Investment fund in line to co-own Hotel 71
(Crain's) — A California fund that invests in distressed real estate is poised to become a co-owner of Hotel 71 when the Wacker Drive property emerges from bankruptcy this spring.
| HOTEL 71 TIMELINE |
| March 2005: A joint venture led by Chicago hotel developer Robert Falor pays $92.1 million for Hotel 71, with plans to rebrand the property as a Solis Hotel and sell off rooms as condominium-hotel units. |
| January 2007: Oaktree Capital Management LLC sues to collect a $27-million mezzanine loan to the hotel that had fallen into default. |
March 2007: Hotel ownership group files for Chapter 11 bankruptcy protection, thwarting Oaktree's plan to auction off the group's stake in the property. |
July 2007: Wells Fargo Bank N.A., the trustee of a $100-million senior loan to the hotel, files to foreclose on the property. |
October 2007: An Oaktree affiliate takes over the Falor-led group's equity stake in Hotel 71 and files for Chapter 11 protection a few weeks later. |
| Late 2007: The Canyon Value Opportunity Fund and Brickman buy part of the senior loan. |
January 2008: Senior lenders, including Canyon and Brickman, submit winning bid in bankruptcy auction of hotel amid poor turnout. |
An investment fund managed by Beverly Hills-based Canyon Capital Realty Advisors LLC last fall bought part of a $100-million senior loan to the 437-room hotel, which was auctioned off last month. Amid weak interest from prospective buyers at the auction, the lenders stepped forward with a so-called credit bid for the hotel, a move that will give the Canyon Value Opportunity Fund and its partner, New York-based real estate investment firm Brickman, a controlling stake in the property.
Canyon Capital has yet to decide what to do with the hotel, says Jonathan Roth, principal at the firm.
It's a "phenomenal asset to reposition," he says. "We will assess our options in the very near future. We are happy to own it and we're happy to sell it."
A Brickman executive did not return phone calls for comment.
The 50-year-old building at 71 E. Wacker benefits from a prime location, but it has been neglected over the past two years amid financial problems, including two trips to Bankruptcy Court. It lacks meeting space to accommodate business groups and a well-known brand name. Many big hotel brands already have a downtown presence, so finding a new flag could be a challenge.
"How will (they) fill the hotel without meeting space or a brand?" says Steven Kisielica, principal of Lodging Capital Partners LLC, a Chicago-based hotel investment firm. "That to me is a big issue."
The Chicago hotel market has been strong, a trend Mr. Roth of Canyon Capital expects will continue. But Hotel 71 has largely missed out on the boom amid a failed plan by hotel developer Robert Falor to convert the property into a condo-hotel.
In a condo-hotel, a developer sells off individual hotel rooms to investors, who can stay in the units some of the time and make money by renting out the rooms when they're away.
Mr. Falor launched the conversion in 2005 after buying the hotel for $92.1 million, but the plan flopped as the condo-hotel market fizzled. The developer defaulted on about $120 million in loans.
An affiliate of Los Angeles-based Oaktree Capital Management LLC, which provided a mezzanine loan for the project, took control of the hotel last October and filed for Chapter 11 protection a few weeks later.
Related story: Hotel 71's new owner files Chapter 11 as expected
The Oaktree affiliate, which claims that including interest and fees it is owed about $50 million, is expected to lose its entire investment in the hotel. Canyon Capital and Brickman, meanwhile, hold a portion of the $100-million senior loan, which will effectively be converted into equity when the hotel exits bankruptcy.
The other, less risky piece of the loan was pooled with other loans and sold off as part of a commercial mortgage-backed securities offering by Credit Suisse First Boston. That part of the loan is expected to be repaid in full.
As owners of Hotel 71, Canyon and Brickman would have to finish off a massive renovation launched by Mr. Falor — a project that could cost another $15 million, sources say. Only 78 of the hotel's rooms have been refurbished, and construction has stopped on another 144, rendering them unusable, according to a Bankruptcy Court document.
Canyon Capital is known for its Canyon-Johnson Urban Funds, an investment partnership the firm formed with former pro basketball star Earvin "Magic" Johnson. Canyon-Johnson was a key investor in State Place, a mixed-use project with 243 condominiums and 62,000 square feet of retail space at State Street and Roosevelt Road.
