Terrorism, bankruptcy contribute to writeoffs at Desert Passage mall

Jennifer Robison

Tuesday, Jan. 29, 2002 | 11:13 a.m.

Toronto-based TrizecHahn Corp. announced today that it adjusted downward the value of several company properties, including the developer's massive Desert Passage shopping center at the Aladdin resort on the Las Vegas Strip.

A third party that TrizecHahn hired to appraise Desert Passage knocked $18 million off the 450,000-square-foot shopping center's value, TrizecHahn said.

The developer blamed faltering tourism in the wake of Sept. 11 and the Chapter 11 bankruptcy filing of the $1.2 billion Aladdin for the decline in Desert Passage's value.

A big tenant at Desert Passage, Ark Restaurants Corp., cited similar problems when it took a $10 million charge in December to write down the value of its restaurant and food court operations there.

In addition, Ark took a one-time, pretax charge of $935,000 following its cancellation of a development project in Las Vegas. It's unclear if that project was at Desert Passage.

Michael Weinstein, Ark president, said the planned development was a retail, restaurant and museum complex. He declined to disclose the location of the project and the partners in the joint venture.

"We decided it was the wrong time for the project," Weinstein said. "A lot of work has been done on the project, so we might decide to renew the plans at some point, but because of the economic uncertainty after 9-11, our joint-venture partner decided not to go forward."

A spokesman for TrizecHahn said the decline in Desert Passage's value will delay the previously disclosed plans by TrizecHahn to sell the mall.

Rick Matthews, senior vice president of TrizecHahn, said the company's plans to go public this spring as a real estate investment trust focusing on office properties led the firm to seek a third party to pinpoint the value of its major retail holdings. The results of that study are encouraging TrizecHahn to wait before putting Desert Passage on the market, Matthews said.

"We had hoped to have it on the market by the end of 2002, but we're not sure we're going to be able to hold to that timetable because we're not sure how quickly the bankruptcy and new (Aladdin) management will be in place.

"Until new hotel management can be in place to develop a strategy for the future of the property, we won't be going to market with it, because quite frankly, we want the property to be as fully valued as possible. We don't want to conduct any fire sales."

Jim Sullivan, a senior analyst with Green Street Advisors, said Sept. 11 and the Aladdin's bankruptcy weren't the only factors affecting Desert Passage's value.

"There were structural issues from the start, like the hotel and casino being owned by a separate entity from Desert Passage," Sullivan said. "It's hard to separate where one stops and the other starts. It seems to me to be a project best owned in its entirety by one entity. By having two sets of ownership with different incentives and goals, the operation of the hotel-casino and the retail center are not as fully integrated as they might be."

Sullivan said he was surprised Desert Passage's value didn't drop further, given "the challenges to Las Vegas in the face of declining tourism, combined with the property's specific issues."

Sullivan said TrizecHahn's portion of Desert Passage's construction cost $290 million, and it was likely with the value downgrade that the company would not break even on the project.

But he said TrizecHahn could boost Desert Passage's value somewhat by being involved in the Aladdin's bankruptcy proceedings.

"They need to bring something to the table in terms of integrating the mall and the hotel-casino. They need to work with potential acquirors to formulate a plan that really does integrate the whole property."

Sullivan said he wasn't aware of whether TrizecHahn was offering concessions or free rent to lure and retain tenants at Desert Passage.

Matthews, of TrizecHahn, said he wouldn't disclose whether the company was offering those kinds of incentives.

"We always hope to restore value," Matthews said. "We would hope there would be quite a significant improvement in the prospects for the property with the re-emergence of the Aladdin under strong management."

The $18 million value adjustment of Desert Passage was part of a $285 million downward value adjustment that involved the Desert Passage, the Hollywood & Highland retail and entertainment complex in Los Angeles and other assets in Europe.

The pre-tax provisions for the $285 million loss will be reflected in TrizecHahn's year-end 2001 earnings statement.