How savvy refinancing and timely renovation saved the landmark 330 North Wabash building, a Mies van der Rohe skyscraper in Chicago

A city architecture website www.chicagoarchitecture.info says 330 North Wabash, now named AMA Plaza after the American Medical Association moved its headquarters there in 2013, is “an engineering feat”. The website also shares how the building had to avoid a freight line that bought newspaper rolls to the Chicago Sun-Times building that was once on the other side of the Wabash Avenue. “The City of Chicago even helped out a little with the engineering, shifting the path of Wabash Avenue slightly to allow the architect to pursue the building shape he desired,” it adds. The architect: Ludwig Mies van der Rohe, one of the pioneers of modernist architecture.

But that’s not the reason why Lynne B Sagalyn, Earle E. Kazis and Benjamin Schore Professor of Real Estate, Columbia Business School (CBS); and David Linn Reynolds, Managing Director, Five Mile Capital Partners, decided to write a case study on the 1.5 million square foot building. Sagalyn explains: “I wanted to teach my students not only about finance and the restructuring of a deal, but also about the real, physical aspect of a building with a pedigree.” She says it was a classic case of restructuring a deal in distress. “Sometimes business students might be narrow-minded about the building itself; a case like this gives them exposure to how the building’s physical characteristics influence renovation options and impact financial returns,” says Sagalyn, former director of the MBA Real Estate Program, and the founding director of the Paul Milstein Centre for Real Estate at Columbia’s CBS.

And thus, the case. It was panic time at Prime Group Realty Trust (PGRT), when the company was about to default on its debt on the Chicago skyscraper landmark, completed in 1972. The company’s primary asset, 330 North Wabash, would see its occupancy fall from 90% to 40% after international law firm Jenner & Block announced it would be vacating in 2009; the company had the top eleven floors of the building. IBM, the building’s historical primary tenant, had already moved out in 2006. To add to its woes, the equity in Prime Group was in trouble and the preferred shares were trading below 10% of their value.

Appraising the situation
Yet PGRT was making efforts. In 2008, the company sold floors two to thirteen to hotel management group LaSalle for $46 million, which gave it capital and also reduced annual operating expenses for the building. PGRT also secured a loan on its remaining share in 330 North Wabash. Alas, at the time the world economy was reeling under the effects of the Great Recession, which did not make things any easier. Chicago was no exception; the unemployment rate reached 11.4%, and even in 2010, the total direct vacancy in the city’s central business district (CBD) office market was 15% — even above the 10.9% in 2008. Class A office space was not doing any better, especially with the arrival on the market of big new office properties. To sum up, the building continued to bleed and the tenancy rates didn’t improve.

In 2010, PGRT’s CEO and President Jeff Patterson approached Jim Glasgow, managing director and portfolio manager of Five Mile Capital Partners, the Connecticut-based principal investment firm specializing in alternative investments such as real estate. Glasgow, in turn, asked his then colleague David Reynolds to take a closer look at the opportunity. Despite initial hesitation, Reynolds agreed to have a look at the asset.

It was hard not to be blown away by the stately skyscraper standing proud along the Chicago River. A competent management team, along with his own research about the building, made Reynolds change his mind. Five Mile struck a deal with PGRT to:

  1. Form a joint venture to acquire the property;
  2. Restructure the debt on 330 North Wabash with its lenders;
  3. Invest as much as $75 million of equity for renovation of the property; and
  4. Tender for PGRT’s preferred shares.

Commenting on the deal, Sagalyn says, “Five Mile is a savvy player. Its business model is to find distressed real estate situations. It’s a high-risk capital company and is paid well for taking that risk.” What also worked wonderfully for the deal, according to Sagalyn, is that it was a mutually beneficial venture; the two companies were not adversaries but rather partners in the true sense.

A harbinger of better times: Great Eagle Holdings Ltd, one of Hong Kong’s leading property firms, bought the LaSalle property (floors two to thirteen) to flag the space as The Langham Chicago, a new five-star luxury hotel, the most expensive and exclusive hotel in the city. The luxury hotel chain has premium properties in cities such as Auckland, Boston, Hong Kong, London, Melbourne, New York, and Shanghai.

Building it up
By 2011, about 35% of the building’s office space was leased but things were about to get better. The joint venture implemented a renovation plan for the building, which included doing away with asbestos on the floors that were vacant, and adding a 5,000 sq ft fitness center, a fashionable café, a new conference centre that could be used by all office tenants, state-of-the-art fire and life-safety systems, new restrooms, and an updated HVAC system, as well as elevator-cab modernization. Total cost: nearly $74 million.

Lease negotiations for the building then started in earnest. For instance, there were three significant tenants who showed interest in several floors at or near the top of the building. The ownership team not only found the best deal for the top of the building, it made deals with the other two tenants. All three tenants signed the lease agreements in December 2011 and January 2012.

All the hectic activity finally bore fruit and in about nine months, the occupancy rate of the building shot up from 35% to 89%. About 600,000 sq ft of space had been leased. New tenants included AMA; SmithBuckin Corporation; Latham & Watkins; BDO USA, LLP; and Creative Circle, LLC. Patton & Ryan not only extended its lease by 11 years, but also increased the size of its occupancy – from 20,186 to 23,252 to sq ft. According to the co-authors, such leasing success in such a short period of time was unheard of in the Chicago market at the time.

Thanks to Great Eagle’s investment and the amount of capital spent on the property, AMA Plaza became eligible for Chicago’s Class L designation, implying property tax abatements for more than a decade. The benefits were passed onto the tenants, thus making the building’s pricing more competitive. The renovations also mean the property was back in the market as a solid Class A.

Potholes and roadblocks
The case study also offers valuable insights into a frequent guest in property deals: litigation. Some of the hedge fund investors tried to obstruct the deal by filing lawsuits against the deal, and possibly increase their wins from their PGRT preferred shares. “This is not uncommon with hedge funds. That is what they do,” says Sagalyn, adding that it worth noting that PGRT won or settled every lawsuit filed.

It is also worth mentioning that in October, 2017, the owners proudly announced that AMA Plaza had been bought for $467.5 million by Riverview Realty Partners, an affiliate of Beacon Capital Partners, LLC, a private real estate investment firm based in Boston, Massachusetts. In June 2016, AMA Plaza was awarded the 2016 The Outstanding Building of the Year Award (TOBY) in the Over One Million Square Foot category at the Building Owners and Managers Association (”BOMA”) International annual conference in Washington, D.C.

330 North Wabash Reference no. CCW161701
Professors Lynne Sagalyn & David Linn Reynolds

Profile: Professor Lynne Sagalyn http://casium.net/prof-lynne-sagalyn-columbia-business-school/