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Developer tries comeback with new Chicago Waldorf
By Jennifer S. Forsyth | The Wall Street Journal

Artist rendering of the new Chicago Waldorf

 

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Published: 10/1/2007 6:23 AM

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It wasn't so long ago that Michael Reschke was one of the biggest names in Chicago real estate, and the company he built developed or acquired more than $10 billion worth of properties.

He founded his development company while in his 20s and constructed a Chicago skyscraper by the age of 36. His Chicago-based Prime Group thrived during the 1990s, spinning off five publicly traded real-estate companies. But he ended up losing his office company in part because of a gamble he took with Blackstone Group LP, and the retail company he founded was sold against his will.

Now Mr. Reschke is mounting a big comeback, with $2 billion worth of projects planned or under construction. The most prestigious is a Waldorf-Astoria hotel and residence towers in Chicago that he plans to develop for Hilton Hotels Corp. The $500 million project will offer 325 rooms in a five-star hotel and 300 luxury condominiums in a sleek modern building about a block from the Chicago River.

Other projects Mr. Reschke, 51 years old, has in the works include a luxury condominium building under way on the tony Gold Coast near Lake Michigan and a JW Marriott hotel that will go in a landmarked building designed by Daniel Burnham in the financial district.

It may be an awkward time for a return to center stage. Wall Street is nervous about lending. Chicago's condo market is slowing and industry experts question whether the city needs more luxury hotel rooms. But Mr. Reschke is unfazed. "I'm a developer -- an eternal optimist," he says.

Mr. Reschke's career tumble started in 1997, when he teamed up with Blackstone to buy an additional four million shares of Prime Group Realty Trust stock at $18.60 a share before the office company (which was spun off from the Prime Group) went public at $20 a share. For its $45 million contribution, Blackstone received an option to force Mr. Reschke's closely held investment vehicle to buy it out at $60 million -- or $22.50 a share -- three years later.

By that time, Prime Group Realty Trust's stock was trading at about $16 a share. In desperation, he turned to the New York REIT Vornado Realty Trust, which agreed to lend him $60 million to pay off Blackstone. The loan was secured by Mr. Reschke's controlling 33.6 percent stake in the Prime office REIT.

Mr. Reschke teamed up with Cadim Inc., a Montreal-based real-estate advisory company, and attempted a management-led buyout. Cadim also agreed to refinance the Vornado debt. But after the Sept. 11, 2001, attacks, Mr. Reschke said Cadim got spooked by the office market and bailed. Mr. Reschke was left with his loan due on Sept. 30. He was current on his interest payments but Vornado wouldn't extend the loan and he couldn't pay it in full.

Vornado later foreclosed on loans to Mr. Reschke and bought his stock in an auction for $66 million. Vornado didn't return calls. Cadim had no comment.

Equally frustrating to Mr. Reschke, in 2003, the board of directors of his Prime Retail Inc. -- a struggling outlet-mall company -- voted to sell the company at the fire-sale price of $625 million -- over his objections.

In 2004, Mr. Reschke tried again to buy out his office REIT, this time with Barry Mansur, a Chicago-based real-estate investor. Mr. Reschke admits that he desperately wanted to win. "It was like buying my kids back," he says. But another group of investors came in with a higher bid. When Mr. Reschke's team invoked its right to match, the REIT's executives announced that the partnership's financing was defective and sold the company to the other bidders in 2005. Mr. Reschke and his partner sued, settling in part for the ability to buy the Burnham-designed building at 208 South LaSalle for $44 million.

That set the stage for his comeback.

The LaSalle property was built in 1914 -- two years after the architect died -- as an office building. But Mr. Reschke always believed it would be perfect for a plush hotel. Mr. Reschke lured Marriott International Inc. to sign on for a JW Marriott at the site, a luxury property in the heart of the financial district, an area underserved by high-end hotels.

Yet it is difficult to borrow right now. Mr. Reschke said one Wall Street firm backed out of a construction loan this summer on the Marriott project. Now, he will borrow less and put in more equity, believing this will get the project funded. "This is a very attractive development and there is financing available for quality projects," said John Wolf, a Marriott spokesman.

The Waldorf-Astoria is being built in a partnership with Fordham Co., a Chicago-based high-end residential developer. Preliminary plans call for a 100-floor tower that in no way resembles its Art Deco-style Manhattan namesake. Instead, the project is more akin in style to the Chicago Spire, the 2,000-foot-tall condominium project being built by architect Santiago Calatrava on Lake Shore Drive. "It's a little bit of a tip of the hat to the Spire just down the street, as they are both slender, tall and elegant, but it's different," says Christopher Carley, chairman of Fordham.

If Mr. Reschke's projects, which also include an Embassy Suites hotel, all are built as planned, they would increase the city's hotel room supply by almost 4 percent. "Even if it's the right thing for the market over the long term, there will be a short-term impact to existing operators, including existing Marriotts," says Will Marks, an analyst with San Francisco-based JMP Securities.

About 80 percent of the revenue from the Waldorf-Astoria project will come from the condominium portion, at prices about $800 per square foot, says Mr. Carley. Yet, there are concerns from experts that Chicago has too many condominiums under construction. This total includes 121 units of Mr. Reschke's project Ten East Delaware. D. Waveland Kendt, sales manager for Ten East Delaware, says 65 percent are sold two years before completion.

Despite the number of hotels and condominiums being built in Chicago, Hilton considers this a long-term endeavor that will pay off. "It's a market that every hotel brand in the world wants to be in," says David Greydanus, senior vice president for Hilton's Waldorf-Astoria Collection.

With all his projects, how does Mr. Reschke know he won't get in over his head? Seated in his 25th-floor offices, he glanced around a conference room plastered with plans of projects he was working on and shrugged. "It's not that many," he said. "How can I be overextended? I still have room on the walls for more drawings."