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CHICAGO-A joint venture between LaSalle Hotel Properties, based in Bethesda, MD, and Oxford OG Hospitality Chicago, based here, is acquiring 12 floors of the former One IBM Plaza, 330 N. Wabash Ave. The sales price is $46 million.

The joint venture, called Modern Magic Hotel LLC, is acquiring the floors from Prime Group Realty Trust, based here, which will continue to own the rest of the 52-story building. The venture has acquired the second floor through the 13th floor of the building, which has a total of approximately 375,000 sf, and plans to convert the floors into a luxury hotel. The total estimated cost for the hotel project is about $160 million, says Hans Weger, CFO of LaSalle Hotel Properties. The company has a 95% controlling interest in the joint venture with the remaining 5% owned by Oxford.

“It is a great piece of real estate in Chicago,” Weger says. “We think the heart of the city is moving there.” Buying floors of an existing building allows the joint venture to develop the hotel for less money, in less time and with less risk, he says. “We do not have any risk of going down into the ground [and] we do not have any risk in terms of construction costs for the building.”

The building was designed by architect Mies van der Rohe and completed in 1971, and was recently designated a historic city landmark. The joint venture has an option to acquire the 14th floor of the building, according to a release from Prime Group. The venture also may decide to sell a couple of the floors in the building for condominiums or other uses depending on how many hotel units there will be, Weger tells GlobeSt.com.

The hotel will have a separate entrance on the ground floor of the building and will have separate elevators. The hotel is expected to have up to 335 rooms, although development plans have not been finalized. Standard guestrooms are expected to be approximately 525 sf with 9.5-foot ceilings and floor-to-ceiling windows. About 20% of the rooms will be suites which will range in size from 775 sf up to 2,350 sf, according to a release from LaSalle. The hotel rate is expected to be in excess of $500 per night, based on luxury rates for last year, Loeb says.

The hotel will have approximately 17,000 sf for meetings and events, including a 5,000-sf ballroom. Additionally, it will have a 9,000-sf restaurant, a lobby bar, wine room, fitness center, indoor pool and spa. The Getty’s Group Inc., based here, is designing the hotel. A brand for the hotel has not been decided yet, with a decision expected later this year on either a brand or an independent operator. Possible brands include St. Regis, Waldorf-Astoria Collection, Taj, Jumeirah and Plaza, Loeb says. “Those are luxury brands that are not in Chicago that we think would be logical in that location,” he says. It is also quite possible that it would be an independent hotel, he says. Construction on the hotel is expected to begin in the second or third quarter this year, and the hotel is expected to open in 2010, Weger says.

The recent designation as a City of Chicago Landmark and Class L status allows for reduced real estate taxes as the assessed value of the property is reduced by 50% per year for a 10-year period, says Jeffrey Patterson, president and CEO of Prime Group. Baird is projecting that the hotel will stabilize with around 10% earnings before interest, taxes, depreciation and amortization yield, or a 9% net operating income yield.

The venture may also have $10 million to $15 million of tax credits that could be sold on the open market, according to Loeb in a recent note about the company. “I think a hotel like that generally takes three years after opening to get full stabilization,” Loeb says. With that yield, between $50 million and $70 million of value creation is possible, according to Loeb in the note.

The building is near the Chicago River, the Michigan Avenue Corridor and is adjacent to Hotel Sax Chicago, which is also owned by LaSalle Hotel Properties. Other hotels in the immediate area include Westin River North, Trump International Hotel and Tower and Renaissance Chicago Hotel in addition to the proposed Shangri-la Hotel. While there is a concentration in that area, the number of luxury rooms “is not a big number,” Loeb says. “Los Angeles and New York [City], two larger cities, have a substantially larger proportion of luxury rooms.” The area has a concentration because of the river views the location affords, its proximity to the Loop and River North business areas and the relative proximity to McCormick Place, he says.

Prime Group decided to sell the floors because “I think the economics ultimately were better for us than trying to hold 350,000 sf of low-rise office space and try to release it over time,” Patterson tells GlobeSt.com. The remaining floors of the 1.5-million-sf-building, approximately 1.1 million sf, will remain office space and is currently 87% occupied, he says. The property has executive underground parking spaces and an adjacent 11-story parking garage with 902 parking spaces. The asking lease rate for the building is between $20 and $26 per sf, net, Patterson says. One of the major tenants in the building is Jenner & Block, which will vacate its space by moving to 383,000 sf at 353 N. Clark St. in April 2010.

Besides the renovation of part of the building for the hotel, the office portion of the building will also be renovated by Prime. The company has already recently completed the cleaning and restoration of the exterior plaza granite and the lobby’s granite, travertine walls and mosaic ceiling. The building will also receive new signage, renovation of the lobby lighting, redevelopment of the elevator cabs and new heating ventilation and air conditioning, security and fire systems in addition to a green roof. When Jenner and Block vacates the top 10 floors of the building, the floors will be completed renovated, including the washrooms, creating a block with new space, he says. The estimated cost for the base building improvements is around $10 million, Patterson tells GlobeSt.com. Prime Group paid off an existing $195-million loan for the building with the proceeds from the sales of the floors and financing from ING and GE Capital, he says. The sale of the floors and conversion to a luxury hotel “is the big first step in repositioning the building and modernizing it,” he says.

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