February 18, 2009 - Chicago's Mandarin Oriental Tower Developers, Chicago IL

Foreclosure suit hits Chicago Mandarin Oriental developer

A New York-based lender has filed a foreclosure suit against the developer of the proposed Mandarin Oriental tower just north of Millennium Park, a 74-story project with a lot of sizzle but not enough sales.

Foreclosure suit hits Chicago Mandarin Oriental developer

A New York-based lender has filed a foreclosure suit against the developer of the proposed Mandarin Oriental tower just north of Millennium Park, a 74-story project with a lot of sizzle but not enough sales.

An affiliate of iStar Financial Inc. filed to foreclose on the development site at the northwest corner of Stetson Avenue and Lake Street, according to a document filed earlier this month with the Cook County Recorder.

The project’s developer, a group that includes former construction executive Gerard Kenny, had owed iStar as much as $43 million more than a year ago, but the filing did not disclose the balance on the loan, which was used to finance the acquisition of the property and pre-development costs.

The unbuilt condominium-and-hotel tower has struggled with slow sales and frozen credit markets that have made it nearly impossible to finance construction of such an extravagant project, which was considered a big risk even when lenders were loose with their money. Many observers predicted it was only a matter of time before the developer pulled the plug on the $750-million building.

The project was tarnished by its ties to Florida developer Leonard J. Mercer Jr. whom the Illinois Gaming Board in 2007 called an "associate of organized crime." Mr. Kenny's co-developers, Patrick Danan and Frank Leo, had "notorious and/or unsavory reputations," the board said.

The development’s sales center at 160 N. Stetson Ave. has been closed since December, and unsold units in the building are no longer being marketed through the Multiple Listing Service, according to a recent report by Appraisal Research Counselors, a Chicago-based consulting firm.

The sales office also was closed Tuesday afternoon; calls to the office and Mr. Kenny were not returned.

The Mandarin Oriental is one of a growing number of developments that have been canceled or put on hold amid an awful downtown condo market. Developers scrapped or suspended 22 proposed downtown projects comprising 3,799 units last year, mainly because they didn’t sell enough condos to secure a construction loan, according to Appraisal Research.

Recent additions to the list include Related Midwest’s 358-unit Peshtigo project in Streeterville and X/O, a 479-unit project developer Keith Giles has proposed in the South Loop.

Sales at the Mandarin were stuck at the same level for most of 2008, with about 52% of the 262 condos in the building under contract, according to the Appraisal Research report. Prices ranged from $675,000 for a one-bedroom up to $17.6-million for a full-floor unit.

The developer, Palladian Development, also planned to sell off hotel suites in the building as condos. Buyers had signed contracts for about 44% of the condo-hotel units, not much higher than in mid-2007, the report says.

“While it is reported that the developer is still attempting to secure financing for this project, it too has seen its sales stalled and the prospects of getting this project out of the ground soon appear slim,” the Appraisal Research report says.

Palladian paid $27.2 million for the vacant development site in 2005, just as the condo market was peaking. iStar originally loaned the developer $25 million.

The foreclosure notice doesn’t say how Palladian defaulted on the loan, but it’s likely the developer failed to pay iStar back when the loan matured. Palladian had negotiated loan extensions over the past few years, most recently on Sept. 15, when iStar agreed to extend the maturity date to Oct. 15.

Hong Kong-based Mandarin Oriental International Ltd., which operates hotels in Africa, Asia, Europe and North America, has no ownership stake in the Chicago project but agreed in June 2005 to lend its name to the development and manage the hotel.

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