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THE SEARS TOWER
A CASE STUDY OF THE DEVELOPMENT, RE-FINANCINGS AND SALE
OF NORTH AMERICA’S TALLEST BUILDING
Students:
Ben Bove, Aristithis Loukas, Rich McPhillips, Eddie Meder, Kevin Merchant,
Agustin Rizo, Greg Trimmer, Susan Weaver, Neal White, and John Wilbeck.
Faculty Member:
Joseph L. Pagliari, Jr.
January 1, 2007
This case study has been prepared solely for purposes of class discussion. It should not be construed as a
judgment about or endorsement of any particular business matter. Moreover, the information contained herein
has been obtained from sources we believe to be reliable; however, we make no representation or warranty as to
their accuracy.
The Sears Tower
January 1, 2007
I.
II.
Executive Summary............................................................................................................. 1
Overview of The Sears Tower ............................................................................................ 3
Background of Sears & Roebuck Co........................................................................................ 3
Sears Consolidates Chicago Operations ................................................................................. 3
Tower Construction & Architectural Significance ................................................................ 4
Retail Industry Background in the 1970s - 1980s.................................................................. 9
Sears Encounters Hard Times and Decides to Leave the Tower ............................................ 9
Sears Relocates its Headquarters .......................................................................................... 13
III. A Series of Tower Refinancings (1990-2003) .................................................................. 15
The MetLife / AEW Years .................................................................................................... 16
The MetLife / Trizec Years ................................................................................................... 21
September 11, 2001............................................................................................................... 23
Trizec Decides to Exit the Sears Tower ................................................................................ 27
The MetLife Years................................................................................................................. 29
MetLife’s Decision to Purchase the Sears Tower ................................................................. 30
MetLife’s Decision to Sell the Sears Tower .......................................................................... 30
IV. Joseph Chetrit and Company Acquire the Sears Tower .............................................. 32
Valuation of the Tower in 2004 ............................................................................................ 32
Aggressive Financing Leads to Sky High Prices & Emergence of Private Buyers ............. 36
Chetrit Group Wins the Deal ............................................................................................... 37
The CMBS Market Provides the Fuel................................................................................... 39
The Sears Tower Today (2006) ............................................................................................. 50
The State of the Office Market .............................................................................................. 53
Repositioning Possibilities for the Sears Tower.................................................................... 57
V. Conclusion .......................................................................................................................... 61
VI. Case Questions ................................................................................................................... 62
VII. Acknowledgments ............................................................................................................. 66
VIII.Appendices ......................................................................................................................... 68
I. Executive Summary
The Sears Tower is one of the most well-known skyscrapers in the world, having had a
long reign as the tallest building in the world, and sharing a name with one of the
world’s largest retailers. What is less widely known are the real estate decisions behind
the Tower, namely the initial site selection by Sears, Roebuck & Company, its
subsequent decision to build the world’s tallest tower, and their ultimate departure for
the Chicago suburbs. Further, the Tower has gone through a series of refinancings and
recapitalizations over six ownership structures in an effort to capitalize on its rapidly
changing value. Over the past thirty years the Tower has been valued as high as $1.2
billion, and as low as $500 million, having faced shifting tenant demands, competition,
real estate slumps, and the tragic terrorist events of September 11th, 2001.
The following timeline illustrates key milestones in the history of the Sears Tower:
Exhibit 1: Timeline of Sears Tower Events
1969
1973
1989
1990
Decision to
consolidate offices
in Chicago
Tower construction
completed
Sears attempts to
sell Tower
Sears takes out
$850M mortgage
on Tower, and
chooses new
Hoffman Estates
HQ location
1997
1995
1994
1993
Trizec purchases
AEW's second
mortgage stake for
$70M
Sears completely
moves out of
Tower
Sears finalizes the
General
Agreement with
Tower’s creditors
Sears begins
moving offices to
Hoffman Estates
2001
2002
2003
2004
9/11 leaves an
indelible mark on
the future of the
Tower
Trizec writes down
$48.3M of its
investment on the
Tower, but still
claims it will take
ownership in 2003
Trizec sells its
stake to MetLife
for $9M
MetLife sells the
Tower to Chetrit
for $840M
1
The Sears Tower
January 1, 2007
As one of fastest-growing retailers of the 20th century, Sears, Roebuck and Company
had an impressive need for space and a desire to consolidate its vast operations under
one roof. Several sites in Illinois were considered and Sears quickly settled on 233
South Wacker Drive for its convenience to major transportation nodes and widespread
city support. Skidmore, Owings & Merrill were retained as architects and created a
flexible, yet open design based on a “megamodule” system of structural tubes. Sears
presence at the Tower, however, was short lived; in 1990, Sears moved to a new
headquarters complex in Hoffman Estates, a suburb outside of Chicago.
Unable to find a buyer to purchase the Tower during the late 1980s, Sears instead
leveraged the value of the Tower and borrowed $850 million in 1990, thereby injecting
cash into its balance sheet. In 1994, Sears entered into a complex financial arrangement
transferring effective control of the Tower to its creditors MetLife ($600 million first
mortgage loan) and AEW ($250 million second mortgage loan). Between 1997 and 2003,
TrizecHahn – which had acquired AEW’s interest – attempted to buy a controlling stake
in the Tower but reversed course due to the economic downturn after September 11,
2001. Subsequently, Trizec sold its position to MetLife. After serving as the primary
loan note holder for the past 13 years, MetLife now had full control of the Tower.
In 2004, MetLife sold the Tower to a small investor group led by Joseph Chetrit for $840
million. In a great twist of irony, Chetrit’s financing package ($600 million in firstmortgage financing and $225 million in mezzanine financing) looks eerily similar to the
financing package supplied by MetLife and AEW nearly 15 years earlier. Fueling the
purchase was a combination of historically low interest rates and an aggressive lending
environment. Chetrit was able to secure an interest-only loan covering 93% of the
purchase price of the Tower. As of the date of this writing, Chetrit is reportedly looking
to refinance the Tower, using a combination of outside equity and a fixed-rate loan.
Despite the Tower’s turbulent history, an impressive rent roll, a desirable Chicago CBD
location, a design well ahead of its time and a perceived premier status have made the
Tower an attractive acquisition for investors since it was built. What does the future
hold for the Tower? There are several key questions that must be considered in the
context of the Chicago office market and national investment trends. They include: Will
the Chetrit acquisition of the Tower prove financially viable? Will lenders remain as
aggressive? Will the Tower be repositioned for another purpose or kept as primarily
office space?
2
II. Overview of The Sears Tower
Background of Sears & Roebuck Co. 1
Sears, Roebuck & Company (“Sears”) was formed in 1893 as a mail-order watch
company in Chicago, Illinois, and was the innovative idea of Richard Sears, a railway
station agent from Minneapolis, Minnesota. Early on, Sears and his partner, Alvah C.
Roebuck, recognized that there was a lucrative market to sell general merchandise
using a mail-order business model. At this time, the United States was largely an
agricultural economy. Rural farmers primarily bought their goods at the local general
store and, since little competition existed in these locations, were often faced with
intolerably high markups on the items they purchased. By purchasing goods in bulk to
take advantage of volume discounts, Sears utilized the rail and postal systems to deliver
goods to rural customers at prices well below those of the local general stores.
Sears’ mail order business took off. Sales reached $400,000 by 1893, and surpassed
$750,000 by 1895. The company began producing a general merchandise catalog with
over 500 pages offering items ranging from shoes, women's garments and china to
firearms, furniture and buggies. As Sears expanded, they leased various buildings
throughout Chicago. By 1906, they constructed a 40-acre, $5 million 2 , 3 million square
foot mail-order plant and office building on Chicago's West Side. At that time, it was
the largest commercial building in the world.
Sears Consolidates Chicago Operations
Sears’ continued success led to the expansion of its offices and retail stores nationwide
as well as internationally. In December 1967, Sears, Roebuck & Co reached $1 billion of
sales in a single month, a new record for Sears. By 1969, Sears earned $8.9 billion in
annual sales up from $8.2 billion the year prior, thus breaking its own sales record for
15 consecutive years. That same year, the company’s management, under the direction
of Chairman Gordon Metcalf and President Arthur Wood, decided to consolidate its
Chicago office locations into one building. The company had an immediate need for
approximately 3 million square feet of space and wanted to ensure it would have room
to expand in the future.
Rumors circulated about where the new headquarters would be. Sears had previously
moved its Allstate Insurance division to Northbrook, Illinois, a northern suburb of
Chicago. Speculation came to an end in April 1969, when Sears named Cushman and
1
2
Sears Archives. Sears, Roebuck & Co. 23 May 2006 <www.searsarchives.com/history/history1887.htm>.
Adjusted for inflation, this expenditure would have roughly equaled $100 million in today’s dollars.
3
The Sears Tower
January 1, 2007
Wakefield, Inc. as the developer of its new headquarters at 233 South Wacker Drive in
Chicago’s West Loop, as shown in Exhibit 2. The site provided easy access to public
transportation including suburban commuter trains and the city’s elevated trains, as
well as several major expressways. Building the Tower in Chicago helped combat the
downtown’s downtrodden image (partially caused by the loss of manufacturing
companies), strengthened the city’s tax base, and stimulated additional office
construction in the Loop. 3 A disadvantage of this site was that the City of Chicago had
to vacate Quincy Street between Franklin and Wacker Streets. 4
Exhibit 2: Map of Downtown Chicago
Tower Construction & Architectural Significance
The design of the Tower was a culmination of careful planning for the current and
future needs of Sears as well as the imaginative creativity of the architects at Skidmore,
Owings & Merrill (SOM). Guided by the Mies van der Rohe mantra of “less is more,”
lead architect Bruce Graham and structural engineer Fazlur Khan designed the Tower
to minimize material costs and structural impediments and maximize the number of
windows and corner offices. Khan devised the idea of a building constructed of nine
3
4
“The Sears Tower and Chicago’s Future,” Chicago Tribune, 29 July 1970: 12.
See Appendix 1for more detail.
4
tubes that varied in height to help support the weight of the structure on itself. 5 All
nine tubes would rise to the 49th floor. Two of the corner modules would end at the 50th
floor. Two more tubes would end at the 66th floor. Then three tubes would end at the
89th floor, leaving only two tubes reaching to the 110th floor. See Exhibit 3.
This “megamodule” system with its setbacks fashioned the distinctive, huskyshouldered look of the building and created four distinct floor plans to appeal to
differing types of prospective tenants. The “megamodule” system created larger floor
plans at the lower levels where Sears would house its merchandise and catalog
operations in the 3 million square feet it required. The upper floors would consist of
smaller floor plates to appeal to smaller firms. Exhibit 4 summarizes the square footage.
With the upper floors having a higher ratio of window space to floor space, Sears could
charge premium rental rates for these spaces until it needed to reclaim the space. The
Tower was initially designed to be the largest high-rise in the city of Chicago. However,
after some discussion, the height of the Tower was increased so that it would surpass
the then-current record for world’s tallest building.
5
As shown in Appendix 2, the Tower’s height and design created interesting elevator banks.
5
The Sears Tower
January 1, 2007
Exhibit 3: Sears Tower Floor Plans
6
Exhibit 4: Overview of the Sears Tower Rentable Square Footage (RSF)
Building Use
Office
Gross Area
Rentable Area
3,973,870
3,550,304
Floor)
464,156
199,398
Skydeck & Broadcast
Total
126,608
4,564,634
60,769
3,810,471
nd
Retail (LL - 2
Source: Eastdil Secured, February 2004.
Construction on the Tower began in April 1971 and was completed in May 1973. The
total acquisition costs including land and construction costs totaled approximately $199
million, which Sears internally financed. (On an inflation-adjusted basis, 6 the $199
million in total acquisition costs in 1971 is equivalent to approximately $986 million in
2006 dollars). The distinctive steel and bronze-tinted glass façade of the Tower’s 110
stories ascend 1,450 feet and 7 inches, the maximum height permitted by the Federal
Aviation Administration in 1970. 7
At the time the Tower was completed, it replaced the twin towers of the World Trade
Center in New York City as the world’s tallest building. Twenty-five years later, the
Tower lost that title to the Petronas Towers in Kuala Lumpur, Malaysia. The Sears
Tower encompasses 4.56 million gross square feet, with approximately 3.8 million
rentable square feet including approximately 199,308 rentable square feet of retail space.
The footprint of the building covers approximately 50,625 square feet, as shown in
Exhibit 5.
An excerpt from the Sears Tower marketing materials
(www.thesearstower.com) describes the interior of the building as:
“Each floor of the building is divided into 75-foot, column-free squares, or
“megamodules,” which provide maximum planning, flexibility and efficiency. Building
columns are uniformly spaced fifteen feet on center and exterior window mullions are
spaced five feet on center for ease of office layout. The floor dimensions provide extremely
flexible space, ideal for any office use including trading floor, open or perimeter office
layouts or multi-tenant designs. Twelve feet, 10 ½ inch slab heights allow for high
finished ceilings or raised floor or special ceiling configurations.”
6
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
Nagelberg, Alvan, “Sears to Construct Tallest Building in the World, 110 Stories,” Chicago Tribune, 28 July
1970: 1.
7
7
The Sears Tower
January 1, 2007
Exhibit 5: Sears Tower “Footprint, First-level Floor Plan and Site Plan
The Tower contains a mix of office and retail space with the observation sky-deck on
the 103rd floor serving as an additional source of revenue. From the sky-deck, visitors
have a 360-degree view of the city with visibility estimated at 40 to 50 miles.
Additionally, the sky-deck is home to exhibits chronicling Chicago’s history. In 1992, a
second sky-deck was added on the 100th floor to accommodate overflow. Other sources
8
of revenue include a 160-car underground parking garage below the building as well as
easement rights to 810 parking spaces (out of 950 total) in the Franklin Street Garage
located across from the east side of the building.
Retail Industry Background in the 1970s - 1980s
In the early to mid 1970s, the U.S. experienced slowing retail sales due to increasing
joblessness. The country entered an economic recession in 1973, its first since the end of
World War II. At this time, retailers were receiving mixed signals. Reports of increasing
retail sales bolstered executive’s confidence to build inventories in one month; then,
slowing sales would cause retail management to invoke aggressive price-reduction
strategies to trim inventory levels in the next month. Inflation grew to 12% between
1974 and 1975 while retail sales only increased by 7%. 8 The US economy recovered
from the recession in 1976, but by 1979, consumer spending decreased as energy costs
increased. Consumers again felt the effects of price inflation, which brought on another
recession in the early 1980s.
The 1980s also brought with it a new retail culture. Specialty retailers led the economic
recovery for the retail sector, posting higher sales and earnings increases than the
general merchandise department stores. Additionally, discount stores such as K-Mart
and Wal-Mart and junior department stores such as Kohl’s challenged the traditional
department stores model.
Sears Encounters Hard Times and Decides to Leave the Tower
Sears was losing market share in both its retail stores and its catalog business. Sears’
merchandise group struggled against the big-box discount retail stores. Losing market
share to Wal-Mart and others, Sears’ management decided to create its own low-price
strategy. However, in sharp contrast to Sears’ original model of integrating low-cost
procurement in order to offer low prices, this time around Sears dropped prices before
it could secure lower costs from its suppliers. The costs of operating its 82-year-old
distribution system were much higher than those, for example, of the leaner Wal-Mart.
To help offset deteriorating retail profits, Sears had expanded into the financial services
industry to diversify its operations. It added Allstate Insurance, Dean Witter, and
Coldwell Banker over the years.
The Sears catalog business also lost share to specialty retail catalogs. In 1987, Sears
began planning cost-cutting measures, which included trimming marketing budgets
8 Slom,
Stanley H. and Rothmyer, Karen, “Reeling Retailers,” The Wall Street Journal. 6 Feb 1975: 1.
9
The Sears Tower
January 1, 2007
and laying off employees. Exhibit 6 tracks the retail sales and net income of Sears’
Merchandise Group from 1978 through 1994. Over this period, sales grew at an average
annual rate of 3.5% per annum, while income averaged 3.6% of sales (excluding 1992, a
year of significant accounting charges).
Exhibit 6: Sears Retail Sales and Net Income Trends
for the Period 1978 – 1994
$35
$1.5
$1.0
$30
Sales ($Billion)
$$(0.5)
$20
$(1.0)
$15
$(1.5)
$(2.0)
$10
$5
$(2.5)
Sales
Net Income
$(3.0)
$(3.5)
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
*1
99
2
19
93
19
94
$-
Net Income ($Billion)
$0.5
$25
Note: 1992 net income includes cumulative effect of accounting charges ($1.51 billion) and
restructuring costs ($1.73 billion).
