Killed $130M Chicago CBD Deal Sign of the Times

Even the lowered price proved too much for the Wakefield, MA-based REIT, which issued an SEC filing earlier this week announcing the deal's termination.

The SEC filing says the purchase agreement was called off on Jan. 13, and that there won't be any fees to Franklin or Grubb as a result of the deal's demise.

"Obviously we're disappointed that the deal fell through with Franklin, but we're going to continue to actively market the property on behalf of our investors," a Grubb spokesman tells GlobeSt.com. A representative for Franklin could not be reached for comment.

Tamara Kos, Transwestern executive vice president that specializes in Chicago's CBC, speculates that, like many deals not being completed elsewhere in the city, the demise of this sale came from the buyer's inability to align the mortgage or debt needed to acquire the building. Sources confirm that the deal fell through after Franklin Street Properties Corp. wasn't able to secure financing, as its lender took issue with the legal structure and make-up of the corporation.

"Even if you're talking about buildings that are well-leased and capitalized that have debt coming up in the foreseeable future, a lot of owners are very concerned that they won't be able to renew or replace debt when their loans come up," Kos tells GlobeSt.com. "There is an absolute dearth of capital. When you're talking about a downtown CBD building that's worth hundreds of millions of dollars, I don't know where you can find that amount of capital right now. Banks and institutions simply aren't playing. Everyone is standing back and reserving capital for their balance sheets in the future."

Grubb & Ellis reportedly assumed the building, at 525 W. Van Buren St., in 2007, after merging with NNN Realty Advisors, the parent company of real estate investment firms including Triple Net Properties, which last purchased the 16-story property five years ago.

The building was completed in 2001 and has a 40-space indoor parking garage in addition to a 1,700-car parking garage. The building has a lobby with 20-foot ceilings and column-free floors with a center-core design. Asking lease rates in the building are around $21 per square foot, according to published information. Asking lease rates in the West Loop submarket average around $38.

The property is around 79% occupied, according to Grubb's Web site. The building's occupancy is low for the area, as compared to an average occupancy rate around 88% in the West Loop submarket, according to recent Cushman & Wakefield market research. Tenants include the federal government, Akzo Nobel Inc., North American Co. for Life and Health Insurance and Amtrak, which all have leases expiring in 2011 through 2013. GE Employers Reinsurance Co. had been a major tenant in the building until early last year, when they vacated the fourth and fifth floors to move to 227 W. Adams, playing a large role in the property's vacancy.Another planned sale locally which has failed to close yet is that of 180 N. LaSalle. Los Angeles-based Younan Properties had agreed by early September to buy 180 N. LaSalle St. for $124 million from Prime Group Realty Trust. Built in 1972 and renovated in 1999, the 38-story office is about 770,000 square feet and reportedly more than 86% leased, with annual rent averaging around $16 per square foot. Zaya Younan, chairman and CEO of the firm, told GlobeSt.com in September he believed the time was ripe to buy more in Chicago and that the credit crunch created many opportunities for his firm.

"I think there's a lack of liquidity and buyers in that market," he said. "I'm bullish on occupancy increasing." He said at the time that his firm had tremendous equity and liquidity and a track record that makes finance firms feel comfortable.

The sale was originally planned to be completed by mid-October, a close date later pushed back by several months. Following continued financing setbacks and a new deal that slashed the sales price to $120 million, Younan's acquisition is now planned to close next month, according to Kos. "It's my understanding from word on the street that they won't be able to close in February because they haven't been able to secure debt," Kos says.

Kos says the tight state of the financial markets is becoming increasingly apparent by the volume of building sales.

"Usually we see multiple assets trading hands in any given quarter, but there wasn't a single close in quarter four," Kos says. "Not having even one close, even in today's market, was surprising. There's been a mismatch between sellers expectations and what buyers are willing to pay.There were tons of property owners that tested the market and weren't able to get what they wanted, so they took it off the market. Capital has been very hard to find, and until sources of capital reverse the trend and markets become unfrozen, I don't know if anyone can acquire anything right now."