DRAKE HOTEL OWNER BUYS STAKE IN LAND UNDER LANDMARK, FOILING JOHN BUCK
By: Alby Gallun August 07, 2013
(Crain’s) – After resolving a four-year legal dispute, the owner of the land underneath the Drake Hotel and the venture that owns the Michigan Avenue landmark are now partners.
The hotel owner, a joint venture including Chicago-based Lodging Capital Partners LLC, paid $30 million in late June for a 20 percent stake in the parcel where the Drake has stood for 93 years, Cook County records show. Lodging Capital and its partner, New York-based Mount Kellett Capital Management L.P., own the building at 140 E. Walton Place, but lease the land underneath it from a trust tied to local investor Stanley Brashears.
The ground lease has been a source of conflict for years, as current and past hotel owners have clashed with Mr. Brashears over how much rent they should pay, In 2008, the Brashears trust sued a different Lodging Capital venture, alleging that it defaulted on its lease by withholding information about financing on the 537-room hotel. The two sides settled that lawsuit last September, according to Cook County Circuit Court records.
The sale could signal a new era of cooperation, but it happened because the Brashears trust received an offer for the 20 percent stake from Chicago developer John Buck, according to people familiar with the transaction. Under a right of first refusal in its lease, the Lodging Capital-Mount Kellett venture was able to match Buck’s offer and buy the stake itself, the people said.
A Lodging Capital executive and Mount Kellett declined to comment. Messrs. Brashears and Buck did not return calls.
RENT HIKE LIKELY
It’s unclear whether the sale means major changes for the Drake, a vintage building with redevelopment potential. But it almost most certainly means a rent hike for its owner. Under the ground lease, annual rent is reset every five years at 10 percent of the land’s market value. The two sides have argued over the value of the land in the past, bringing in an outside arbitrator to decide on a final figure.
The recent sale makes it harder for the two sides to disagree on what the 63,000-square-foot parcel is worth. The transaction implies a $150 million value, which would translate into a $15 million rent payment. The next five-year period begins in 2014.
That rent is more than double the $6 million the Lodging Capital-Mount Kellett venture paid in 2007; a more recent figure was not available. Of course, the venture would receive some rent itself because of its 20 percent ownership stake in the land.
Lodging Capital teamed up with Chicago-based Walton Street Capital LLC and New York-based Westbrook Partners LLC to buy the Drake for $55 million in 2006. Mount Kellett, which is also an investor in the John Hancock Center two blocks south of the Drake, bought out Walton Street and Westbrook in 2011.
John Buck’s attempt to buy a stake in the Drake parcel renews questions about the development opportunities there. Under current zoning, a developer could build an additional 760,000 square feet on top of the existing building, though it’s unclear whether city officials would sign off on such a big project involving an official landmark. Any developer also would have to get control of the hotel itself to launch a major redevelopment of it.
Mr. Buck also may have pursued the acquisition strictly for investment purposes. A person familiar with the transaction said he sought the property as a personal investment primarily to defer taxes on another investment he had exited.
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