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Bottom-Feeding in a High-Rise Market

In a city built on the backs of shot-takers, many condo investors have failed to rake in the dough and their apartments sit empty. But as with everything else in Vegas, their losses can be profitable for somebody else.
Michael Kaplan
From the Print Edition:
Arnon Milchan, September/October 2008

The recent history of Las Vegas real estate is littered with alluring monikers: Aqua Blue, Krystal Sands, Opus, Icon, Las Ramblas. Those are just several among dozens of poetically named high-rise projects that failed to see the light of day in a city that thrives on optimism and is built on the backs of shot-takers.

Once-gilded projects have been aligned with headline grabbing names such as Michael Jordan, Ivana Trump and George Clooney. Who could blame them for desiring a piece of the Strip-side action? Not so long ago it seemed as if Sin City could do no wrong, and its real estate was an odds-on favorite. Investors literally became affluent overnight, parlaying their bets, rolling the bones, winning again and leveraging themselves into exponentially larger positions. But as every gambler should know, sooner or later negative variance hits, and that is when everything gets wiped off the table.

Real estate in Vegas became so overheated that a comedown was inevitable. Few people—including Kirk Kerkorian, who sold off a chunk of his multibillion-dollar CityCenter project before the bottom dropped out—expected the market to unravel as quickly and as violently as it did. But maybe, considering that gambling is deeply ingrained in the Vegas culture, that shouldn't be a huge surprise. The big question now is, how low can it go? And when is the time to plow back in, to take advantage of the battered prices and walk away with a steal or at least a deal? Astute shoppers in this market are not unlike sharp sports bettors who obsessively watch the NCAA lines, wait for sucker money to drive point spreads in one direction or the other, and then calculatedly jump in.

The consensus seems to be that prices are at a bottom or else pretty close. This story is being reported in the spring of 2008; by the time you read it, numbers are expected to be suitably alluring for people with cash or the ability to get financing (no easy task at the moment). "I bet you that toward the end of this year, I will be buying again," says Jim Dunn, a real estate investor who did well on the rise, strapped in for the plunge and now seems ready for more. "It's definitely a buyer's market right now."

As prices dip to 2003 levels, and owners who bought high—often intending to flip their units or rent them—get crunched, the downward pressure is a plus for anyone eyeing a second-home, high-rise condo in Las Vegas. "In Panorama Towers [a ritzy example, situated off of the Strip] there was a two-bedroom, two-bath, 12th-floor unit available for rent at $2,100," recounts Dunn. "But no one will rent it at that price. And it sits empty. How long can that go on? How much of a loss can the unit's owner take? It's all about diminishing returns." With no sorrow in his voice, he adds, "Guys like that will be distressed sellers."

Las Vegas's high-rise condo boom blasted off in 1999 with the development of Park Towers. Located a couple blocks east of the Strip, the luxurious condo was built by moguls Irwin Molasky and Steve Wynn. Only 84 units exist and they start at 2,100 square feet. The building boasts a screening room, wine cellar, catering facility and a tennis court. Well-connected concierges arrange hotel-like amenities ranging from unlikely dinner deliveries to sold-out show tickets. With spectacular views, stratospheric prices and celebrated developers, the building became a magnet for the moneyed crowd.

Naturally, the success of Park Towers inspired other developers to build luxe high-rises. Turnberry Towers (complete with a private club, restaurant and cigar lounge) opened in 2007 as did Panorama Towers, an ambitious project put together by Laurence Hallier, who made his money by marketing bubble ads on top of Vegas taxis, and nightclub impresario Andrew Sasson. Lacking a great location—it's off the Strip, near a highway—Panorama does boast gorgeous loft-like apartments, with walls of windows and top-notch appliances. Nevertheless, Sasson, who seems to have a brilliant knack for timing, sold out to his partner as the third tower was getting under way. He managed to escape just before real estate costs soared and the market in Vegas began to sour. Now he's developing The Harmon Hotel, Spa and Residences, in CityCenter, and branching beyond that with the help of deep-pocketed backers from Dubai.

Others weren't as lucky. This past March, Nevada's foreclosure rate rose 220 percent from a year earlier; that's one foreclosure for every 183 households. Leading the charge is Las Vegas, where speculation fever has turned to reneging fever. Last year in Clark County one out of every 30 homes was on the road to shutdown. "Fortunate for the buyer, unfortunate for the seller, there are a lot of really good deals out there," says Jim Brooks, a broker who specializes in high-rise condos and invests in them as well.

