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twitterLenders: Cost overruns led to Fontainebleau loan default
Published Tuesday, June 16, 2009 | 4:23 p.m.
Updated Tuesday, June 16, 2009 | 11:07 p.m.
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Sun Coverage
Bank lenders for the first time have publicly disclosed why they declared the $2.9 billion Fontainebleau resort in Las Vegas in default on its construction loan and shut off funding. Tuesday, they cited hundreds of millions of dollars in cost overruns and possible misrepresentations by the hotel-casino developer.
"Fontainebleau repeatedly made contractually-required representations that it was, among other things, solvent, and that its remaining construction costs did not exceed its available remaining financing. But ... Fontainebleau management has submitted documents and made statements to the lenders that call those representations into question," attorneys for Bank of America and other bank lenders said in a Miami bankruptcy court filing.
"Moreover, developments in recent weeks indicate that Fontainebleau had been in serious financial distress over the past year," the bank lenders said in a filing opposing Fontainebleau's request that its lawsuit filed against the banks in April be expedited in bankruptcy court.
A hearing on Fontainebleau's request is set for Wednesday as Fontainebleau seeks an order requiring B of A and the other banks in a revolving loan agreement to release $656 million it says it needs to get the stalled project, 70 percent completed, back on track. Fontainebleau charged in the April lawsuit that the banks had wrongly stopped financing the resort over an unspecified event of default.
Bank of America said in court papers Tuesday that the case doesn't belong in bankruptcy court since it involves alleged breaches of the lending contract that occurred before Fontainebleau filed for bankruptcy last week.
B of A also charged that prior to the bankruptcy, Fontainebleau had been in no rush to fast-track its lawsuit against the banks, so there's no rush now to proceed with the suit; and that the lenders need time to study the resort's financial situation and events that led to the alleged default.
Fontainebleau attorneys responded to Bank of America's filing late Tuesday, insisting the lawsuit belongs in bankruptcy court as being a core part of the bankruptcy process and saying the banks -- not Fontainebleau -- are responsible for the delays in the April lawsuit.
"Any 'delay' here is entirely the fault of the banks, which invited Fontainebleau to commence settlement discussions, and then continued those discussions, for weeks on end without any resolution -- or even a meaningful counter-proposal. Fontainebleau understandably chose to negotiate first rather than burn its bridges, and the banks’ dragging their feet in negotiations in no way constitutes delay on Fontainebleau’s part," a Fontainebleau court filing said.
Fontainebleau also denied it defaulted on the loan, but said even an alleged default did not give the banks the right to stop funding the resort.
"Thus, simply put, even if an event of default had occurred -- and none did -- the banks would not have been permitted to refuse to honor the March 2 notice (from Fontainebleau seeking funds)," the Fontainebleau attorneys said.
Fontainebleau also issued a statement about the banks' court filing.
"Bank of America and the other revolver banks claim there is no urgency to deciding this issue. Tell that to the thousands of unemployed workers who are anxiously awaiting for funding to resume so they can go back to work. Delaying construction for lack of funds creates significant costs and serious human hardship, so it is absolutely essential that this issue be resolved as soon as possible," the company said.
In Tuesday's court filing detailing the alleged breach of the resort construction credit agreement, the banks said Fontainebleau was provided $138 million in funding on March 25 after Fontainebleau submitted papers showing the project was "balanced" -- that is available funds exceeded construction costs by about $14 million.
But on April 13, B of A said, the lenders were informed by Fontainebleau that the project had become out of balance. The bank said Fontainebleau listed additional costs of $187 million that needed to be funded but were not included in the March paperwork.
"But Fontainebleau offered no explanation of what had occurred in the prior three weeks to alter the 'in balance test' calculation so dramatically. In fact, it has never done so," charged B of A, which suggested Fontainebleau was in default on the agreement in early March.
"On April 17, Fontainebleau representatives met with the lenders. During this meeting, Fontainebleau confirmed that it was facing a substantial construction deficit and would not be able to complete the project using the funds available under the credit agreement -- Fontainebleau needed additional new financing. Fontainebleau also told the lenders that it would likely seek bankruptcy protection to restructure its financial obligations," B of A said.
