Buildings

JOHN BUCK BUYS A PIECE OF THE DRAKE

By:  Alby Gallun January 29, 2014

(Crain’s) – After getting shut out in his first try at investing in the Drake Hotel, Chicago developer John Buck got it done the second time around.

A venture led by Mr. Buck paid $7.5 million last month for a 5 percent stake in the parcel where the Drake has stood for 94 years, Cook County records show.  The land and the 537-room hotel are owned separately, with the hotel owner leasing the parcel under an agreement that expires in 2039.

The sale may say more about Mr. Buck’s tax planning than signal any immediate changes at the Drake, a landmark building at 140 E. Walton Place with redevelopment potential.  People familiar with the transaction say Mr. Buck acquired his stake as a personal investment in a so-called 1031 exchange, a transaction that allows real estate investors to defer capital gains tax on a property sale if they plow the proceeds into another acquisition.

Mr. Buck, who declined to comment, tried to buy a 20 percent stake in the Drake parcel last year but was thwarted by the hotel owner, a joint venture led by Chicago-based Lodging Capital Partners LLC, which exercised a right of first refusal to buy the stake itself.

On the same day Mr. Buck completed his recent acquisition, the Lodging Capital venture upped its stake in the 63,000-square-foot lot to 30 percent, paying $15 million for another 10 percent, county records show.

Mr. Buck invested alongside a venture led by Chicago Investor Gary Brinson, which also paid $7.5 million for a 5 percent stake, according to county records.  The three investors acquired their stakes from a trust tied to local real estate investor Stanley Brashears.

MORE CONTROL

The transactions give Lodging Capital and its partner, New York-based Mount Kellett Capital Management L.P., more control over the ground lease, a source of friction over the years between Mr. Brashears and the owners of the hotel.  Mr. Brashears, who did not return a call, has clashed with hotel owners over how much rent they should pay under the lease, a number that is reset every five years, usually by an arbitrator.  The two sides must agree on a new rate in 2014.

Now that it, Mr. Buck and Mr. Brinson own 40 percent of the land, the Lodging Capital and Mount Kellett venture will be on both sides of negotiations over lease rates, meaning the talks could be less contentious then they have been in the past.                                                                    

Less clear is what the transactions mean for the Drake.  Though a major redevelopment is not likely, the hotel’s owners could consider a repositioning and reshuffling of its valuable retail space along Michigan Avenue, according to people familiar with the hotel.  Retail tenants at the Drake include Chanel, George Jensen and Van Cleef & Arpels.

Though he is known mainly as an office developer, Mr. Buck, chairman and CEO of the John Buck Co., has developed hotels including the Hotel Palomar in River North.

 

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