601W’s bad week gets worse with $43M foreclosure on Tesla-leased Chicago building

You know it’s a bad week when a $43 million Chicago foreclosure lawsuit is the least of your problems.

That’s exactly the position New York-based commercial real estate giant 601W Companies finds itself in, though.

Seattle-based Washington Capital filed a $42.6 million foreclosure lawsuit against the landlord’s Tesla-leased service center at 717 South Desplaines Street, near the southwest corner of Chicago’s Loop, compounding distress across the owner’s portfolio, court records show.

Washington Capital, acting as administrative agent for affiliated lender entities MIF IL Desplaines LLC and REEF IL Desplaines LLC, filed the complaint in Cook County Circuit Court on Tuesday. The lawsuit names 601W-affiliated entities Jefferson Polk LLC, Jefferson Polk 2 LLC, and Jefferson Polk 3 LLC as defendants.

The lender alleges the borrowers defaulted on a $42 million commercial loan when it reached its maturity date on May 1. The loan originated in July 2023, and the parties executed four extension agreements before the final maturity date. The lender issued a notice of maturity default on June 10.

As of May 29, the outstanding debt totals $42.6 million, which includes $42 million in principal and $665,000 in accrued default interest. Interest continues to accrue at a per diem rate of $16,333. Washington Capital seeks a judgment of foreclosure, the sale of the property and the appointment of a receiver. The lender isn’t seeking a personal deficiency judgment.

601W executive Mark Karasick, who signed the loan as guarantor, didn’t return requests for comment. Neither did Washington Capital executives nor the firm’s attorney in the foreclosure suit.

A 601W venture purchased the 4.5-acre site from data center firm Ascent for $34 million in 2018, when it previously held a vacant warehouse. A data center development plan eyed by Ascent never came to fruition. At the time, 601W was trying to swallow up land near its huge Old Post Office redevelopment, which is a couple blocks away from the Desplaines site.

Developer Sterling Bay previously purchased the Desplaines site for $23.5 million in 2012.

Washington Capital’s 2023 loan provided financing for construction costs tied to the Tesla lease. Tesla rented about 116,000 square feet to convert the existing industrial building into a service and maintenance facility as well as a showroom. The loan agreement allocated funds for a $1.2 million tenant improvement allowance and an approved project budget of $9.3 million set to be funded by 601W, with Tesla set to pick up the remaining costs of its project, according to documents filed in the lawsuit.

The foreclosure adds to a series of financial challenges for 601W in the office market. Earlier this month, the firm defaulted on a $343 million loan backed by the 40-story office tower at One South Wacker Drive. Blackstone Mortgage Trust originated that debt in 2018, and about half of the loan was packaged into a commercial mortgage-backed security offering. The 1.2 million-square-foot property is 73 percent occupied. Plus, 601W’s Civic Opera Center building on the Chicago River is also still in receivership after years of a $195 million foreclosure lawsuit over the historic property playing out in court.

Concurrently, 601W is negotiating a three-year extension on a $536 million senior loan tied to the 83-story Aon Center at 200 East Randolph Street. The developer informed its lender it cannot pay the mortgage when it matures on July 1 — the second such post-pandemic request 601W has made for more time to resolve the huge debt on a skyscraper with diminishing value. The Aon Center’s appraisal dropped to $330.5 million in September, a decrease from $780 million when the loan was originally issued.

The original Aon Center mortgage included an additional $142 million mezzanine loan from Brookfield Asset Management. The building generated $27.6 million in cash flow last year, covering the $24.8 million debt service payment, but the property was only 66 percent leased at the end of the year. The Netherlands-based firm Aegon Asset Management, the special servicer overseeing the debt, is evaluating a shorter-term forbearance arrangement, loan commentary shows.

610W hasn’t let its problems on existing property stop it from buying up distress, however. The firm has capitalized on the distressed market, teaming up early this year with David Werner to buy 175 West Jackson Boulevard in Chicago for $41 million, an 87 percent discount compared to its pre-2020 price. And in Los Angeles, 601W snagged a $132 million senior loan from Northwind Group to buy the 55-story office building at 333 South Grand Avenue, known as the Wells Fargo Center North Tower, after previous owner Brookfield ran into financial distress with a $506 million debt on the property.

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