Source: Sears, Roebuck & Company annual reports, 1978 through 1994.
N
In November 1988, Sears Chairman and CEO Edward A. Brennan set out a broad
restructuring plan which included buying back 10% of the company’s stock to address
short-term return issues and revitalizing the merchandise business to address long-term
returns. Included in the restructuring plan was the possible sale or repositioning of the
Tower. According to Brennan, “the building represented a large reservoir of unrealized
appreciation that could be better used to help us grow the company.” 9 Analysts
speculated that the Tower which was on the books at $200 million could command a
selling price over $1 billion (approximately $263 per rentable square foot) given that the
best commercial buildings in Chicago were then valued between $250 and $300 per
square foot. Given the economics of the deal, Goldman Sachs was retained to
9
Schwadel, Francine. “Sears to Sell Tower, Buy 10% of Stock Back.” The Wall Street Journal. 1 Nov. 1988: A3.
10
orchastrate the sale of the Sears Tower and, shortly thereafter, Toronto-based Olympia
& York Developments Ltd. emerged as the primary bidder with a $1.045 billion offer.
However, the potential sale of the Tower was tainted by two looming factors. First, as
part of its restructuring, Sears planned to relocate all but 600 of its 8,700 employees to a
separate (but undetermined) location. This would leave the Tower almost two-thirds
vacant and the new owner would be faced with the formidable task of leasing the space
soon after its purchase. This task was further hindered by the construction of 1.2
million square feet of office space next door at 311 S. Wacker where developers of this
building were reportedly offering concessions of 5 years worth of free rent to lock in
tenants for 15 years or more. 10 Second, the building had appreciated significantly over
the past decade and a half. The sale of the building was sure to trigger a reassessment
of the property value, thus significantly increasing the new owner’s real estate taxes.
The Wall Street Journal reported that as part of the sales negotiations, Sears was willing
to pay Olympia & York rent for six years on the space it would vacate in the Tower. 11
However, due to failed negotiations over the Tower’s property-tax burden, Olympia &
York withdrew its bid for the Tower in September, 1989. Thereafter, Sears decided
instead to refinance the Tower for approximately $850 million in order to procure the
money needed for its stock buy-back, which had been initially funded by working
capital. The details of the refinancing are discussed in a subsequent section.
Exhibit 7 provides a pro forma comparison of selling the building for Olympia & York’s
bid at $1.045 billion dollars 12 to refinancing the building at $850 million. Our internal
estimates suggest that the sale of the building would have resulted in a taxable gain of
approximately $900 million, which at the 1989 capital gains tax rate of 28% would have
resulted in a $252 million tax liability. With a mortgage amount of $850 million on the
Tower, the refinancing would have generated $65 million more in after-tax proceeds for
Sears’ immediate redeployment. Refinancing, however, is a tax-deferred solution. The
capital gains tax associated with the refinancing would ultimately be due at the point in
the future when the Tower is eventually sold. In theory, the tax liability associated with
the refinancing could be deferred indefinitely, while preserving the option to sell the
Tower at a later date. 13 Given Sears’ broad restructuring plan (including a 10% stock
10
Elstrom, Peter J. “Office Glut Sparks Boon for Tenants; Developers Compete in Discount Frenzy.” Crain’s
Chicago Business. 20 Aug. 1990: 1.
11
Barsky, Neil. “Edifice Rex: Toronto’s Reichmann Scales the Heights of Real Estate.” The Wall Street Journal. 5
Sept. 1989: A1.
12
The break-even sale price (i.e., gross sale price at which the net after-tax proceeds would have equaled the net
refinancing proceeds) would have equaled $1.137 billion.
13
The tax liability could be further deferred through the use of §1031 like-kind exchange. Given Sears’ extensive
real estate holdings and the nature of its core business, such an exchange would seem quite plausible.
11
The Sears Tower
January 1, 2007
buy-back plan and merchandise business revitalization), the $65 million difference in
immediate proceeds may well have been important to Sears.
Exhibit 7: Illustrative Comparison of Sears Tower Estimated
After-Tax Proceeds of Proposed Sale v. Refinance
Initial Investment:
Land Cost
Building Construction Cost
Total Acquisition Cost
Loan Balance
Initial Equity - Real Estate
$
23,466,667
175,000,000
$
$
Disposition:
Fair Market Value (based on failed O&Y bid)
Loan-to-Value Ratio
Gross Loan Proceeds
Loan Balance
Transaction Costs
Pre-Tax Net Proceeds
Tax Liability
After-Tax Net Proceeds
$
$
198,466,667
0
198,466,667
Disposition Alternatives
Sale
Refinance
1,045,000,000
$ 1,045,000,000
81%
850,000,000
0
0
(20,900,000)
(12,750,000)
1,024,100,000
837,250,000
(252,002,333)
0
772,097,667
$
837,250,000
Difference in proceeds due to deferral of taxes via refinance.
Tax Liability:
Net Sale Proceeds
Initial Basis
Accumulated Depreciation (1973-1989)
Book Value
Realized (Taxable) Gain
Capital Gains Tax Rate
Tax Liability
$
$
$
$
198,466,667
(74,375,000)
124,091,667
$
65,152,333
1,024,100,000
124,091,667
900,008,333
28%
252,002,333
$
0
Notes: 40-year straight-line depreciation used to adjust book value of building. Land value is estimated
based on $31 million purchase for Chicago plots plus $2.8 million paid to City of Chicago for Quincy
Street. Transaction Costs: Sale costs estimated at 2% of FMV. Refinance costs estimated at 1.5% of
proceeds.
Sources: Sears, Roebuck & Co 1969 and 1990 annual reports. Edward Schreiber, "Sears Tells
Plan to Build Huge Structure in Loop," Chicago Tribune 23 Dec. 1969: 3. Authors' estimates.
12
Sears Relocates its Headquarters
Aside from the fate of the Sears Tower, the City of Chicago and the State of Illinois
officials had concerns about where Sears would relocate its headquarters and
merchandise group. As part of the restructuring, Sears was looking for cost-efficient
office space to relocate its 6,000 employees, but still allow room for future expansion.
The City of Chicago courted Sears with 200 acres of land located near Chicago’s O’Hare
International Airport. The State of Illinois offered up nearly 800 acres of land in the
northwest suburb of Hoffman Estates as well as two different locations near the western
suburb of Naperville; a 230-acre plot owned by Shell Realty Co. and a 400-acre plot
owned by private Chicago real estate investors. These sites are depicted in Exhibit 8.
Exhibit 8: Potential Illinois Sites for Sears’ Headquarters
Additional cities approaching Sears with relocation proposals included Atlanta, Dallas
and Denver. The possibility of losing Sears to another state would have had a
significant adverse impact on both Chicago and Illinois. An analysis performed by
Regional Econometric Model Inc. estimated the adverse impact of Sears moving out-ofstate to be approximately $1.0 billion. See Appendix 3.
13
The Sears Tower
January 1, 2007
Clearly, the city and state were deeply concerned and highly motivated to
accommodate Sears. The Chicago/O’Hare and Hoffman Estates locations were among
the frontrunners in the competition for Sears, as the company had its roots in Chicago.
The cost of relocating 3,000 salaried employees was estimated around $100 million. The
State of Illinois was offering to deem the proposed locations as State Enterprise Zones
so that Sears would be exempt of the 5% sales tax on construction materials for its
development of the land. Additionally, the State of Illinois pledged $49 million in direct
subsidies for land infrastructure and road improvements. (See Appendix 4 for a
summary of the Chicago/O’Hare and Hoffman Estates relocation packages).
The City of Chicago offered to purchase an 80-acre plot of land located near O’Hare
airport. The City would have leased the land to Sears for a negligible amount ($10 per
year) for 99 years. Adjacent to the 80-acre tract of land was a 140-acre plot of land
which Sears would have the option to purchase at market prices. Not to be outdone,
Illinois state legislature drafted a provision whereby a tax increment financing (TIF)
district would be created for the prosperous Hoffman Estates suburb, legislation which
at that time was typically reserved for blighted communities. The TIF district
designation would allow Hoffman Estates to purchase the land for the potential Sears
site by floating tax-exempt long-term bonds. The debt service on the bonds would then
be paid by Sears via the incremental property tax increases generated from the real
estate development.
By January 1990, Sears made its decision to move out of Chicago and relocate its
headquarters and Merchandise Group to Hoffman Estates. The two-year move out of
the Tower began in 1993, the same year in which Sears discontinued publishing its
general merchandise catalog.
14
III.
A Series of Tower Refinancings (1990-2003)
In the 13 years following Sears’ decision to leave Chicago, the Sears Tower underwent
numerous revisions to its financing structure and the Tower’s ownership rights
changed hands several times. Additionally, as a backdrop to these transformations,
both the national and Chicago office markets were going through several boom and
bust cycles. This time period also contained an event that indelibly changed the future
of skyscrapers in the United States forever: the terrorists’ attacks of September 11, 2001.
A brief overview of this turbulent period in the Tower’s history is illustrated below:
Exhibit 9: Book Value of Mortgage Loans as Compared to Estimated
Property Value for the Period 1990 Through 2003
$1,400
AEW / MetLife
Trizec / MetLife
MetLife
$1,200
$1,000
$800
$600
$400
$200
$0
1990
1991
1992
1993 1994
MetLife
1995
1996 1997
AEW
1998
Trizec
1999 2000 2001 2002 2003
Tower Value
A summary of the important mileposts includes:
•
July 2 1990: Sears finances the Tower with loans totaling $850 million, in one
of the largest real estate financings then on record
•
November 7, 1994: Sears transfers control of the building to its creditors
(MetLife and AEW) via the General Agreement – essentially, a deed-in-lieu-offoreclosure.
15
The Sears Tower
January 1, 2007
•
December 3, 1997: TrizecHahn (Trizec) purchases AEW’s stake for $70M in a
highly levered deal considered a large risk at the time.
•
December 31, 2002: Trizec recognizes that their original investment is
impaired and writes it down $48.3 of the $70 million originally invested.
•
August 28, 2003: Trizec sells its ownership rights to MetLife for only $9
million with less than three years before the $766 million MetLife loan (i.e. the
original $600M plus accrued interest) was to come due.
The next sections will explore these refinancing arrangements in much greater detail.
The MetLife / AEW Years
Sears looked to sell the Tower in the late 1980s amid declining real estate values,
increased retail competition and its declining stock price. See Exhibit 10:
Exhibit 10: Stock Price History for Sears
January, 1988 - December, 1996
Share Price (as Adjusted for Splits)
$120
$100
$80
Sears begins the
move to Hoffman
Estates
Sears attempts to
sell the Tower
Sears borrows against
the Tower
Sears “sells” the
Tower
$60
$40
$20
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Ja
n9
M 4
ay
-9
4
Se
p94
Ja
n9
M 5
ay
-9
5
Se
p95
Ja
n9
M 6
ay
-9
6
Se
p96
$-
Source: Center for Reseach in Security Prices
Unable to consummate a sale with Olympia and York (at approximately $1 billion),
Sears sought a mortgage loan on the Tower in order to raise cash. In July of 1990, Sears
entered into an agreement with two lenders who were willing to provide $850 million
16
in non-recourse mortgage loans in one of the largest real estate financings then on
record. MetLife provided three first-mortgage notes - on a non-recourse basis - for an
aggregate value of $600 million and AEW provided – also on a non-recourse basis another $250 million 14 ($42.5 million of which encumbered the Franklin Street garage, a
950-car parking garage located adjacent to the Sears Tower). Collectively, these notes
were due to mature in 2005 and had an effective interest rate of approximately 8.7%.
AEW also acquired additional rights, including an option to buy the Tower by
exercising a right of first refusal. 15 These transactions are summarized in Exhibit 11:
Exhibit 11: Overview of 1990 Financing
$195 Equity [Sears]
Second Mortgage
$250 Million to Sears
$1,045
Equity
[Sears]
First Mortgage
$600 Million to Sears
Pre 1990
$250 Second Mortgage
[AEW]
$600 First Mortgage
[MetLife]
1990
Although this financing allowed Sears to generate much-needed cash (approximately
$840 million – see Exhibit 7) in the short-term, the real estate market continued to
weaken over the next four years and the value of the Tower plummeted to an estimated
$400 million, leading many to call the Sears Tower “that world’s tallest real estate
problem.” 16 Additionally, as Sears’ retail woes continued in the wake of increased
competition, the $75 million in annual interest payments required to service the debt
taken out in 1990 became increasingly burdensome. Many industry pundits thought
Sears should consider walking away from the Tower altogether. Because the MetLife
and AEW mortgage loans were non-recourse (i.e., the loan collateral was limited solely
14
General Agreement by and among MetLife, AEW, PTLP, Tower Leasing, Sears, and ST Holdings, Nov. 7, 1994.
General Agreement by and among MetLife, AEW, PTLP, Tower Leasing, Sears, and ST Holdings, Nov. 7, 1994.
16
Barnaby, J. Feder “Trust Gets Skyscraper from Sears”, New York Times, Nov. 8, 1994.
15
17
The Sears Tower
January 1, 2007
to the real estate assets) none of Sears’ corporate assets were exposed to satisfying any
loan shortfall.
In 1993, Sears entered into negotiations with MetLife and AEW to restructure the
Tower’s finances. After more than a year of negotiating, they finalized a deal. Under
the terms of the complex arrangement (the “1994 General Agreement”), Sears
essentially transferred all control, but technically not ownership, of the building to an
AEW-directed trust which would hold the Tower until 2003. AEW would then have the
option to take title of the building from the trust in 2003 provided AEW could retire the
remaining MetLife loan balance (if AEW could not retire the MetLife loan balance, then
MetLife would have the option to take title to the Tower). As a demonstration of its
continued ownership interests, the trust also received a cash contribution of $36 million
and a subordinated loan of $9 million from Sears. According to Sears Vice-chairman
James Denny, the rationale for such as decision was as follows:
“Sears believes the move helps it retain enough of an economic interest in the Tower to legally
defer taxes on the ownership transfer, despite escaping liability for the building's debt.”
This transaction also allowed Sears to remove $845 million in long-term debt from its
balance sheet and, when combined with the $501 million asset book value, to record a
before-tax profit of $344 million. However, because ownership was not set to transfer
until 2003, Sears was able to defer its tax liability of $149 million for approximately 10
years. 17 For all intents and purposes, Sears had – after 20 years – finally fully divested
itself of control of the Sears Tower. However, as part of the agreement, the Sears name
would remain on the Tower. Exhibit 12 overviews the flow of potential benefits and
liabilities for each party included in the 1994 General Agreement:
17
Sears 1994 10-K.
18
Exhibit 12: Overview of Key Features of 1994 General Agreement
Sears provides:
• Transfers control of all Tower
income and rent proceeds
• New $9 million subordinated
loan at 7.7%
AEW Receives:
• Beneficiary of Trust
• Option to purchase Tower by July 2,
2005 subject to retiring MetLife loan
• 2nd distribution priority of Tower
income and rent proceeds
• $36 million cash contribution
AEW-Directed
Trust
(expires 1/1/03)
Sears
AEW provides:
• Forbearance agreement to defer
foreclosure of Tower
• New $215.25 million Amended
Second Note
• New $42.5 million note on Franklin
Parking deck
• New $15 million subordinated loan
at 7.7%
Sears receives:
• Current Income beneficiary (subordinated to all
debt repayments)
• Tax deferral of $124 million
• Naming rights
• Amortized repayment of $69 million in
refurbishments prior to trust agreement
(subordinated to MetLife and AEW distributions)
• Right to building title before January 1, 2003 in
exchange for marketable securities equal in value
to appraised value minus current indebtedness
MetLife provides:
• Forbearance agreement to defer
foreclosure of Tower
• New $400 million Amended First
Note A at 75 bps over treasuries
• Adjustable-rate $200 million
Amended First Note B & C
• New $15 million subordinated loan
at 7.7%
AEW
MetLife receives:
• 1 st distribution priority of Tower
income and rent proceeds
MetLife
19
The Sears Tower
January 1, 2007
Note that Sears advanced $43 million (a $9 million loan and $36 million in equity) in
new funds, while MetLife capitalized $15 million in previously unpaid interest expense
and AEW capitalized approximately $24 million in unpaid interest expense as part of
the General Agreement. From a legal perspective, a lender is frequently better served
by recapitalizing previously unpaid interest and converting it to principal. Bankruptcy
courts tend to view unpaid principal more sacrosanctly than unpaid interest.
Exhibit 13 outlines the distribution priorities received by each participant to the 1994
General Agreement under various estimates of the residual value of the Tower after 15
years.
