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Gaming Guru

Rod Smith

Downtown Redevelopment: Keeping The Piece

29 March 2004

Downtown developers and operators are a wrangling lot, but on one thing they agree: The patchwork, crazy-quilt ownership of many downtown Las Vegas land parcels poses a serious impediment to revitalization efforts.

Just how serious a problem "parcelization," as it is called, can be was highlighted recently by the often-tortuous path Harrah's Entertainment and MTR Gaming Group had to take to close on their agreement to buy Binion's Horseshoe.

What was to have been a quick takeover of the downtown landmark dragged on for several weeks. One of the biggest stumbling blocks dealt with a 4,000-square-foot tract of land, the Parry parcel, underneath the property that is jointly owned by scores of separate people.

Often these "parcelized" leasehold tracts, as opposed to fee simple land that is owned by the user, have short-term leases with unrealistically high market rents that give the leaseholders little incentive to negotiate reduced rents or sell the parcels. Either way, redevelopment or revitalization efforts stall.

The problem with "parcelization" means a developer may have to deal with one, two, or even hundreds of property owners -- often descendants of the original property owner -- that may have veto-voting rights over how a parcel can be used.

That appeared to be the case when former state Sen. Bill O'Donnell acquired a piece of the Parry parcel during a probate auction that gave him veto power to delay the Horseshoe deal.

And although O'Donnell quickly came to terms with MTR Gaming over the tract, experts say finding solutions for the overall problem of parcelization is harder.

At least one major landowner and industry experts argue condemnation and the use of the right of eminent domain are essential to clearing up title and consolidation problems. Others say employing those practices are unrealistic and politically unlikely to happen.

Former Mayor Jan Jones, now a spokeswoman for Harrah's Entertainment, which will operate Binion's Horseshoe starting Thursday, agreed parcelization poses a problem for downtown redevelopment.

"It's a big deterrent to downtown redevelopment because you can't control one of your most important assets: the land," Jones said.

She said there are a very large number of individuals who own small parcels, or portions of small parcels, downtown who have been waiting for years "for the value of their land to come in."

The result is rent rates and land appraisals that are completely out of whack from the value that gaming, which represents the "highest and best use" of the property, could realize from buying the properties.

Barrick Gaming Vice Chairman Stephen Crystal, whose company recently bought the Plaza and its seven additional acres, the Las Vegas Club, the Gold Spike and the Western Hotel, said the parcelization of downtown isn't just a problem for gaming companies, but also for the community.

Crystal said condemnation of land held by "recalcitrant" owners, consolidation of holdings and setting reasonable rents are the best solutions to the problem and one the city will have to deal with to make revitalization possible.

Crystal said his company faces no similar problems in its revitalization plans because the properties were all acquired from Jackie Gaughan, who Crystal said was a visionary for recognizing the importance of controlling the land on which your developments stand.

"(By comparison) look at the Horseshoe. A lot of their problems can be traced to having seven parcels-owners beneath them and having to pay $7 million in rent (a year)," he said.

Furthermore, he said the investment pools that can be put together for redevelopment projects are limited without title to the land because financial underwriters look for collateral, especially in the form of land, to provide a margin of comfort for borrowing or raising capital.

When short rents compound the issue, as was the case with the Horseshoe and is the case with much of downtown, developers planning redevelopment projects are hit with a "double whammy," Crystal said.

Tom Breitling, a principal in Poster Financial Group, which recently bought the Golden Nugget, said the parcelization problem is not unique to Las Vegas and is not uncommon in most major cities.

"The Golden Nugget has been successful in consolidating and buying out the land on which it sits. But it's definitely something that's a challenge," he said. "Everybody needs to get on the same page. Together, we need a clear vision of where we want to go and negotiate some deals to make it work."

Crystal agreed the problem is not insurmountable. He said, for example, that redevelopment has progressed in New York, Honolulu and London, although leasehold is the norm in those cities.

"It's hard enough to get momentum going for redevelopment in an urban area. Add to that (multiple parcels with multiple heirs) like the Entertainment District (with multiple owners), and it creates a real problem. But priced right and with the right duration, (ownership) is not a problem," he said.

"This is one reason municipalities have the tool of condemnation, where you have irregular tracts or multiple landowners who are standing in the way of infrastructure for the city, master planning and delivering proper services," Crystal said. "Cities can use condemnation subject to their ability to pay fair compensation. This is why a lot of cities use condemnation for master planning redevelopment.

"I understand that with the Fremont Street Experience and the parking garage, the city has not had a good experience with condemnation. But as someone who is going to be part of the redevelopment of downtown, you cannot deny that condemnation has to be a tool for dealing with recalcitrant landowners and real estate pricing that does not reflect market conditions," Crystal said.

University of Nevada, Las Vegas professor and casino industry expert Bill Thompson said although he believes parcel ownership hurts the prospects of a renewed downtown, he is not very hopeful that condemnation would work in Las Vegas.

He cited the case involving the Pappas family, which has spent 11 years battling the city after it took a 7,000-square-foot property through eminent domain in 1993 to build a $23 million parking garage on the corner of Fremont Street and Las Vegas Boulevard.

The land was transferred to a cluster of casino owners who formed the Fremont Street Experience Limited Liability Co. The parking garage was a joint project between the company and the city and the family has not collected any money for the land since the city acquired it more than a decade ago. The case finally reached the U.S. Supreme Court this month, but the court refused to consider it.

"The city could have done a better job with (condemnation) when they did Fremont Street. The city staff was trying to get the best price, but we could have paid more and that would have been better for everybody," Jones said.

Because of the public outcry over the Pappas family's treatment, however, Thompson said the city will have to rely on the goodwill of small-parcel owners to sell them or trade ownership rights for equity interests in future redevelopment projects.

Mayor Oscar Goodman said he was reluctant to speculate on the possible use of eminent domain.

"In the past, it's given the city a real black eye," he said.

Other officials who asked not to be named said condemnation and eminent domain are such "slippery slopes" the city will avoid them at all costs.

Still, in some situations Goodman has said he would have to consider it carefully, especially if people's lives are affected.

County Assessor Mark Schofield said whether land ownership is a problem depends on the individual owners and the terms of the lease. But he noted dealing with many landowners and different lease structures can be almost as much of a practical problem as parcelization.

"It would be less of a problem if it was turned over the a public entity for a public purpose," however, unlike the Pappas land.

Jones, Goodman's predecessor as mayor, said simply, however, the issue of condemnation mostly boils down to a question of money.

"The problem with eminent domain is first the public doesn't like it. It's worked in cities like San Diego, but it's even tougher in Las Vegas because the city doesn't have the money. Developers don't have the vision or the money, and owners have owned land forever and they're waiting for their pay day," she said.

"I just don't see it happening. They're all afraid of it," she said of the officials who would have to act.