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September 18, 2014

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Fontainebleau sitting idle benefits Strip’s economy

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Sam Morris

The hulking shell of Fontainebleau sits dark on the Strip. Construction was halted on the resort in summer 2009 after lenders pulled $800 million in financing.

Fontainebleau

The stalled Fontainebleau project is seen Jan. 15, 2010. Launch slideshow »
Carl Icahn

Carl Icahn

Ever since it became clear a month ago that financier Carl Icahn would be the new owner of the bankrupt Fontainebleau Las Vegas on the Strip, the big question has been: When will it open?

One of the last things Las Vegas needs during this Great Recession is Fontainebleau’s 3,812 hotel rooms. With tourism and consumer spending still in the tank, Las Vegas is struggling to absorb the hotel rooms that have been added in past year, a 6 percent increase. Strip hotels have had to lower their rates to try to maintain occupancy levels.

Icahn has kept silent about his plans for Fontainebleau, but a key gaming analyst predicts it won’t open until 2015 at the earliest.

The analyst, Bill Lerner, is considered one of the gurus of gambling, a swami of the Strip, so his take on Fontainebleau has some in the industry breathing a little easier.

Lerner, who was with Deutsche Bank until co-founding Las Vegas-based Union Gaming Group last year, figures Icahn will just wait for better market conditions.

“I really think it’s a five-year mothball,” Lerner says. “When it comes to market, who knows what the ultimate cost to fit it out will be? There are going to be remediation issues that need to be addressed earlier. They’ll lock the building down, get security and insure the thing. But I think it’s a smart idea to mothball it.”

It’s hard to estimate how much the shutdown, remediation and completion of the 68-floor project would cost, but he says it could be “$1.5 billion in today’s dollars to bid out the interior and finish the exterior.”

In any case, Lerner is skeptical Las Vegas will ever again enjoy an average occupancy rate in excess of 90 percent and average room rates of $132 a night.

One contributor to that is likely to be the Cosmopolitan, adjacent to CityCenter.

The 3,000-room Cosmopolitan was foreclosed on by Deutsche Bank, Lerner’s former employer, and he expects the property to open in the fourth quarter.

“It’s unfortunate that we’re going to have some incremental supply,” Lerner says. “As far as the market goes, we just don’t need more supply. Deutsche’s not concerned about what its supply will do to the rest of the market. It’s about recovering capital invested in the project, getting to a recovery and then selling it.”

The future of another stalled Strip project, Boyd Gaming’s Echelon, is even more complicated.

Construction on the 87-acre multiuse development on the site of the former Stardust shut down in August 2008 for what was then described as a three- or four-quarter delay. As the economy worsened, Echelon was put on hold for three to five years.

Lerner figures its startup timetable depends on whether Boyd succeeds in buying some, if not all, of the assets of Station Casinos, which is operating under Chapter 11 bankruptcy protection.

If Boyd buys at least a piece of Station — and Lerner expects it will — that’s likely to keep Echelon on the back burner.

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