Those deals have metamorphosed in a way that is very Vegas. As recently as 2005, the market was so hot that people couldn't enter quickly enough. If you wanted to buy into a new development, you often needed to arrive before dawn and wait on a long line with other prospective buyers. But the hassle was worth it: units sold and prices literally went up overnight. In at least one instance, a developer raised the sale price by $20,000 every time five units were spoken for. So the 16th person in line paid $560,000 for a house that he expected to purchase for $500,000. Among greed-crazed buyers, the heavy-handed move was easy to overlook. Housing was hot, prices were soaring, and putting down 20 percent in nonrefundable earnest money virtually ensured profits.

Such was the common wisdom four years ago, on the day that the developers of a seemingly can't-miss project called Cosmopolitan, the first high-rise hotel/condo/casino that would open on the Strip, began accepting pre-construction deposit money. Jim Brooks was there at 4:30 in the morning. He had 13 deposit checks—one for himself and 12 for clients. "They sold 1,000 to 1,200 units in one day," Brooks remembers. "The reps there weren't sales agents; they were order takers. People threw checks at them. It was crazy. But you knew that if you could get earnest money down on something, you could make a profit. We won't ever see it again like that in Las Vegas." (Incidentally, Cosmpolitan was sued this June for trademark infringement by The Hearst Corp., owner of the magazine of the same name.)

In angling for the Cosmo's fabulous units, with Japanese soaking tubs and views of the Bellagio's famed dancing waters, nobody focused on how ugly things could get. In short order, however, the subprime crisis hit America hard and delivered a knockout punch to Vegas. Suddenly people who bought units to flip—and really couldn't carry them—faced a market without buyers (the free flow of jumbo-rate financing seemed to dry up instantly). Those with adjustable mortgages were in even more trouble. And people who put down six-figure deposits were shocked to find themselves unable to drum up the rest of the necessary dough. Rather than increasing in value over the term of construction, units decreased, so even if the banks wanted to lend, 2004 prices were a lot higher than 2008 prices, which meant more money needed to be expended up front. Vegas became a place with beautiful apartments and no liquidity.

It's a situation that is now illustrated in miniature by the Cosmopolitan itself, a project undertaken by a nervy New Yorker named Ian Bruce Eichner. Though the building practically sold out on that amazing day in 2004, problems loomed. Construction costs soared and at least one very pricy, unexpected mishap occurred: while building an underground parking garage, workers hit a riverbed that flooded the site and needed to be shored up at a cost in the tens of millions of dollars.

This past May, after sinking some $1 billion into Cosmo, chief backer Deutsche Bank foreclosed on the project and took it away from Eichner despite his $280 million in earnest money from buyers, who were theoretically committed to closing on nearly $1.4 billion in sales. As of this writing, Deutsche Bank is continuing to pay for construction, but it is unclear who will ultimately own the building.

Nobody is very happy about it. "I have two units overlooking the fountains," says investor Dunn, who has since branched out into managing condos for rent through a company called Bluechip Management. "But we bought too high." Acknowledging that he's not the only one, Dunn gloomily adds, "They pre-sold 84 percent, and, when it's completed, it will be interesting to see if there is a market."

Mark Sivek, who's marketing apartments for the recently opened Trump International Hotel and Tower, a partnership between Donald Trump and Vegas hotelier Phil Ruffin, inadvertently paints a stark post-boom picture. Like the guys at Cosmo, he acknowledges, he has crossed the rubric from salesman to something else. Unlike them, however, he is no order taker. "I'm a deal maker," he explains, pointing out that rather than selling units, he's helping buyers strategize on how to manage the financing in a tough environment, sometimes forging partnerships between individuals who lack the wherewithal to buy their units solo. "It's about making deals, saving the integrity of the building, and everybody goes home happy."

Or not, as Jim Dunn relates: "Supposedly a guy walked away from five units at Trump with 500 grand down. He lost half a million dollars." Dunn shrugs and turns down his lips. "It's a buyer's market, but financing is hard to get. The banks want 35 to 40 percent down, perfect-A credit and full documentation. There are a lot of people walking away from six-figure deposits. They don't have choices." On a Saturday afternoon in Las Vegas, the sun burns hot and bright on the balcony of an empty apartment in a luxury three-tower complex known as The Signature at MGM Grand. Inside it's all cool earth tones, flat-screen TVs and nice but bland furnishings. A broker by the name of Glen is walking a potential buyer through the one-bedroom apartment. In town on business, the prospect is shopping around with no immediate need to make a purchase.

He steps toward the edge of the balcony and looks down on a European-style pool, spotted with topless female sunbathers. "I'm getting vertigo," he says, retreating inside.

A few years ago, it would be unclear whether the source of his dizziness was aerial or financial, brought on, perhaps, by unsettling prices. These days, however, there is little question. "One year ago, my client paid $700,000 for this place and now he is selling it for 510," says Glen the broker. When the potential buyer appears unmoved, Glen points out that similar units are available for $440,000. "But they're bank-owned. And you don't know [ahead of time] if you're going to get it or not."

