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One Law Firm Move Sparks Two Building Loan Modification Requests

Although Willis Tower is Gaining Tenant, and Citadel Center Losing One, Both Said to Seek Loan Modifications
June 3, 2014
Seyfarth Shaw recently announced that it will move its Chicago office to the iconic Willis Tower (formerly Sears Tower) taking 200,000 square feet. The law firm reportedly is signing a 15-year lease in the landmark skyscraper at 233 S. Wacker Drive, leaving about 300,000 square feet at the Citadel Center, 131 S. Dearborn St., its home since 2007.

Now credit ratings agency Fitch Ratings is reporting that the loans on both office towers, which are held in CMBS trusts, have been placed into special servicing.

Loans are moved to special servicing when issues arise that are not routine. This may include addressing performing loan issues such as approvals for the sale of the property and assumption of the debt or evaluation of loan modification requests.

In both the Willis Tower and Citadel Center loan cases, the assignments are said to be for loan modification requests.

The total loan balance on Willis Tower is $773.3 million divided among four CMBS trusts.

CWCapital Asset Management is acting as special servicer. According to CWCapital, the borrower is facing the prospect of significant capital costs required to fill the remaining available space.

With the signing of Seyfarth Shaw, vacancy at the tower will decline from more than 20% last summer to about 14%. The 3.78 million-square-foot high rise still shows about 684 million square feet of space available for lease at an average asking rent of $21.40 per square foot.

At the Citadel Center, from which Seyfarth is moving, the current vacancy rate is less than 8%. Seyfarth Shaw’s lease at the building runs through June 2017.

The CMBS loan balance on 131 Dearborn is $236 million. CWCapital Asset Management is acting as special servicer on this property as well.

Although the property is producing significant net operating income with a current debt service credit ratio of 1.52x, the building has a large number of leases rolling in 2016 and 2017. Spaces being offered for lease imply an effective vacancy rate of less than 60%, according to analysis by Morgan Stanley Research.

Although Morgan Stanley's analysis suggests an 'as-is' value for the property ranging from $300 to $350 per square foot (before considering lease-up costs), it also said the stabilized property value could increase up to $400 per square foot if the occupancy level is restored to approximately 90%.

That will require meaningful tenant improvement and leasing commission expenses, Morgan Stanley noted.



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