A new way to play the game on the Strip

By Liz Benston (contact)

Monday, May 14, 2007 | 7:04 a.m.

A new business model is slowly but significantly unfolding along the Strip. Just watch what happens to the 26 acres that were the El Rancho hotel site in the 1940s but which have languished, vacant, since 1960.

In the 1990s the then - owner of Circus Circus rejected opportunities to buy the land, just north of the casino, because it wasn't considered the high-rent district the company coveted to elevate its reputation.

But now that Strip property at Sahara Avenue is looking awfully good - for more than just a resort.

MGM Mirage, the current ower of Circus Circus, has bought those 26 keystone acres to create a 78-acre site for a collection of new resorts.

That's more land than it needed to build its mammoth CityCenter, two miles down the street.

The company spent $575 million to buy the 26 acres and another 8-acre parcel, both of which adjoin Circus Circus, making the sites the most costly dirt in Strip history. The project site will also include the company's less-profitable 44-acre RV park and motel.

The property's newfound value shows the shifting algorithms of doing business on the Strip, and the direction of new development.

"Just two years ago we would never have conceived of buying more land on the Strip," said Jim Murren, president and chief financial officer of MGM Mirage.

That was before the company sold $1.1 billion worth of condominiums at CityCenter, a multiple resort, 76-acre complex that Wall Street dismissed as too big, too complex and too oriented toward nongaming attractions to work in Las Vegas. That $7.4 billion gamble appears to be paying off, with an expected $2.7 billion in condo sales offsetting the company's financial risk and further proving the case for nongaming hotels and amenities on the Strip.

"We believe we can do this all over again" at the Circus Circus site, Murren said. "The future of Las Vegas is not the gaming industry as we know it, with slots and table games. Our model is to continue to invest in nongaming amenities and by doing that, we dramatically increase the market, expanding the population of people interested in coming here."

Yet being emboldened to spend additional billions on another multiuse project doesn't fully explain why the company is willing to gamble on the north end of the Strip, long dismissed by investors as a no-man's land of cheap rooms and smoky casinos.

While resorts flourished along the middle and southern end of the Strip, the vast acreage near Sahara Avenue gathered tumbleweeds, occasionally attracting interest from offbeat speculators. Stratosphere creator Bob Stupak, for instance, once offered $65 million for the 26-acre parcel so he could build a replica of the Titanic, with a casino inside the iceberg and time-share condos inside fake smokestacks. Another speculator wanted to dig a giant hole for an underwater casino.

But the north end of the Strip is now being gentrified, with Wynn Las Vegas and sister resort Encore, the Palazzo extension of the Venetian, condominium towers from Hilton, Turnberry Associates and Fifield Cos. and the upcoming $2.8 billion Fontainebleau resort just north of the Riviera.

Even with these deluxe neighbors, most casinos would balk at paying $17 million per acre. But casino companies aren't the ones making most of the bids these days on the Strip. The new players are cash-flush private equity firms on the hunt for aggressive returns.

So MGM Mirage had to make a top-dollar offer for land it dearly wanted. With CityCenter, the company is ushering in a new business of multiple high-rise resorts on neighborhood-size parcels. That strategy is now playing out alongside Circus Circus.

To execute the project, MGM Mirage is exploring partners to hurry along the development . Although MGM Mirage is financing CityCenter on its own, partners would allow the company to start building the new project before finishing CityCenter, which is to open in late 2009.

Future partners won't be gaming companies but entertainment or hotel companies that have expansion and marketing opportunities, desirable customer lists and management expertise that wouldn't duplicate what MGM Mirage does best, Murren said.

Sitting on fallow land even for a year or two would have been unthinkable just a few years ago and still is too expensive for most public companies to contemplate. Yet even that way of thinking is changing.

Although operators historically justified land purchases in terms of how quickly they could make money, companies such as MGM Mirage now see land as a long-term investment.

By controlling so much of the Strip's available land, MGM Mirage can create financially superior deals - with partners taking on more of the risk, said Robert LaFleur, a stock analyst with Susquehanna Financial Group.

"There's plenty of people who can build casinos, manage them and finance them , but there's only so much land, LaFleur said. "MGM Mirage is in a position to create financial partnerships that are tremendously advantageous because they have the thing that is most precious."

MGM Mirage controls more than half of the Strip market and all but three casino sites on the west side of the Strip's core. The company owns 865 acres of Strip land, more than 250 acres of that ripe for future development.

"Anyone who has ever sold land (on the Strip) has lived to regret it," Murren said. The price "goes up slowly or rapidly , but it doesn't ever go down. There isn't a North Strip and South Strip anymore. It's just the Strip."