Donald Trump had a November deadline to pay off a $640 million senior construction loan on Trump Tower Chicago, at 401 N. Wabash in River North, and couldn’t meet the deadline.
According to the WSJ and Crain’s, Trump already obtained one six-month extension on the loan and now wanted another. The lending group, led by Deutsche Bank, has refused it.
From Crain’s:
Sales of the unfinished tower’s condominium and hotel units have been stuck in roughly the same place for more than two years as the condo market has fallen into a deep slump and the credit markets have frozen up. So far, the developer has sold condo and hotel units valued at $204.1 million, with another $353.1 million in purchase contracts yet to close, the complaint says.
Mr. Trump didn’t have the money to pay off the construction loan by its original May 7 maturity date, but the lenders granted the developer a six-month extension, according to the complaint. So far, however, they have been unwilling to extend the due date a second time, unless Mr. Trump agrees to unspecified “financial concessions.”
The lawsuit was filed in New York supreme court in Queens.
From the Wall Street Journal:
The suit demands — among other things — that an extension provision in the original loan agreement be triggered because of the “unprecedented financial crisis in the credit markets now prevailing, in part due to acts Deutsche Bank itself participated in.” This so-called force majeure provision is common in contracts and can be applied to acts of war and natural disasters. Mr. Trump already extended the loan once in May.
The lawsuit won’t affect the completion of the building. According to the WSJ, Trump has the roughly $90 million in order to complete it.
The Donald attempted to resolve the financing problems, according to the lawsuit, by offering to buy the unsold hotel units for $97 million.
From Crain’s:
One of the developer’s biggest problems is that the project’s hotel units are overpriced. In the suit, Mr. Trump says he wants to cut prices below a minimum amount specified in his loan agreement, but his lenders won’t let him.
But a slew of investors have put their units back on the market, undercutting prices on the development’s remaining unsold condo-hotel units by 30% in some cases. For instance, an investor-owned unit on the 18th floor is currently listed for $799,900, vs. $975,000 for a comparable unit. The competition is making it hard for Mr. Trump to sell out the hotel.
Buyers had either purchased or signed contracts for 180, or 53%, of the hotel units by the end of July, according to a court document.
By not signing off on price cuts, the lenders “have effectively prevented (Mr. Trump) from making any additional sales of hotel units, even though, had defendants consented to the sales of unsold hotel units at current market values, such lower prices would not have impaired the ability” of the lenders to get paid back in full, the complaint says.
The $97 million from the hotel/condos would be used to pay down the construction loan along with the $204 million from the already closed units.
That leaves $353 million from units expected to close in the next 6-months (if those even close in this market environment – which is a whole other question.)
Even if they resolve this financing issue, there will also be problems next year with the mezzanine loan (the secondary loan.)
From the WSJ:
The lawsuit also alleges Deutsche Bank created a “serious conflict of interest” by taking a separate stake in the project’s so-called mezzanine loan that was originated by private-equity firm Fortress Investment Group. The mezzanine loan, which is junior to the senior construction loan, had an original principal of $130 million but will eventually accrue to $360 million. Deutsche Bank purchased roughly one-quarter of the mezzanine loan, according to people familiar with the matter.
Unless sales of the condo and hotel units restart despite the worst housing market in generations, and quickly generate $400 million in new sales, it will be difficult for the project to pay off the mezzanine loan, which comes due in May 2009.
Stay tuned. Trump Tower will be a big story for months to come.
Trump sues lenders for more time to pay off loan on Tower [Crain’s Chicago Business, Nov 7, 2008]
Trump files suit against lenders [Wall Street Journal, Nov 8, 2008]
