LG Group’s 330 South Wells in Special Servicing

Converting an oversupply of office space into much-needed housing seemed like a win-win in the wake of the pandemic.

But a pre-pandemic office-to-resi conversion at 330 South Wells in the Loop shows how such redevelopments can fall short of expectations.

Chicago-based LG Group has been up-to-date on interest payments on its loan for the South Wells building but failed to pay off the remaining principal when the note matured last month, according to loan data collected by Morningstar Credit. The CMBS loan was moved to special servicing, and it is unclear when or if a debt workout plan will be achieved.

Representatives of LG Group and special servicer Situs Holdings did not respond to requests for comment.

LG Group took out a $27 million construction loan to convert the nearly 100-year-old office building to apartments in 2018. Once it was completed, the firm refinanced in 2021 with $27 million originated by Prime Finance, with an adjustable interest rate. The debt service costs have increased substantially as a result of Federal Reserve rate hikes since 2022.

The redevelopment includes 132 apartments, office space on the second through fifth floors and 5,200 square feet of ground floor retail. The retail space is vacant.

When LG refinanced in 2021, the 17-story building was generating enough revenue to cover debt costs, but by 2023 it was not, according to Morningstar. Loan commentary from last month attributed at least some of the property’s poor performance metrics to “stagnant rents.”

The building is 88 percent occupied. The apartment units, which consist entirely of studios and one bedrooms, range from about $1,700 to $2,300 per month.

Not far from 330 South Wells, the City of Chicago is pumping millions of dollars of public funds into similar office-to-resi conversions along LaSalle Street. The LaSalle Street Reimagined initiative, started under former Mayor Lori Lightfoot, commits future property tax revenues to subsidies for such developments in the core of the Loop.

In return for the subsidies, developers must preserve a portion of their units as affordable.

So far, several projects have been selected — most recently a $64 million proposal from Campari and R2 to repurpose 79 West Monroe Street. Out of the $64 million budget, $28 million will come from city funding.

Affordable units will make up 35 percent of the 117 apartments planned for the redevelopment.

As more of the city-subsidised office-to-resi conversions get underway, developers will find out if public funding will be enough to avoid a similar fate to 330 South Wells.