A Goldman Sachs Group Inc. real-estate fund that has walked away from a number of struggling investments is taking a different approach with a Chicago skyscraper, deciding to fight its creditors rather than surrender ownership of the building.
Goldman and its partner, property manager Golub & Co., are required to repay on Feb. 9 some $400 million in debt that they put on the John Hancock Center after they purchased the 100-story tower in 2007. But a default is likely because the owners haven't been able to sell or refinance for that amount.
Indeed, Goldman's Whitehall real-estate fund last week requested a loan extension and is preparing to challenge in court any efforts by debtholders to take over the building, according to a letter from its attorney reviewed by The Wall Street Journal. The $400 million in debt consists of a $182 million senior loan that was converted into commercial mortgage-backed securities and the rest in three pieces of junior debt.
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Close Getty ImagesThe John Hancock Building (black tower) in Chicago is 81% leased. Goldman's Whitehall fund and Golub face repayment of some $400 million in debt that they put on the building.
The letter accuses some of the junior creditors with interfering with Goldman's business plan to sell the building in five pieces. That plan "would have enabled the borrowers to repay the loans in full well before the stated maturity and to earn a meaningful profit," the letter states.
Those junior debtholders—Chicago developer John Buck Co., a Morgan Stanley real-estate fund and NorthStar Realty Finance—declined to comment or didn't respond.
Others familiar with the property say that Whitehall's problem is primarily that the fund and Golub paid too much when they purchased the tower for $383 million in 2007.
At that price, the building would need annual office rents around $35 a square foot to be profitable, or about $7 to $8 more than it is getting, according to Jack McKinney, president of the Chicago real-estate-services firm J.F. McKinney & Associates. "That's not achievable," Mr. McKinney said. "They bought it for too much."
Goldman's tougher stand comes at a time when commercial-property battles are erupting throughout the country as loans made during the boom years come due. They often pit owners against junior debtholders who angle to take over properties by foreclosing and assuming the senior debt.
What is unusual in the fight over John Hancock Center is that, if Whitehall ends up challenging lenders in court, it would represent a break from its recent conciliatory approach toward lenders. The once highflying fund was humbled by a number of real-estate investments that collapsed during the downturn, and it has generally preferred to turn over the keys or negotiate with creditors when property loans soured.
Goldman's adversaries for control of the tower may change because a number of investors are looking at acquiring a $98 million piece of junior debt held by the Morgan Stanley fund and John Buck, say people familiar with the matter. These investors include private-equity giant Blackstone Group, people said.
Whitehall's charge against some of its junior creditors is known as "lender liability" in real-estate circles. Often used by owners facing foreclosure actions, it essentially tries to shift the blame for a default to creditors.
Whitehall believes that it would be able to make more than the $400 million it owes by selling the building in separate parts: the retail, office, broadcast tower, observation deck and garage. The letter, signed by Daniel Tabak, a lawyer at Cohen & Gresser, claims that this plan "received conditional approval" in 2007 from KeyCorp Real Estate Capital Markets, the servicer at the time of the debt that was converted into commercial-mortgage securities.
The letter also states that the original holder of the junior debt, Lehman Brothers, "was prepared to formally approve" the plan, too. But Lehman sold that debt shortly before the firm collapsed in 2008 to investors including the Morgan Stanley fund, John Buck and NorthStar. Those investors refused to approve the sales strategy, the letter said.
The lenders "were not acting in good faith" and their true goal "was to wrest ownership of the property from the borrowers," the letter alleges.
Real-estate attorneys say it is hard to say how effective Whitehall's legal case will be, and that claims that exist on anything less than a formal written agreement can be tough to prove. Some lawyers suggest it could be a Whitehall ploy to strengthen its hand in negotiations with creditors.
At 1,127 feet, the John Hancock Center is one of the tallest and most-recognizable towers in Chicago's skyline. The building's is 81% leased, according to CoStar Group, a real-estate research firm.
The building isn't in a prime office location for many companies, brokers say. Its office tenants include advertising firms, diplomats and doctors attracted by the property's proximity to nearby upscale residential neighborhoods and Northwestern Memorial Hospital.
Write to Craig Karmin at craig.karmin@wsj.com and Maura Webber Sadovi at maura.sadovi@wsj.com
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