Red River Defaults on Suburban Chicago Office Loan

Between an abandoned data center conversion and the dropoff in demand for office space coming out of the pandemic, a west suburban commercial real estate complex has been pummeled by two waves of distress that have now sunk $32 million in loans.

The latest victim of the depressed Chicago-area office market is a joint venture of Bruce Stern’s New Jersey-based investment firm Red River Asset Management and Dallas-based Lincoln Property Company.

Its $15.2 million commercial mortgage-backed security loan against the 174,000-square-foot building at 701 East 22nd Street in Lombard was transferred to special servicing last month after their joint venture defaulted on paying the debt upon its Nov. 6 maturity, according to loan data collated by Morningstar Credit. The borrower “expressly stated their inability to pay off on maturity,” the debt’s special servicer, Starwood-owned LNR Partners, said in a note about the loan.

While it’s unclear how much of a stake each company owns in the building, the Red River-Lincoln Property venture used the loan to buy it for $23.4 million in 2017 from a fund managed by New York-based DRA Advisors, according to public records.

The loan default is the second time a landlord in the immediate vicinity has felt an unpaid lender’s sting since the pandemic evaporated demand for office space, sending the suburban vacancy rate soaring to 31 percent, worse than downtown Chicago’s near-record-high vacancy.

The owner of the near twin of the Lombard asset, next door at 747 East 22nd, also defaulted on its $16.9 million loan back in 2019, and a consortium led by Utah-based lender Reef Capital has since stripped control from the borrower through foreclosure. The borrower and former landlord was a company called Manila Coles, which had ties to Frank Asante-Kissi, who didn’t return requests for comment.

Lincoln Property Company declined to comment, while Red River, Reef and LNR didn’t return requests for comment.

Manila, in part to acknowledge that the 229,000-square-foot 747 East 22nd suffered from a lack of parking as compared to the smaller building next door, had planned to turn about half of its square footage into a data center operation, according to people familiar with the property.

But that plan never came to fruition, and the foreclosure process started in 2019, ahead of the pandemic, continuing until a sheriff’s sale was conducted in 2022, with Reef taking control of the property. It’s still lender-owned and a little more than half occupied, with the federal Department of Homeland Security as the largest tenant at about 80,000 square feet, and the state of Illinois taking up about 20,000, according to market sources.

As for Red River and Lincoln’s 701 East 22nd, it’s a little more than 50 percent leased, down from more than 80 percent last year, according to loan data. Its loan was originated by an affiliate of New York-based Benefit Street Partners before being sold off to investors as part of a CMBS package of various real estate debt instruments.

Together, the struggling office buildings add to the string of suburban Chicago office deals that have fallen apart due to loan defaults or decimated property values, leading to massive discounts for buyers. Both Lincoln Property Company and Red River have also been on the other side of the coin.

Lincoln scooped up a big office complex in Playa Vista, California, in October for $187.5 million, down from the previous owner’s $271 million loan that fell into default.

Red River bought an Evanston office property last year for nearly $28 million, or about 21 percent less than it last sold for in 2011.