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Arnold M. Knightly

Project on Strip suffers setback

17 January 2008

LAS VEGAS, Nevada -- The tightening lending market is jeopardizing the ownership of a multibillion-dollar hotel-condominium development under construction on the Strip.

The owner of the $3 billion Cosmopolitan confirmed Wednesday that he received a notice of default from Deutsche Bank after payments on a $760 million construction loan came due.

"This action by our lender comes as no surprise to the senior management," Bruce Eichner, the New York-based owner and developer of the south Strip development, said in a statement. "With the current challenges within the real estate and debt capital markets, which are out of control, being felt across the country, we both anticipated and planned for this."

The project's senior management team is continuing to work with financial institutions Deutsche Bank and Merrill Lynch to find new investors, Eichner said.

The 2,998-room Cosmopolitan is still scheduled to open late 2009, a company spokesman said.

Wednesday's announcement comes less than two weeks after former Cosmopolitan Chief Operating Officer Audrey Oswell departed for the under-construction Fontainebleau project after 18 months with the company.

Eichner and his management team have been traveling the country in recent weeks seeking an equity partner so banks would extend another loan.

Prospective lenders said Eichner's company, 3700 Associates LLC, needed to increase its equity to at least 10 percent of the project's cost before they would provide new funding for the project.

So far, 3700 Associates has contributed the 8.5-acre site, purchased for $90 million in 2004, and $50 million from Grand Hyatt Corp.

Cosmopolitan Chief Operating Officer Scott Butera said Eichner's management team is "working on an equity offering which is expected to raise $400 million."

A call to Hyatt's corporate offices in Chicago was not returned by press time.

MGM Mirage President Jim Murren said he wasn't surprised by news of the default.

Murren said the project was a challenge from the start because it is wedged in between MGM Mirage's Bellagio and its $7.8 billion CityCenter development. He said the amount of site work plus the challenge of selling high-rise residential condominiums in the hotel and casino project may have doomed the Cosmopolitan.

Murren also suggested that the Cosmopolitan's owner may have been having trouble getting commitments for its five-level retail section.

Although Deutsche Bank and Merrill Lynch have approached MGM Mirage officials about the site, Murren said gaming company isn't interested in the Cosmopolitan project -- at least for now.

"It's not something we're looking at," Murren said. "We hope somebody can find a way of fixing this because it doesn't help the Strip, Las Vegas or us to have a half-finished project sitting there."

Still, Murren did not dismiss the possibility that the company might consider taking over the project if it made financial sense.

The Cosmopolitan isn't the first local hotel-casino project to run into problems because of the current economic climate.

"We have seen selected projects fail to move forward that had previously announced plans with the current credit crunch and the tightened lending requirements," Las Vegas-based Applied Analysis principal Brian Gordon said. "Certainly, that has impacted many projects throughout the Las Vegas Valley, including resort and nonresort projects."

Tight credit markets have been cited as the reason for postponing planned resort developments at the Tropicana, the Silverton and Southern Highlands Resort.

However, unlike the Cosmopolitan, which broke ground in October 2005, none of those projects had begun construction.

The most famous example of a stalled Strip project was the Stratosphere, which was conceived by casino operator Bob Stupak in the early 1990s.

Grand Casinos stepped in and finished the 1,149-foot tower hotel-casino project after Stupak ran into financial trouble that had stopped construction. Construction work was halted again in the mid-1990s, this time on a hotel room section, when the company went bankrupt. The development was eventually bought and completed by billionaire Carl Icahn.

Construction stopped on the Landmark in 1962 for four years before an influx of cash from the pension fund of the Teamsters Union restarted the project.

Billionaire Howard Hughes bought the property in 1969 when the owner ran afoul of creditors. Hughes finished construction and opened the property later that year.

"We've had a few of those," said Michael Green, a history professor at College of Southern Nevada. "Happily, not too many where they've started running into trouble. In the end it seems to work out, it just takes a few years."

The Cosmopolitan is designed to have 2,184 condominium units. The developer holds contracts on 84 percent of the units, which includes two deposits, with some additional units not yet on the market.

Laurence Hallier, developer of Panorama Towers, said he was surprised to hear of the default notice issued by Deutsche Bank. Unlike Miami, where 50,000 condo units are being built, Las Vegas only has five or six "legitimate" condo projects with about 7,000 units, he said.

"I believe they were doing well in presales," Hallier said. "I don't know all the details of the project and why it didn't work. No doubt, the market has changed drastically in the last year or year and a half, but we're finding more foreign buyers and California buyers, not a lot of investors."

Hallier said Panorama has closed escrow on 98 percent of the 320 units in the second tower and the 420-unit third tower is scheduled for completion in September. A Japanese buyer paid more than $10 million for a penthouse unit at Panorama's second tower, he said.

"From our perspective, we've got 2 million people in Las Vegas and at the end of the day, there's a percentage of those people who want the high-rise lifestyle," Hallier said.