By Liz Benston (contact)

Mon, Aug 11, 2008 (2 a.m.)

With work on Echelon grinding to a halt, people are wondering what project might be next.

To answer that question, it helps to take another look at an announcement a year ago that sent the financial world reeling.

When investment giant Bear Stearns last summer gave word that billions of dollars in securities backed by risky subprime loans were virtually worthless, the news couldn’t have come at a worse time for the Strip. Developers were counting on investment banks such as Bear Stearns to continue funding the biggest building boom in history.

Cheap money had allowed casino giants to expand, fulfilling master plans laid out years before. It had also enabled newcomers to finance multibillion-dollar resorts, and entrepreneurs, pushing speculative projects, to line up investors, believing banks would provide the bulk of the cash needed for their ideas down the road.

Bear Stearns’ warning shot immediately tightened lending by other banks that had bought and sold similar mortgage-backed securities.

Banks are now working through the credit crunch by writing off loans and being more cautious about lending.

“It’s pretty simple: Banks are forced to take their leverage down, which means they have to be more discerning, and that means you either lend less or you charge more for the money,” said Andrew Zarnett, a bond analyst with Deutsche Bank.

The effect on the Strip is also simple: Projects that were under way before the subprime crisis erupted last summer have made the cut, and those without financing probably won’t get built, at least in the near future.

Boyd Gaming was out of luck because Echelon’s retail mall and two boutique hotels hadn’t received financing before crunch time. Building Echelon without those components was out of the question, executives reasoned, because they were to create the critical mass of businesses needed to draw crowds.

Other Strip projects that will have to wait for better times include Plaza Las Vegas, Crown Las Vegas and MGM Mirage’s joint venture with Kerzner International.

“Nobody is going to lend to new projects in Las Vegas until there’s some visibility about how all this new supply (of rooms) gets absorbed,” Zarnett said.

As MGM Mirage President and Chief Operating Officer Jim Murren put it last week: “If you’re not almost done (with a project), you’re just not going to do anything for a long time in Las Vegas.”

Before the credit crunch and economic slowdown, as many as 40,000 new rooms were planned for the Strip. Excluding the Palazzo resort, which opened in January, the new number is about 18,000 rooms.

The projects that made the financing cut still face challenges. Fontaine-

bleau Las Vegas received a cash infusion from Australian magnate James Packer, and Cosmopolitan is now held by its primary lender, which is paying the bills as it seeks a buyer.

The developers able to continue building the Strip’s most expensive resorts in history might appear, given the state of the economy, to have lost touch with reality. Yet these companies have little choice but to continue construction.

Would some developers have delayed or scuttled their projects had they known the extent of the slowdown? Sure. But they can do little now except hope the economy turns around by the time their resorts open.

And yet what makes sense elsewhere doesn’t necessarily apply in Las Vegas, where casino executives still operate under the seemingly unreasonable, yet historically proven, notion that new resorts create their own demand.

The worst slowdown in the modern resort era will put that theory to the test.