ANALYSIS:

Why Cosmopolitan’s credit collapse accentuates positive in Strip outlook

Interest of prominent buyers suggests long-term health

Thu, Jul 17, 2008 (5:22 p.m.)

Steve Marcus

Cranes and construction equipment surround the Cosmopolitan on Monday. The resort’s unconventional design places retail on the first several floors and makes the casino accessible from a side entrance.

Steve Marcus

An ironworker looks out from the Cosmopolitan this week. Deutsche Bank, the project's primary lender, took possession of the property after its developer, New York condo builder Ian Bruce Eichner, defaulted on a $760 million construction loan.

Robin Leach reporting sale of Cosmopolitan (5-28-2008)
Foreclosure filing meant to push Strip project’s sale (3-19-2008)
Cosmo dodges foreclosure; Hyatt to manage the hotel (2-22-2008)

The Cosmopolitan Web site

The Cosmopolitan, which sits half-built in the middle of the Strip, has been held up as a symbol of Las Vegas’ doubtful future.

In fact, the $3 billion property — part of the resort corridor’s largest construction boom, amid its worst economic slump in recent memory — might better serve as a symbol of the Strip’s long-term economic strength.

While Cosmopolitan reps have kept quiet since the project’s primary lender started foreclosure proceedings in January, plenty has gone on behind the scenes.

The centrally located site offers a rare opportunity to buy Stripfront property, and experienced hotel operators, including Hilton and Hyatt, are lining up to acquire it.

Evidently, some investors still think Las Vegas is a good long-term bet.

Closing a deal, however, will be difficult.

The usual hurdles have grown higher amid the economic downturn. Prospective buyers need to come up with several billion dollars during a credit crunch that has made capital cost-prohibitive. Owner Deutsche Bank, unwilling to see the costly and complex project that it bankrolled fall into the wrong hands, will be choosier than the typical seller.

The difficulty in getting financing, the tourism slowdown and the challenge of reconfiguring an under-construction property to meet a new owner’s needs will likely add up to a loss on the sale for Deutsche Bank, which is owed more than $900 million on the property.

Just how much of a loss the bank will take is an open question. The bigger the discount, the more appealing the prize.

The company declined to comment.

The resort was the vision of an outsider who financed it when capital was cheap.

Where others saw a 9-acre parcel that might have housed a parking garage or a strip mall, New York condo developer Ian Bruce Eichner saw enough space for a 7 million-square-foot resort featuring twin skyscrapers attached to a five-story base. Rather than buy out time share owners at the neighboring Jockey Club, he erected his resort flush with their property and built parking spaces for the Jockey Club residents beneath Cosmopolitan.

The towering design tested the limits of county planners, who weren’t entirely comfortable with its density.

The design also presents a challenge for potential buyers.

The resort stands out on the Strip, where whimsical designs belie a time-tested method for separating customers from their money.

Eichner viewed his design, with retail on the first few floors and restaurants and other amenities on floors high above the Strip, as an eye-catching innovation that would appeal to well-heeled city dwellers. The casino is planned for the resort’s ground floor, accessible from a side entrance fronted by retail stores.

Some casino operators, at least privately, panned the design. Gamblers should expend little effort to get to the casino floor, they said. Guests want to be greeted by the energy of gaming tables and whirring slots rather than the relatively sterile atmosphere of a mall, the insiders said.

Others said Eichner was ahead of his time. CityCenter and even the new Palazzo have entrances that lead into malls, and space constraints will require future developers to be more creative with multistory attractions.

Deutsche Bank took possession of the property after Eichner defaulted on the property’s $760 million construction loan.

The plans for Cosmopolitan’s rooms — which have the bold look of a rock star’s pad — are another hard pill to swallow. Hipsters will no doubt welcome the shag carpeting, mirrored walls, glass chandeliers and zebra-print furniture. But what will a conservative hotel company do with such baubles?

Eichner planned to open the property by early 2010, but the foreclosure process might delay its debut.

All this uncertainty is making a lot of people uncomfortable, including hundreds of condo buyers who plunked down nonrefundable deposits.

Despite the challenges the project poses, would-be buyers are already at the table. The wheeling and dealing will continue to be quiet but intense. And it could go on for as long as the credit crunch continues.

The winning bidder will gain a status purchase and a potential flagship property, and help continue to fuel the Strip’s growth for decades.

(This story has been corrected. An earlier version indicated that the casino would not be on the ground floor.)

Discussion: 6 comments so far…

By Fccfirstclass

7/17/08 at 5:37 a.m.

Suggest removal

Total agreement. Would I go to the 3rd floor to gamble? You bet. I am tired of having to walk thru acres of tables, slots, etc to get to the other parts of the building. Having the casino up in the air is a great new approach to ideas needed before now.
By uddeboda

7/17/08 at 6:55 a.m.

Suggest removal

To think of all this investment in Las Vegas, and whats it all for. Standing in the middle of a desert, finding it hard to get enough water, you know, the desert will eventually take over and turn L V into a ghost town. There are whole countries in Africa that will eventually be taken over by the sands, it only needs a few more degrees warmer,in lets say 25-30yrs time, and thats it. Tiny Las Vegas will be lost for ever.
Pity!!
By laguna

7/17/08 at 9:34 a.m.

Suggest removal

eddeboda,
you are really al gore, I recognize the haunting
rhetoric from your movie. you should have had them recount the whole state, not just cherry pick the districts, you could have been 'the man'. you then wouldnt have needed to make up the movie.
By RPJ

7/17/08 at 9:50 a.m.

Suggest removal

Hey, Uddeboda:

1) Take an English lesson. Your spelling and grammar is embarrassing.

2) The ENTIRE EARTH will eventually succumb to environmental issues -- namely, the expansion of the sun into a red giant, swallowing up the first three planets of the solar system -- so what is your point?

Oh, I know ... Just another anonymous Las Vegas hater or clueless Internet troll with too much time to stir the sh*t but no time to edumacate yourself.
By webserver227

7/19/08 at 1:09 p.m.

Suggest removal

I think global warming might actually make Las Vegas less hot because a desert will turn into a forest and a forest turn into a desert.
By harske

7/19/08 at 3:24 p.m.

Suggest removal

Hey laguna... make up a movie? Seriously? Or are you just trying to bait people like me? What cave have you been in? You mean to tell me there really are people left who don't think global warming is real? If that's true I have an ice shelf to sell you just off of Greenland. The price is reasonable, but it only comes with a 2 year warranty. But I will throw in nice rubber raft free of charge.

While your point is absolutely true RPJ, I think the water issue here in Vegas is a little more pressing, which is uddeboda's point. I really don't expect to be around in a couple billion years when the sun takes us out.

Back to the topic though, while Eichner's idea may be bold and fresh and forward-thinking and all that... he's just another in a long line of people that got caught up in the "irrational exuberance" of the gambling boom and craze. Most everything is cyclical, and nothing goes up forever. A lot of people are over their head right now, and way over leveraged. He shouldn't be nearly as embarrassed as Wynn, the Boyds, and all the others though that have been around Vegas long enough to know this. Just wait until City Center and Echelon open. Then it'll really be nervous time.