JV Picks Up 1 MSF Chicago Office Tower in $350M Sale-Leaseback

By Barbra Murray, Contributing Editor

In what’s being touted by industry leaders as Chicago’s largest office sale in 2012, the 1.1 million-square-foot office building at 540 W. Madison St. came under new ownership in a $350 million sale-leaseback transaction. A joint venture consisting of real estate players Joseph Mizrachi, David Werner, Eyal Ben-Yosef and David Alcalay acquired the premier downtown high-rise from Bank of America, which will continue to occupy 750,000 square feet of the tower.

In addition to the 31-story building, which was developed by Hines in 2003 and also offers 12,500 square feet of ground-level retail space, the office destination at 540 W. Madison features an adjacent development site that can accommodate a second office structure.

It was the kind of deal that attracted the lending community, just as a picnic invites ants. The quality of the sponsorship, the 10-year-old property’s 91 percent occupancy level and trophy status in the highly desirable West Loop submarket were hard to ignore. As noted in a prepared statement by Peter Nicoletti, a managing director with Jones Lang LaSalle, the commercial real estate firm that marketed the asset and secured the financing for the buyer, more than a few life insurance companies, banks and CMBS lenders expressed interest. Ultimately it was Deutsche Bank that supplied the partnership with acquisition financing in the form of a five-year, interest-only loan at a fixed rate.

For its part, Bank of America gets to stay put in its digs and, should the bank desire, avail itself of the option to vacate 400,000 square feet of space at the LEED Gold-certified building after three years.

The 540 W. Madison trade topped the sales list by quite a margin in 2012, but it was hardly the only major office transaction of the year. Harbor Group International grabbed the 1.2 million-square-foot One South Wacker for roughly $230 million. GlenStar Properties L.L.C. and USAA Real Estate Co. acquired the 1.3 million-square-foot Chicago Board of Trade Building complex at 141 W. Jackson Blvd. for $152 million.

Sales volume in Chicago’s Class A market in 2012, however, may very well be destined for a bit of a downslide. Supply is the issue.

“The problem that you see is if you have a Class A building, you are going to say, ‘ It would make more sense for me to refinance because I can borrow at a very inexpensive rate if I’m 50 percent levered; I can pull some cash out or I can increase my levered return,'” Art Burrows, a senior vice president with commercial real estate services firm NAI Hiffman, told Commercial Property Executive. “That’s a better option than selling and being in a liquid position and making next to no money on it. So the challenge you’re going to face going forward is people who have bought the Class A buildings recently don’t have that incentive to sell, so I think there’s going to be a shortage of product.”