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Arnold M. Knightly

Strip development: Financing imperils projects

19 March 2008

LAS VEGAS, Nevada -- Two multibillion-dollar Strip developments less than two miles apart could become victims of the tightening credit markets and rising construction costs.

Wall Street investment house Deutsche Bank last week notified developers of the Cosmopolitan that it will begin foreclosure proceedings on the mixed-use development being built in the shadow of MGM Mirage's massive CityCenter complex.

A little north on the Strip, a potential $6 billion development modeled after the Plaza in New York City that was to be built on the site of the imploded New Frontier may be put on hold because of the current subprime crisis.

"It's extremely difficult to borrow capital in the current market," Wachovia Capital Markets bond analyst Dennis Farrell Jr. said Monday. "This is not only happening in Las Vegas but across the country."

The Cosmopolitan foreclosure comes about three weeks after an announcement that a deal had been reached to keep the Strip project from entering foreclosure. The Wall Street Journal reported Saturday, however, that New York-based developer Bruce Eichner was unable to complete the tentative deal to save the project.

The Review-Journal reported last month that a deal was being completed between Global Hyatt Corp. and New York-based Marathon Asset Management to recapitalize the condominium-hotel project.

The two groups had agreed to contribute cash in exchange for large equity stakes in the Cosmopolitan. But the deal could not be completed by a deadline Thursday. Deutsche Bank, the lead lender on a $760 million loan, notified Eichner, Hyatt and Marathon that it was beginning foreclosure proceedings on the project.

Analysts said they believe the move by Deutsche Bank could help push the bank's continuing negotiations with Hyatt and Marathon to a faster resolution.

Eichner and Cosmopolitan Chief Operating Officer Scott Butera did not return phone calls Monday. Hyatt representatives also did not return a phone call seeking comment.

Increased construction costs for the Cosmopolitan helped drive the budget from its original $2 billion price in early 2006 to a current estimate of $3.9 billion.

Prospective lenders said in January that Eichner needed to increase his equity to at least 10 percent because of the rising costs before they would provide new funding.

Eichner contributed the 8.5-acre site, which was purchased for $90 million in 2004, and $50 million from a subsidiary of Global Hyatt.

Eichner told the Wall Street Journal last week that 83 percent of the project's condominium units have been sold, with buyers putting down 20 percent nonrefundable deposits on sales totaling $1.35 billion.

Perini Building Corp., the Cosmopolitan's general contractor, said Monday it will continue construction on the project. Perini, which has been involved with the Cosmopolitan from the beginning, signed a month-to-month agreement with Deutsche Bank on Jan. 18. The Cosmopolitan had been expected to be completed in late 2009.

While financing for the Cosmopolitan project is in limbo, the developers of the Plaza have decided to shelve their project until the credit markets loosen.

The Israeli investors who own on the 34.5-acre New Frontier site told Israel's most widely distributed newspaper, Yediot Ahronot, the project's sponsors do not plan to seek financing until the current subprime crisis ends.

Plaza Las Vegas Chief Operating Officer Daniel Wade declined to comment on Monday, saying any statements will come through the project's public relations firm.

However, Elad Group President Miki Naftali said late Monday in an e-mail the "there is no credibility to the rumor" and that "the project is forging ahead."

The Plaza is being developed by Elad IDB Las Vegas, a joint venture between New York-based Elad Group and Property & Building Corp., a subsidiary of Israeli-based IDB Holdings Corp.

Details of how the development group planned to finance the project have never been made public. The group paid approximately $35 million per acre, which set a record for Strip land.

Deutsche Bank gaming analyst Bill Lerner said the project's financing was questionable even before the lending markets tightened.

"The ability to sell expensive residential units probably would have given it a chance," Lerner said. "That's probably not on the table right now. The cost of development, not just the financing cost but the construction cost, has materially inflated."

Analysts said that if banks are lending money at all, it is at a rate three to four percentage points higher than last year.

The Plaza plans called for seven towers as high as 671 feet containing 4,100 hotel rooms and 2,600 condominium units. It was to be anchored by the Strip's largest casino at 175,900 square feet. It was scheduled to open in 2012.

The project received approval from Clark County planning officials in December. Plans for the project are scheduled to go before the Clark County Commission on Wednesday.

The postponement of the Plaza takes 6,700 rooms out a projected growth pipeline of nearly 45,000 rooms that were to be coming online by 2012.

With suspended or canceled projects, including a new resort with 9,000 rooms on the Tropicana site, the 3,000-room W Las Vegas on Harmon Avenue and the 1,400-room Southern Highland Resort, the local room growth rate has significantly decreased during the past eight months.

"It's like the perfect storm of negative factors that are going to continue to impact the pipeline here," Lerner said.