SPECIAL FOCUS: AFT’s Top Deals of 2007

APARTMENT FINANCE TODAY • NOVEMBER/DECEMBER 2007

Topping Out

Waterton Associates’ purchase of Presidential Towers hits a new high in Chicago.

By Jerry Ascierto

Waterton Associates’ business came full circle when it purchased the Presidential Towers in a $475 million deal in March, the largest multifamily transaction in Chicago’s history.

The towers, four 50-story high-rises that take up two full city blocks in Chicago’s West Loop, were sold to Waterton by Pritzker Realty Group, the very same firm that helped a fledgling Waterton Associates get off the ground when it began in 1995.

“They were our first equity partner when we started,” said Mark Stern, executive vice president of acquisitions for the Chicago-based Waterton Associates, LLC. “When we went in for the interview during the final stages of the deal, they said ‘I remember when you guys came in here and asked to borrow $2 million.’”

Competition for the project, built in the mid-1980s, was fierce, with more than 20 bids coming in to broker CB Richard Ellis. Waterton executives felt that the $475 million price tag was too good to pass up for a unique property that, in their view, never realized its potential.

“We thought there was a tremendous amount of upside, of value-add that could be done to the property,” said Stern. “It really hasn’t been rehabbed since it was built. They have great floorplans, they had a great architect— the apartments just needed to be modernized.”

The company has already pumped in almost $14 million, or about $6,000 per unit, to rehabilitate the units, remaking the kitchens and bathrooms and realizing rent increases of between 10 percent and 12 percent. Rents averaged $1,325 when the deal closed, and now average more than $1,450. The complex consists of 2,346 studio, oneand two-bedroom apartments, as well as more than 120,000 square feet of retail space.

The debt financing in the Presidential Towers transaction was well-timed. The deal was completed April 12, before problems in the subprime mortgage industry led to tighter lending requirements from conduit lenders.

Waterton took out a conduit loan through Bank of America of nearly $325 million. It was an interest-only loan with a sevenyear term and an interest rate of slightly less than 5.4 percent, an 88 basis point spread over the seven-year Treasury rate. “There’s no way that I could get that [loan] today,” said Stern. “If it was in today’s environment, we wouldn’t be able to get it done.”

To complete the deal, Waterton also provided a large amount of equity, approximately $160 million, from a joint venture equity fund it established with the California State Teachers’ Retirement System in 2006.

The towers were built by local developers McHugh Levin Associates Venture and Madison-Canal Co. as a self-contained community in a bad part of town, a sort of garrison surrounded by urban blight. There was only one entrance to each building, guarded by security personnel, and the 120,000- square feet of retail space faced inward, not toward the street.

The developers secured tax-exempt bond financing from the city and the federal government. None of the units were for affordable housing, despite its location in an area dominated by single- room-occupancy developments.

The developers had a political ally in Illinois Rep. Dan Rostenkowski, then-chair of the House Ways and Means Committee, who helped the project skirt federal requirements mandating a 20 percent affordable housing component for projects financed with tax-exempt bonds, according to several reports.

The project soon fell on hard times, defaulting on a $159 million Federal Housing Administration (FHA) mortgage in 1990 as the city’s apartment market softened. At the same time, protests against the development’s lack of affordable housing from area resident groups and the Chicago Coalition for the Homeless drew unwanted attention to the complex, and further depressed its occupancy rate.

At issue were the huge federal and state subsidies used to build the development. The city sold the site for $30 per square foot, loaned the developers $5.8 million at 2 percent interest, and authorized $180 million in tax-exempt bonds for construction costs. The FHA’s $159 million mortgage was the largest at that point for a private development.

When the owners defaulted, HUD decided to refinance the project, and for the next few years sparred with the developers on how much affordable housing it would contain. Ultimately, 7 percent of Presidential Towers’ units became affordable housing. The Pritzker Realty Group bought a controlling interest in the complex in 1995 with a $14 million investment, restructuring its finances in the process.

The area has improved dramatically. In the last 10 years, the neighborhood has seen a boom in office construction, making it more attractive to renters.

Waterton is also in the process of adding value to the retail and parking components of Presidential Towers.

The company is working on opening the retail stores to the neighborhood at large by replacing the exterior brick walls with windows. The retail space is about 85 percent occupied and features a grocery store, several restaurants, a dry cleaner, and a health facility. Waterton is also modernizing the complex’s 1,159-stall parking garage, which had no automated pay stations and didn’t accept credit cards when the deal was closed.