In For a Penny, In For a Pound

Or, in Deutsche Bank’s case: In for $ 768 million, in for $ 4 billion.  Yes – I’m talking about the Cosmopolitan Hotel in Las Vegas, which Deutsche Bank acquired via foreclosure after the developer, Bruce Eichner, defaulted on his $ 768MM construction loan.  DB is now in for a total of $ 4 Billion.  From the NY Times:

“The bank reluctantly inherited the Cosmopolitan in 2008, just as the local and national economy began to crumble. After running into cash-flow problems, Bruce Eichner, then the owner of the casino and a developer mainly known for high-end residential properties in New York and South Beach, defaulted on his $768 million construction loan from Deutsche Bank. The lender foreclosed on Mr. Eichner and took control of the property — one of the first signs that the city was headed for hard times.

“It’s a story that’s closely linked to that of Las Vegas’s fortunes,” said Anthony Curtis, a former professional gambler who now runs the Web site Las Vegas Advisor.

Many big lenders and opportunistic investors ended up owning troubled, half-built properties in recent years. Some walked away, like Morgan Stanley, which took a $1 billion write-off on the Revel in Atlantic City. Others decided to wait out the economic downturn. The billionaire Carl C. Icahn, who picked up the unfinished Fontainebleau resort in Las Vegas in bankruptcy for $156 million in 2009, still has not restarted construction on it.

In contrast, Deutsche Bank doubled down on the Cosmopolitan, opting to go it alone after failing to find a partner. Almost immediately, the bank scrapped Mr. Eichner’s vision for the Cosmopolitan, which was originally planned as a modern residential building with 28-foot robots playing guitars in the lobby area. The bank also provided the project with a low-interest loan, potentially making Deutsche liable for roughly $4 billion.”

I think I’ve mentioned previously on this blog that I actually had a deposit (refundable) down on a condo-hotel unit at the Cosmopolitan back in 2006, I think, near the height of the real estate orgy.  Fortunately, I bailed on that purchase and got my money back, although I’m not sure what happened to others, as the Cosmopolitan canceled the condo-hotel idea entirely and is now just a “normal” hotel.

The article talks about Cosmo’s goal to become the new, edgy “spot” in Vegas:

“In a sea of sameness, we are trying to stand out,” said Mr. Unwin (who leads Cosmopolitan’s management team)

but also highlights the problem with dealing with a customer base of young hipster douchebags:  they don’t have big money to lose at the gambling tables!  I think they sourced the subjects in this video at the Cosmopolitan:

The NYTimes article’s author, Susanne Craig, pontificates falsely:

“But the young clientele attracted to the Cosmopolitan is a notoriously fickle group. While they willingly spend on food and drinks, they are less likely to drop thousands on roulette or poker — typically the largest source of industry profits.”

I’m willing to bet that there’s not a single casino in Vegas that gets the majority of its profits from either poker or roulette, but I think that Ms. Craig was trying to say that the big revenues come from gambling.

Bill Lerner, formerly of Deutsche Bank, is the best Las Vegas Gaming analyst I know of.  He weighs in in the NYT article:

“When you build a $4 billion casino in the middle of the Strip, it is important to have a base of gamblers,” said Mr. Lerner of Union Gaming, who previously covered the industry for Deutsche Bank. “They have zip.”

Then there’s the issue of the desire to label Cosmopolitan as the edgy hot spot, versus the staid, traditional, conservative business values of Deutsche Bank:

“But behind the scenes, executives at Deutsche Bank have balked at some aspects of casino ownership. The Cosmopolitan created a risqué advertising campaign featuring farm animals and proclaiming that the casino had “just the right amount of wrong.” But senior officials in Germany felt that the commercials were too “racy for a bank,” said a former Deutsche staffer who spoke on the condition of anonymity. Despite Deutsche’s concerns, the Cosmopolitan ran the ads.”

We’ve seen this all before in Vegas.  Hard Rock, then Palms, now Cosmo.  The difference is that those other two hotels didn’t cost $4 Billion to build!  But Cosmo might only be DECADES away from breaking even – so things aren’t looking so bad (/sarcasm)!

Meanwhile, Deutsche Bank is years — if not decades — away from breaking even on the Cosmopolitan, say analysts, given the weak cash flow and heavy debt load. The resort, which was open for just 17 days in 2010, logged a loss of $139.5 million for the year.

“With the world coming to an end in 2008, I wouldn’t have done that project if someone had a gun to my head,” said Mr. Lerner. “I suspect they will look for a liquidity event over a short period of time.”

In for a penny, in for a pound!  Lerner gives the money quote: “I wouldn’t have done that project if someone had a gun to my head,” trumping Unwin’s rhetoric about trying to stand out in a “sea of sameness.”   Will DB’s decision to sink another $3+ Billion into the Cosmopolitan project as the Las Vegas bubble was crumbling prove costly? Time will tell, but the early answers point to: “yes.”


appendix: There are actually a number of different types of douchebags in Vegas, and I’ve over-generalized here.  While Hard Rock and Palms cater more to the Kangol-cap-wearing-tribal-tatted-spiked-mohawk-hair-sunglasses-indoors-VEGAS-BABY type of douche, Cosmopolitan caters more toward the Brooklyn Hipster Douche – the wears-scarves-indoors-during-all-seasons-watches-cricket-and-tennis-instead-of-football-goes-to-the-spa-and-sits-outside-at-the-pool-with-skinny-jeans-on type.

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