Exhibit 13: Distribution Priorities of 1994 General Agreement
Summary by Key Participants
Participant
MetLife
AEW
Sears
Total
Estimated Amounts Based on Year 15 Residual Value of Tower ($000s) *
$2 Billion
$1.5 Billion
$1.0 Billion
$840 Million
___$___
__%__
___$___
__%__
___$___
__%__
___$___
__%__
$944,585
992,415
63,000
$2,000,000
47%
50%
3%
100%
$844,585
592,415
63,000
$1,500,000
56%
39%
4%
100%
$772,165
218,835
9,000
$1,000,000
77%
22%
1%
100%
$756,165
74,835
9,000
$840,000
90%
9%
1%
100%
* Terminal values of $1.5, $1.0 billion and $840 million were not shown in the 1994 General Agreement. For purposes of this
analysis, we have simplistically assumed that operating distributions are constant to each participant under all three valuation
scenarios.
Source: November 7, 1994 General Agreement between MetLife, AEW and Sears. Authors' estimates.
As indicated above, MetLife, as the holder of the first-mortgage note, is clearly in the
best position to recoup the principal and loan interest provided to the Sears Tower. As
stated in the 1994 General Agreement, cash flows and residual Tower value were
allocated to the participants based on a schedule of seven distribution priorities.
Generally, MetLife Notes A, B, and C held the highest priority positions followed by the
Tower Second Note by AEW and finally any distributions made to Sears. Appendix 5
provides greater detail of the distribution priorities and allocations for each participant
under various residual value scenarios for the Tower. Please note that the $840 million
price shown above represents the eventual sales price in 2004.
Effectively, the 1994 General Agreement and resulting transaction served as a deed-inlieu-of-foreclosure. By transferring all control of the building into the trust, Sears was
released from its mortgage debt obligations; however, Sears essentially no longer had
an interest in the underlying real estate. Sears was an owner in name only. The deed-inlieu-of-foreclosure agreement between Sears, AEW and MetLife allowed all three
20
parties to avoid the time, expense, and uncertainty of litigation inherent in most
foreclosure proceedings. For Sears, these arrangements resulted in a ten-year deferral
of an estimated $124 million tax liability – the cost of which was a $45 million (debt and
equity) contribution. Therefore, the implicit return to Sears was 10.7% per annum.
The MetLife / Trizec Years
In 1996, Trizec Corporation and Horsham Corporation entered into a merger creating
the the next owner of the Sears Tower, TrizecHahn Corporation. TrizecHahn (Trizec),
one of the largest public real estate companies in North America, bought the ownership
of the second mortgage interest (which had effectively become an equity ownership in
the Tower) from AEW for $70 million in 1997. 18 See Exhibit 14:
Exhibit 14: Overview of Trizec’s Acquisition of AEW Position
$250 Second Mortgage
[AEW]
2
nd
Ownership of
Mortgage to Trizec
$250 Second Mortgage
[Trizec]
$70 Million to AEW
$600 First Mortgage
[MetLife]
$600 First Mortgage
[MetLife]
1994
1996
This did not include ownership of the garage which it later purchased for another $40
million. 19 Under the terms of the deal, Trizec also had the option of assuming the
MetLife mortgage (valued at $735 million in 1996 with accrued interest) in 2003 at an
interest rate of 9.2%. At the time, Trizec’s motivations in acquiring the Tower seemed to
be two-fold. First, Trizec felt it was buying an undervalued asset. Secondly, Trizec
viewed itself as an emerging player in the market and wanted to prove its ability to
undertake complex transactions. As Trizec’s 1997 annual report stated:
18
19
J. Linn Allen “Sears Tower Symbol, Signal for New Owner” Chicago Tribune, March 15, 1998.
Feder, Barnaby “Trizec Hahn’s Office Group Buys Sears Tower in Chicago” New York Times, Dec. 4, 1997.
21
The Sears Tower
January 1, 2007
“…our ability to understand and manage complex transactions, involving multiple affected
parties, results from the depth of our management team and our relationships with industry
participants. One such example was [our] purchase of an interest in the Sears Tower in December
1997. The seller held a set of complicated rights, including a second mortgage and effective
control of the Tower, but received no current cash payments on its investment. However, this
position did have substantial appreciation potential given the property’s strong market position
in Chicago, which has been experiencing rapid rental rate growth. By understanding and
ultimately acquiring this complex position, TrizecHahn was able to acquire effective control of
the Sears Tower, a world-class, quality office building, on favorable terms.”
Trizec projected that the Sears Tower would quickly reach a value of $1 billion and
looked for this property to be the prize of its portfolio. Trizec felt the Chicago office
market was improving. Given that the Tower had a large number of leases about to
expire, Trizec felt it could renegotiate higher rents. Many industry pundits however felt
the Trizec move was extremely risky. As one insider put it:
“In 1997, just about everyone felt the only way to ‘own’ the Tower was to get the first mortgage.
Even though Trizec technically bought the ownership rights to the building, it was a huge gamble
because conventional wisdom was that the only way to really control the building was to get the
first mortgage, but Met was not about to let go. However, as a result, Trizec was able to purchase
the second mortgage for an extremely reduced rate.”
Nevertheless, some of Trizec’s optimism can be attributed to the strength of the firm
during this time period. In 1998 Green Street Advisors indicated that Trizec’s strengths
included the breadth of the firm’s global investment opportunities and a visionary
management team. During this period, Green Street 20 suggested that Trizec warranted
a share price of about $23.00. At the time of their report, Trizec’s share price was $19.88.
For the first few years, Trizec’s projection seemed on the mark as the Sears Tower
experienced occupancy rates of up to 97.0% – see Exhibit 15 for vacancy rates from
1997-2006 – and its value has been estimated to have increased to over $900 million.
20
“Green Street Advisors Research – TrizecHahn Corp,” Green Street Advisors 1998.
22
Exhibit 15: Direct and Indirect Vacancy Rates for the Sears Tower
For the period 1997 through 2005
20%
Total Vacancy
Vacancy Rate
15%
Direct Vacancy
10%
Sublet Vacancy
5%
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
0%
Source: CoStar.
However, as the new millennium dawned, Trizec was dealt successive blows from two
of the most dramatic events in modern American history. These events had indirect
and direct consequences for Trizec. First was September 11, 2001, one of the largest
tragedies in American history, which caused “permanent impairment” to the Sears
Tower according to a PriceWaterhouseCoopers study. Shortly thereafter, the sudden
collapse of Enron sent shockwaves through the world and financial markets and left
Trizec without its fourth-largest tenant, one that represented 2% of the company’s total
rentable space. 21
September 11, 2001
The 9/11 attacks and the resulting economic downturn were devastating for major,
urban real estate markets, and Chicago was no different. Both market or (“spot”) rents
and market vacancy were adversely affected despite the sound fundamentals in even
the strongest CBD markets. Moreover, due to its global prominence as the largest
building in the United States and one of the largest in the world, the rents and
occupancy levels specific to the Sears Tower suffered more than most other office
buildings. Two of the Tower’s largest tenants, Goldman Sachs and Merrill Lynch,
representing over 300,000 square feet, immediately announced plans to vacate the
21
“Trizec’s Triple Double,” Canadian Business Magazine, December 9, 2002.
23
The Sears Tower
January 1, 2007
building despite considerable remaining lease lengths reflected in contractual rent
obligations – while other tenants felt similarly, not all acted upon such concerns.
Despite significant tenant unease, the Tower had a very strong tenant roster both in
terms of investment-grade financial strength and long lease maturities. The six largest
tenants were all high-quality tenants with three rated by S&P with credit ratings of AAor better and two others rated by Dun & Bradstreet with Composite Credit Appraisals
of 2 (good). These six alone represented over 1,335,000 rentable square feet (or 35% of
the Tower) with a weighted average lease commitment of over 8.3 years remaining. In
fact, although physical occupancy plummeted from 95.3% in 2001 to 83.9% in 2004 and
first-year net rent for new leases plunged from $26.32 in 2001 to $11.95 in 2003, the
Tower’s NOI was actually forecasted to increase from $66,721,895 in 2001 to $67,979,183
in 2004 – see Appendix 6. This apparent discrepancy was largely attributable to
contractual lease obligations providing rental income which was higher than thencurrent “spot” rates and to unoccupied space still paying rent (due to lease contracts
with credit-worthy tenants); in addition, the number of new tenants leasing at
historically low market rental rates was very small in comparison to the total space in
the Tower.
However, property insurance on the building jumped from approximately $751,000 in
2002 to $6.75 million in 2003 and held steady around $5.5 million during 2004 and
2005. 22
Further, capital expenditures of over $5 million for counter-terrorism
improvements were made. With the exception of a sharp increase between 2000 at
6.89% to 7.98% in 2002, capitalization rates steadily fell to 6.40% in 2005. See Exhibit 16:
22
Eastdil Offering Memorandum.
24
Exhibit 16: History of Capitalization Rates for the Office Sector
14.0
Capitalization Rate (%)
12.0
National CBD
Chicago CBD
10.0
8.0
6.0
4.0
2.0
D
ec
-8
3
D
ec
-8
5
D
ec
-8
7
D
ec
-8
9
D
ec
-9
1
D
ec
-9
3
D
ec
-9
5
D
ec
-9
7
D
ec
-9
9
D
ec
-0
1
D
ec
-0
3
D
ec
-0
5
0.0
Source: NCREIF.
Even in the face of falling capitalization rates, the increases in insurance and capital
expenditures had a large negative effect on the value of the Tower. Although declining
contractual occupancy and rental rates did not immediately impact the financial
position of the Tower, the reversionary/rollover lease values conducted in a typical pro
forma analysis were negatively affected.
Consequently, the value of the Tower plummeted 10% in less than a year and,
according to Trizec’s then current President and CEO, Timothy Callahan (who assumed
this position in August, 2002), new leases at the Tower fell by 25%, as compared to a
10% drop in the overall market, 23 and vacancy skyrocketed. 9/11 also seemed to
accelerate the rental rate decline in the Chicago office market. Exhibit 17 shows the
effect on rents in Chicago while Exhibit 15 illustrates the effect on the vacancy rate for
the Tower. Appendix 6 provides greater detail regarding the changes to operations
experienced through the years 2001 to 2005.
23
David Roeder, “Trizec Trims Value of Its Stake in Sears Tower,” Chicago Sun-Times, Nov 6, 2002
(http://www.looksmartchicago.com/p/articles/mi_qn4155/is_20021106/ai_n12482420).
25
The Sears Tower
January 1, 2007
Exhibit 17: Illustration of Gross & Net Rents for the Chicago Market
For the Period 1988 through 2003
$30
9/11 attacks
Sears borrows
against the Tower
$25
MetLife buys
out Trizec
Failed O&Y Sale
Trizec buys out AEW
$20
Sears “sells” its
interest to AEW
$15
Average West Loop
Sub-Market Gross
Rent
$10
$5
Average West Loop
Sub-Market Net Rent
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
$-
Source: Torto Wheaton Research and author’s calculations.
After the 9/11 terrorist attacks, CEO Callahan remarked that the Sears Tower “has been
hurt as much as any asset that I'm aware of in regards to post-9/11.” 24 In addition to
the increased threat of terrorist activity, tenants also had to deal with new security
procedure which caused considerable delays at first. As one prominent Canadian
business magazine reported in 2002:
“Every weekday, Trizec has the unhappy task of aggravating 10,000 of its customers. What’s
worse is the fact that by Christmas, there are expected to be even fewer tenants around for the
landlord to annoy. The obliteration of America’s most prominent office buildings in New York
on Sept. 11, 2001, is making life very difficult in another: Chicago’s celebrated Sears Tower. The
110-story tribute to commercial prowess might once have been the jewel in any company’s real
estate portfolio, but these days it is one of Trizec’s—and its tenants’—biggest headaches. The
landlord has done its best to calm the jittery nerves of renters, investors and insurers alike,
virtually garrisoning the premises. But the extensive security measures have meant additional
hassles for all. Each morning, Chicagoans who work at and visit the landmark must first
24
Thomas A. Corfman, “Sears Tower Likely to Go to Its Lender,” Chicago Tribune, July 11, 2003
(http://www.searstower.org/news.html).
26
negotiate the perimeter of concrete highway pillars that fortify its entrances against truck bombs.
Then it’s a phalanx of security guards, examining each building pass, inspecting every bag.
Guests must show photo identification and sign in at the front desk. Even deliveries are vetted
by sniffer dogs trained to identify explosive material.”
Trizec Decides to Exit the Sears Tower
Trizec, itself, underwent a post-9/11 change as well when the company became two
separate entities: Trizec Properties Inc. (TRZ) and Trizec, Canada (TZC). Aside from
dealing with the effects of 9/11 and the Enron scandal, several other factors influenced
Trizec to exit its Sears Tower investment. Trizec’s CEO, hoped to revive the company’s
plummeting stock price – see Exhibit 18 – which had languished for several months and
traded at a significant discount to other office REITs. In the month of October 2001
alone, Trizec’s stock had fallen approximately 12% and performance up to this point led
Green Street Advisors to “lower their NAV estimate to $18.25/share. Trizec’s
warranted discount to NAV was now 11%, versus 1% for the average REIT. 25
Exhibit 18: Trizec Stock Performance v. NARIET Equity REIT Index
Relative Comparison for the Period 1997 through 2006
400%
Stock Price Return
350%
300%
Trizec's Sale of AEW
Position to MetLife
250%
NAREIT
200%
150%
100%
50%
Trizec
Ja
n06
Ja
n05
Ja
n04
Ja
n03
Ja
n02
Ja
n01
Ja
n00
Ja
n99
Ja
n98
Ja
n
-9
7
0%
Sources: Center for Research in Security Prices (CRSP) & NAREIT.
25
“Sears Tower – Not Worth What We Thought,” Green Street Advisors, Inc. October 30, 2001.
27
The Sears Tower
January 1, 2007
One of the problems with Trizec’s stock was that its leverage ratio was around 65% as
compared to its peer group average of around 50%. If Trizec became the owner of the
Sears Tower, then the company would have added the $766 million first mortgage
(including accrued interest) to its highly levered balance sheet, which would come due
in 2005. 26 Increasing its leverage, coupled with the soft office market, led investors and
analysts to suggest selling the Sears Tower was Trizec’s best course of action. The Sears
Tower only contributed about $0.02 per share to Trizec’s funds from operations (FFO).
In mid-2002, the Sears Tower was 94% leased, but this was projected to drop to 91% by
the fourth quarter of 2002. 27
For several months, Trizec talked with MetLife about renegotiating the first mortgage
but was unable to decrease the loan amount and/or the interest rate, which was above
then-current levels. Ultimately, in 2004 the two parties reached an agreement where
Trizec would sell its second mortgage for $9 million to MetLife – as summarized in
Exhibit 19:
Exhibit 19: Overview of MetLife’s Acquisition of Trizec’s Position
$250 Second Mortgage
[Trizec]
2
nd
Ownership of
Mortgage to MetLife
$250 Second Mortgage
[MetLife]
$9 Million to Trizec
$600 First Mortgage
[MetLife]
$600 First Mortgage
[MetLife]
1997
2004
Trizec had previously written down $48.3 million of its $70 million investment in the
Tower. The net loss of approximately $15 million was partially offset by tax benefits
associated with the sale of the second mortgage. Concurrent with this transaction,
Trizec renewed its property management contract until 2004. 28 Suffering from the
26
RBC Capital Markets Research Comment on Trizec Properties August 29, 2003, “Sale of Sears Tower Interest to
Met Life – Another Step in the Right Direction.”
27
Jack Lyne, “Continuing 9/11 Concerns Stall REIT's Scheduled Sears Tower Buy,” Site Selection,
(http://www.siteselection.com/ssinsider/pwatch/pw021111.htm).
28
Trizec 2003 Annual Report.