"Additional facts continued to surface suggesting that Fontainebleau was in default under the Credit Agreement on March 2, 2009. For example, Fontainebleau’s Chapter 11 proceeding papers disclose, for the first time, that it has been 'intensely focused' on securing additional funding sources for the project since at least Sept. 15, 2008, when Lehman Brothers Holding Inc., which was the largest participant in the project’s mortgage loan, filed for bankruptcy protection. Fontainebleau has still not obtained firm commitments for this additional funding," B of A said.
The bank also recounted how Fontainebleau has been sued by CCCS International, a construction management firm that says it was hired to find overpayments on the project. The CCCS suit said that when it was hired in 2008, Fontainebleau had projected it had made $130 million in prior overpayments.
Tuesday's filing also noted a report by Moody's Investors Service which, like fellow credit rater Standard & Poor's, had predicted early this year that Fontainebleau could be headed toward default on its credit agreement because of a lack of condominium sales at the resort and other problems.
And the bank noted a June 8 story by Liz Benston in the Las Vegas Sun quoting consultants as saying the project was as much as $375 million over its most recently revised budget; and quoting financial analysts as saying the cost of the project had probably jumped to $3.5 billion.
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" ...possible misrepresentations by the hotel-casino developer."
Gosh, could it be?? LOL, "misrepresentations" (otherwise known as "lying") are in every casino executive's job description, and most are quite good at it. This should certainly come as no surprise to anyone.
---------------------------------------
Opinions and Commentary on the Gaming Industry: www.TheBearGrowls.com
As anyone thathat has driven by Fountainbleu in the last six months knows that the project would not be ready this year, that is nothing unusual for a project of this scope in this economy. But why should lenders walk and take a huge loss? There are good people behind this project, lets see what can be salvaged, at least the hotel and casino, forget the shopping center and condos. that is over. Las Vegas does not need a 62 story monolith empty, the property has a lot of innovative emmenities going for it.
When you start to build a job under the control of Union loafers, you are screwed. The idea of "on time and under budget" is unknown in the Union world. And apparently, F had no cost controls. So the banks were right to torpedo this disaster. Soon, however, after City Center is done in five months or so, the loafers will be long gone all over town. No work here, see 'ya. So save your pennies, guys, you're gonna' be on the road. And there's not much out there. Union "Craftsmen" working for 10 bucks an hour. If they're lucky. Good....
(sic) ammenities
It's funny how some people blame this job shutdown on "union loafers" with no real backup. Nednougat really has some real underlining issues about the unions that have built this town. luckily the unions in this town have the skill and knowledge to build big projects like this and keep the work coming to this town. I have had the "pleasure" to come on to some projects that the non-union contractors thought they could handle but had to hire substandard workers that put some of the non-union contractors out of business. Fontainebleau will get going again and us union workers will help complete this project properly for them.
ugly building.
Nednougat... You are way off base bro. As a 30 year UNION Journeyman plumber,I must say that people like you are the reason this country Is In trouble... You have no clue at all what you are talking about,and just spout off about a bunch of complete nonsense. If you want to find out the real story about these MISMANAGED construction projects,I suggest that you ask your great Senator Harry Reid why these big projects Insist on hiring Illegals by the boatloads,that are NOT QUALIFIED and do not even speak ENGLISH. The Harmon Tower at City Center Is a good case In point. You have a bunch of Illegals that cannot read blueprints,or understand ENGLISH, tying and spacing the Rebar for wall and floor structural support They do not know the correct codes for proper Rebar spacing,and they do not even know the difference beween a #2 or a #3 bar etc... Believe me,I was there. That project had to be halted at 23 stories because REAL UNION CRAFTSMAN were kicked aside for all of the Border brothers...The real story will NEVER be told because It Involves telling the truth. And right now,the truth Isn't something that the ELITES In our society want to hear. They would rather SPIN the story to make It fit with their own personal goals and aspirations. You get what you pay for,and If you want It done right,you should begin by using UNITED STATES "UNION" engineering and design companies, Instead of NON-UNION companies from outside the U.S.A. Some of the blueprints on our job were from FRANCE !! Trying to save a buck by hiring LESS QUALIFIED people Is the driving force behind all of these huge cost overruns. Its not the QUALIFIED Union Workers that Is the problem here,Its the people above us,that are running the show.... right Into the ground.
