Marriott International plans to pay $500 million for the Sheraton Grand Chicago, one of the city’s largest hotels, as part of a settlement reached with the hotel’s longtime owner more than six years ago when property values were much higher.
The Bethesda, Maryland-based hotel chain said it will complete the purchase of the 1,218-room hotel in the fourth quarter of this year as part of an unusual agreement struck in 2017 with property owner Tishman Realty.
Marriott will pay $300 million for the hotel, plus another $200 million for the ground beneath the hotel at 301 E. North Water St., according to Securities and Exchange Commission filings and a call with analysts Tuesday as part of the company’s quarterly earnings.
The price Marriott is set to pay “reflects a liability that we've established on the balance sheet, frankly, years ago, as part of the overall transaction,” Marriott Chief Financial Officer Leeny Oberg said on the call with analysts. She added that “it does obviously impact our available cash for the year.”
When the deal is completed, Marriott will become the owner of the city’s fifth-largest hotel by total rooms. The largest is the nearby Hyatt Regency Chicago, which has 2,032 rooms.
Those hotels are near the Chicago River, Navy Pier, the Magnificent Mile and other tourist attractions.
It’s unclear whether Marriott, which already operates the hotel, plans any significant changes to the Sheraton property beyond its $500 million investment to buy the property. The company did not immediately respond to requests for comment.
The Sheraton Grand Chicago deal will allow one of the hotel’s original owners to cash in on a lawsuit settlement with Marriott reached in 2017 over Marriott’s merger with Starwood Hotels the previous year.
New York-based Tishman Realty was part of the development team that completed the hotel in 1992.
It’s unclear how much Tishman Realty has invested in the hotel since its inception, and the company did not immediately respond to a request for comment from CoStar News. The firm bought the land beneath the hotel from a local investor for just over $52.5 million in 2009, according to Cook County property records, or about a quarter of the price that Marriott is now set to pay for the 2.3 acres of land.
Tishman Realty sued Marriott over its merger with Starwood before reaching the settlement that allowed Marriott to waive a noncompete clause from Starwood’s management contract for the Sheraton.
Option to Sell
As part of the settlement, Tishman Realty was given an option that, if later exercised, would require Marriott to buy the 34-story hotel for $300 million.
At the time, that amount was well below the hotel’s appraised value. However, it gave Tishman Realty insurance against a plunge in property values, which happened about three years later with the onset of COVID-19.
As of last June, the property’s estimated value was $270.5 million, according to a Morningstar DBRS loan report. Factoring in commercial mortgage-backed securities loans to Tishman Realty in 2017 — $115 million for the leasehold interest in the hotel and $140 million for the land — the owner’s implied equity in the property was just $15.5 million, according to the Morningstar DBRS analysis.
That report’s estimate of the current value was far below the $516 million combined value of the land and the leasehold interest from 2017 appraisals when the loans were issued.
Those loans had been set to mature late last year, but they appear to have been extended until November, according to CoStar loan commentary.
Tishman Realty previously was allowed to exercise its “put option” to sell the hotel to Marriott in the first half of 2022, according to the CoStar loan commentary. In August 2021, the option period was changed to the first half of 2024.
Marriott’s required closing date, by the end of this year, was not affected by the amendment.
The two-year delay in exercising the option was made because of “among other things, a $15 million unsecured working capital loan that Marriott made to the borrower for the payment of capital expenditures, debt service and operating expenses,” according to the commentary.
Marriott’s purchase of both the leasehold interest and the land will eliminate recurring ground-lease payments for the company.
Under a 99-year ground lease that began at the start of 2017, ground-lease payments were $9 million annually, with 10.5% escalations every five years.
Hotel News Now reporter Bryan Wroten and CoStar News reporter Mark Heschmeyer contributed.