28
challenges posed by ownership of the Tower as well as poor stock performance overall,
Trizec’s sale of its AEW position to MetLife had a minimal effect on the stock price. The
Trizec entities were finally acquired in 2006 by Brookfield Properties Corporation and
Blackstone Group in an $8.9 billion deal. 29
The MetLife Years
MetLife, Inc., a leading provider of insurance and other financial services to millions of
individual and institutional customers throughout the United States, holds a wide
range of short- and long-term investments (assets) designed to match its policies
(liabilities). As of December 31, 2003, MetLife held cash and invested assets of
approximately $221.8 billion – please see Exhibit 20 for a summary:
Exhibit 20: MetLife’s Cash and Invested Assets
For the Years Ended 2002 and 2003
Balance Sheet Items
Fixed maturities available-for-sale, at fair value
Mortgage loans on real estate
Policy loans
Cash and cash equivalents
R/E and R/E joint ventures held-for-investment *
Other invested assets
Equity securities, at fair value & other LP interests
Short-term investments
Real estate held-for-sale *
Total cash and invested assets
December 31, 2003
Carrying Value
($000s)
% of Total
$167,752
26,249
8,749
3,733
4,014
4,645
4,075
1,826
789
$221,832
December 31, 2002
Carrying Value
($000s)
% of Total
75.6%
11.8%
3.9%
1.7%
1.8%
2.1%
1.8%
0.8%
0.4%
100.0%
$140,288
25,086
8,580
2,323
3,226
3,727
4,008
1,921
1,499
$190,658
73.6%
13.2%
4.5%
1.2%
1.7%
2.0%
2.1%
1.0%
0.8%
100.0%
* Adjusted to reflect that subsequent to 12/31/03 MET entered into a marketing agreement to sell one of its real estate investments, the
Sears Tower, and reclassified the property from Real Estate -- Held-for Investments to Real Estate -- Held-for Sale. The carrying
value of the property as of December 31, 2003 is approximately $700 million.
Source: MetLife 2003 10-K
Prior to acquiring Trizec’s interest in the Sears Tower, MetLife carried the Sears Tower
mortgage on its balance sheet under “Mortgage loans on real estate.” In 2002, the $691
million (book value) mortgage debt, accrued interest and other liabilities would
represent only 2.6% of MetLife’s mortgage loans on real estate and just 0.2% of
MetLife’s total invested assets. However, once it acquired Trizec’s second mortgage,
the Sears Tower was now carried on MetLife’s balance sheet as “Real estate and real
estate joint ventures held-for-investment.” In 2003, the $700 million carrying value ($691
29
“Brookfield Agrees to Buy Trizec in $8.9 Billion Deal,” Wall Street Journal, June 06, 2006.
29
The Sears Tower
January 1, 2007
million mortgage plus $9 million cash purchase price from Trizec) of the Sears Tower
would represent 17.4% of MetLife’s real estate and real estate joint ventures held-forinvestment, but less than 0.32% of MetLife’s total invested assets. 30
MetLife’s Decision to Purchase the Sears Tower
According to a company press release, purchasing Trizec’s second mortgage on the
Sears Tower allowed MetLife to “manage the long-term strategy of its investment” 31
and “allows us more flexibility and operational control.” 32 As mentioned previously,
there were questions about whether Trizec would be able to repay the first mortgage on
the Tower, especially during a time of declining building values. This transaction
allowed – at least temporarily - MetLife to avoid any further asset impairment charges
or write-downs. MetLife now carried the Sears Tower on its balance sheet at a value of
$700 million.
MetLife’s Decision to Sell the Sears Tower
During 2003 and 2004, MetLife sold many of its commercial real estate holdings to take
advantage of falling capitalization rates and rebounding asset prices. In November
2003, MetLife sold One Cal Plaza in Los Angeles to Maguire Properties for $225 million.
In December 2003, MetLife agreed to sell 11 Madison Avenue (an art deco office
building in Manhattan’s Midtown South District) to ZAR Realty for $675 million. After
the sale of these two high-profile deals, MetLife estimated that there was an additional
$3.6 billion of unrealized gains in its real estate portfolio.
Shortly after purchasing the Sears Tower from Trizec, MetLife began discussions with
brokers to explore its options, including an out-right sale as well as “selling a stake in
the building to a joint venture partner or refinancing its debt, among other options.”
Early in 2004, the Chicago office of Eastdil Realty won the assignment to sell the Sears
Tower. They began marketing the Tower and expected bids in the range of $750 million,
significantly higher than MetLife’s $700 million carrying value on its balance sheet. The
sale of these assets increased MetLife’s statutory capital and allowed the company to
repurchase more stock in efforts to boost its own share price. The sale would end
MetLife’s relationship with the Sears Tower, which had begun in 1990, but take
advantage of Chicago’s strengthening office market.
Although economic uncertainty prevailed between 2002 and 2003, Chicago’s population
had grown by 4% since 1990 and the city was ranked 5th best out of 31 markets in the
30
MetLife 2003 Annual Report.
“MetLife Acquires Sears Tower,” A/E/C Newswire, August 28, 2003
http://www.aecnewswire.com/industrynews/Detailed/470.shtml.
32
Kelly Quigley, “Trizec Sells Back Sears Tower Stake” Crain’s Chicago Business, 8/28/2003.
(http://chicagobusiness.com/cgi-bin/news.pl?id=9912&rel=1).
31
30
2003 Emerging Trends in Real Estate Survey. More importantly, Chicago’s diverse
economy allowed it to weather economic downturns better than most. The 8.5 million
in rentable square feet of net absorption that occurred since 1994 makes this fact evident.
Furthermore, the city’s diverse economy fostered a broad tenant mix not dependent on
any one employment sector and mitigating some of the vacancy concerns faced by other
cities.
Prior to 2003, the slow economy (due to technology market crash and 9/11) and the
delivery of new office product had taken vacancy rates for Class A, B, and C markets to
16.4%, 15.7%, and 15.7% respectively. Absorption in the CBD market slowed as well
beginning in 1998 due to the limited availability of Class A space , and then fell in 2001
as new projects totaling in excess of 3.0 million RSF opened. Nevertheless, in
anticipation of an overall economic recovery, an up tick in leasing activity in the latter
part of 2003 coupled with the sound fundamentals of Chicago’s CBD market positioned
the city well amongst competitors to thrive in the recovering economy. Exhibit 21
delineates Torto Wheaton Research’s forecast for the metropolitan Chicago office
market.
Exhibit 21: Torto Wheaton Research Forecasts for the Chicago CBD Office Market
Year
2004
2005
2006
2007
2008
Office
Employment
998
1,016
1,032
1,047
1,062
Vacancy
Rate
17.1%
14.4%
13.0%
13.4%
13.8%
Net
Absorption
(RSF x 000's)
2,579
6,204
3,903
841
962
Rent
Inflation
0.7%
6.7%
5.6%
2.8%
2.4%
Source: Torto Wheaton Research.
31
The Sears Tower
IV.
January 1, 2007
Joseph Chetrit and Company Acquire the Sears Tower
Valuation of the Tower in 2004
The commercial vacancy rate in Chicago reached 17.1% in 2004. However, eleven
notable tenants relocated to the West Loop submarket, a migration that bode well for
the Sears Tower. These high “credit” tenants included PriceWaterhouse Coopers,
Quaker Oats, UBS Warburg, Deloitte & Touche, ABN Amro, and Options Clearing
Corporation, plus law firms Gardner, Carton & Douglas, Mayer, Brown, Rowe & Maw,
and Lord, Bissel & Brook.
Between 1996 and 2004, sixteen premier CBD buildings, with an average of 92%
occupancy, were sold in Chicago for a weighted-average sales price of $252 per square
foot. Adjusting for the Sears Tower’s occupancy of 88% in 2004, this suggested an
approximate purchase price of $918 million. In the past, the Tower was considered a
premier location and, as such, it demanded among the highest rents in the city. After
9/11, however, this trend reversed; many potential investors forecasted that rents for
the Tower in the range of $24-$30 gross rent per square foot were unlikely to be
obtained in the future. This widening disparity was evidenced by the Sears Tower’s six
primary competitors’ occupancy at 96% in 2004, eight percentage points higher than
that of the Tower. Exhibit 22 shows the growth of rents through 2001, followed by the
correction, and projections through 2011:
32
Exhibit 22: Gross and Net Rents for the West Loop and the Sears Tower
For the Years Ended 2001-2011
$40
Sears Tower
Gross Rent
$35
Historical
Forecasted
$30
$25
Average West Loop
Sub-Market Gross
Rent
Sears Tower
Net Rent
$20
$15
$10
Average West Loop
Sub-Market Net
Rent
$5
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
$-
Source: Torto Wheaton Research; Eastdil Secured; authors’ calculations.
Despite the turmoil generated by 9/11, Enron, etc., there were several property-specific
traits that made the Sears Tower an attractive asset. In addition to owning a trophy
office building, this included the overall quality of the construction which was
considered dramatically ahead of its time, the potential to increase rental square footage
by 112,000 square feet due to new BOMA (National Association of Building Owners
and Managers) measurement regulations, the potential for selling the Tower’s naming
rights, and the quality of the antennae and Sky-deck income. (Please see Appendix 7
for additional detail on the Tower’s antennas and unique features.) Most important to
note was the overall quality of the tenancy, both in terms of lease duration and credit
quality. As shown in Exhibit 23, three of the six largest tenants (a combined 539,000
square feet, or 21% of rentable area were committed to the building for more than 10
years. Further, the six largest tenants (representing over 1,335,000 square feet or 35% of
GLA) were all high credit-rated tenants with a weighted lease commitment of 8.3 years
33
The Sears Tower
January 1, 2007
Exhibit 23: Sears Tower – Summary of Primary Tenants
Tenant
Credit Rating
Ernst & Young
n/a
A+
Goldman Sachs
Sonnenschein
5A2
1R2
Schiff, Hardin & Waite
Bank of America NA
AAA+
UNICARE
Latham & Watkins
1R3
5A3
Heidrick & Struggles
MWH Americas
5A3
A
Chubb
Total / Weighted Average
Rentable
Area
352,356
243,311
207,596
200,445
180,503
150,984
138,780
111,110
100,047
99,081
1,784,213
% of Property
9.25%
6.39%
5.45%
5.26%
4.74%
3.96%
3.64%
2.92%
2.63%
2.60%
46.84%
Lease
Expiration
5/1/2012
2/1/2011
8/1/2014
10/1/2006
2/1/2015
10/1/2014
10/1/2017
9/1/2010
6/1/2006
9/1/2019
9/2/2012
Source: Eastdil Secured, February 2004.
As mentioned previously, the Sears Tower’s Antennas are a source of considerable
revenue. The capabilities of the tower include broadcast antennae for high-definition
television, radio, cell phones, and emergency transmitters. Revenue from providing
these services was projected to account for over 5% of the Tower’s annual gross income
- see Exhibit 24 below:
Exhibit 24: Sears Tower – Projected Antenna Income
Fiscal Year
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Antenna Income
($000's)
8,060
8,386
8,725
9,078
9,445
9,827
10,224
10,637
11,067
11,514
% of Gross
Income
5.98%
5.56%
5.21%
5.23%
5.23%
5.28%
5.43%
5.46%
5.66%
5.70%
Source: Eastdil Secured, February 2004.
In addition, the Sears Tower had a manageable lease maturity schedule. The building’s
near-term lease rollover schedule was favorable with 7% leases expiring during fiscal
34
year 2005 and 9% expiring in fiscal year 2006. Refer below to Exhibit 25 for the full lease
expiration schedule.
Exhibit 25: Sears Tower – Lease Expiration Schedule
Fiscal Year
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016 +
Total *
Annual Rentable
Square Feet
Expiring
5,092
245,915
355,861
357,220
335,476
89,685
132,882
342,764
352,686
67,891
198,500
327,253
336,595
3,147,820
% of Total
0.1%
6.5%
9.3%
9.4%
8.8%
2.4%
3.5%
9.0%
9.3%
1.8%
5.2%
8.6%
8.8%
82.6%
* 14.5% of total rentable sq. ft. was vacant as of
February 2004. Fiscal Year ends June 30th.
Source: Eastdil Secured, February 2004.
From a construction standpoint, and as mentioned previously, the Sears Tower was
well ahead of its time. To this end, there are many aspects of the building that still
make it attractive from a leasing and operating standpoint, including:
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
Expansive column-free space,
Strong electric and cooling capacity,
A duct system which enables high-level phone and internet distribution,
Floor-to-ceiling windows,
8’6” finished ceiling height,
Seven restaurants, a health club, the Metropolitan Club, and extensive conference
space,
1200 dedicated parking spots,
Fully automated window washing,
Fully sprinklered building, and
No asbestos used during construction.
35
The Sears Tower
January 1, 2007
Based on NCREIF data, commercial capitalization rates in the Chicago area were
approximately 7.27% for the quarter ending March 31, 2004. Using this estimate and
the Sears Tower’s 2003 NOI of $65.1 million, the likely purchase price could be
estimated at $896 million. As mentioned previously, however, many of the rents in the
buildings were considered well-above market. Further, it was generally known that
Goldman Sachs was planning on vacating the building in 6-7 years. Not only did
Goldman Sachs represent the second largest tenant at 243,000 square feet, it also paid
net rent of $25 per square foot, which most thought would be nearly impossible to
replace.
Aggressive Financing Leads to Sky High Prices & Emergence of Private Buyers
Fueled by the “dot.com” implosion, low interest rates, investors “flocking to quality”
and banks wanting to finance large deals, a glut of capital flooded the real estate market
after 2001. Further, buyers with a healthy borrowing history were finding the
opportunities to leverage close to 100 percent of the purchase price of an asset. Such
financing often included a first mortgage for approximately 75% of the property’s value
with the balance supplied by aggressive mezzanine financing.
The looming Sears Tower transaction also highlighted a more general trend in which
private individuals, as opposed to large institutions, were increasingly engineering
mammoth deals to acquire trophy properties. Many wealthy investors were acquiring
prized properties. For example:
•
•
•
A group of investors, led by New York investor David Werner, paid $675 million
at the end of 2003 to acquire 11 Madison Ave in New York City.
Another group of investors along with David Werner invested $400 million for
50 percent stake in the Bank of America building in San Francisco in 2004.
In 2004, New York investor Harry Macklowe stunned the real estate world with
a record-setting $1.4 billion bid for the General Motors building, in New York. 33
The rush of private capital into these properties resulted in driving down cap rates to
well below historical levels for CBD office properties, which typically ranged between
7% and 8%. In 2004, it was not uncommon to see cap rates as low as 5%. Generally
speaking, these low cap rates were attributable to the high prices paid by private buyers
who were more comfortable (than their institutional counterparts) taking on
substantially higher leverage ratios (and implicitly incurring substantially more risk).
33
Alison Gregor, “Will Building Buyers Bust?,” The Real Deal, March 2005
(http://www.therealdeal.net/deals/sales.php?deals_sales_sort_order=DESC&deals_sales_sort_field=price).
36
Referring to these bidding wars, Richard Baxter, an Executive Director at Cushman &
Wakefield stated:
“The prices for the assets are considered high -- even bubbly. This is the market of the individual
investor. They're dominating right now.” 34
In addition, James Hanson, a Managing Director for Jones Lang LaSalle, stated at this
time:
"Anybody who is going to use a high degree of leverage in an acquisition is going to have an
advantage, given how low interest rates are, and also how aggressive lenders are just to put
money out."
Exhibit 26 illustrates the breakdown of CBD buyers in 2004:
Exhibit 26: CBD Buyers – Nationally 2004
REIT/Public
User/Other 12%
2%
PrivateNational
32%
Foreign
22%
Institutional
12%
PrivateLocal
20%
Source: Real Capital Analytics, November 2004.
Notice that private buyers constituted more than half of 2004 acquisition activity.
Additionally, these private buyers typically utilize more leverage to finance their
acquisition than institutional buyers.
Chetrit Group Wins the Deal
In this context the Feil Organization, a large, New York City-based firm, attempted to
preempt the bid process for the Sear Tower by making an offer directly to MetLife for
$810 (Appendix 8 provides additional detail on the investment sales process for
34
Ray Smith, “Sears Tower Deal Marks Return of the Mogul,” The Wall Street Journal, May 11, 2004.
37
The Sears Tower
January 1, 2007
commercial real estate.) The offer was very credible as Feil had a respectable and wellknown track record of successfully developing and managing millions of square feet of
office buildings across the country up through 2003 (it was also rumored that Wachovia
was to be Feil’s mortgage lender). MetLife, anxious to exit the deal, had the Sears
Tower on the books for a carrying value of $700 million. Feil’s offer would get them out
at a sizeable profit. Moreover, few in the industry believed that the Sears Tower would
sell for over $800 million. MetLife verbally accepted Feil’s offer before bidding
concluded, but because of the approaching end-of-year holidays, decided to wait to
enter into a formal purchase-and-sale agreement. Meanwhile, Eastdil advised MetLife
against accepting the deal and to wait for the auction process deadline to be reached.
Although the Feil deal was reportedly under contract, Joseph Chetrit, a Frenchspeaking, Moroccan-born New Yorker, formed a group and partnered with Joseph
Moinian and Israel Gluck from American Landmark Properties to aggressively pursue
the purchase of the Sears Tower. Chetrit, who pleaded guilty in 1990 to a felony count
of violating federal customs law when he was operating his business of importing and
exporting fabric, 35 had already been active on the high-profile real estate scene. Just
prior to his purchase of the Tower, Chetrit crafted the acquisition deals of two large
Manhattan office properties—530 Fifth Avenue, for $210 million 36 and 450 West 33rd
Street for $171.5 million 37 —and in Miami—Roney Palace, a beach resort for $149.8
million 38 – among others. In addition, Chetrit had already purchased other properties
in the Chicago area.
