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Distressed downtown office properties go up for sale

Neither listing comes with a specific asking price, but both are expected to fetch bids below the value of the debt on the properties as the pandemic clouds the outlook for the office sector. Downtown office vacancy remains at a record high after more than two years of companies rethinking their workspace needs, with many shrinking their footprints amid the rise of remote work. That diminished demand has hammered many landlords’ bottom lines and driven down property values, in some cases triggering foreclosure lawsuits or pushing owners to surrender buildings to their lenders rather than engage in legal battles.

The Adams and LaSalle Street buildings show different examples of pandemic-era stress. They also set up properties to get new life from buyers that could pick them up at relatively low prices, allowing them to invest heavily in reviving them as offices or something else.

The LaSalle Street offering comes as a potential resolution to a $50 million foreclosure lawsuit filed last year by lender Midland National Life Insurance against the owner of the property, a venture controlled by Chicago real estate veteran Michael Reschke’s Prime Group. Midland alleged that the Reschke venture defaulted on its $47.5 million loan by commingling funds between the office property and a hotel Reschke is developing on the floors above, among other accusations. Reschke vehemently denied the allegations, countering that Midland had been illegally hoarding revenue from the office property to make it appear that Reschke’s venture has defaulted on its loan and to effectively build up a security deposit in the case Reschke’s venture were to walk away from the property .

A Cook County judge last year appointed Millennium Properties’ Dan Hyman as a receiver to oversee the nearly 220,000-square-foot property with the lawsuit pending. Hyman said both parties in the dispute recently agreed to have the property marketed for sale in an effort to resolve the matter.

But Reschke may step in before any buyer has a chance to. The developer said he has reached a deal with Midland that gives Prime Group a little more than 30 days to pay off the loan at a mutually agreed upon price and that he intends to do so. If he doesn’t, the Prime Group venture will hand the keys to the property over to Midland, Reschke said. He declined to share the agreed price.

“We’re hoping all goes well and we’re able to perform,” he said.

A Midland spokesman declined to comment.

Sources familiar with the property said it would likely to fetch bids below the value of loan. But any deal to sell the property would be subject to court approval.

The offices on floors 13-17 in the landmark building are 49% leased, according to a marketing flyer, which frames the condo as an opportunity to lease up the vacant space or redevelop it. The property could be eligible to receive a Class L tax designation from Cook County to reduce its property taxes if a buyer invests heavily in fixing up the space, according to the flyer. The offering also includes more than 9,500 square feet of ground-floor retail space with 7-Eleven and men’s clothing store Charles Tyrwhitt signed to triple-net leases.

A Midland spokesman declined to comment.

Reschke’s Prime Group has owned the 208 S. LaSalle offices since 2005, when it paid $44 million for the entire Daniel Burnham-designed building and proceeded to spend close to $400 million renovating it and converting the first 12 floors into the 610-room JW Marriott , which opened in 2010. Another Reschke venture redeveloped five floors above the office condo into a 232-room luxury hotel dubbed the LaSalle Hotel that is scheduled to open this summer.

The potential sale of the office portion comes as Reschke bets heavily on the future of office space elsewhere on LaSalle Street. A Prime Group venture last year reached a deal to buy and renovate the James R. Thompson Center, where Reschke will have 600,000 square feet of offices to lease up when the project is completed.

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