Parkway to Seek JV on Two Illinois Center

"We've reached a verbal agreement with an investment bank to go to market to see if we can find a joint venture interest," Loeb says. He adds that the Jackson, MS-based REIT may sell off a stake ranging from 50% to 80% in the 1.07-million-sf office building it purchased last month from Tishman-Speyer for $175 million, hoping to raise $125 million. Some of the proceeds could go toward reducing the $106-million mortgage on the property as well, Loeb says.

Parkway Properties maintains it bought the property at a 9.5% initial capitalization rate, but admits that figure will look somewhat like a "stair-step" when the first-year figures are examined. Some tenants have expense pass-through limits in their leases, which will cost Parkway about $300,000 each in the third and fourth quarters of this year, or about $0.026 per share in both quarters.

Besides those additional expenses at 233 N. Michigan, which represents about 12% of Parkway's entire portfolio, the REIT used an $18.5-million preferred-stock sale to reduce debt at 5% interest rather than buy property at a presumed 9.5% cap rate. And now it is seeing some new leases start later than expected and revising its income and expense estimates for its Parkway Realty Service operations.

"Any of these items in isolation would not have been material," says president and CEO Steven G. Rogers. "However, in the aggregate, we had a 'Perfect Storm' in the third quarter."

Parkway would retain management, leasing and maintenance responsibilities of the building if a joint venture partner is found. The REIT has hired J.F. McKinney & Associates to lease more than 100,000 sf of space in the building.

Meanwhile, another Illinois Center building at 111 E. Wacker Dr. reportedly is off the market. Parkway had explored purchasing the similarly-sized building, but could not justify matching a reported bid close to $150 million from Phoenix-based Pivotal Group, Inc. According to a published report, Pivotal Group has lowered its bid, prompting Carlye Group and Lincoln Property Co. to take the building off the market.