Moinian, an immigrant who came to the U.S. from Iran in the late 1970s, was also
prominent in large real estate deals. Moinian and his group purchased several highpriced properties in New York City: 180 Maiden Lane for $355 million; 530 Fifth
Avenue for $213 million; 95 Wall Street for $184 million; 1450 Broadway for $124
million; and 17 Battery Place North for $70 million. 39
Chetrit’s group immediately made an offer of $840 million which MetLife accepted
conditioned upon Chetrit forming a partnership with Feil to jointly acquire the Tower.
Eastdil spoke with the other bidders, described as the “top five trophy landlords in the
United States,” to see if any other offers were forthcoming at prices approaching this
number. Eastdil received a unanimous response of “no” and Chetrit’s group won the
deal.
35
Ray Smith, “Sears Tower Deal Marks Return of the Mogul,” The Wall Street Journal, May 11, 2004.
“$220 Million Fifth Ave. Sale - Joseph Chetrit,” Real Estate Weekly, February 25, 2004.
37
Real Estate Alert, January 14, 2004.
38
“Real Estate Developer Joseph Chetrit May or May Not Buy the Bankrupt Roney Palace Hotel and
Condominiums for $153.5 million”, Knight Ridder/Tribune Business News, June 10, 2004.
39
Alison Gregor, “Will Building Buyers Bust?,” The Real Deal, March 2005.
36
38
In order to secure sole ownership and avoid a power struggle, Chetrit reportedly
bought out Feil for $30 million. To alleviate MetLife’s concerns over Chetrit’s capacity to
close such a large transaction, the purchase-and-sale agreement provided for $20
million in non-refundable earnest money and a five-day due diligence period. These
actions are highly unusual and essentially eliminated any risk to MetLife for accepting
Chetrit’s offer.
It is estimated that the Chetrit group required approximately $80 million (or
approximately 9.5% of the purchase price) in equity to acquire the Tower – see Exhibit
27:
Exhibit 27: Estimate of Equity Requirement
Purchase Price
Payment for Feil Buyout
Legal & Other Professional Fees
Loan Origination Fees & Costs
All-In Purchase Price
Less: Gross Loan Amount
Net Loan Reserves *
Net Loan Proceeds
Cash Required to Close
$
$
$
825,000
(20,462)
804,538
$
840,000
30,000
5,000
10,000
885,000
(804,538)
80,462
* For purposes of simplicity, the lender's escrows for property taxes
and insurance are assumed to equal the buyer's closing proration
for property taxes and pre-paid insurance (if any).
Source: Author's calculations.
Although it is difficult to determine the motives for why such a high premium was paid
for the Tower, there was some speculation that the Chetrit group used the acquisition to
defer taxes on income generated from another real estate transaction. Section 1031 of
the U.S. Internal Revenue Code allows investors to defer capital gains taxes when they
exchange similar properties. The Code specifies that the exchange must take place
within a certain time period (usually 6 months) which could explain the hurried nature
of the deal and the apparent high price paid for the Tower.
The CMBS Market Provides the Fuel
Commercial mortgage-backed securities are structured investment instruments that
typically represent an undivided ownership interest in a group of mortgages, secured
39
The Sears Tower
January 1, 2007
by income-producing commercial properties. Lease agreements signed by the tenants
serve as the source of income from which the mortgage payments are ultimately made.
Therefore, the quality of the properties, geographic regions in which the properties are
located, and the creditworthiness of the tenant plays a part in assessing the overall risk
of the CMBS offering. 40
Typically, a CMBS offering is divided into two major classes of debt, a senior and a
subordinated tranche - sometimes, these are referred to as the “A piece” and “B piece.”
There are often several subclasses within each of these two major categories. Following
the A and B debt pieces is an equity allocation generally referred to as the “residual- or
equity-class shareholder.” As to be expected, the senior tranche receives the highest
priority claim, followed by the subordinated “B” piece, and finally, the residual equity
holders.
Consistent with the CMBS lending environment and the very low interest rates at the
time, Chetrit’s purchase price reflected the availability of plentiful mortgage debt. With
the increased competitiveness in the CMBS market place, Bank of America emerged the
victor due to what many industry observers thought to be its aggressiveness. This
aggressiveness was rumored to have been motivated by the fact that Bank of America
had recently lost a string of “mega” deals to other real estate investment banks and was,
therefore, determined to originate this loan.
This approach proved successful and during 2003-2004, Bank of America quickly
ascended to the top of the League Tables. Some of its lending activity during this time
period included:
ƒ
ƒ
ƒ
ƒ
$825 million for the Sears Tower in Chicago,
$750 million for the Bank of America Center in San Francisco,
$315 million for One Beacon Street in Boston, and
$225 million for the Desert Passage at Aladdin in Las Vegas.
For the Tower acquisition, Bank of America provided Chetrit with an $825 million loan
(in part, based upon a $925 million appraisal). This interest-only acquisition loan used
floating-rate debt at a weighted-average of 225 basis points over the 1-month London
Interbank Offered Rate (LIBOR). This represented 98% leverage on the sale price of $840
million. The term was 3 years, with three one-year extension options. The price
required that Chetrit and his partners put up an estimated additional $80 million in
equity and reserves for closing costs, various improvements, taxes and insurance.
Including this amount, the deal was ultimately leveraged at 90%, and represented an
implied cap rate of 7.08%. With financing in place, MetLife completed the sale to
Chetrit on March 26, 2004.
40
William B. Brueggeman and Jeffrey D. Fisher, Real Estate Finance and Investments, McGraw-Hill/Irwin, 2005.
40
Exhibit 28: Overview of Chetrit’s Acquisition of MetLife’s Position
$240 Second Mortgage
[MetLife]
Sale to Chetrit Partnership
$840 Million to MetLife
$15 Equity [Chetrit]
$225 Mezzanine
Financing
[Bank of America]
$600 First Mortgage
[MetLife]
$600 First Mortgage
[Bank of America]
2004
2004
Bank of America’s $825 million financing package consisted of a 1st mortgage note of
approximately $600 million and a mezzanine note of $225 million. Like most large loan
deals, several tranches were made available and sold off to investors. While the Bank of
America financing is monumental in its own right, it is especially ironic to recall that
fourteen years prior to this transaction, Metlife provided a 1st mortgage on three notes
totaling $600 million and AEW provided a 2nd mortgage of $250 million in a single
transaction.
Exhibit 29 illustrates the approximate tranche breakdown and LIBOR spreads of the
2004 financing package:
41
The Sears Tower
January 1, 2007
Exhibit 29: Sears Tower CMBS Tranches Detail
Amount
Interest Spread
Over LIBOR*
Allocation
Purchaser(s)
1st Mortgage Note
Sr. Interest Securitized & Pooled
Sr. Interest Securitized & Not Pooled
419,724,695
105,275,305
0.71%
0.71%
419,724,695
105,275,305
Multiple
Multiple
Jr. Interest Placed in Outside Trust
75,000,000
5.00%
25,000,000
25,000,000
25,000,000
Capital trust
BofA
BofA
125,000,000
8.00%
8.00%
8.00%
8.00%
22,000,000
36,500,000
36,500,000
30,000,000
CIT
Lehman
Lehman
Carbon
100,000,000
825,000,000
8.00%
2.25%
100,000,000
825,000,000
BofA & Ramius
Note
Mezzanine Note
Sr. Mezzanine Interest
Junior Mezzanine Interest
Total
* The junior interest placed in outside trust and mezzanine note are estimates based on documentation indicating a total
weighted average spread of approximately 2.25% with the total mezzanine note at 8.00% over LIBOR.
Sources: Commercial Mortgage Alert, Fitch Ratings and Standard & Poors.
Exhibit 29 details the structural features and reserves of the CMBS loan as required by
Bank of America.
Exhibit 30: Structural Features of the Loan for the Sears Tower
Reserve Detail
Lock Box
Ongoing Reserves
Amount
$3,000,000
2,300,000
Upfront Reserves
Total
10,250,000
8,900,000
5,300,000
962,000
716,667
$31,428,667
Notes
Hard
For estimated annual expenses for real estate taxes,
capital expenditures, and tenant improvement/leasing
costs
For "Reglazing Project," the ongoing replacement of
windows at the property
For real estate taxes
For TI/LC reserve for obligations of future payments
owed to current tenants
For replacement reserves
For immediate repairs
For insurance
Source: Fitch Ratings, Commercial Mortgage Presale Report - Series 2004-BBA3.
A schematic overview of the 2004 Sears Tower transaction to the Chetrit group is
summarized in Exhibit 31:
42
Exhibit 31: 2004 Sears Tower Sale to the Chetrit Group
Securitized
1st Mortgage
Holders
$419.7 +
$105.3
MetLife
1st Mortgage
Security
$75
Unsecuritized
1st Mortgage
Holders
Title to
Real Estate
$840
$825 Loan
1st Mortgage Security
Interest
Senior Mezzannine
Interest
Lehman &
Carbon
Bank of
America
$125
$100
1st Mortgage & Mezzanine
$15*
Sears
Tower
Junior Mezzannine
Interest
BofA &
Ramius
* Note: Excludes upfront reserves paid and payment to the Fiel organization.
43
Chetrit
Title to Real Estate Subject
to BofA interests
The Sears Tower
January 1, 2007
It was also widely rumored that the Fiel organization has a $10-20 million interest in the
junior mezzanine note. If true, this move may indicate that the firm had a “win/win”
proposition: If Chetrit overpaid for the Sears Tower and eventually defaults, Feil may
then end up owning the Sears Tower after all. If not, he still was able to secure a high
yielding piece of mezzanine debt apparently using a portion of the $30 million buy-out
payment that was originally supplied by Chetrit.
Bank of America included the loan for the Sears Tower in a pool established by Bear
Stearns, which securitized a number of loans and brought the entire pooled transaction
to the market. For most CMBS transactions, the rating agencies will review the
underlying assets in the pool and provide an independent assessment of the risk and
creditworthiness of the offering. Three well-known agencies that serve this space
include Fitch Ratings, Moody’s Investors Service and Standard & Poors. Each reviewed
the CMBS offering conducted by Bear Stearns and provided specific strengths and
weaknesses on both the entire pool and the Sears Tower portion, since it was such a
large percentage of the total pool (approximately 39% of the total). The complete
securitized offering by Bear Stearns, dated July 27, 2004, of pooled mortgages including
the Sears Tower is detailed below in Exhibit 32.
44
Exhibit 32: Bear Stearns 2004 CMBS Offering Detail
Series 2004 – BBA3 Including the Sears Tower
Property
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
Trust Junior
Pooled Balance
Interest
(Senior Interest) (Non-Pooled)
Sears Tower
Desert Passage 1
CNL Portfolio
MCI Center
Transpoint Building
Park 80 West I&II
Davidson Hotel Portfolio
655 Fifth Avenue
Longacre House
Pyramid Mall of Ithica
Hanover Mall
Hyatt Regency
Ritz-Carlton San Juan
Parkway Corporate Center
Riverside Center
Sheffield Office Park
Tribeca Grand Hotel
Bridgewater Crossing
Capital Partners
Mt. Kemble
Arbor View Apartments
Total
419,724,695
70,000,000
130,000,000
85,000,000
62,600,000
53,500,000
52,000,000
50,000,000
44,000,000
43,300,000
37,560,000
35,000,000
34,000,000
31,710,773
28,238,000
26,000,000
25,500,000
25,000,000
20,926,912
18,300,000
15,000,000
1,307,360,380
105,275,305
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
105,275,305
Junior Interest
(Outside Trust)
75,000,000
0
0
0
4,000,000
0
15,000,000
10,000,000
18,000,000
0
20,000,000
5,000,000
16,000,000
12,882,502
9,662,000
15,000,000
0
5,600,000
8,275,833
11,700,000
0
226,120,335
Mezzanine
Debt
225,000,000
55,000,000
35,000,000
15,000,000
0
26,000,000
15,000,000
0
0
0
0
0
0
0
0
0
0
0
7,972,155
0
0
378,972,155
Total
Debt
825,000,000
225,000,000
165,000,000
100,000,000
66,600,000
79,500,000
82,000,000
60,000,000
62,000,000
43,300,000
57,560,000
40,000,000
50,000,000
44,593,275
37,900,000
41,000,000
25,500,000
30,600,000
37,174,900
30,000,000
15,000,000
2,117,728,175
Source: Moody's Investors Service.
As highlighted above, Bank of America securitized via a CMBS offering approximately
$525 million (i.e., $419.7 plus $105.3) of the entire $825 million loan amount. (See
Appendix 9 for more detail.) That is, approximately $419.7 million of the Tower’s $600
million first mortgage was placed in a pool with other (portions of) first mortgage loans
totaling approximately $1.3 billion. (In other words, the pooled portion of the Tower’s
first mortgage loan comprised almost one third of the total pooled mortgages).
Additionally, approximately $105.3 million of the Tower’s $600 million first mortgage
loan was sold as a separate instrument. (This piece does not enjoy the diversification
benefits of a pooled security.) The remaining portion ($75 million) of the first mortgage
was sold outside the trust.
Lenders are often faced with the difficult choice of trying to balance the tradeoff
between the securitized loan amount and the market-clearing interest rate. Typically, a
large securitized loan amount relative to property value leads to a higher market45
The Sears Tower
January 1, 2007
clearing interest rate. In the same vein, a more concentrated pool offering (whether its
loan size/allocation, property type, geographic area, borrower or sponsor) is viewed as
a more risky investment and, therefore, increases the market-clearing interest rate. In
the case of the Sears Tower, Bank of America may have received feedback from ratings
agencies that a CMBS pool with a smaller Sears Tower concentration, given its inherent
strengths and weaknesses, may have been viewed more favorably. Consequently,
approximately $525 million of the $600 million first mortgage loan was securitized. The
$75 million balance of first mortgage loan was sold outside the CMBS offering.
Additionally, the $225 million second/mezzanine mortgage was separated into “senior”
and “junior” pieces and sold privately. This is not an uncommon practice for lenders to
“sell off” a portion of the total loan since this course of action will significantly reduce
the amount of risk the lender faces. Again, separation into senior and junior tranches
will balance the potential rewards of the loan/interest payouts and the risk taken by the
note holders.
As shown in Exhibit 32, the $525 million securitized portion of the Sears Tower loan
was divided into a “pooled” senior interest and a “non-pooled” junior interest. The
main difference between the two is the primary reason CMBS transactions are so
popular: sequential-pay bond structures. A sequential-pay structure means that as
principal from the underlying loans is paid, it is allocated to the top of the structure first
(the highest rated tranches or in this case the “pooled” senior interests) and continues
down through the bond structure in sequential order after each bond is paid off. In
contrast, loan losses work from the other direction as they are applied to the lowestrated tranche outstanding (in this case the “non-pooled” junior interest) and continue
upward through the structure. 41 In industry parlance, the subordinated positions are
sometimes referred to as “rake certificates.” Generally speaking, losses in respect to the
loan would be applied first to the subordinate “non-pooled” interest. Once the
subordinate “non-pooled” interest reaches zero, further losses would then be applied to
the senior “pooled” component. 42 Hence, by keeping approximately $105 million of the
loan securitized but non-pooled, Bank of America may have satisfied certain feedback it
received from the ratings agencies regarding loan size, portfolio concentration, and
overall risk.
41
42
Wachovia Securities, “Real Estate in Real Terms, Wachovia Real Estate Primer,” July 2005.
Commercial Mortgage Securities Association, “CMBS World,” Spring 2005.
46
Exhibit 33 summarizes by the ratings agencies, the major strengths and weaknesses of
the Sears Tower portion of the loan pool were the following:
Exhibit 33: Rating Agencies’ Assessment of the Sears Tower Loan Pool
•
•
•
•
•
•
Strengths
Diversified rent roll
Significant portion of building leased
to investment-grade tenants
Excellent collateral quality
Excellent location in Chicago’s west
loop office submarket
Experienced sponsorship and property
management team
Property is considered a “landmark”
building offering a prestigious address
•
•
•
•
•
•
Weaknesses
Potential terrorist target because of
“landmark” status and prestige
Goldman Sachs, one of the largest
tenants, is expected to leave the Tower
Underperforming
Chicago
office
market with increasing supply of Class
A buildings coming on the market
Highly levered total financing relative
to the building’s value (e.g., $825
million in total debt)
On-premise restaurants operating at
loss since 2003
Above-average (tenant reimbursable)
operating expenses for its submarket
primarily due to insurance costs and
historically inefficient management
Sources: Fitch Ratings, Moody’s Investors Service and Standard & Poors.
