KBS REIT III Pays $425M for 500 West Madison in Chicago, Plans $70M Upgrade

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A subsidiary of KBS Real Estate Investment Trust III, Inc. has acquired 500 West Madison in Chicago, an office property containing 1,393,435 rentable square feet of office space and 64,289 rentable square feet of retail space, for $425.0 million plus closing costs.

The seller was UST-GEPT Joint Venture, L.P.

KBS REIT III anticipates that it will invest $70 million in renovations and improvements to 500 West Madison over the next six years.

KBS REIT III, a public non-traded real estate investment trust based in Newport Beach, Calif., has selected Transwestern to lease and manage the 40-story skyscraper. The Transwestern leasing team of  Michael Lirtzman, executive vice president, and Courtney Baratz will be the exclusive leasing agents for the property.

500 West Madison is a LEED Gold certified building that sits atop the Ogilvie Transportation Center. It was constructed in 1987 and designed by Helmut Jahn.

As of December 1, 2013, 500 West Madison was approximately 93 percent leased to more than 90 tenants. The current aggregate annual effective base rent for the tenants of 500 West Madison is approximately $30.3 million. The current weighted-average rental rate over the remaining lease term is $25.34 per square foot.

The tower is home to major office tenants including W.W. Grainger, Orbitz Worldwide Inc. and Citigroup Inc. At 152,089 rentable square feet, the global bank is the only tenant at 500 West Madison that individually occupies more than 10 percent of the total rentable square feet of the property. Its lease expires on December 31, 2017, with one five-year extension option, pursuant to which the tenant may renew on a floor-by-floor basis.

As of December 1, 2013, the annualized base rent for this tenant was approximately $3.1 million, the remaining lease term was approximately 4.1 years and the average annual rental rate  over the remaining lease term was $21.81 per square foot.

KBS funded the acquisition of 500 West Madison with proceeds from existing credit facilities, proceeds from its public offering and proceeds from a mortgage loan.

The five-year mortgage loan is with Wells Fargo Bank, National Association, for borrowings of up to $255.0 million. The loan consists of $215.0 million of term debt, $20.0 million of non-revolving debt and another $20.0 million of non-revolving debt. At closing, the entire $255.0 million of the 500 West Madison Mortgage Loan was funded.

The 500 West Madison Mortgage Loan matures on December 16, 2018, with a one-year extension option, subject to certain conditions and the payment of an extension fee equal to 0.15% of the outstanding principal balance at the time of the extension.

The 500 West Madison Mortgage Loan bears interest at a floating rate of 165 basis points over one-month LIBOR during the term of the loan and monthly payments are interest only with the entire balance and all outstanding interest and fees due at maturity, assuming no prior prepayment.

KBS entered into an interest rate swap that effectively fixes the interest rate on $215.0 million of the outstanding loan balance at 3.16% effective March 3, 2014 through December 16, 2018.