A legal row has arisen over the fate of one of downtown Chicago’s best remaining potential skyscraper sites, as a Chicago real estate development firm has accused the corporate descendant of General Growth Properties of moving to cut it out of the future construction of a new tower on the land now occupied by General Growth’s headquarters at 110 N. Wacker Drive.
On Wednesday, May 13, Development Resources Inc. filed suit in Cook County Circuit Court against Dallas-based Howard Hughes Corporation and various of its affiliate companies, alleging Howard Hughes violated the terms of a lease the companies held in partnership for the site.
The case has sprung up out of actions allegedly taken by Howard Hughes reassign ownership of the land to a subsidiary company, effectively retaining both existing rent from the building for itself and all the potential tens of millions of dollars in profit from the anticipated redevelopment of the site to match the surrounding streetscape of glass and steel towers.
According to the complaint, DRI has held an interest in the “long-term ground lease” at the property since the late 1990s, when it formed a limited liability corporation with an affiliate of General Growth Properties. The agreement stipulated “the General Growth affiliate would be the sole manager of the LLC.”
DRI said it assigned to the LLC at that time a “binding purchase contract to acquire the tenancy” at General Growth’s six-story structure at 110 N. Wacker. General Growth then paid rent to the LLC under the terms of a long term lease deal. Published reports indicate General Growth’s lease is scheduled to continue until at least 2019.
According to the complaint, the LLC partners agreed to “share equally” any “longer term profits” the LLC might earn once the General Growth affiliate’s investment was repaid through General Growth’s rent.
The ground lease gives the LLC control of the land until 2055, according to the complaint, affording the LLC “the right to capitalize on the property, including the existing building, for at least the next 40 years and to purchase the land outright in the event of a sale.”
Since 2009, the 110 N. Wacker LLC has included DRI and subsidiaries of Howard Hughes, a company spun off from General Growth after General Growth’s bankruptcy filing that year.
In 2014, Howard Hughes exercised the LLC’s purchase rights, buying the land for more than $12 million, according to published reports.
The complaint alleges Hughes than assigned the purchase contract to a Hughes affiliate, rather than the 110 N. Wacker LLC.
“Absent relief … the result of this transaction will be the destruction of the LLC’s opportunity to develop 110 N. Wacker,” the DRI complaint asserts. “Instead, a Howard Hughes affiliate will have acquired the land and Howard Hughes – not the LLC – will be poised to undertake the development opportunity for itself.”
DRI alleges Howard Hughes has also withheld information about the undertaking, stating Hughes has “repeatedly failed to provide notice to DRI about major transactions undertaken by the LLC,” including 30-day notice of “major transactions,” including the 2014 purchase of the land, which DRI maintains is required by its LLC agreement, and has “misled DRI and concealed material facts … by omitting material information” from reports.
In all, DRI has alleged eight counts against Howard Hughes and its subsidiary companies, including breach of contract and breach of fiduciary duty.
DRI has asked the court to intervene, requesting the court create and impose a “constructive trust” over 110 N. Wacker; rescind Hughes’ assigning of the purchase agreement for the property to the Hughes affiliate; appoint a receiver to manage the limited liability corporation holding rights over the land; require Hughes and its subsidiaries to “account … for all property, proceeds and benefits derived by (Howard Hughes) from diversion of the LLC’s property or opportunities;” and award unspecified compensatory and punitive damages.
DRI is represented in the matter by attorneys David J. Bradford, Daniel J. Weiss and Anthony B. Borich, of Jenner & Block LLP, of Chicago.