The Wall Street Journal-20080117-Las Vegas Default Highlights Commercial-Property Crunch
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Las Vegas Default Highlights Commercial-Property Crunch
The credit crunch that roared through the residential real-estate market is starting to bite commercial projects, too.
Yesterday, Ian Bruce Eichner, the developer of a twin-tower casino resort in the heart of Las Vegas, defaulted on a $760 million loan from Deutsche Bank AG after he failed to get refinancing. The default on the loan supporting the $3 billion Cosmopolitan Resort Casino is a signal of trouble for Mr. Eichner, who gained notice during an earlier real-estate downturn in the early 1990s when he lost several projects in New York City.
Owners and developers of some of the country's choicest properties are having trouble refinancing shorter-term loans they received during the boom days.
Recent casualties include Centro Properties Group of Australia, one of the largest owners of shopping centers in the U.S. Its stock has sunk because it can't refinance $3.4 billion in short-term debt. Also, New York developer Harry Macklowe, who bought a group of Manhattan office buildings last year at the top of the market, is struggling to repay some $7 billion in debt that comes due in February. Mr. Macklowe just put his prized General Motors Building in midtown Manhattan on the block.
During the boom, investment banks made loans for both commercial and residential properties, quickly packaged them into securities and sold them to investors. Last summer, the market for securities backed by subprime home loans seized up as defaults by these less credit-worthy borrowers surged. The subprime problem is at the heart of huge write- downs on Wall Street, where the toll is set to pass $100 billion.
Now the same system is breaking down in commercial property, because few investors want securities backed by loans to commercial real- estate owners. Moody's Investors Service warned last week that the corporate default rate for the construction and building industry could reach 12% this year and predicted a 6% default rate in the hotel, gaming and leisure industries.
Mr. Eichner yesterday received a notice of default on the $760 million loan, which came due Tuesday. He had failed to obtain refinancing to pay back the loan. The default triggered technical defaults on additional debt totaling $175 million.
Mr. Eichner may still succeed in finding new investors, something he has been struggling to do for weeks. Work is continuing on the 3,000- room casino and hotel, which is scheduled to open in late 2009, according to a spokesman for the casino. He said he didn't know whether it would be halted by the default action.
Mr. Eichner released a written statement blaming "current challenges within the real estate and debt capital markets which are out of our control." The statement said he is working with Deutsche Bank and Merrill Lynch & Co. on raising new equity. "This action by our lender comes as no surprise," the statement said. Representatives of Deutsche Bank and Merrill Lynch declined to comment.
The Cosmopolitan includes 2,184 "condo hotel" units, which are condominiums that typically get rented out as hotel rooms. During the housing boom, speculators in cities such as Las Vegas, Miami and San Diego snapped up these units because they promised to rise in value while also producing rental income.
Lately investors have soured on condo hotels. In Las Vegas, a group of buyers are suing a development partnership behind the Signature condo-hotel project, claiming room rates aren't as high as promised. A spokesman for MGM Mirage, now the operator of the project, denied that promises were made about the rates.
The Cosmopolitan spokesman said that 84% of the condo-hotel units have been sold. "It's a successful offering," he said.
The Cosmopolitan is designed to include a high-rise hotel tower, to be managed by Global Hyatt Corp. as a Grand Hyatt, as well as another tower with the condo-hotel units. The developers announced in September that chef Philippe Chow's upscale New York restaurant would open a branch in the development and that Wolfgang Puck Catering would supply the hotel catering.
Mr. Eichner's problems come as Las Vegas is in the midst of an unprecedented construction boom that is affecting nearly every corner of the Strip, the broad thoroughfare at the city's center lined with hotels and casinos.
The Venetian, a lavish casino hotel, is holding a grand opening this week of a $2 billion addition called the Palazzo. MGM Mirage's massive CityCenter project promises to transform a large chunk of the Strip with residential properties and noncasino luxury hotels. Some $35 billion of new construction is planned or under way in Las Vegas, according to the Las Vegas Convention and Visitors Authority. That is expected to produce about 40,000 new hotel rooms by 2012.
However, some projects are seeing delays or getting canceled as financing dries up and the housing market slows. Plans to renovate the legendary Las Vegas Tropicana are on hold after the casino's owner, Kentucky-based Columbia Sussex Corp., had troubles with another casino in Atlantic City, N.J.
Messrs. Macklowe and Eichner both have histories of living on the edge. Mr. Macklowe lost the Hotel Macklowe near Times Square and at least two other properties in the real-estate bust of the early 1990s. Mr. Eichner lost a series of buildings, including two prominent New York skyscrapers, in that period. His saga was portrayed in a 1993 book by Jerry Adler: "High Rise: How 1,000 Men and Women Worked Around the Clock for Five Years and Lost $200 Million Building a Skyscraper."
After bottoming out, Mr. Eichner began his comeback in Miami with a condominium project in the land-precious South Beach that was touted as the "last great oceanfront property" there. The project was recently completed, according to the company's Web site.
Then he turned his attention to Las Vegas. Unlike many projects on the Strip that raise money via public stock or bond markets, the Cosmopolitan is privately owned and financed.
Around April of last year, commercial lenders started to get nervous about the lax underwriting standards that developed during the property boom. Bankers began to raise interest rates and required borrowers to put in more of their own money into deals.
