The owner of Chicago's second-biggest hotel has been hit with the city's largest foreclosure lawsuit in years, an early case in what could be a historic wave of distressed downtown property as COVID-19 wallops the hospitality sector.
New York-based investor Thor Equities defaulted on a $333.2 million loan tied to the Palmer House Hilton hotel after failing to make mortgage payments since April, according to the complaint filed this month in Cook County Circuit Court. Lender Wells Fargo last week asked the court to appoint a receiver for the property at 17 E. Monroe St. as it seeks to take control of a hotel that is now worth nearly 40 percent less than what Thor owes on it, according to a recent appraisal.
Wells Fargo represents investors in Thor's 2018 mortgage, which was packaged with other loans and sold off to bondholders.
The complaint is the largest and highest-profile foreclosure lawsuit against the owner of a downtown property since the coronavirus pandemic triggered widespread economic shutdowns starting in March. Hotels have arguably endured the worst of the outbreak's assault on commercial property, with business and leisure travel sapped for months and no sign of when they'll come back in a meaningful way. That has forced many to suspend operations and some to stop paying their mortgages or plead with lenders to modify terms of their loans to account for the worst crisis for hotels on record.
The pandemic has been especially painful for large, full-service hotels like the 1,635-room Palmer House, which rely on business from group meetings, food and beverage sales and conventions and trade shows at McCormick Place. The convention center has been mostly empty since mid-March amid a statewide ban on indoor gatherings larger than 50 people.
With demand all but evaporated, the Palmer House is now worth just less than $306 million, according to an appraisal done earlier this month. That's 45 percent less than the $560 million it was appraised at just more than two years ago when Thor refinanced the hotel amid surging tourism to Chicago.
The decimated value means that if Thor had to pay back its lenders today, it would be more than $100 million short. In addition to the $333.2 million senior loan, Thor's debt on the Palmer House also includes a $94 million mezzanine loan that was packaged separately with other mortgages and sold off to commercial mortgage-backed securities investors. Including interest and other late charges, Thor owes nearly $338 million on the senior loan, according to the lawsuit.
Wells Fargo asked the court to immediately transfer control of the property to a receiver because Thor doesn't have the funds to cover critical operating expenses, "putting the hotel at physical risk" and threatening the lender's interest in the hotel, the complaint said.
A spokeswoman for Thor declined to comment.
The Palmer House's bottom line had been falling before the onset of the pandemic. It generated $30.9 million in net operating income in 2019, down 20 percent year over year, according to a Bloomberg report tied to the senior loan.
But Thor had already cashed out with significant gains on the Palmer House, which it bought for $230 million in 2005 and spent $131 million renovating in 2008. The firm refinanced the property in 2014 with a $420 million loan, paying off a previous $365 million loan and likely pocketing the $55 million difference. The 2018 loan allowed it to cash out with another $7 million in equity compared to the previous one, adding onto its annual operating income from the property.
It tried twice to sell the hotel over the past decade—seeking about $575 million in a 2015 offering—but ultimately held onto it.
Thor also owns the building's 60,000-square-foot retail space facing State Street and has also missed five months of payments on a $62 million mortgage tied to that property, according to Bloomberg loan data.
The Palmer House could be the first of several downtown hotels staring down potential foreclosure lawsuits if COVID continues to stunt the economy. Signs of impending distress among hotels with CMBS loans started popping up in May, when the delinquency rate on such loans among Chicago-area hotels jumped to a record-high 33.5 percent from 2.5 percent in April, according to New York-based research firm Trepp.
Now many of those hotels have been flagged for potential default, including the JW Marriott Chicago, Hotel Felix, Hilton Suites Chicago Magnificent Mile and the Whitehall Hotel. The 610-room JW Marriott was also appraised this month at $210 million, down from $370 million when the property at 151 W. Adams St. was appraised in 2017.
While the Palmer House foreclosure suit deals Thor a big blow, the firm has had big wins elsewhere downtown this year. In May, it sold Mondelez International's new 98,000-square-foot Fulton Market District headquarters building at 905 W. Fulton Market for more than $86 million, shattering the previous mark for the most expensive sale ever for a Chicago office building on a per-square-foot basis.
Just more than a block east of that property, Thor is developing an 18-story, 450,000-square-foot office building at 800 W. Fulton Market where dental practice services company Aspen Dental recently leased roughly 200,000 square feet for its new headquarters.
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August 31, 2020 at 11:57PM
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Chicago Palmer House Hilton hit with foreclosure suit for $338 million - Crain's Chicago Business
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