COVID-19 has created all sorts of tension between hotel owners and their lenders about how to weather the pandemic. In the case of the Ace Hotel in the Fulton Market District, it's a messy tale that involves Sterling Bay and a big deal with Google gone awry.
The details are laid out in a lawsuit filed by the Chicago developer that highlights the strain created by the worst crisis the modern hospitality industry has ever seen and raises questions about the future of one of the trendy neighborhood's most prominent hotels.
Sterling Bay filed the complaint in August in New York against Ohana Real Estate Investors and LoanCore Capital, its lenders at the Ace, the 159-room hotel it owns at 311 N. Morgan St. across the street from Google's Midwest headquarters at 1000 W. Fulton Market. Greenwich, Conn.-based LoanCore owns a $44 million senior loan and Redwood City, Calif.-based Ohana owns a $20 million mezzanine piece of the $64 million Sterling Bay borrowed against the seven-story property when it refinanced it in 2018, court documents show.
The suit came a few days after Ohana sent Sterling Bay a letter saying the developer had defaulted on its mortgage and thus had to repay the loan immediately. But Sterling Bay hadn't missed any payments and didn't need a break on its mortgage like many hotel owners have during the pandemic, according to Sterling Bay's complaint.
Instead, the alleged default has more to do with a different property.
Ohana's beef focused on a deal between Sterling Bay and Google at 1000 W. Carroll Ave., a development site kitty corner from the Ace and immediately north of Google's main Chicago office. In a previously unreported detail revealed in court documents, Sterling Bay had agreed to sell that site to Google and develop a new 18-story building there for the company. The building would have been part of a massive office expansion by the tech company on the Near West Side.
But that sale hinged on a zoning change at the Ace, which would be part of a new planned development that included the hotel, a parcel immediately north of it at 345 N. Morgan and the Carroll Avenue property, according to the complaint. In order to build the 18-story Google building, Sterling Bay needed the Ace rezoned to allow more development density there, and then was going to transfer those bonus development rights to the Carroll property. Developers frequently use such a maneuver to be able to build more dense properties on a given block.
Sterling Bay got the City Council OK in October 2019, and the developer said in the lawsuit that Ohana had signed off on the plan to transfer the new development rights away from the Ace as part of the property sale to Google, which was slated to close April 1.
But then came the COVID-19 outbreak. Sterling Bay's deal with Google fell apart, according to the complaint, as the search giant began rethinking its immediate and future office needs amid a public health crisis.
A week after the Google deal was supposed to close, Ohana sent Sterling Bay a letter telling the developer it had violated terms of the Ace's loan by having the hotel property rezoned in the first place. Ohana had taken steps toward resolving that if the Google deal had gone through, since Google would have paid nearly $6 million to the entity that owns the Ace for its new development rights under the deal. But with no deal done, Sterling Bay remained in default for rezoning the property without Ohana's consent, the lender's attorneys said in a response to the lawsuit.
A New York judge in August granted Sterling Bay a temporary restraining order against Ohana, preventing it from taking further action related to the alleged default. Now Sterling Bay's lawsuit seeks a longer-term block against Ohana and LoanCore Capital and takes it a step further, accusing them of "bad faith, predatory loan practices" and alleging the lenders are trying "to take advantage of the exigent circumstances presented by the COVID-19 global pandemic."
The lenders' "repeated refusals to entertain any of (Sterling Bay's) many commercially reasonable proposed solutions to resolve this matter evidence a calculated, intentional strategy designed to depress the (Ace Hotel's) market value so that lenders can attempt to seize the property at a substantial discount through foreclosure," Sterling Bay attorneys alleged in the suit.
Ohana attorneys fired back in their response, calling Sterling Bay's allegation that the lender had agreed to the rezoning "an effort to escape the bargained-for consequences of their actions" and that Ohana had only agreed to resolve the default issue if the Google deal had gone through as laid out in a March letter explaining the terms of the transaction.
Responding to Crain's, Ohana issued a statement saying that Sterling Bay had defaulted on its loan "long before the pandemic ever occurred."
"Despite lenders' best attempts to work through a constructive resolution, Sterling Bay decided to use the veil of the pandemic to try to deny a default had ever occurred," the statement said. "The mezzanine lender ultimately had no other option but to seek to enforce its rights and remedies."
A spokesman for LoanCore Capital couldn't be reached.
Sterling Bay CEO Andy Gloor also issued a statement in response to a Crain's inquiry:
"Despite the challenges of operating a hotel during a global pandemic, Sterling Bay is not—nor has it ever been—in default of its loan at the Ace Hotel," the statement said. "Unfortunately, in August of this year, Ohana Real Estate Investors, Ace Hotel's mezzanine lender and a hospitality owner, operator and lender itself, asserted meritless defaults in an attempt to take unfair advantage of the circumstances created by the pandemic by accelerating the payment of its loan."
The legal battle comes just 20 months after Sterling Bay put the Ace Hotel up for sale to take advantage of soaring property values in Fulton Market and a flood of companies pouring into the gritty-turned-cool former meatpacking district. The developer was seeking close to $100 million for the property at the time, which would have made it the second-priciest hotel sale in Chicago history on a per-room basis.
Now the hotel is one of many in the city starving for business amid a pandemic that has crushed both leisure and corporate travel. Occupancy at open downtown hotels hasn't risen above 27 percent in any week since early March, according to hotel research firm STR. It's unclear how the Ace, which reopened in mid-summer after shuttering early in the pandemic, has performed. But the hotel disclosed plans to temporarily lay off 64 employees this fall, according to the state's latest monthly WARN report.
Google was the main reason the hotel opened in Fulton Market in 2017. Part of Sterling Bay's deal with the tech company to turn a former cold storage facility into its Midwest headquarters was that the developer would build a hotel across the street to serve Google's visitor needs. That birthed the Ace, which was redeveloped from a two-story industrial building Sterling Bay bought for $4 million in 2013, according to Cook County property records.
Sterling Bay took out a $41.5 million loan on the property in 2016, though the cost to build the hotel—which included an expansion of the original building—is unclear.
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November 11, 2020 at 02:15AM
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