As seen in Crain's. The owner of Rosemont office building has gone from vulture to prey.
In a deal that illustrates the perils of distressed real estate investing, a venture led by local investor Ruben Ybarra has sold a 180,000-square-foot building at 6400 N. Shafer Court for $10.8 million about two years after buying it for $11.5 million, Cook County records show. An entity formed by Michael Nortman, principal at Schaumburg-based Crossroads Development Partners LLC, bought the building from Mr. Ybarra in May.
“It fit the profile,” Mr. Nortman says. “I’m focused on buying well-located, quality assets that are distressed.”
The property was also distressed back in April 2010, when Mr. Ybarra bought it for $11.5 million from Tremont Realty Capital LLC. Boston-based Tremont had taken over the property through a so-called deed in lieu of foreclosure from a unit of Grubb & Ellis Co., which paid $21.5 million for the building in 2007, at the peak of the market.
Tremont also loaned Mr. Ybarra’s venture $14 million to finance his acquisition. Mr. Ybarra and a Tremont representative decline to comment, but records show that Tremont released the venture from a mortgage at the time of the sale, suggesting that he satisfied his obligation to the lender.
Now, it’s up to Mr. Nortman to turn around the property. He says the building is 68 percent leased, up from 56 percent when Mr. Ybarra bought it. The property’s new leasing broker, Jack Reardon, senior vice president at Oakbrook Terrace-based NAI Hiffman, is confident he can find tenants to fill it up.
“We are seeing a fair amount of movement,” Mr. Reardon says. “I’m going to attribute it to an improving economy and tenants reacting more quickly due to lack of available options. There are far fewer (large blocks of office space) today than there were 18 months ago.”
Current tenants in the Rosemont building include Seasons Hospice Foundation, Paris-based consulting firm Capgemini and Rosemont-based Foresite Realty Partners LLC, according to Mr. Nortman. He financed his acquisition with a $7.5 million loan from Guggenheim Life & Annuity Co.
Mr. Nortman already has pulled of a turnaround of a half-empty, foreclosed Schaumburg office building he bought in 2010 for $4.5 million, less than a third of what the previous owner paid. Today, he says the 140,000-square-foot property at 1300 E. Woodfield Road is 94 percent leased and “cash flowing significantly well.”
Still, the Rosemont property’s recent history underscores the risks that distressed investors face.
“When you factor in the reality of a 30 percent to 40 percent vacancy, tenant improvements, broker commissions and deferred maintenance, your anticipated cash flow in this market gets to be very close to zero,” said Al Klairmont, president of Chicago-based Imperial Realty Co., an investor in distressed office properties. “As I evaluate property in the O’Hare market, not only is 2012 written off, but 2013 and 2014 are also written off.”
Mr. Nortman says buying properties at such depressed prices allows him to be extremely creative with rent, cover tenant build-out costs and still make a return on his investment.
Mr. Klairmont is less sanguine.
“You have to be very cautious,” he says. “It’s going to be a very rough ride.”