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Best of Liz Benston

Gaming Guru

Liz Benston

Developers Enter Las Vegas Market

11 March 2005

LAS VEGAS -- The $1.5 billion Cosmopolitan Resort and Casino is expected to break ground this summer on an ambitious, New York-style, high-rise hotel and condominium project with a relatively small casino and resort amenities located on several floors.

The project, announced last fall, also will bring two new equity investors to town -- New York developer Ian Bruce Eichner and SFM Capital Management, an affiliate of New York City-based Soros Fund Management LLC. The third equity partner in the Cosmopolitan is David Friedman, former executive assistant to Venetian owner Sheldon Adelson and one of the first employees with Adelson's Las Vegas Sands.

The presence of Soros Fund Management in the deal is significant, observers say, because it is believed to be the first time the company has made a direct equity purchase in a Las Vegas resort. The project comes at a time when an increasing number of New York-based money managers are trolling for investments in the nation's hottest tourism market.

"Everybody is looking there," Deutsche Bank Securities bond analyst Andrew Zarnett said. "Everybody has a very clear picture of the supply and demand dynamics of the Las Vegas market." Deutsche Bank Securities, also based in New York, is one of the top lenders to casino companies.

Eichner, though not well known in Las Vegas, has developed several condominium and commercial buildings in Manhattan as well as a luxury condo tower in Miami's South Beach neighborhood. Soros Fund Management, one of the world's largest hedge funds, needs little introduction.

The company's founder and chairman George Soros -- worth an estimated $7.2 billion and ranked No. 55 on Forbes' 2005 list of richest Americans -- has through various philanthropic organizations donated millions of dollars to promote human rights, social work and economic reform in more than 50 countries.

The Hungarian-born financier has authored several books on economics and politics and grabbed headlines last year in a campaign to urge voters not to re-elect President Bush. The effort included television ads, public speeches, a book and donations to two controversial political groups that produced anti-Bush ads.

Soros was not available for comment for this story and his representatives declined comment.

Eichner said he has used New York-based investment funds to finance other high-rise projects.

"I've known most of these guys for 20-plus years," he said. "They were really fascinated by the concept of taking a business application from New York and Miami to Las Vegas and combining it with local expertise."

"Typically much, if not most, of the money that finances large scale projects, whether in Las Vegas or whether in Florida or New York ... all comes from New York."

Eichner said he is an equal partner in the Cosmopolitan project with SFM Capital. He would not reveal the percentage stake of each of the three partners but said their equity investment is worth about $400 million.

The resort also will be financed with about $1.1 billion in debt, which will consist of a traditional construction loan rather than the "junk bond" or other type of public or private bond financing typically obtained by casinos, Eichner said. The financing will be entirely private, he said.

Eichner said he expects the construction loan to close in June and intends to break ground on the resort by August. The project is expected to open by early 2008.

The Cosmopolitan will be built on 8.5 acres between the Bellagio resort and MGM Mirage's upcoming CityCenter project, which is planned for the site of the Boardwalk casino. It will feature about 2,700 hotel and condo units, a 70,000 square foot casino, 150,000 square feet of meeting space and 300,000 square feet of retail, restaurant and entertainment space overlooking the Strip.

Eichner said he and Friedman, who was previously licensed at the Venetian, intend to apply for a state gaming license by early next year in order to run the resort. Eichner, a former assistant District Attorney in New York and a developer for the past 25 years, has never held a gaming license.

Soros Fund Managment representatives haven't yet determined whether to apply for a gaming license and are not likely to do so, Eichner said.

The partnership likely will come up with an arrangement in which the fund does not have a direct interest in the casino itself and therefore would not have to undergo an exhaustive licensing process, he said.

More money managers would be invest in Las Vegas if not for the requirement that casino owners with a significant stake in a project be vetted by state regulators, Zarnett said.

"It's a very onerous process that requires a lot of submissions," he said. "Some don't want to go through that process."

Privately traded hedge funds, which have historically employed more aggressive investment techniques than consumer funds to obtain higher returns, are expected to become an increasing part of the Las Vegas real estate scene as the market continues to expand, experts say. Publicly traded equity and bond funds already invest in the bonds or stocks of major Las Vegas casino companies.

Barrick Gaming Corp. last year purchased four downtown casinos from gaming operator Jackie Gaughan with financing help from two New York City companies, a private real estate group and an investment company that runs a hedge fund.

Privately held companies including Colony Capital and Columbia Sussex Corp. also have snapped up older casinos in recent years to capitalize on the tourism boom.