Buildings

LAND UNDER DRAKE HOTEL FOR SALE

By:  Thomas A. Corfman December 5, 2007

(Crain’s) – The longtime owners of the land under the Drake Hotel have put their interest in the Michigan Avenue landmark up for sale in what could be a $120-million deal.

A partnership led by investor Stanley Brashears has hired the Chicago office of real estate firm Eastdil Secured LLC to market the land, but not the historic, 535-room hotel, which is separately owned, people close to the partnership say.  Mr. Brashears, president of Oak Brook-based National Realty & Investment Co., did not return a call requesting comment.

The deal could prove to be a test of the appetite that investors have for long-term, secure investments, amid jitters about the economy and continued uncertainty in the market for large commercial mortgages.

The hotel building, 140 E. Walton St., is owned by a venture that includes two Chicago firms, Lodging Capital Partners LLC and Walton Street Capital LLC, which bought the 14-story structure in August 2006.  Under a ground lease established in 1979, the partnership leases the land to the hotel owner which pays rent of about $6 million a year.

The Lodging Capital-Walton Street venture is expected to bid on the land, although the extent of its interest could not be determined.

Based on the current rent, and assuming a prospective buyer would bid up the price to receive just a 5% annual return, the sale price would be $120 million.  The relatively low return would reflect the steady income stream over a long period of time that the investment would offer a potential buyer.

In a factor that could boost the price, the rent is reset every five years to equal 10% of the fair market value of the land.  The next adjustment is scheduled to take place in early 2009.  In 2004, an arbitration panel decided to increase the rent just 12%, compared to the 75% increase sought by the partnership, Crain’s reported.

An investor with a very long-term view could look toward the expiration of the ground lease, which runs until 2039 but could be extended until 2059.  When the lease expires, the ownership of the building reverts to the land owner.

Putting the land up for sale comes as a bit of surprise, because the partnership includes members of the Brashears family and other families that have been associated with the hotel since its construction in 1920.  Ten year later, the partnership bought the hotel in 1930 from its original developers, John and Tracy Drake.  In 1979, the ground lease agreement separated ownership of the hotel from the land.

 

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