'Growing Less Patient,' Bank OZK Takes Write-Down On $128M Loan To Sterling Bay After 6 Modifications
Bank OZK wrote down nearly $21M on its loan to a subsidiary of Chicago developer Sterling Bay for a section of the land at the Lincoln Yards megadevelopment and moved the debt to a more critical status.
The bank recognized a charge-off of $20.8M on a loan made to Alloy Property Co., a subsidiary of Sterling Bay, during the third quarter. The loan is tied to a large chunk of land for the proposed Lincoln Yards development, bound by the Chicago River to the west and south, North Kingsbury Street to the east and West Dickens Avenue to the north, according to Cook County property records.
The action reduced the loan's balance from $128M to about $107M, or about 90% of the June 2024 appraised value, according to management comments.
The loan, which Bank OZK agreed to give to Sterling Bay in December 2019, has been modified six times since then, according to property records.
Bank OZK also moved the loan from “substandard accrual” to “substandard nonaccrual” based on its assessment of Sterling Bay's efforts to recapitalize the project, something the Chicago-based firm has struggled with.
“We are growing less patient with the progress that our sponsor is making,” Bank OZK CEO George Gleason said during the company's Q3 earnings call on Thursday. “The progress has been slow, despite the sponsor's serious and hard work toward accomplishing it.”
Sterling Bay did not respond to requests for comment.
Bank OZK and other Sterling Bay subsidiaries have agreed to extensions on maturing loans tied to other properties in the past few months.
At the end of September, both parties agreed to extend the maturity date on a $150M loan tied to a mixed-use asset at 300 N. Michigan Ave. from July 2024 to July 2025, according to property records. In August, the bank and the developer's subsidiary pushed the maturity date on a nearly $70M loan tied to an office building at 345 N. Morgan St. from August 2024 to August 2026.
Two of Lincoln Yards’ key backers, J.P. Morgan Asset Management and Lone Star Funds, have sought to sell their stakes in the project at substantial discounts.
As a result, Sterling Bay has been on the prowl for a new backer for more than a year. Last August, The Chicago Teachers' Pension Fund rejected Sterling Bay’s pitch to invest in the Lincoln Yards project. Kayne Anderson Real Estate was reportedly mulling the idea of injecting capital into the development in March, but it is unclear where the investor stands at this point.
The $6B, 53-acre project set along the North Branch of the Chicago River is intended to transform historically industrial land into a mix of offices, residential units, retail and other uses.
But with time ticking away ahead of looming debt maturities and the ongoing struggle to find a financial partner to execute its grand vision, Sterling Bay put three properties near its Lincoln Yards development up for sale this spring.
Just last week, Sterling Bay put another property near the proposed megadevelopment on the market, a bioscience center at 2430 N. Halsted Ave., Crain's Chicago Business reported.
Gleason said the bank continues to be engaged in ongoing discussions with its sponsor, which records indicate is a Sterling Bay subsidiary, about putting up additional reserves to give the developer time to recapitalize the project. The decision to put the loan on nonaccrual status was a recognition of the slow pace of the sponsor's recapitalization efforts, he said.
Bank OZK, which has been the subject of scrutiny over its significant exposure to CRE, announced on the earnings call that it would cap the size of its loans going forward to diversify and reduce its risk. The bank will limit newly originated loans to $500M, it said on the call.
CLARIFICATION, OCT. 21, 3 P.M. CT: Additional context has been added to clarify the contents of Bank OZK's earnings call.