Although Bank of America received an appraised value for the Tower of $925 million at
the time of purchase, three major rating agencies reviewing the securitized portion of
the loan (i.e., $525 million) thought otherwise.
Exhibit 34: Sears Tower Ratings Agency Assessment
Debt Stack
Sr. Participation
Jr. Participation
Sr. Mezzanine Interest
Junior Mezzanine Interest
Implied Value of Tower
Bank of America
Debt Amounts
$525,000,000
75,000,000
125,000,000
100,000,000
$825,000,000
Fitch Ratings
DSCR
LTV
1.42
1.24
1.03
0.90
64.7%
73.9%
89.3%
101.6%
$812,007,874
Moody's
DSCR
LTV
1.67
1.33
1.17
0.85
69.0%
78.8%
95.3%
108.4%
$761,070,111
Standard & Poors
DSCR
LTV
n/a
n/a
n/a
n/a
66.2%
75.7%
91.5%
104.1%
$792,507,205
Sources: Fitch Ratings, Moody's Investors Service and Standard & Poors.
47
The Sears Tower
January 1, 2007
The Chetrit group opted for a floating-rate loan lasting three years with three one-year
extensions. Although interest rates for fixed- as well as floating-rate loans were at
historically low levels (please refer to Exhibit 35), Chetrit – like a significant number of
other borrowers at the time - may have chosen short-term floating-rate debt for the
following reasons:
•
•
•
Fixed-rate debt is generally more costly.
Reduced cost of floating-rate debt provides buffer to reinvest in Sears Tower to
increase NOI by:
– Increasing occupancy levels,
– Improving facilities, grounds or systems,
– Bumping tenant rents upon lease expiration, and/or
– Repositioning and retail space and sky-deck income.
Lockout, prepayment and defeasance provisions are generally less restrictive and
not as costly.
As the following exhibit shows, LIBOR rates for the period between 2003 and 2004 (and
approximately concurrent with the Chetrit Group’s acquisition of the Tower) had
dipped to the lowest point in 10 years. Had Chetrit financed the Tower with fixed-rate
debt, (the same exhibit displays 5- and 10-year Treasury rates during this same time
period (generally fixed-rate loans are based on a spread over Treasury rates)), the
differential would have been approximately $12 million in annual debt service when
calculated at the time of loan origination (using the 10-year Treasury rate as the
benchmark for the fixed-rate financing alternative). As shown in Exhibit 35, this
differential narrowed considerably in 2005.
48
Exhibit 35: Historical Treasury and One-Month LIBOR Rates
For the Period 1996 through 2006
One-Month LIBOR Rate for the Period 1996-2005
8%
Chetrit
Considers
7%
Fixed-Rate
Debt with UBS
6%
5%
4%
3%
2%
Chetrit Purchases
1%
Tower with BofA
Floating-Rate Debt
Ja
n96
Ju
l-9
6
Ja
n97
Ju
l-9
7
Ja
n98
Ju
l-9
8
Ja
n99
Ju
l-9
9
Ja
n00
Ju
l-0
0
Ja
n01
Ju
l-0
1
Ja
n02
Ju
l-0
2
Ja
n03
Ju
l-0
3
Ja
n04
Ju
l-0
4
Ja
n05
Ju
l-0
5
Ja
n06
Ju
l-0
6
0%
1-Month LIBOR
5-Year Treasury
10-Year Treasury
Note: LIBOR rates shown represent the One Month LIBOR as published monthly by
Fannie Mae and aggregated by MoneyCafe.com. LIBOR as shown above is for a one
month deposit in U.S. dollars during a given month.
Sources: MoneyCafe.com (LIBOR Rates) and FederalReserve.gov (Treasury rates).
LIBOR rates at these historically low levels allowed Chetrit to save a significant amount
of money that would have otherwise been paid out as interest on the loan. As the onemonth LIBOR has increased to 5.33% (as of December 31, 2006) and Chetrit’s interest
payments have correspondingly risen, the Tower’s debt-service coverage has narrowed
substantially, as estimated in Exhibit 36.
49
The Sears Tower
January 1, 2007
Exhibit 36: The Chetrit Group’s Estimated Interest
Coverage on Floating-rate Debt
Year
One-Month LIBOR
(Averaged Over
One Year)
Estimated Spread
over LIBOR
Operating
Income
Estimated Annual
Debt Payment
Debt Coverage
Ratio
July 2004
Dec 2006
1.16%
5.13%
2.25%
2.25%
$62,494,000
$72,877,000
$27,980,467
$43,534,041
2.23 to 1
1.67 to 1
Assumptions:
Total amount of floating rate debt = $825 million.
Debt Amortization occurs over 30 years.
Spread over LIBOR is a weighted average of all BofA debt and is held constant throughout the life of the loan.
LIBOR rates shown are an average of the one-month LIBOR rates collected over the previous 12 months.
Source: Eastdil Secured (Operating Income), MoneyCafe.com (LIBOR rates) and authors' calculations.
One interesting point relates to the involvement of Ramius Capital. In July 2004,
Ramius Capital bought $100 million of Bank of America’s mezzanine loan for Chicago's
Sears Tower. This further raises suspicions that the Feil organization has a $10-20
million interest in the junior mezzanine note, as the two organizations seem to have had
dealings in the past. This connection was formalized in December 2006, when the Feil
organization and Ramius Capital formed the RCG Longview Equity Fund, L.P. to
expand on a partnership that began between the two in 1998. If true, this move may
indicate that Feil has still maintained an interest in the Sears Tower using the buy-out
payment that was originally supplied by Chetrit.
The Sears Tower Today (2006)
As mentioned earlier, prospects did not look good for future of the Sears Tower
immediately after September 11th, 2001. Yet, today the Tower is looking to regain much
of the solid footing it enjoyed before the terrorist attacks. Financially, the building still
has a strong, diverse rent roll with tenants such as Ernst & Young, Goldman Sachs,
Sonnenschein, Bank of America, and UNICARE. Also, with occupancy at around 87%,
vacancy levels are relatively low compared to the broader Chicago office market. From
an overall image stand point, some feel the worst is over in terms of the stigma and
security concerns associated with very tall buildings. In addition, the security process
of entering and exiting the property has been greatly streamlined.
Moreover, there has been a great deal of discussion over how to take advantage of the
high traffic flow of tourists visiting the Tower’s observatory. The current plan is to
renovate roughly 80,000 square feet of below-grade space to create an interactive
entertainment and retail destination for the roughly 2 million tourists who visit the skydeck annually.
50
On the other hand, there have been some negative events. This would include the
recent construction efforts of several Class A competitor buildings in the downtown
business district, such as Mesirow Financial’s 1.2-million-square-feet tower at 353 N.
Clark Street and Hines’ 1.3-million-square-feet tower at 300 N. LaSalle Street, both
slated for completion in 2009. Also, a few buildings have recently opened and are now
competing with the Sears Tower for tenants. (See Appendix 10.) These buildings
include:
ƒ
191 N. Wacker
- 734,500 rentable square feet
-Developer: Hines, 2003
ƒ
Dearborn Center
- 1,400,00 rentable square feet
-Developer: Beitler/Prime, 2003
ƒ
540 W. Madison
- 1,300,000 rentable square feet
-Developer: ABN AMRO/Hines, 2004
ƒ
71 South Wacker (Hyatt Center)
- 1,550,000 rentable square feet
-Developer: Prime/Pritzker, 2005
ƒ
111 S. Wacker (Deloitte)
- 970,000 rentable square feet
-Developer: The John Buck Co., 2005
ƒ
1 S. Dearborn
- 800,000 rentable square feet
-Developer: Hines, 2006
Prior to their lease maturities and as suspected, Goldman Sachs and Merrill Lynch
elected to prematurely leave the Sears Tower, choosing to relocate to 71 South Wacker
and 1 North Wacker, respectively. These two tenants occupied 243,311 square feet
(Goldman) and 46,876 (Merrill Lynch), representing an additional 7.6% vacancy. As
these leases have yet to expire (Goldman expires in February 2011 and Merrill Lynch in
June of 2008), this space has entered the sublease market, cannibalizing potential new
tenants for the Tower. Nonetheless, over the past three years, CB Richard Ellis has
managed to sign roughly 600,000 square feet of new leases, broken down as 400,000 in
renewals or expansions, and 200,000 in new tenancy. The Merrill and Goldman spaces
51
The Sears Tower
January 1, 2007
are predominately located on floors 50 through 69 which, in addition to great views,
have the desirable 40,000 square foot floor plate, making this space very attractive.
Currently, the majority of vacant space falls below the 20th floor and on the Tower’s
largest floor plates. According to CBRE, however, the weakened market has dropped
average rents from the $18-24 per square foot range pre-9/11 to the $10-14 per square
foot range currently. Nevertheless, there has reportedly been interest in the naming
rights and CBRE expects a Tower renaming scenario in the coming years. It is rumored
that renaming the Tower could fetch up to an additional $10 million in revenue
annually.
In March of 2007, the owners of the Sears Tower selected U.S. Equities to handle leasing
and management after CB Richard Ellis resigned in November 2006.(CBRE was
handling duties in the interim). U.S. Equities was chosen in large part for their success
in positioning the John Hancock Center in Chicago during the 1990s. Vacancies for the
Tower hit 21.8% during the third quarter of 2006, but recently have rebounded to 17.7%,
due in large part to expansions by key tenants. 43
As noted earlier, another source of income for the Tower is the revenue generated from
the leasing of rooftop space for telecommunications antennas. Previously, there
appeared to be few buildings with the height necessary to compete against the Sears
Tower for this business. However, recent plans by other Chicago developers may
jeopardize this income stream. Paul Beitler and LR Development Co. unveiled plans in
October 2005 for a 2,000 foot-tall broadcast center, to be built in downtown Chicago. 44
In addition, developer Garrett Kelleher of Dublin, Ireland-based Shelbourne
Development Ltd. has mentioned placing a broadcast antenna on top of its 2,000 foot
spiral high rise, dubbed the Chicago Spire. Although these developments are still in
question, they pose a risk to a previously secure source of income for Sears Tower.
Two years after acquiring the Tower, the Chetrit group is apparently seeking to
refinance the Tower. The partnership has hired Carlton Group, a New York real estate
investment bank, to explore refinancing the building’s $825 million mortgage and
“bringing in an institutional equity partner,” says a person familiar with the situation.
It’s reported that Chetrit’s group wants to sell as much as $200 in preferred equity in the
building. 45 This deal would potentially allow Joseph Chetrit and his partners to recoup
their equity investment and take profits from the deal while remaining in control of the
asset.
In marketing the property for refinancing, the Carlton Group indicates that:
43
Thomas A. Corfman, “Sears Tower Owners Tap New Firm for Leasing, Management,” Crain’s Chicago
Business, March 17, 2007.
44
Thomas A. Corfman, “Tweezer Broadcast Tower Off the Horizon,” Chicago Tribune, March 10, 2006.
45
Alby Gallun, “Sears Tower Owner Seeks Refinancing,” Crain’s Chicago Business, March 6, 2006.
52
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
530,000 square feet of leases have been renewed,
120,000 square feet of vacant space has been leased,
200,000 square feet of leases are projected to be signed this year,
$8,000,000 will be spent on renovating the observation deck,
restaurant space has been repositioned with Sodexho operating 4 restaurants and
adding catering and other services, and
additional opportunities being explored are:
• leasing of signage space, and
• selling of naming rights
The State of the Office Market
As indicated in Exhibit 37, the downtown Chicago office market has steadily
deteriorated since 1996 as total rentable building area increased to approximately 380
million while occupancy levels were at approximately 340 million. In 2005, the office
sector was dominated by a strong investment market selling $20 billion. Some of this
office space was vacant, with many of these properties were being redeveloped into
residential condos. In regards to new developments, the office investment market
combined with developers generally looking to pre-lease expensive new construction to
“marquis” tenants has provided fuel to the new construction building market, keeping
a steady line of new office projects in the construction pipeline. While prices for vacant
properties increased, CBD buildings specifically experienced an increase of 52%. 46
46
“Office Capital Trends Monthly, March 2006,” Real Capital Analytics.
53
The Sears Tower
January 1, 2007
Exhibit 37: Chicago Market Historical Rentable Building Area and Occupancy
For the Period 1996 through 2006
94%
400
390
380
Total RBA
Occupancy
Occupancy
370
360
86%
350
340
Total RBA (mil)
90%
330
82%
320
310
300
19
96
19 2Q
96
19 4Q
97
19 2Q
97
19 4Q
98
19 2Q
98
19 4Q
99
199 2Q
9
200 4Q
0
200 2Q
0
200 4Q
1
200 2Q
1
20 4Q
02
20 2Q
02
20 4Q
03
20 2Q
03
20 4Q
04
20 2Q
04
200 4Q
5
200 2Q
5
200 4Q
6
200 2Q
64
Q
QT
D
78%
Source: CoStar.
As shown in Exhibit 38, office transactions for comparable properties have varied
depending on asset quality, occupancy and location. The Sears Tower was purchased
for $218 per rentable square foot and $248 per occupied square foot. At this pricing, the
Tower traded at approximately $40 per square foot lower than the average.
54
Exhibit 38: Selected Chicago Office Transactions
Property
111 South Wacker
550 West Jackson
100 N. Riverside
123 North Wacker
AT&T Corporate Ctr.
555 West Monroe
191 N. Wacker
333 West Wacker
Sears Tower
515 N. State
35 W. Wacker
131 South Dearborn
225 West Wacker
525 West Van Buren
55 E. Monroe
One North Wacker
311 South Wacker
181 West Madison
500 West Monroe
77 West Wacker
Date
Closed
4Q05
4Q05
3Q05
3Q05
4Q04
4Q04
3Q04
3Q04
2Q04
1Q04
4Q03
3Q03
2Q03
1Q03
4Q02
4Q02
3Q02
3Q02
1Q02
3Q99
Total
Total Rentable
Building Area
1,029,000
407,500
770,000
535,000
1,500,000
420,000
725,000
868,000
3,850,000
622,500
1,118,000
1,525,000
644,400
525,000
1,600,000
1,343,000
1,275,000
936,400
952,000
945,000
21,590,800
Estimated Sale
Per Rentable Occupied
Price
Occupancy Square Foot Square Feet
$412,100,000
126,000,000
165,200,000
171,200,000
480,000,000
115,000,000
222,000,000
208,000,000
840,000,000
128,000,000
285,000,000
434,000,000
153,000,000
136,100,000
239,000,000
412,000,000
273,000,000
256,500,000
248,000,000
280,000,000
$5,584,100,000
84%
83%
95%
98%
98%
99%
91%
93%
88%
96%
93%
70%
95%
83%
83%
91%
84%
98%
99%
96%
90.9%
$400
309
215
320
320
274
306
240
218
206
255
285
237
259
149
307
214
274
261
296
$259
864,360
338,225
731,500
524,300
1,470,000
415,800
659,750
807,240
3,388,000
597,600
1,039,740
1,067,500
612,180
435,750
1,328,000
1,222,130
1,071,000
917,672
942,480
907,200
19,615,242
Price per
Square Foot
$477
373
226
327
327
277
336
258
248
214
274
407
250
312
180
337
255
280
263
309
$285
Source: Eastdil Secured, February 2004.
The Sears Tower is situated in the West Loop. Holding a dominant position from the
standpoint of square footage, the Sears Tower remains relatively well occupied and its
size remains a competitive advantage. See Exhibit 39 for detail on the West Loop office
market:
55
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7
Rentable Building Area (RBA)
4,500,000
3,500,000
3,000,000
2,500,000
60%
2,000,000
1,500,000
40%
1,000,000
20%
500,000
0
0%
RBA
Occupancy
Median Occupancy (Excluding Sears Tower)
Source: Costar.
56
2006 Occupancy Rate
The Sears Tower
January 1, 2007
Exhibit 39: West Loop’s Top 30 Buildings
Rentable Building Area and Occupancy for First Quarter 2006
100%
4,000,000
80%
The Sears Tower has remained a low-cost “trophy” alternative in relation to high-priced
new construction properties in the West Loop.
Please refer to Appendix 10 for
additional information on proposed and recent developments in Chicago, Appendix 11
for additional information on office specific projects and Appendix 12 for additional
information on comparable office properties in the Chicago market.
