Mesirow to take loss on $380-million sale of 353 N. Clark

353 N. Clark St. Photo from CoStar Group Inc.

(Crain's) — For the first time since the 1990s, a new downtown office building is likely to be sold for less than it cost to build, as Mesirow Financial reaches a painful deal to sell its River North headquarters for about $380 million.

Running up against a deadline to pay off its construction loans, an affiliate of Mesirow has agreed to sell 353 N. Clark St. to New York-based Tishman Speyer Properties L.P., according to people familiar with the transaction. Those sources say the price is a little less than the debt on the nearly 1.2-million-square-foot tower, which opened about a year ago.

The sale sidesteps an ugly foreclosure suit that might have been filed by Munich, Germany-based Hypo Real Estate Holding A.G., which financed the project with a construction loan that comes due Monday.

But the sale would wipe out tens of millions of dollars in equity invested in the 45-story tower, built by a venture led by veteran developer Richard Stein, a Mesirow senior managing director. Mr. Stein did not return calls requesting comment.

The downtown office market hasn't seen a new skyscraper sold for less than the construction cost since the collapse of the commercial real estate market in the 1990s, when billionaire investor Sam Zell scooped up 161 N. Clark St. and 1 N. Franklin St. at bargain prices.

Now, as developers start pushing plans for another round of new office buildings, the woes of 353 N. Clark could serve as a warning to investors and lenders that might back those future projects.

“A lender would be out of their mind to provide financing for new construction when prices are depressed as much as they are, and the (leasing) market is still in the early stages of recovery,” says Zaya Younan, chairman and CEO of Woodland Hills, Calif.-based Younan Properties Inc., which has a 1.6-million-square-foot local office portfolio that includes 200 N. LaSalle St.

353 N. Clark got off to a strong start, with Mesirow and law firm Jenner & Block LLP agreeing to take more than 60% of the building before construction started in 2007. But the leasing effort has stalled at about 80%, according to real estate data provider CoStar Group Inc.

The price Tishman has agreed to pay for the building, about $324 a square foot, stands in sharp contrast to the record-breaking $503 a foot that a Southern California investment firm paid this summer for the nearby skyscraper at 300 N. LaSalle St. That building also was completed last year but is 95% leased.

The Hypo loan has an outstanding balance of roughly $330 million and has been extended until Tishman closes on the purchase, sometime before the end of the year, sources say.

The project was also financed with a $44-million mezzanine loan from Chicago-based real estate firm Transwestern Investment Co.

Transwestern could recoup as much as 90% of its loan, which is similar to a second mortgage. A Transwestern representative declines to comment.

How much equity was used to finance the project could not be determined, but most of that money is probably lost. The project is a joint venture between Mesirow and Chicago-based Friedman Properties Ltd., which originally controlled the site.

The site, tucked behind the office building at 321 N. Clark St. and the Westin Chicago River North at 320 N. Dearborn St., reportedly had a value of $20 million, which typically would be included in equity.

Albert Friedman, CEO of Friedman Properties, did not return a call requesting comment.

A firm now called Cornerstone Real Estate Advisers LLC also invested more than $20 million, sources say. A spokesman for Cornerstone, an affiliate of Springfield, Mass.-based Massachusetts Mutual Life Insurance Co., declines to comment.

The Mesirow venture also put up a multimillion-dollar letter of credit that would have become payable in the event of a loan default.

As part of the deal, Tishman is paying a couple million dollars to the development venture, sources say. And the venture avoids the costly expense of surrendering the letter of credit, sources add.

Tishman already is one of the largest landlords in downtown Chicago, with a portfolio that includes 10 and 30 S. Wacker Drive and Franklin Center in the West Loop. Tishman's financial partner in the deal for 353 N. Clark could not be determined.

A Tishman spokesman declines to comment. The deal was previously reported by Real Estate Finance & Investment, a trade publication.