DRAKE HOTEL OWNER SUED BY LAND TRUST
By: Thomas A. Corfman May 7, 2008
(Crain’s) – The joint venture including Walton Street Capital LLC that owns the Drake Hotel has defaulted on a lease for the land under the Michigan Avenue landmark by holding back information about the financing of the highly leveraged property, according to a lawsuit filed by the longtime owner of the land.
The land owner, a trust that benefits a partnership led by investor Stanley Brashears, is seeking a court order barring the joint venture from selling the hotel or exercising a right to match any offer to buy the land, according to a complaint filed last Wednesday in Cook County Circuit Court.
A lawyer for the Walton Street venture downplayed the case, despite the potential seriousness of the consequences.
“In 26 years of practice I have seen some very silly things, this is near the top,” said attorney Eugene Leone, a partner in the Chicago office of Los Angeles-based law firm Pircher Nichols & Meeks, which represents the joint venture.
Related story: Land under Drake Hotel for sale
The litigation comes after an unsuccessful attempt to sell the land earlier this year by Mr. Brashears, president of Oak Brook-based National Realty & Investment Co. Some observers blamed the lack of a sale on the stalled real estate investment market, while others doubted whether the partnership really wanted to sell because of long ties to the historic hotel, 140 E. Walton Place.
In August 2006, a joint venture that includes Walton Street and another Chicago firm, Lodging Capital Partners LLC, paid $55 million for the 14-story hotel building. As a part of the purchase, the joint venture assumed an existing lease for the land that requires annual rent, which last year totaled about $6 million. The ground lease also limits how much money, and under what terms, the hotel owner can borrow.
There apparently is no dispute that the joint venture has refused to provide documents relating to $47 million in financing used to buy the 535-room hotel.
An attorney for the partnership, Jeff D. Harris of Chicago-based law firm Figliulo & Silverman did not return a call requesting comment. The financing, obtained from Barclays Bank PLC, accounted for about 85% of the purchase price.
The case raises questions about whether the Barclays financing itself violates the ground lease, but the complaint seeks remedies only for not providing the Barclays documents and a copy of the hotel management agreement with Hilton Hotels Corp. of Beverly Hills. Hilton is not a defendant in the suit.
The joint venture denies it has violated the ground lease and says Mr. Brashears isn’t entitled to the documents.
Over the years, Mr. Brashears has been a prickly protector of the hotel. In 1996, he prompted the partnership that owns the land to sue the hotel’s former owners, alleging that they had let the property run down. The case was settled the next year.
When the ground lease expires, no later than 2059, the ownership of the hotel building would revert to the partnership.
The partnership that owns the land includes members of the Brashears family and other families that have been associated with the hotel since its construction in 1920. Ten years later, the partnership bought the hotel 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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