Repositioning Possibilities for the Sears Tower
The adaptive re-use strategy to add value to office properties and loft properties is
prevalent in Chicago. Owners of well-located, but obsolete, buildings have tended to
look to reposition the property for condominium or hotel use. Two recent examples of
office corporate headquarter properties that have undergone adaptive re-use are the
Montgomery Ward Headquarters and the Palmolive building converted to luxury
condominiums. Exhibit 40 details the adaptive re-use projects in Chicago and Exhibit
35 shows a map of some adaptive re-use properties:
Exhibit 40: Recent Adaptive Re-Use Projects in Chicago
Property
Acquisition
Price / SF
Sales
Price / SF
$149
$250 - $500
$361
$850
$850
$560
$500
55 E. Monroe
Metropolis
900 N. Michigan
The Palmolive Building
Metropolitan Tower
The Montgomery
$165
Source: Appraisal Research Counselors.
The magnitude of the spread between residential prices and commercial acquisition
prices indicates why these re-use strategies (commercial to residential) have become so
popular.
57
The Sears Tower
January 1, 2007
Exhibit 41: Map of Adaptive Re-Use Projects
Source: Appraisal Research Counselors.
The residential market has been increasing in units added. In 2005, there were 9,055
condominiums added to the market, and developers sold a record 8,162 units during
this peak level. However, the condominium market has since cooled off considerably.
The number of downtown condominium units sold fell 29% to 5,783 units during 2006
and plummeted 46% in the first quarter of 2007 to 1,207 units. 47 Despite the
condominium market slowing down, some developers are still moving full speed ahead
with new projects, giving buyers numerous options. Adaptive re-use projects have
ranged in location from any outlying neighborhood outliers to downtown business
districts and entertainment districts. Prices per square foot for adaptive re-use have
also run the range of budget to luxury, with prices ranging from $250 to almost $1,000
per square foot.
During the last 15 years, over 50,000 residential units have been added to the greater
Chicago downtown area. This revitalization has created a more dynamic business
district. A new energy and positive economic forces have created an attractive
47
Alby Gallun, “Downtown Condo Sales Down 46% in First Quarter”, Crain’s Chicago Business, May 14, 2007.
58
alternative to suburban living. Exhibit 42 details the activity of downtown Chicago’s
condo market:
Exhibit 42: 1998-2005 Annual for Sale Condo Units Added and Sold
Year
2005
2004
2003
2002
2001
2000
1999
1998
Average
Adaptive Re-Use
Units
Units
Added
Sold
506
1,690
545
379
679
545
1,350
27
715
799
1,318
402
422
609
718
1,384
1,205
857
New Construction
Units
Units
Added
Sold
4,582
3,398
1,267
2,469
3,536
4,932
2,732
958
2,984
4,408
3,747
2,173
2,423
2,376
3,618
2,341
1,214
2,788
Condo Conversion
Units
Units
Added
Sold
3,697
685
1,319
-17
1,884
1,325
539
1,783
1,402
2,955
1,233
857
730
959
1,289
1,272
839
1,267
Total Units
Units
Units
Added
Sold
9,055
5,773
3,131
2,831
6,099
6,802
4,621
2,768
5,135
8,162
6,298
3,433
3,575
3,944
5,625
4,997
3,258
4,912
Note: 2006 data not available as of the date of this publication.
Source: Appraisal Research Counselors.
59
The Sears Tower
January 1, 2007
There are 20,577 units in the development pipeline for Chicago and approximately 20%
will be located in the West Loop, as shown in Exhibit 43:
Exhibit 43: 1990-2005 New Units Developed by Submarket
New Condo
Construction
Rental
Units
Adaptive Re-Use
Condo
Rental
TH
Units
Total
Units
Percentage
Developed or Under Development
West Loop
South Streeterville
South Loop
River West
River North
Loop/ New East Side Projects
Gold Coast/ Near North
Total
5,620
2,247
7,642
368
5,734
1,952
2,510
26,073
274
2,062
0
0
3,227
1,510
717
7,790
4,574
0
2,793
155
1,778
1,254
324
10,878
332
0
466
0
0
677
0
1,475
768
75
1,384
216
332
0
296
3,071
11,568
4,384
12,285
739
11,071
5,393
3,847
49,287
23%
9%
25%
1%
22%
11%
8%
100%
Proposed for Future Development
West Loop
South Streeterville
South Loop
River West
River North
Loop/ New East Side Projects
Gold Coast/ Near North
Total
3,106
2,733
6,218
142
1,672
2,055
957
16,883
450
481
411
0
421
0
0
1,763
677
9
143
0
0
325
0
1,154
0
0
0
0
0
0
0
0
92
0
383
0
0
74
228
777
4,325
3,223
7,155
142
2,093
2,454
1,185
20,577
21%
16%
35%
1%
10%
12%
6%
100%
Note: 2006 data not available as of the date of this publication.
Source: Appraisal Research Counselors.
60
V. Conclusion
Over thirty years ago, the Sears Tower transformed the Chicago skyline and set a new
precedent for building design and architecture. Since that time, the Tower has
undergone a series of refinancings and ownership changes while weathering economic
downturns and the tragedy of September 11th. Nevertheless, today the Sears Tower
remains an American icon and one of the world’s most well-known skyscrapers with a
story left to be told.
During the period of the 1990s thru to the turn of this century, the Tower has endured
many buyers and investors with varied intentions and motivations. Since 2004, though,
the focus has turned towards the Chetrit group. Although there is no doubt that the
Tower is a building of superior design, there is uncertainty as to how the building can
maintain its tenant roster amidst an increasingly competitive Chicago office market.
Within the context of regional and national office investment trends, there are several
key questions that have arisen. Will the Chetrit group’s willingness to pay such a high
premium for the Sears Tower be justified by an even greater resale of the Tower? Will
banks continue to finance the Tower with record-setting loan amounts? Will Chetrit
look for a global investor willing to pay a premium for the building, given that the
investment may look like a discount relative to trophy assets located on the east and
west coasts?
Moreover, how will the Tower be positioned in Chicago’s increasingly competitive
office market? Are there possible re-use strategies worth considering viable enough for
the Chetrit group or future owners to consider converting this office space for another
use? How will future investors find ways to create value?
The Sears Tower has survived such periods of uncertainty in the past. Nevertheless,
with so many questions left unanswered, the future of the Tower will undoubtedly be
as storied as its past.
61
The Sears Tower
VI.
January 1, 2007
Case Questions
1. From Sears background section – questions focus on leverage and corporate investment in
non-core assets prior to 1990 refinancing:
Prior to 1990, Sears, Sears, Roebuck & Co financed the Tower using cash from
working capital. Evaluate this decision to finance the Sears Tower itself rather than
utilize a mortgage or other debt vehicle to leverage the asset. What factors would
have amplified or detracted from the ultimate return that Sears, Roebuck & Co
realized from the sale of the building? In your opinion, should Sears (a retail
company which owned many of its retail stores) have owned the Tower? Why or
why not?
2. From the Sears background section – questions focus on potential buyers for the Sears Tower
prior to 1990 refinancing:
Why would Olympia & York consider buying such a sizeable asset with when one
of its largest tenants [Sears] was going to vacate the building? What factors would
influence this decision? Why did Olympia & York eventually decline to purchase
the Tower? Why would Sears agree to continue paying rent for up to six years on
vacated space, in effect paying “double rent” with its new space at Hoffman Estates?
3. From the Sears background section – questions focus on location decision and corporate
strategy in move to Hoffman Estates:
Evaluate the decision by Sears to move its headquarters from the Sears Tower to
Hoffman Estates. What were some of the primary considerations for choosing this
new location over the other potential sites in Chicago, the Chicagoland area, and
cities outside of Illinois? Describe the tax incentives used by the State of Illinois to
“win over” Sears. Are these incentives similar to those used today to lure new
businesses to the area?
4. From “A Series of Tower Refinancings (1990-2003)” section – questions focus on intentions
of buyers/investors:
What motivated Sears to pursue the 1994 General Agreement? Describe the
transaction that led to a “deed-in-lieu-of-foreclosure.” What were the benefits and
drawbacks of such a transaction? Why did Sears need to contribute a relatively
small amount of funds (in relation to the total size of the 1994 General Agreement) in
62
order for the transaction to move forward? What were the tax implications for Sears
to consider at this time?
5. From “A Series of Tower Refinancings (1990-2003)” section – questions focus on intentions
of buyers/investors:
What were the motivations of the buyers of the 2nd mortgage?
contrast the different perspectives on each side of the deal:
A.
B.
C.
Compare and
Sears to AEW
AEW to Trizec
Trizec to MetLife
Which of these investments seemed like a “good deal” at the time? With the
advantage of hindsight, which of these investments were actually a “good deal?”
How could the investors have protected themselves or mitigated some of the risk
with this investment?
6. From “Joseph Chetrit and Company Acquire the Sears Tower” Section – questions focus on
individual’s ability to compete in real estate auctions, the ease of financing during the sale,
and valuation.
Was Chetrit’s group willingness to pay such a high premium for the Sears Tower
(on such short notice) reasonable?, What was their strategy for positioning the
Tower in an increasingly competitive Chicago office market?” Comment on how
private buyers can pay more for a real estate asset than public buyers, all else equal.
What gives private buyers this flexibility?
Short-term interest rates in 2004 enabled Chetrit to secure a very favorable loan and
value the building at a level higher than his competitors. Given historical interest
rate movements, was the floating-rate mortgage aggressive? How would the
building have been valued using fixed-rate debt? Was Chetrit decision to pursue a
fixed-rate loan in 2007 prudent?
7. From “Joseph Chetrit and Company Acquire the Sears Tower” Section – questions focus on
the CMBS market and Bank of America’s loan on the Tower:
63
The Sears Tower
January 1, 2007
Why did Chetrit pursue a CMBS loan over a whole/portfolio loan? Comment
generally on the differences between interest rates and flexibility of terms for each?
Given the total size of the loan, why couldn’t Bank of America collateralize a larger
portion of the loan? Why was a portion of the CMBS loan “pooled” and a portion
“not pooled?”
Bank of America received an appraisal on the Tower at the time of its CMBS loan of
approximately $925 million. Speculate on the potential reasons why the rating’s
agencies valued the Tower around $800 million. Why was there such as large gap?
It is speculated that the Fiel organization purchased an interest in the junior
mezzanine loan? Why would Fiel consider doing this? Comment on the potential
transfer of ownership if Chetrit were to ever default on its mortgage payment. Who
or what organization would get the rights to the Tower given this type of situation?
8. From “Joseph Chetrit and Company Acquire the Sears Tower” Section – questions focus on
the effects of September 11, 2001 on the value of trophy assets such as the Sears Tower:
September 11, 2001 had a huge and adverse impact on the Sears Tower with regard
to tenant occupancy, perceived safety, and rents collected. Given the flight of
tenants to other office buildings and the difficulty in attracting new tenants, do you
believe that the Sears Tower can reclaim its “top” position in the market and
command premium rents and occupancy levels?
9. From “The Sears Tower Today (2006)” Section – questions focus on the downtown Chicago
office market and space-market fundamentals for Class A office space:
Since 2000, several new Class A office buildings have been constructed in the
downtown Chicago CBD, yet vacancy rates have hovered in the mid- to upper-teens
on a percentage basis. Comment on the ability of developers to secure financing and
proceed with construction on such assets. How has this new construction affected
other office buildings in Chicago’s CBD (especially those buildings considered Class
B or C)? Are some buildings/locations in the Chicago’s CBD hurt worse than
others? Comment on the adaptive re-use strategies some office buildings have
pursued to deal with the rise of this new space.
10. From “The Sears Tower Today (2006)” Section – questions focus on possible re-use
strategies and the value of the Sears Tower today.
64
What, if any, adaptive re-use strategy would you recommend for the Sears Tower?
Given the height and structure of the building itself, what are some of the limitations
for a re-use strategy involving residential or hotel applications?
Given current market conditions, what do you think is the optimal strategy for the
Chetrit group today?
65
The Sears Tower
January 1, 2007
VII. Acknowledgments
First and foremost, we would like to thank Stephen Livaditis of Eastdil Secured for
his continuing support, inspiration, and guidance in the preparation of this case
study. In addition, we would also like to thank the following people:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Michael Caron – Lyon & Caron LLP
Lijian Chen – UBS
James Church – Moody’s Investors Service
Thomas Corfman – Crain’s
Menahem Deitcher – CB Richard Ellis
Sally Gordon – Moody’s Investors Service
David R. Hendrickson – Jones Lang LaSalle
Chang Lee – Eastdil Secured
Bryan P. McDonnell – Prudential Mortgage Capital
Teri Murray – Kellogg School of Management
Paolo Obias – Moody’s Investors Service
Rickard Olander - Moody's Investors Service
Daniel T. Ryan – Jones Lang LaSalle
Stephen Simsic - U.S. Equities Realty
Steve Steinmeyer – Jones Lang LaSalle
Jim Sullivan – Green Street Advisors
Raymond Torto – Torto Wheaton Research
Neal White - Wachovia Capital Markets
Michael Yurnich – BlackRock Realty
However, any errors or omissions are the sole responsibilities of the authors. We
recognize that there have been many others who have provided guidance on this
case study along the way from idea inception to final production that have not been
mentioned outright. Our sincerest thanks go to each and every one of you. Your
contributions were invaluable to us for the successful completion of this project.
66
67
The Sears Tower
January 1, 2007
Appendix 1:
Plat of Survey – Showing Sears Site
Bounded by Adams, Wacker, Jackson and Franklin Streets
Note: City of Chicago vacated Quincy Street between Franklin and Wacker.
68
Appendix 2:
Sears Tower Elevator Diagram
69
The Sears Tower
January 1, 2007
Appendix 3:
Potential Economic Impact of Sears Move from Chicago and Illinois
5,500 Merchandise Group (MG) jobs leaving Illinois translates into losses of:
$600 million a year in Gross Regional Product
$400 million a year in disposable income
$25 million to $38 million a year for businessmen traveling to Sears
and 900 support jobs related to this activity
$1,025 million
Additional losses incurred by the city of Chicago:
$0.3 million a year in head tax revenue directly derived from MG
$0.15 million a year in head tax revenue from firms doing business with MG
$1,025.45 million
Sources: Hornung, Mark. “TIFs for the Rich: Sears Deal the Start?” Crain’s Chicago
Business . 3 July 1989: 3.
70
Appendix 4:
Summary of Proposed Relocation Packages for Potential Sears Sites in Illinois
Location
Size
Leasing rate
Expansion option
Bounded by Route 72 & Route 59 and NW Tollway
& Cook-Kane county line
200 acres for building the Merchandise Group
campus
n/a
588 acre parcel that could be developed for sale or
lease by Sears included in the deal.
Between Wolf Rd & Lee Rd near O'Hare Airport
80 acres
$10/yr for 99 yrs
Adjacent 140-acre parcel offered at market prices.
Incentives
HE will purchase land for Sears through general
obligation & revenue bonds. Incremental increases
to Sears to property tax over 20 years will service
the debt. Estimated at $75m.
State enterprise
zone
Cook County Real
Estate Tax relief
Training grants
Restrictions/caveats
IL DCCA* pledged up to $33m for infrastructure
and on-site improvements
ILDOT** pledged up to $16m in road
improvements
Sears exempt from 5% (IL) sales tax on building
materials for construction of Merchandise Group
campus (~$300m x 5%=15m)
New property assessed value:
First 8 yrs: 16% of mkt val (s/b 38%)
Yrs 9-12: 30%,
Thereafter normal 38%
Assuming $300m constr cost: est'd $109.8m over the
12 yrs
$2000 per employee
IL DCCA* pledged up to $33m for infrastructure
and on-site improvements
ILDOT** pledged up to $16m in road
improvements
Sears exempt from 5% (IL) sales tax on building
materials for construction of Merchandise Group
campus (~$200m x 5%=10m)
New property assessed value:
First 8 yrs: 16% of mkt val (s/b 38%)
Yrs 9-12: 30%,
Thereafter normal 38%
Assuming $300m constr cost: est'd $109.8m over the
12 yrs
No sale of the Merchandise Group campus until
Sears occupies for 5 years. Leasing or saleleaseback of facility will be allowed.
Sears to donate 15 acres on campus site for HE
municipal facilities.
Sears pay $1.2m to HE for hiring/training police
and firemen for campus.
Sears to pay prior year amount of municipal
entertainment taxes (est'd $70k) and $450k to HE
Police Dept for loss income if it closes music theater
on the larger parcel.
Sears to create/retain minimum of 2000 full-time
equivalent jobs and invest a minimum $100m in
project area.
