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Hedge Fund Blackacre Institutional Capital Management May Buy
 Chicago's Palmer House for Upwards of $250 million

By Thomas A. Corfman, Chicago Tribune
Knight Ridder/Tribune Business News 

May 26, 2005 --CHICAGO -- The real estate arm of a New York hedge fund is trying to put together a deal to buy Chicago's oldest hotel, the Palmer House Hilton, for close to $250 million. 

Blackacre Institutional Capital Management LLC, which owns the historic Eden Roc Resort and Spa in Miami Beach, would purchase the city's second-largest hotel from Hilton Hotels Corp., which would likely retain management of the Palmer House, according to sources familiar with the transaction. 

But sources cautioned that the deal for the 1,639-room hotel could quickly unravel. Blackacre has been working on the transaction for some time and negotiations are about to reach a critical stage, those sources said. 

Reaching an agreement on price could be challenging, say hotel consultants not involved in the deal. The Palmer House, despite its prominence, is more difficult to value than a smaller, newer hotel because it would probably be redeveloped, with changes 

"At this point, it's walk away from the table, come back, walk away, come back and renegotiate," said Brian Flanagan, president of Chicago-based Property Valuation Advisors Inc. 

A Hilton spokeswoman said the company is in negotiations on a sale, but had not reached an agreement. She declined further comment. 

Blackacre is part of hedge fund Cerberus Capital Management LP, which manages more than $15 billion in assets. Peter Locke, a Blackacre managing director, could not be reached for comment. 

Blackacre is no stranger to Chicago. The firm is one of the high-powered investment funds financing New York developer Donald Trump's hotel/condo tower in Chicago. 

For the Palmer House, 17 E. Monroe St., Blackacre is putting together a venture that would have several partners, including at least one developer, sources said. The identity of the partners could not be confirmed. 

One likely partner is LNR Property Corp., a Miami Beach commercial real estate development and investment firm that Cerberus and Blackacre acquired earlier this year as a part of a $3.8 billion management buyout. 

In February a venture that included Blackacre and LNR agreed to pay $650 million for the former El Toro Marine Corps base in Irvine, Calif., which would be redeveloped into homes and commercial buildings. 

LNR is a former division of homebuilding giant Lennar Corp., another participant in the El Toro bid and the parent company of Chicago-area residential developer Concord Homes. 

In addition to the Eden Roc, which Blackacre bought in 1998, Blackacre's holdings include venture interests in the 1,004-room Marriott Los Angeles Airport Hotel and the 481-room Frenchman's Reef and Morning Star Beach Resort in St. Thomas, Virgin Islands. 

But the Palmer House is a complex asset that, in addition to the guest rooms, also has 52,000 square feet of office space and 59,000 square feet of retail space, including its arcade. 

In addition to revitalizing the office and retail space, Blackacre's options likely include a residential condominium conversion of a portion of the giant structure and a hotel condo conversion of another portion. Under the hotel-condo concept, rooms are sold as condominiums to private buyers, who allow the hotel to rent them out when the owners are not using them. 

The Palmer House, established in 1871 by legendary Chicago entrepreneur Potter Palmer, moved to its current location in 1925. 

Among Chicago hotels, only the Hyatt Regency, with 2,015 rooms, is larger. 

Hilton received widespread interest in the Palmer House after putting it up for sale last year, hiring the hotel unit of Chicago real estate firm Jones Lang LaSalle Inc. 

The hotel is part of a $750 million portfolio that Hilton has put up for sale. 

"The big one is the Palmer House in Chicago," Hilton Vice President Marc Grossman said during a May 4 investor conference. 

At the conference Grossman said Hilton has selected buyers for each of the 12 properties who were conducting due diligence investigations on the deals before making earnest money deposits, according to a transcript of the conference by a unit of Thomson Financial. 

Should the deal with Blackacre fall apart, Hilton could turn to another prospective bidder, sources said, or even pull the property from the market. 

Hilton "is not pressured to sell assets," according to a report issued earlier this year by Green Street Advisors Inc., which advises institutional investors. 


--Address: 17 E. Monroe St. 

--Building stats: 25 stories; 1,639 guest rooms; 44,400 square feet of office space. 

--Suitor: New York hedge fund Blackacre Institutional Capital Management. Hotel would probably remain under Hilton management. 

--Price: About $250 million. 

--History: Established by Chicago entrepreneur Potter Palmer in 1871. Current structure was opened in 1925. Owned by Hilton since company founder Conrad Hilton bought the hotel in 1945 for $20 million. 


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