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Gaming Guru

Jennifer Robison
 

Fontainebleau goes on the market, asking for $650 million

12 November 2015

Available on Las Vegas' hot real estate market: One hotel tower, never occupied, just two owners. Great fixer-upper with retail, convention, condo and theater space — all yours for $650 million, give or take a few dollars.

But Fontainebleau Las Vegas, mothballed since 2009, is more than mere investment opportunity. Brokers with CBRE Las Vegas, who listed the property Wednesday, say its for-sale sign marks the last gasp of Southern Nevada's devastating economic downturn. After Boyd Gaming's defunct Echelon and El-Ad's halted Las Vegas Plaza on the New Frontier Hotel and Casino site, Fontainebleau is the last Strip megaresort started in the downturn and still waiting for its second chance.

"Las Vegas didn't just have a recession, it had a depression," said John Knott, executive vice president of CBRE Las Vegas. "We've come a long way. Gaming companies are investing in and renovating properties. Local gaming numbers are starting to show improvement. New projects are bringing vibrancy to our community. I believe the recession is behind us now."

Few projects symbolize the city's economic ups and downs like Fontainebleau, planned for 3,875 hotel rooms and condominiums. Construction on the 730-foot building -- the Strip's tallest hotel tower — began in 2007, with an estimated completion price of $3 billion. Its original developers, Fontainebleau Resorts of Miami, spent $2 billion and two years on the project before the economy crashed.

Following the global banking crisis in 2008, nervous creditors shut off the resort corridor's money spigot. Fontainebleau's lenders, including Bank of America and JP Morgan Chase, canceled $770 million in loans for the tower in April 2009; Fontainebleau Resorts filed for Chapter 11 bankruptcy two months later, its hotel 70 percent complete.

Billionaire corporate raider Carl Icahn bought the tower out of bankruptcy in January 2010 for $150 million.

Nearly six years later, the time is right to sell, said brokers with CBRE Las Vegas.

The shuttered Riviera next door is set for a $2.5 billion refashioning as an expansion of the Las Vegas Convention and Visitors Authority's Convention Center District on Paradise Road. The revival of Echelon as Resorts World Las Vegas, plus the Plaza Hotel and Casino as Alon, suggests both available capital and consumer demand for new rooms in the next half decade. Visitor volumes and average daily room rates have returned to record levels, and local hotel-occupancy rates are back above 90%, said Michael Parks, first vice president with CBRE Las Vegas.

"The time is ideal to realize the potential of this incredibly valuable piece of Las Vegas real estate," Parks said.

Wrap on building called nonissue

Both Parks and Knott said the decision to sell the property had nothing to do with a Nov. 4 agreement between the Clark County Commission and Icahn forcing the investor to wrap 10 stories of the tower's west side in paint and fabric to hide rusty building panels from Strip view. Work on the cover is scheduled for completion in mid-2016.

Clark County Commissioner Chris Giunchigliani, who spearheaded efforts to shelter the tower, didn't return a call for comment by press time.

Wrap spat or not, Chris Jones, managing director and head of equity research in North America for investment bank Union Gaming Group, agreed it's the right time to sell.

"I think this is as good as it's going to get, absolutely," Jones said. "(Average daily room rates) have strengthened up and down the Strip, and that's given people the belief that the Strip can support more hotel rooms."

Also, that $650 million price isn't out of line with other unfinished megaresorts, though Fontainebleau comes with less land, at just under 23 acres.

The largely unfinished Echelon, on 87 acres, sold to Genting Berhad of Malaysia for a reported $350 million in March 2013. A consortium including Crown Resorts of Australia, former Wynn Resorts executive Andrew Pascal and investment firm Oaktree Capital Management paid $260 million to buy the vacant, 35-acre New Frontier parcel in August 2014.

It's not clear whether Fontainebleau will also draw outside buyers new to the market, but Knott said CBRE Las Vegas is marketing the property to both existing gaming companies and investors from Asia and other continents.

"Everyone we've called so far has wanted to at least understand what is going on," he said. "This is a notable project worldwide."

Whoever buys it will need the money to finish building it, Jones said, because contrary to years of speculation that the tower would eventually get scrapped, the only way a revival will work is if it builds on what's already there.

"To demolish it would make it unaffordable," Jones said. "You can use the existing infrastructure. It would be odd to tear it down. There have been other opportunities to do that. Someone could have bought the Tropicana for $360 million and torn it down. It doesn't strike me that there are that many people willing to spend $3 billion to do a ground-up destination resort."

Up to two years to finish the tower

It will cost about $1.2 billion to finish Fontainebleau, Knott estimated. Combined with a purchase price of $650 million, it would take less than $2 billion for a buyer to enter or expand on the Strip market. That's about $500,000 per room, he said — just half of the $1 million or more per room to build new.

It will be a while until completion, no matter who buys it.

Knott said it could take up to two years to finish the tower.

Any buyer should be in no rush, Jones said. Resorts World's 3,000-room first phase is scheduled to open in mid-2018. There's no projected completion date for the 1,100 room Alon, on the New Frontier site.

But "there's no benefit to them all opening simultaneously," Jones said. "Of the three, (Fontainebleau) will be the largest. I would want the Strip to develop, if I were them. If you flip a switch and open today, there's a lot of empty space between the Wynn and where (Fontainebleau) is. I'd want the Strip to develop such that it comes closer to me before I open."

The tower's plans may also need updating, Jones said. Some of its elements — a 155,000-square-foot casino and 993 condominiums — don't fit today's smaller-scale resort ethos. Newer properties such as The Cosmopolitan of Las Vegas have casino floors of about 100,000 square feet, and for-sale condos have yielded the market to timeshares. Also, with food-and-beverage and retail spending continuing to supplant gambling revenue, boosting the 300,000-square-foot retail center might be a good move, he said.

Initial plans also called for 543,000 square feet of meeting space and a 3,200-seat theater.

When construction does resume, Fontainebleau will create thousands of jobs, Parks said.

The project had 3,000 construction workers on-site just before it shut down in 2009.

Once it's open, it will have have thousands of permanent employees as well. Numbers from local research firm Applied Analysis show 1.1 hotel-casino employees per room, which would put Fontainebleau's projected worker count at just under 4,300.
Fontainebleau goes on the market, asking for $650 million is republished from CasinoVendors.com.