service, there remains a big balloon maturity to pay off this year, with the recent rise in interest rates making it harder for landlords to get new loans, and facing them with increased operating costs when they do.

Hearn and Fortress tried to market the building for sale in 2021, and trade publication Real Estate Alert reported New York-based Foundation Capital Partners went under contract to buy it for $180 million, but that deal never closed.

In May this year, the loan’s servicer reported that the building was being shopped for sale once again, according to Morningstar.

The picture has gotten bleaker since, with law firm Neal Gerber & Eisenberg set to depart from its 119,000-square-foot space in the LaSalle Street building when its lease expires in 2025 for 90,000 square feet at Onni Group’s 225 West Randolph Street, The Real Deal reported earlier this year.

“The debt structure after modification makes a loss on this loan a near certainty,” Morningstar said in its analysis of the debt earlier this year.