How Real Estate Helped The Illinois Medical District Remove A $40M Bond Albatross From Around Its Neck
Last week, the Illinois Medical District used its real estate holdings to put it on firmer financial footing and jump-start its ambitious plans to redevelop 40 acres of vacant land within its boundaries.
The IMD announced the early redemption of $40M in Illinois Finance Authority revenue bonds, which the district borrowed via a combination of tax-exempt and taxable revenue bonds in January 2006 for the acquisition and strategic development of vacant land in the second-largest medical district in the U.S.
Although the bonds were not scheduled to mature until 2032, the debt service accounted for more than half of the IMD's $5.5M budget, and brought the district to the brink of bankruptcy several times over the past 12 years. With the bonds redeemed, the district can now accelerate its redevelopment plans.
IMD Executive Director Dr. Suzet McKinney said tackling the bond issue was on her immediate agenda when she was named executive director in September 2015. She split the bonds into three components and turned to the best asset the IMD had at its disposal — its existing land holdings.
The IMD sold a 9.7-acre, Jewel-Osco-anchored shopping center at Ashland Avenue and Roosevelt Road last September for $25M. Last month, the IMD completed a $15M sale of a 16-acre site at 14th Street and Ashland Avenue, anchored by a Costco. The district secured a $12M bridge loan from Signature Bank between the two sales, satisfying a covenant. Both properties had long-term ground leases associated with them. The buyers were undisclosed family foundations, and the leases and payment shifted over to them.
McKinney said the district looked to sell the fewest assets at the highest prices.
"We knew we needed to raise money and the debt service coverage was significant; $40M is not a small amount of money," McKinney said.
The bonds hung like the Sword of Damocles over the IMD's head. The problems started after the district used $8.8M from the funds to purchase 7.5 acres at Ogden and Damen for redevelopment. The district operates independent of state funding and generates its revenue from operating activities, primarily real estate. But it didn't always operate this way.
For most of its 70-year existence, the IMD received appropriations from the Illinois General Assembly to acquire land under eminent domain and aggregate parcels. Illinois Finance Authority Executive Director Christopher Meister told Bisnow that sometime after 2003 his predecessors, past IMD leadership and the administration of Gov. Rod Blagojevich cut off the appropriations, yet kept the other handcuffs of a state agency in place.
"The statute was not changed to allow the Illinois Medical District to operate like a business, and leadership signed off on the bonds," Meister said.
Had the district defaulted on repaying the bonds, the state was legally obligated to step in and pay the debt with taxpayer funds. A 2016 audit showed the IMD owed more than $50M in principal and interest on the bonds, and would have fallen $15M short of redemption when the bonds matured in 2032.
In the interim, the IMD turned to the state for help. Blagojevich's successor, Pat Quinn, gave the district a $4.5M grant and removed the restraints, allowing the IMD to operate as a self-sustaining, self-supporting entity for the first time. Quinn's successor, Bruce Rauner, recognized the potential for a commercial real estate boom on the West Side and the impact on taxpayers if the IMD defaulted on the loan, and a search for a new executive director identified McKinney as the best candidate, who was unanimously approved by the district's board of directors.
Meister said with the bond redemption out of the way, the IMD can now take its rightful place of being a convener of the district's four stakeholder hospitals and contribute to the economic vitality of Chicago, Cook County and Illinois.
"Dr. McKinney approached this existential threat with confidence, courage and leadership. She ran into a burning building and put out the fire before it could burn to the ground," Meister said.