I am sorry but that is an ugly building. What happened to the theme resorts like TI, Excalibur, NY NY, Etc. that make the strip fun to look at and the reason so many people visit las vegas each year. Myself being one of those people. These plain old glass buildings are BOOOOORING!!!! Also, didnt this same thing happen with the city center and isnt that why it isnt done yet? Hasnt that been being built for the last two years or more?
Less qualified? Does that mean a guy with a hammer with a Union Label is better than a Spanish guy without a label? You Union whiners somehow think that years of slow motioning on a Union jobsite makes you more skilled than someone who does the same work, but has to work a real 40-50 hours a week.
Save your money, skilled craftsmen. The bad times are a'comin'.
NED,What that means Is the bad times are here to stay for everyone, Including yourself,as long as there are people here working In jobs that Qualified AMERICANS should be doing... It should alarm any and every AMERICAN CITIZEN that there are low skilled under educated people from third world countries that are stealing the livlihood of people that are BORN AND RAISED here In AMERICA. You will be a witness to one of the greatest collapses of an entire country since the fall of the ROMAN EMPIRE. Do you know why the ROMAN EMPIRE collapsed ? IMMIGRATION!! Look around,smell the roses while you can... Read more about this topic,If you care to find out the truth behind all of the madness. http://www.numbersusa.com/content/
As an Engineer in this town I have been on both union and non-union projects. I was recruited from the Northwest to work on FBR at the start of the project. I was one of the project's design engineers and can tell you that the majority of the Design Team is from Vegas. The only out of towners involved are from NYC. From what I witnessed, cost over runs are the product of over zealous county building officials demanding expensive changes above and beyond Code requirements and adhering to a mind set of "this is always been the way we have done it here and we don't care what it costs". Throw in some lack of timely decision making, requiring portions of the project to built, torn out and built again, and you end up with cost over runs. On the other hand, I believe this is one of the few places in the world where a project of this scope can be constructed in the time line set out. This can only be done with skilled Architects, Engineers and Craftspeople. So here I sit, layed off and wondering if I will be able to finish this great project. And yea, to all that know who this is, I'm doing good.
Well after reading all of the related stories concerning FBR and the various Banks and Lenders, maybe some of us layed off workers, about 3,500 by my guess, should consider our own class action suit against the banks. I know my wife would feel better.
Vegashorseman actually raises some interesting issues. Sadly, a class action lawsuit would never work. If this project is ever completed, it won't be with the same group of bumbling idiots. It will done be by vulture capitalists led by Carl Ichan. Our favorite J people.
Skilled Union Labor??!! Ha! What a joke. Look what they did to the auto industry. Someone joins the the union, pays their dues, demands higher wages, more denefits. What a joke, down with unions!!!
vegas, maybe if it was designed right in the first place, you guys wouldn't have to be worrying about fixing the problems?
jaesun, starting to notice your comments across the boards (so kudos on that i guess, but for the wrong reasons).
Building is about balance (from structure to finishes) now more than ever, multiple mockups are necessary and changes are made during the project to maintain that balance from the owners' eyes.
Of course delayed decisions from the owner results in change orders (union guys are pushing as fast and proper as they can to complete, what's on current plans in field is being built, proper expedited coordination of changes from top-execs to laborers is necessary, but does consume time - too much time in f'b case apparently)
please contribute constructive text to lasvegassun if you are to continue visiting
I agree to some of NED's points. Sorry BUDGER, but Unions absolutely share a good portion of the blame for the implosion of the Auto industry and play a good part in the challenges of the Strip construction issues. Sure, there may be the fact that unskilled individuals don't know the difference between a #2 and #3, but if you were there, why didn't you fix it? Was it not in your Union Job description? Real life union workers, in my on the job experience, will not pitch in to help out when help is needed unless it is in their Job Description - they hide behind those. This, in my experience is the rule, not the exception. Why is it SO expensive to get a soda or coffee in a Union Labor House (Strip Property)- because you have to pay a cashier net $35 an hour with benefit cost - that is unacceptable to the the public who just wants to buy a cup of coffee. Why is a draft domestic beer 8, 9, 10 or 12 bucks at a ball game? Same reason - union labor. You may not be one of them, but I've seen countless union construction workers delay and take their mandatory breaks and sleep on the job, and sit around and complain and bs when things should be getting done. They outwardly speak to the fact that they will do just enough so they can eventually get OT (or better) near the end of the job. So, again, you may not be one of them, but you are the exception in my experience and more power to you. If you want to blame the illegals for the job they did on the Harmon Tower, I'll bet you there were plenty of Non-Illegals being paid to supervise and oversee and inspect the job.
