The CMBS spigot is loosening up in Chicago, with a big new debt set to be showered onto an under-the-radar investor who faces multiple obstacles in a tough commercial real estate market.
Morgan Stanley originated a $160 million loan for an LLC led by New York-based investor Teresa Tsai that owns the 481-unit apartment tower called Grand Plaza, at 540 North State Street, according to a prospectus of the commercial mortgage-backed securities package including the deal.
Even after scoring the loan, however, Tsai faced a $16 million shortfall from the property’s previous debt, a $186 million mortgage taken out in 2014, property records show. It’s unclear how Tsai closed the gap — she could have paid out of pocket or raised the money from another investor in exchange for a piece of the property’s equity.
Regardless, landing a CMBS deal on relatively favorable terms is a strong sign for Chicago’s apartment market. Lending activity has been suppressed in the commercial real estate market as interest rates are elevated compared to the previous economic cycle, when most loans coming due this year were taken out.
Grand Plaza was appraised at $241 million during the loan underwriting process. The debt comes with a five-year term and requires only the interest to be paid until its maturity, when the principal becomes fully due, according to a Kroll Bond Rating Agency analysis. The estimated property value is down nearly 20 percent from its 2014 appraisal of $300 million.
Tsai’s conundrum played out similarly to Chicago-based developer Habitat Company’s latest refinancing of a Wacker Drive apartment tower late last year with a $73 million loan. Habitat brought on Torchlight Investors to throw in nearly $30 million in new equity to pay off the property’s last loan of more than $90 million.
The last large CMBS loan for a Chicago apartment property was secured in June by JDL and Wanxiang, which partnered to develop the One Chicago towers in River North. Their $415 million refinancing also required the ownership to kick in another $262 million to pay off their construction debt and preferred equity investors.
The Grand Plaza loan, $93 million of which is set to be sold in the CMBS package, is the largest deal in the latest offering, which totals more than $934 million across 40 loans, according to Kroll. The bond package including the loan consists of mortgages originated by Argentic Real Estate Finance, Starwood Mortgage Capital and Bank of America, in addition to Morgan Stanley. PNC Bank’s Midland Loan Services is set to be Grand Plaza’s master loan servicer and Argentic is set to be the special servicer.
The apartment tower has brought healthy financial returns to Tsai’s venture. The LLC she leads included several other investors. The venture bought the property — along with a huge parking garage and 100,000-square-foot retail assets connected to the complex — for $265 million in 2007. It then refinanced with the $186 million loan in 2014, but appeared to only use the apartment tower as collateral, allowing the retail and parking assets to operate debt-free, property records show.
Through September last year, Grand Plaza brought in $19 million in revenue and $9.2 million in net cash flow, after accounting for its operating expenses, according to loan data compiled by Morningstar Credit. The previous loan matured in January, and the landlord was given an extension of a couple months, apparently to work out closing on its latest CMBS loan.
Still, Tsai isn’t out of the woods with lenders in the Chicago area. In Downers Grove, special debt servicer Rialto Capital brought a foreclosure lawsuit in December against a Tsai venture that owns the nearly empty 300,000-square-foot office property at 3075 Highland Parkway, alleging it still owes $29 million after missing payments on its loan. The building was left almost fully vacant when its largest tenant, Advocate Health Care, exited its lease last year.
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