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Vegas Building Boom Goes Bust

In a first for the market, the credit crunch and an evaporating clientele have caused construction financing headaches for this once unstoppable market.

Tuesday, August 05, 2008
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The Las Vegas construction boom has hit a brick wall. These days there’s omnipresent worry in a town that isn’t used to the jitters. After 20 years of boom times, Sin City casino executives didn’t gamble on a softening economy evaporating business or tightening financial markets making it difficult to get the cash needed to build resorts.

Unfortunately, the expansion side of the business has gone bust. Several notable projects have been cancelled, others are getting pushed back, and some are finding they need to scramble for dollars if they plan to finish uncompleted projects.

Most notably, Boyd Gaming last week delayed its $4.8 billion Echelon for at least nine months. It was a surprise blow to a company that has been in a transformative stage from local market player to Las Vegas Strip contender. But it’s also a major blow to Morgans Hotel Group, which has a 50/50 joint venture with Boyd to develop a Mondrian and Delano within Boyd's Echelon development. Now that relationship is in question as Morgans executives “do not intend to further extend the joint venture agreement on its current terms,” said a statement. They do hope to evaluate future proposals relating to the project with Boyd.

Interestingly, Boyd Gaming is getting some short-term gain from its decision to delay the project. Investors are rewarding the decision and its stock immediately jumped. The company has now diverted cash into a $100 million buyback program.

More telling are the problems taking places further down The Strip. Take MGM-MIRAGE’s CityCenter, for example. Known as the largest privately funded construction project in U.S. history, it’s no surprise it’s having its fair share of trouble completing financing for this mega project, which was originally estimated to cost $7.5 billion. New reports have pegged the final cost at between $9 and $10 billion. Before the credit markets turned sour, it had already sold half the property to Dubai World, which is now a 50/50 partner in the venture. But the company needs cash to complete construction and meet its late 2009 open date.

During the second quarter 2008, MGM-MIRAGE and Dubai World each funded $300 million of construction costs for CityCenter. Now they’re working with several relationship lenders regarding a $3 billion financing package for the joint venture. To date, CityCenter has received commitments totaling $1.65 billion from the lead banks -- Bank of America, Royal Bank of Scotland, UBS, BNP Paribas, and Sumitomo Mitsui. In addition, CityCenter has received commitments from Deutsche Bank, Morgan Stanley, and the Bank of Nova Scotia.

CityCenter will feature a main 60-story structure housing 4,000 hotel rooms and a half-million square-foot entertainment district. Also here will be the city’s first Mandarin Oriental, residential apartments and more amenities than any other resort in the world.

"In an unprecedented credit market, CityCenter has received to date well over half of the financing committed from these institutions and anticipates finalizing its bank financing this quarter," said Executive Vice President and Chief Financial Officer of MGM MIRAGE, Dan D'Arrigo. Related to MGM MIRAGE capital spending, Mr. D'Arrigo noted, "Over the past several years, we have invested significant capital in our resorts in the form of new restaurants, entertainment venues and upgraded rooms, and we maintain them at the highest level. As a result, our required capital spending for the remainder of this year and into 2009 will be lower than in the recent past, enhancing our available free cash flow."

Another project that’s had myriad issues even before the latest credit crunch is The Cosmopolitan. Located on a sliver of land next to Borgata, this hotel has been in foreclosure proceedings since January because its management defaulted on a $760 million construction loan.

After a mad scramble to see who is going to take it on, it looks as if Hyatt has captured the rights. Details on this have been sketchy at best, but the Las Vegas CVB’s most recent construction report has Hyatt listed as a name on the project. Deutsche Bank has taken possession of the property because it is owed more than $900 million on the property, which is a couple of years behind schedule and only half built.

Another project that has evaporated is a massive expansion of the Tropicana Las Vegas. Estimated at a cost of $2 billion, the plan was to reinvent the resort as it upped the room count to an unbelievable 10,000 rooms. However, owners Columbia Sussex have lost their gaming license to operate the Tropicana in Atlantic City, NJ. It’s caused the entire company to essentially implode and it’s unlikely this project will move forward.

Other projects have been put on indefinite hold, such as The Plaza, a $5 billion offshoot of the NYC icon. This resort was to feature 4,100 hotel rooms and 2,600 resort condominium units, as well as a 175,900 square foot casino, and more than a million square feet of space devoted to dining, entertainment and shopping.

In the short term there are still numerous resort openings that have already secured the necessary funding to continue construction and stay on schedule. Encore, the latest venture from Steve Wynn, is set to open later this year at a cost of $2.3 billion. It will feature more than 2,000 suites. Coming in 2009 is the $2.9 billion, 3,900-room Fontainebleau Las Vegas. Also opening will be the $1 billion M Resort, which is holding a topping off ceremony this Friday. Other funded projects in the works include a $1.2 billion tower at Planet Hollywood and a $1 billion Caesars Palace expansion.
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