In Chicago, Trump Hits Headwinds

By ALEX FRANGOS

Donald Trump's tallest construction project ever is facing some tall challenges.

Many real-estate developers are under pressure these days as lenders and investors rush to cut their exposure to the market. But Mr. Trump's 92-story Trump International Hotel & Tower in Chicago, which will be the tallest building constructed in the U.S. since the Sears Tower opened in 1973, may be especially vulnerable because it's getting hit by a triple whammy of colliding forces: the credit crunch, the reversal in the housing market and weak retail sales.

Associated Press

Ivanka and Donald Trump cement their mark on the tower.

The shiny glass skyscraper is one of the few that the brash Mr. Trump developed without partners. The situation also puts pressure on one of the project's major lenders, Fortress Investment Group LLC.

So far, Mr. Trump has lined up buyers for a bit less than $600 million of condo units and condo-hotel units in a residential market that has virtually seized up. Yet he owes lenders as much as $1 billion when the loans are due, according to public records and several people familiar with the project. He has closed around $200 million in sales so far, with roughly $380 million still in contract. The retail portion of the giant building is for sale, at a time of rising vacancies for retail space in Chicago and one of the worst eras for retailers in years.

People close to Mr. Trump concede that the project, which contains 486 condo units and more than 300 hotel rooms, is caught in a tough spot. Still, Mr. Trump says the building can be successful if he sells the rest of the unsold units, which he estimates have a potential value of $475 million. "It could turn out to be a successful development depending on what happens in the market over the next two years," he said in an interview. "The job is on time and on budget, and it's a beautiful job and will become an icon of the Chicago skyline."

Getty Images

The Trump International Hotel & Tower in Chicago, shown as it neared completion in August, has risen as the real-estate market has fallen.

Most urgently, to stay current on the project's biggest piece of debt, a $640 million senior construction loan, originated by Deutsche Bank AG, Mr. Trump must negotiate by Nov. 1 to exercise an extension provision contained in the original loan that he took out in 2005. To extend the loan, Mr. Trump must prepay additional interest charges to Deutsche Bank. Deutsche Bank declined to comment other than to say it syndicated the loan to several other banks and that its exposure is less than $50 million. Mr. Trump is confident that the extension will be agreed upon.

Adding to Deutsche Bank's leverage in the talks, Mr. Trump agreed to a $40 million recourse completion guarantee on the loan. That means Deutsche Bank can both foreclose on the property and go after Mr. Trump personally for that amount in the event he doesn't complete the building. Mr. Trump discounts the importance of the completion guarantee and is confident that he will complete the building next year. Other than the completion guarantee, Mr. Trump has no personal recourse on the project and any problems in Chicago are unlikely to affect his other businesses.

Several people familiar with the project expect Mr. Trump to work out a deal to extend the loan. The hotel opened in January on the lower floors, even as construction continues above. If Deutsche Bank tried to foreclose on the loan instead of extending it, some buyers may attempt to avoid closing. The project would also lose its marketing agent extraordinaire, Mr. Trump.

The issues don't end with the Deutsche Bank loan, according to loan documents. Mr. Trump borrowed $130 million in a mezzanine loan originated by a lending unit of private-equity firm Fortress Investment. That loan contains stiff terms, including a $50 million "exit fee" to be paid when the loan is due, in addition to accrued interest. A loan document says Mr. Trump could have to pay Fortress as much as $360 million, depending on how long the loan accrues interest. Combined with the Deutsche Bank senior loan, he would owe more than $1 billion in total. Should Trump fail to sell more units, Fortress would be on the hook to take over the project and could see a loss on its investment.

Donald Trump

Mr. Trump's challenges highlight the dangers of building very tall buildings. Because they take years to build, markets can change and leave developers in dire situations. In fact, very few supertall skyscrapers have been profitable for their original developers. The Empire State Building was dubbed the "empty state building," when tenants didn't move in. The Twin Towers of the World Trade Center required heavy taxpayer subsidy to stay occupied through the 1970s and 1980s.

During the last real-estate collapse in the early 1990s, Mr. Trump was pushed to the brink of bankruptcy because he was personally on the hook for hundreds of millions of dollars of debt. He later restructured his debt with the banks and worked his way back to doing real-estate deals, product endorsements and reality television.

These days, Mr. Trump adds his name to dozens of real-estate projects and other business ventures around the world, often through licensing agreements and small equity investments. Partners on those projects deal with the nitty-gritty of securing loans and managing construction while Mr. Trump lends his name and makes marketing appearances.

The Chicago project is different. He has no partners, he arranged the financing, and his family is managing the construction and marketing. (In 2004, Bill Rancic, the winner of Mr. Trump's reality-television show, "The Apprentice," worked on the Chicago project for a year.)

Gail Lissner, vice president at Appraisal Research Counselors, a Chicago real-estate tracking firm, says contract signings on condos in downtown Chicago were down 72% the first half of the year from a year earlier. And the supply keeps coming. Downtown Chicago will see nearly 10,000 new condo units delivered in 2008 and 2009, a substantial portion of which haven't been presold.

Mr. Trump recently began marketing to sell the 100,000-square-foot retail space in the building, which will be the last part of the building to open, at the end of 2009. But given the wretched retail climate, and the almost complete lack of real-estate financings, finding a buyer could prove challenging. Mr. Trump's son Eric Trump, who is running the retail portion of the project, is confident the project will eventually sign leases with high-end retail tenants. He says the Trumps will sell the retail portion of the project only if a buyer presents a good price.

The 339-room hotel, of which the Trumps still own more than half the rooms, has generated revenue. The Trumps sold around 150 rooms to buyers who can choose to earn room revenue after paying Mr. Trump various fees and assessments, according to marketing documents.

But the hotel business is in rough waters as travelers cut back. Among the neighborhood's 12 luxury hotels, including Mr. Trump's, the percentage of vacant rooms has increased each of the past three months, compared with the year-earlier period, according to data provider Smith Travel Research. And revenue per available room, a common-industry measure, is down three consecutive months.

Adding to the project's stress, Mr. Trump is now in competition with his own customers. At least 30 buyers of the hotel units have put those rooms back on the sales market at substantial discounts to what Mr. Trump is charging for similar units, according to local sales brokers.

Local real-estate broker Andrew Glatz, of Crown Heights Realty, is representing two dozen hotel units and six condo units for resale in the Trump project. He's sold three so far. "All our units are 30% below Trump. We can't compete with his marketing, so we compete with his prices," he says. "It's the most fabulous property in Chicago. They didn't spare any expense," he boasts. His clients can afford to sell below Trump's prices because they bought their units in 2003, before Mr. Trump raised prices substantially.

Write to Alex Frangos at alex.frangos@wsj.com