* Illinois Department of Commerce and Community Affairs
** Illinois Department of Transportation
Source: Waldstein, Peter D. “Hoffman Estates Deal Gives Sears Flexibility; Village, Merchant Near
Agreement on Site Details.” Crain’s Chicago Business. 29 Jan. 1990: 7.
71
The Sears Tower
January 1, 2007
Appendix 5:
Distribution Priorities of 1994 General Agreement
Distribution Priority
First Distribution Priority
First Loan Principal, Prepayment
Premium and Unpaid Interest
Second Distribution Priority
New Loans Principal, Tower Second
Loan Principal, and First Loan Further
Interest
Third Distribution Priority
Tower Second Loan Principal and
First Loan Participating Interest
Fourth Distribution Priority
New Loans Interest, Tower Second
Loan Interest, First Loan Participating
Interest, and Further Interest
Fifth Distribution Priority
Sears Redevelopment Costs and First
Loan Participating Interest
Sixth Distribution Priority
First Loan Participating Interest and
Tower Second Loan Additional
Interest Distribution on a Pro-Rata
Basis Until Lenders Receive an IRR
Equal to 8.6858%
Seventh Distribution Priority
First Loan Participating Interest (Until
First Lender's Right to Participating
Interest Under the Amended First Note
Terminates), Tower Second Loan
Additional Interest (Until Second Lender's
Right o Additional Participating Interest
Made under the Tower Second Note
Terminates), and Return to Tower Owner
Estimated Amounts Based on Year 15 Residual Value of Tower
$ 2,000,000,000
$ 1,500,000,000 * $ 1,000,000,000 * $
840,000,000 *
First Loan Principal
First Loan Unpaid Interest
Prepayment Premium
$
600,000,000
$
116,850,000
$
$ 1,283,150,000
$
$
$
$
600,000,000
116,850,000
783,150,000
$
$
$
$
600,000,000
116,850,000
283,150,000
$
$
$
$
600,000,000
116,850,000
123,150,000
Estimated Distribution Amount Total
First Loan Share (40%)
Sears Share (10%)
AEW New Loan Share (16.67%)
Tower Second Loan Share (33.33%)
$
90,000,000
$
36,000,000
$
9,000,000
$
15,000,000
$
30,000,000
$ 1,193,150,000
$
$
$
$
$
$
90,000,000
36,000,000
9,000,000
15,000,000
30,000,000
693,150,000
$
$
$
$
$
$
90,000,000
36,000,000
9,000,000
15,000,000
30,000,000
193,150,000
$
$
$
$
$
$
90,000,000
36,000,000
9,000,000
15,000,000
30,000,000
33,150,000
Tower Second Loan Principal
First Loan Participating Interest
$
$
$
185,250,000
20,583,000
987,317,000
$
$
$
185,250,000
20,583,000
487,317,000
$
$
$
173,835,282
19,314,718
-
$
$
$
29,835,048
3,314,952
-
Tower Second, Sears, AEW Unpaid Interest
First Loan Participating Interest
$
$
$
236,803,500
26,311,500
724,202,000
$
$
$
236,803,500
26,311,500
224,202,000
$
$
$
-
$
$
$
-
Sears Redevelopment Costs
First Loan Participating Interest
$
$
$
54,000,000
13,500,000
656,702,000
$
$
$
54,000,000
13,500,000
156,702,000
$
$
$
-
$
$
$
-
Estimated Distribution Amount Total
Tower 2nd Loan Additional Interest (80%)
First Loan Participating Interest (20%)
$
$
$
$
160,600,000
128,480,000
32,120,000
496,102,000
$
$
$
$
156,702,000
125,361,600
31,340,400
-
$
$
$
$
-
$
$
$
$
-
MetLife Share (First Loan at 20%)
AEW Share (Tower Second Loan at 50%)
Balance Remaining for Tower Owner (30%)
$
$
$
$
99,220,400
248,051,000
148,830,600
-
$
$
$
$
$
$
$
$
-
$
$
$
$
-
-
* Terminal values of $1.5 billion, $1.0 billion and $840 million were not shown in the 1994 General Agreement. For purposes of this analysis, we have simplistically assumed
that operating distributions are constant to each participant under all three valuation scenarios. Final distribution priority amounts were prorated in the event that the full
proceeds were not available.
Source: November 7, 1994 General Agreement between MetLife, AEW and Sears.
72
Appendix 6:
EASTDIL
Chicago, IL
HISTORICAL OPERATING STATEMENTS, CALENDAR 2004 REFORCAST, PROJECTIONS
Net Rentable Area:
3,810,471 RSF
CY '01 Actual
INCOME
RENTS:
Base Rent
Overage Rent
Expense Reimbursements
Vacancy/Credit Loss
Sub-total Rent
OTHER INCOME:
Parking
Tenant Sales Net Revenue
Antenna/Other Income
Skydeck Income
Miscellaneous Income
Sub-total Other Income
TOTAL INCOME
$
CY '02 Actual
Occupancy
Actual
95.3%
PSF
Occupancy
Actual
64,388,524 $
211,906
49,392,263
(287,162)
113,705,531
16.90 $
0.06
12.96
(0.08)
29.84
65,337,097
289,623
50,657,532
43,750
116,328,002
650,171
1,572,199
5,325,798
4,349,356
(122,869)
11,774,655
0.17
0.41
1.40
1.14
(0.03)
3.09
CY '03 Actual (3)
93.9%
PSF
$
578,027
1,743,047
7,858,399
4,487,768
(983,778)
13,683,463
17.15
0.08
13.29
0.01
30.53
$
0.15
0.46
2.06
1.18
(0.26)
3.59
CY '04 Reforecast
Occupancy
Actual
89.1%
PSF
62,487,538 $
231,709
52,401,658
(192,316)
114,928,589
16.40
0.06
13.75
(0.05)
30.16
606,816
1,145,577
7,867,917
5,104,632
(1,736,191)
12,988,751
$
0.16
0.30
2.06
1.34
(0.46) (3)
3.41
FY '05 Projection (1)
Occupancy
Budget
83.9%
PSF
62,177,508 $
197,329
51,956,719
(172,296)
114,159,260
16.32
0.05
13.64
(0.05)
29.96
492,010
1,162,152
7,900,495
5,178,145
(352,316)
14,380,486
0.13
0.30
2.07
1.36
(0.09)
3.77
Occupancy
Projected
(2) $
66,066,042
173,389
51,241,629
$
17.34
0.05
13.45
30.83
# $
499,390
1,179,584
8,060,241
7,421,209
104,214
17,264,638
$
0.13
0.31
2.12
1.95
0.03
4.53
117,481,060
(1)
(4)
FY '05 Projection
vs. CY '04 Budget
Occupancy
-0.3%
Variance
%
83.6%
PSF
3,888,534
(23,940)
(715,090)
172,296
3,321,800
6.3%
-12.1%
-1.4%
-100.0%
2.9%
$
7,380
17,432
159,746
2,243,064
456,530
2,884,152
1.5%
1.5%
2.0%
43.3%
-129.6%
20.1%
$
125,480,186
$
32.93
$
130,011,465
$
34.12
$
127,917,340
$
33.57
$
128,539,746
$
33.73
$
134,745,698
$
35.36
$
6,205,952
4.8%
$
4,958,920
4,597,436
2,988,175
3,294,545
1,719,832
3,337,160
2,951,297
632,240
1,917,649
31,916,775
58,314,029
$
1.30
1.21
0.78
0.86
0.45
0.88
0.77
0.17
0.50
8.38
15.30
$
4,579,677
4,569,959
3,140,445
3,292,148
1,855,063
5,376,982
2,349,184
750,912
2,079,509
30,923,519
58,917,398
$
1.20
1.20
0.82
0.86
0.49
1.41
0.62
0.20
0.55
8.12
15.46
$
4,384,343
4,880,550
2,836,717
3,175,416
1,888,833
3,902,370
2,130,449
6,749,702
1,876,268
30,762,425
62,587,073
$
1.15
1.28
0.74
0.83
0.50
1.02
0.56
1.77
0.49
8.07
16.43
$
4,820,312
4,741,285
2,885,330
2,548,067
1,942,967
4,363,177
2,149,915
5,515,000
963,000
30,494,914
60,423,967
$
1.27
1.24
0.76
0.67
0.51
1.15
0.56
1.45
0.25
8.00
15.86
$
4,892,616
4,812,404
2,928,610
2,586,288
1,972,112
4,428,625
2,182,164
5,515,000
1,036,975
30,550,029
60,904,823
$
1.28
$
1.26
0.77
0.68
0.52
1.16
0.57
1.45
0.27
8.02 (6)
15.98
72,304
71,119
43,280
38,221
29,145
65,448
32,249
73,975
55,115
480,856
1.5%
1.5%
1.5%
1.5%
1.5%
1.5%
1.5%
0.0%
7.7%
0.2%
0.8%
2,049
2,049
1.5%
1.5%
EXPENSES
Operating Expenses
Cleaning
Utilities
HVAC
Repairs & Maintenance
Elevator & Escalator
Security & Fire
Building Management
Insurance
Management Fee
Property Taxes
Total Operating Expenses
Non-Recoverable
Total Non-Recoverable Expenses
444,262
444,262
0.12
0.12
682,853
682,853
0.18
0.18
TOTAL EXPENSES
$
58,758,291
$
15.42
$
59,600,251
$
NET OPERATING INCOME
$
66,721,895
$
17.51
$
70,411,214
$
1.
2.
3.
4.
5.
6.
15.64
18.48
192,789
192,789
0.05
0.05
$
62,779,862
$
$
65,137,478
$
16.48
17.09
(2)
(3)
136,596
136,596
(1)
(6)
0.04
0.04
138,645
138,645
0.04
0.04
$
60,560,563
$
15.89
$
61,043,468
$
16.02
$
482,905
0.8%
$
67,979,183
$
17.84
$
73,702,230
$
19.34
$
5,723,047
8.4%
Please refer to Financial Footnotes for projected income/expense assumptions.
Increase is due to Terrorism Insurance.
Categories for income and expenses have changed in 2003 due to a change in accounting systems from CTI to MRI.
Please refer to section 9(a) of the financial footnotes for detailed assumptions to the 2nd level restaurants.
Base on the new remeasured NRA of 3,810,471 RSF.
Please refer to section 15 of the Financial Footnotes for detailed assumptions to the Property Taxes.
73
The Sears Tower
Appendix 7:
January 1, 2007
Antenna Diagram
74
Appendix 7 (Continued):
Sears Tower Technology Features
75
The Sears Tower
January 1, 2007
Appendix 8:
The Investment Sales Process
The typical investment sale process (for a real estate asset) begins when prospective
investment brokers are interviewed for the assignment. Once the assignment is
awarded, the winning broker begins assembling a vast array of financial, market and
physical information concerning the subject property and the market while at the same
time creating a list of potential buyers. In the case of the Sears Tower and other large
trophy buildings, the list is typically smaller due to the large equity commitment. The
seller often adds to the list as well, though many of the names often overlap. In
addition to traditional buyers such as REITs and pension fund advisors, the list may
include high-net-worth individuals. For example, Michael Dell has recently invested
substantially in real estate. Once this list is complete, the brokers will distribute a
“teaser” flyer along with a confidentiality agreement, and follow this up with a phone
call. Once the broker has received the signed confidentiality agreement from a qualified
buyer, they send out the Offering Memorandum (“OM”) and (more recently) a link to a
website which contains an ARGUS© model, an electronic version of the OM, and other
due diligence items. The electronic/digital aspects of distribution have become
instrumental in the process because it drastically improves the speed of distribution of
the sales materials. The preparation of the OM generally takes about three to four
weeks to complete, which overlaps with the assembly of potential bidders and the
distribution of teaser materials. During this time, the main priorities include modeling
the financial aspects of the deal (specifically the rent roll and operating budget to build
an ARGUS model), completely detailing all lease options, preparing the marketing
materials, which includes photography, preparing graphics, and developing a website
presentation.
Bids almost always have a firm bid deadline, roughly three to four weeks after the
distribution of due diligence via offering memorandum and website access. Bids
historically were accepted via letter, but more recently emails have sufficed. For highpriced assets or sales with a large volume of bids, a second round of bids is common for
top bidders.
Bid Evaluation
Bidders for real estate assets are typically “qualified” prior to being provided bid
materials and evaluated throughout the process. For assets the size of the Sears Tower,
the deal size limits the number of groups that could make a reasonable bid. From the
perspective of the seller, pertinent evaluation questions include:
ƒ
How much time have they spent researching the project?
76
ƒ
ƒ
ƒ
ƒ
What is their familiarity with the asset – are they located in the market, have they
owned similar assets, what are the quality of their inquires, have they toured the
asset?
How many deals has the group previously acquired? What types of properties?
What is the financial strength of the bidder?
What is the bidder’s reputation (particularly important if the potential buyer has
a reputation of “re-trading”)?
The on-line availability of due diligence materials now provides the investment sales
group detailed information about the buyer’s evaluation process (e.g., have all files been
opened and, if so, how much time was spent using the materials on the web portal in
general?).
For bidders which have acquired relatively few properties, the perception of the
bidder’s ability to close becomes very important. A significant earnest money deposit
and/or favorable commitments from major lenders may demonstrate this strength. In
the case of Joseph Chetrit’s purchase of the Sears Tower, a concern over their viability
was assuaged by strong earnest money that was nonrefundable, a commitment to a five
day due diligence period, and favorable lender relationships.
77
The Sears Tower
January 1, 2007
Appendix 9:
Additional Specifications of Sears Tower CMBS loan
Series 2004-BBA3 Bear Stearns CMBS Offering Detail, Bank of America Securitized
Short Term Floating Rate Loans
ISSUER
SECURE
SERIES
AMOUNT
CLOSING
PRICING
SBT
Bear Stearns
Commercial
Mortgage
Securities Inc.
Commercial
Mortgage PassThrough
Certificates
2004-BBA3
1,512.6
07/27/04
07/15/04
S
CLASS
AMOUNT
A-1A
A-1B
A-2
B
C
D
E
F
G
H
J
K
L
E-ST
F-ST
G-ST
H-ST
J-ST
K-ST
L-ST
M-ST
X-1A(IO)
X-1B(IO)
X-2(IO)
X-3(IO)
X-4(IO)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
NOTAMT RATINGM RATINGS RATINGF SUB%
357.245
384.800
338.000
57.975
44.163
38.702
71.489
24.514
23.809
19.911
12.525
15.496
18.732
8.025
10.065
17.862
13.208
6.191
10.319
10.795
28.810
1,407.360
1,407.360
19.000
176.160
498.897
Aaa
Aaa
Aaa
Aa1
Aa2
Aa3
NR
NR
NR
NR
NR
NR
NR
NR
NR
NR
NR
NR
NR
NR
NR
Aaa
Aaa
Aaa
Aaa
Aaa
AAA
AAA
AAA
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBAAA+
A
ABBB
BBB
BBBBBBAAA
AAA
AAA
AAA
AAA
AAA
AAA
AAA
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBA+
A
ABBB+
BBB
BBB
BBB
BBBAAA
AAA
AAA
AAA
AAA
47.27
47.27
23.26
19.14
16.00
13.25
8.17
6.43
4.74
3.32
2.43
1.33
BOOKRNR1 BOOKRNR2
SPSERV
TRUSTEE COUNSUW
COUNSISS
RM
Bear Stearns
Banc of
America
Bank of
America
LaSalle
Bank
Dechert
Cadwalader
Wickersham
x
COUPON
PRICE
MATURE
LIFE
SPREAD
BENCH
RATE
1 mo Libor
1 mo Libor
1 mo Libor
1 mo Libor
1 mo Libor
1 mo Libor
1 mo Libor
1 mo Libor
1 mo Libor
1 mo Libor
1 mo Libor
1 mo Libor
1 mo Libor
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
+17
+23
+25
+32
+36
+44
+70
+80
+85
+95
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
99.979
99.636
97.489
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
1.480 06/15/17
06/15/17
06/15/17
06/15/17
06/15/17
1.54
1.79
2.15
2.39
2.47
2.47
2.47
2.47
2.47
2.47
2.66
2.75
2.80
1.80
1.80
1.80
1.80
1.80
1.80
1.80
1.80
1.65
+17
+23
+25
+32
+36
+44
+70
+80
+85
+95
+130
+200
+325
3.75
Note: Classes denoted with "ST" represents the $105.3 million in "rake" certificates for the Sears Tower CMBS loan.
Source: CMAlert.
78
Appendix 10:
West Loop Proposed and Recent Developments
79
The Sears Tower
January 1, 2007
Appendix 11:
Office Developments
80
Appendix 12:
Comparable Office Properties
81