Zell-backed Venture Buys Distressed Near West Apartments

January 26, 2011  By Alby Gallun  (Crain’s Chicago Business) — Sam Zell, whose real estate empire spans from Sao Paulo to Shanghai, found a vulture investing opportunity right in his backyard.A venture backed by a Zell-led investment fund paid more than $13 million for Mod, a 56-unit condominium-turned-apartment development at 1222 W. Madison St., not far from Mr. Zell’s West Loop offices.County records show the venture bought property at the end of December from MB Financial, the project’s construction lender, which repossessed the building from its developer about three months earlier.

The sale resulted in a major loss for Chicago-based MB, which filed a $19-million foreclosure suit against the project about a year ago.  Related story: Residential development faces $19-million foreclosure suit    The Zell Credit Opportunities Master Fund L.P. teamed up on the acquisition with Randolph Street Realty Capital, a Chicago-based investment firm founded in 2009 by two former executives at Equity Residential, the apartment real estate investment trust founded by Mr. Zell.   A spokeswoman for Mr. Zell was unavailable Tuesday evening, and Randolph Street executives did not return phone calls.

Like many condo projects launched at the tail end of the condo boom, Mod suffered as demand for condos plunged and the supply of unsold units ballooned. Its development team, which included Chicago developer Steven Golovan and two Highland Park developers, brothers Joel and Jeff Pickus, canceled all sales contracts in 2009 and converted the condos into apartments, a sector that has flourished despite the bad economy.  Though the venture rented out all the units, it could not refinance the project or persuade MB to extend the due date on its construction loan.  “We rented the building out 100%, we were current on our interest and the bank refused to renew our note,” says Jeff Pickus, president of Highland Park-based Pickus Cos. “You want to know why there are problems with banks? Because they make decisions like that.”  An MB executive did not return a phone call.

The developers handed the project over to the bank in September through a so-called deed-in-lieu of foreclosure. As part of the agreement, MB gave up the right to collect on personal guarantees the developers signed to obtain the loan.  “It was a bad deal because I lost my equity,” Mr. Pickus says. “It was a good deal because I don’t have a building that’s $5-million to $6-million underwater.”  Mod is relatively less risky than many failed condo deals that have been taken back by lenders and shifted into their real-estate-owned, or REO, portfolios. With its units rented out, Mod is a stabilized property that is generating good steady cash flow.  “It was as clean a REO as you’re going to see,” says Symeon Stavrakas, senior associate in the Chicago office of Grubb & Ellis Co., who represented an unsuccessful bidder for Mod.  Mod’s new owners financed the acquisition with a $9-million loan from Citigroup Global Markets Realty Corp., according to a mortgage filed with the county.

In addition to Mod, Randolph Street has acquired a failed 66-unit condo project in Redmond, Wash., and a 34-unit development in Fort Lauderdale, Fla., according to the firm’s website.  Mr. Zell, meanwhile, is known most recently for his failed investment in Tribune Co. but earned his “Grave Dancer” nickname for buying distressed real estate on the cheap. In 2009, he raised $625 million for the Zell Credit Opportunities Fund and other funds, originally to invest in distressed real estate securities.  Recent investments include Wapiti Oil & Gas LLC, a Houston-based oil and gas exploration and production company, and Penford Corp., a Centennial, Colo.-based maker of ingredients for papermaking, textiles and food products.