Bottom line is Unions have priced themselves out of some of the marketplaces and they can only look themselves in the mirror. I'm all for people earning a good wage for hard work, but the word entitlement has been substituted for hard work for the majority of union folks I have come across and that is a shame for all people: The Private Sector, Construction, F&B Labor, Airlines, Auto, etc etc
Enjoy the vacation and I hope you saved your money instead of spending it on beer after a hard days "work" on the site.
VegasHorseman again illuminates a problem that we have here in Vegas. Basically, we're next to Cali. The land of regulations and waste. So I'm sure he is correct when he says that the County is loaded with inspectors who do nothing but confuse and reject, and cause change order hell. Our building codes are a mirror image of Cali's codes, so what do you expect? Even our new houses are under building inspector hell. Now the inspectors have nothing to do, so they make life even more miserable for superintendents and PM's. But get-even's are a MF'r, and with this sad economy in Vegas, things will smooth out nicely, with empty half-built buildings, and vacant land filled with solid waste that was going to have houses. We asked for it, we got it. It's UHaul time....
Regarding the post from- Love Vegas Alot- Are you 12 years old? Go to Disney World for Theme Parks. Even Steve Wynn knows that is an outdated choice for Architecture in Las Vegas, it was fun for a little while, but we need to appeal to a more sophisticated consumer then you perhaps. Anyone can copy something that has already been done. New York New York? That is an example of what NOT TO DO..' When Fontainebleau is completed I think you will get it.
Discretionary income has dried up as the baby boomers' retirement assets have been wiped out by the 7 trillion dollar fall in the stock market. Boomers' are also seeing their real estate value drastically decline. Fontainebleau, City Center, the Trump building, Manhatten West and other under construction projects were conceived and designed with baby boomer discretionary income in mind. It's no longer there to be captured.
Once completed and opened these projects will require the business to get at least $200 or more a night to be profitable. Once opened, the competition for the dwindling demographic able to pay the price will be fierce but without the price per room coming down occupancy rates will be anemic. The math does not add up. If there is success it will be at the expense of other Strip properties. Meanwhile, baby boomers will reduce discretionary spending until they can rebuild a retirement nest egg. Without the boomers, Las Vegas will suffer for years to come.
SJM....Nothing about Vegas is sophisticated nor will it ever be thought of as sophisticated no matter who builds what. That is why its called Sin City. Its funny you mention Steve Wynn since he is responsible for building at least 4 or 5 of those themed resorts. The Wynn in my opinion is just a grossly overpriced glass blob. Read some of the reviews people post about it. Alot of them say the same thing. Like it or not vegas is known for its themed resorts and always will be. Maybe you should research Las Vegas as much as I have before calling me a 12 year old. Go to a theme park or disney land...hmm thats funny since Vegas has many times been referred to as disney land for adults. Your post was very rude and comments are for people's opinions and mine happens to be what I wrote earlier. If you dont like my opinion dont read my posts and you can kindly refrain from writing to me also.
I worked at the Fountainbleu. I think it has great potential. It is true it is not one of the most beautiful structures on the strip, but the pool and shopping facilities were going to be stupendous, and I think it would make a big impact for jobs and revenue. It seems that incompetence played a big part in the cost overruns, no so much the unions, but in the overall corporate structure. Hopefully, all this can be worked out. The jobs restored, and finish the building, so it can live up to its potential. Once completed, the pools, fountains,
casino, convention center, would make it all come together. I think it would stand out as something very different and major on the strip.