Los Angeles – Scarce credit and a slowing US economy have turned some Las Vegas Strip casino projects into losing bets for investors and lenders. Developers have plans to add more than 40,000 luxury hotel rooms to the gambling corridor – about one-third more than today – but financing for certain projects, such as the partially-built Cosmopolitan Resort & Casino, is already precarious and industry experts say others may be postponed.
In addition to upheaval spawned by the collapse of the subprime mortgage market, the casino industry has had to contend with the backlog of debt generated by recent private equity-led buyouts of casino giant Harrah’s Entertainment and Station Casinos.
A block of Harrah’s bonds sold recently at a yield of around 14%, which is higher than the low-teens return on investment (ROI) typically targeted by casino developers. “There is always the opportunity to delay … the hard thing about gaming is when something is halfway built,” said Keith Foley, vice- president at ratings agency Moody’s, which earlier this year cut its outlook for the sector to negative from stable, citing a potential US recession.
The senior lender to the Cosmopolitan, Deutsche Bank, last month began foreclosure proceedings on a USD 760 million construction loan after property developer 3700 Associates was unable to raise cash and construction costs rose. The bank is trying to line up additional investors, but no deal has been reached.
The Cosmopolitan sits next to CityCenter, the more than USD 8 billion multiuse development being built by MGM, which last year secured funding through a joint venture with deep-pocketed Dubai World. It is slated to open late next year.
Other resorts under construction on the Strip include Wynn Resorts’ Encore and Boyd Gaming’s Echelon.
Sands has been offering packages, including restaurant discounts, at the Palazzo for USD 179 per night — not quite the USD 350 nightly rate the new property was expected to fetch. The 50-story Palazzo, adjacent to Sands’ Venetian resort, was built for a relative bargain USD 1.9 billion. Analysts say it will be even more difficult for pricier projects to meet projected returns.
Boyd’s Echelon, with an overall budget of USD 4.8 billion, is forecast to open in the third quarter of 2010, but funding has not been secured for a USD 950 million portion that is a joint venture with Morgans Hotel Group. “We’re working on that right now,” Boyd spokesman Rob Stillwell said on Monday. He said Boyd intends to open all of Echelon’s components at the same time, but noted there is some “flexibility” in the two hotels planned with Morgans.
Questions have also been raised about the viability of plans by Israel’s Elad Group, owner of New York’s famous Plaza hotel, to import that brand to the Las Vegas Strip in the form of an USD 8 billion mixed-use resort.The real estate developer paid a record USD 34 million an acre to acquire the site from the owner of the New Frontier casino, a resort demolished last year, and has yet to secure financing for redevelopment plans.
Elad chief executive Miki Naftali said in a March statement that site excavation is set to begin by the end of this year.
Other developers are not that confident.
Another site at the northern end of the Strip – the former Wet ‘n’ Wild water park – has been put up for sale after a group led by Australia’s Crown balked at investing more capital in a planned casino hotel project. The first Trump International Hotel & Tower recently opened on the west side of the Strip and a second tower is planned.
Another uncertainty for lenders and investors is the tax rate that casinos will be paying to Nevada. The state’s teachers are pursuing a ballot initiative that would raise the tax on large casinos to 9.75% from 6.75%.