Why Landlord CedarSt is Bleeding on $116M in Multifamily Debt

When Alex Samoylovich, the co-founder of Chicago-based development firm CedarSt Companies, brought two West Side apartment complexes to nearly fully leased with minimal concessions to renters, it should have been a win.

Blame the floating-rate loans, totaling more than $75 million, that he took out on them in 2021 for why it didn’t work out that way.

Instead of reaping the rewards of increased occupancy, Samoylovich’s firm is pouring far more cash than it expected into the West Loop and Pilsen buildings due to the surging costs of carrying debt. Interest rate hikes have cut into profit margins and landed the debt on its lender’s watchlist, typically a sign of concerns about a landlord’s ability to repay, according to credit ratings agency Morningstar.

The deals are textbook examples of how floating rate debt threatens borrowers, as many across the country have gotten ensnared in even worse real estate conundrums due to such loans.

Regardless, Samoylovich is confident in his firm’s Chicago multifamily portfolio.

“There’s no issue at the property level,” he said. “It’s the market that has been the challenge.”

With the two watchlisted loans approaching or past their initial maturity dates, he is pursuing refinancing options and not planning on letting go of the assets — The Duncan, a 260-unit West Loop complex at 1515 West Monroe Street and The Otis, a 92-unit Pilsen property at 1435 West 15th Street — any time soon. Their debt maturities could be extended past this year based on the loan terms, records show.

“We are extremely bullish long-term on multifamily,” Samoylovich said.

The Duncan and The Otis were flagged due to their revenues being insufficient to cover the rising costs of carrying their debt loads as interest rates rose over the last two years. Even with each property reporting about 95 percent occupancy, floating rate debt is erasing the buildings’ profits.

The Duncan and The Otis are part of a broader loan package issued in 2021 by a subsidiary of publicly traded Acres Commercial Realty. The Duncan received $51 million, and The Otis received $25 million from the lender. The Duncan currently has a debt service coverage ratio of 0.55 and The Otis’s is 0.73 — any rate below 1 for the measure means the property isn’t generating enough cash to cover the cost of its debt.

Loan servicer commentary shows rising interest rates are the primary factor suppressing the metric below the break-even mark. Each has a rate cap of 6.95 percent, meaning the landlord had some insurance against its rate going any higher.

Samoylovich said a refinancing deal is in the works and will be worth his firm’s effort. With strong rent growth, high occupancy rates and little new multifamily construction on the horizon, he remains optimistic about the market, he said.

“We think anyone who owns and holds onto their real estate will see the best rent growth,” he said.

Plus, CedarSt isn’t shying away from new development deals elsewhere. Even as it’s bleeding cash on its Chicago properties, the company is part of joint ventures pursuing a 311-unit development in Las Vegas, and three projects in San Diego totaling 950 units. Those are being financed by institutional lenders, Samoylovich said.

However, lenders aren’t the source of all his Chicago pain.

Another multifamily property owned by CedarSt is currently watchlisted due to costs associated for repairs from a recent fire and a big jump in property taxes. The 344-unit Uptown complex at 1020 West Lawrence Avenue has a debt service coverage ratio of 0.76 despite having a 3.97 percent fixed interest rate on its $40 million loan.

But Samoylovich anticipates the DSCR will improve and the loan will be removed from the watchlist soon. He’s awaiting the results of a recent property tax appeal — the building’s tax bill has more than doubled to over $700,000 since 2017, when the loan was issued, according to public records.

Interest rates and banks’ willingness to lend will determine how Chicago’s multifamily sector will shape up in 2024. So far, signs of distress have creeped into multifamily but have largely been overshadowed by the office market’s meltdown. Upticks in foreclosures and auction sales indicate that some apartment players haven’t been able to hold on long enough to refinance.

Chicago’s biggest multifamily foreclosure suit so far hit developer Russland Capital’s 199-unit South Loop apartment complex earlier this year at 1411 South Michigan Avenue. The lender, an affiliate of Ares Management, is seeking $80 million for the $76 million loan, plus fees and interest.

While it has come at a cost, Samoylovich is sure he will avoid falling into a similar situation.

“We are prepared for high interest rates for longer periods of time,” he said.