A three-tower development attached to the MGM Grand Hotel and Casino, The Signature once served as the shining beacon for the beauty of high-rise living in Las Vegas. A so-called "condotel," it was designed so that buyers could use their units as often or as seldom as they pleased, enjoy hotel-style amenities and put the units into the MGM's hotel-room pool when they remain unoccupied. The idea was that you could help cover your mortgage with the overnight income, and MGM would get a cut of the rates.

Good as that sounds, for some buyers the project has served as an abject lesson on what can go wrong. The rental incomes have not generated as much cash as many buyers had hoped, although, it should be noted, these properties are explicitly sold as second homes, not as real-estate investments. The income is supposed to be icing, although a lot of investors bought in with the belief that it would be a little bit more. "MGM has a great rental program, but they have a lot of units and visitation is down," Jim Brooks says as a way of explaining less-than-stellar rental returns.

Others spin it differently: one owner complains about getting $10 to $30 per night after fees and splits with wholesalers are accounted for. The disgruntled owner points out, "You don't want to have your $500,000 or $1 million investment getting trashed for $20 per night." That is one reason why he and others are taking matters into their own hands and marketing the rooms independently, often with gussied-up amenities.

Hit hardest are those who bought in the third tower, which was the last one to have been built. As has been the custom with these projects, each new tower sold for more than the previous one. "A studio that went for $400,000 in Tower 1 went for $575,000 in Tower 3," explains Brooks, who bought in Tower 1. "Now that the builders' units are sold out, the prices reset"—meaning that the price is now what the general market will bear, not the asking price for the new tower. "People in Tower 1 can drop down to $400,000; the people in Tower 3 cannot [if they want to sell without sustaining a loss]. Right now there are 100 very distressed owners."

For those with cash or excellent credit, these unfortunate few are the sellers of choice. Sheets printed out from the brokers' multiple listings service boast discounted units in most of the high-rises around town. Sellers are becoming increasingly motivated.

"If you have had [a unit] on the market for 12 months and are chasing the market down, going from $500,000 to $350,000, you see what is really happening," says Brooks. "There is a decent amount of activity on all undervalued units."

Coming into this market cannot be easy. But Donald Trump and George Maloof, of Palms fame, both face the unenviable task of needing to navigate these choppy waters. They each have brand new condotels that need to start closing. In both cases, earnest money was collected when the market was strong and people were optimistic. Now, would-be buyers are having trouble honoring commitments that they made a few years ago, when real estate seemed to be on an endlessly upward trajectory.

At Trump, where the rooms are nicely furnished and outfitted with high-end appliances but, aesthetically, are middle of the road, the name still has appeal for some buyers, but prices are already coming down. Giving me a tour of the marble-and-crystal festooned property, Sivek confides, "I can get you [a one-bedroom], under special circumstances for $783,000." He is referring to a unit that has been priced in the $1.2 million range. "Studios are in the 700,000s, but I have one in the 400s." Ignoring that yesterday he seemed steadfast about sticking close to the original prices, Sivek tells me, "Due to our position, we have some killer deals from people who put down money in 2004 and since then they can't close."

Meanwhile, over at Palms Place, the latest condotel to come to market, the story and the circumstances are a bit different. The units there are the swankiest in town, with Jacuzzi-jetted tubs in the bedrooms, sleekly contoured sofas, wood paneling, low-slung coffee tables and an overall space-age bachelor pad vibe, by way of Palm Springs. These studios, one-bedrooms and penthouses seem to have been built and designed for seduction. George Maloof—whose brother Gavin will be occupying one of the sprawling penthouses, as will pop star Jessica Simpson—maintains that he went way over budget and produces a detailed prospectus to show that no corners have been cut. He challenges me to uncover something that he neglected to include in one of the rooms; as usual, the house wins. "Construction costs just didn't pencil out for us," he says, explaining that, like everyone in town, he was a victim of spiraling expenses. "I sucked it up, wrote checks, finished the project as promised. For me it was personal; everything had to be done right. And I'm happy to say that the comments from our customers is that the finished units look better than the pictures—and the pictures looked great."

Maloof expresses no desire to lower his prices; one-bedrooms have gone for as much as $1.3 million and studios for $769,000. He insists that any buyers who back out will lose their earnest money, but the units will not come to market at a discount—at least not so long as he's the one doing the selling; in a year's time, if original buyers opt to sell their units, there is no telling where the prices will go. For now, however, with the majority of the apartments closed, Maloof says that he'll hang on to those that remain, put them into the Palms' rental pool, keep 100 percent of the revenue for the time being and sell them when the going is good.

Of course, he's in a particularly advantageous position to do this. The Palms is a hot place. Anything he might have to eat on the units, he'll more than make up for in his casino, restaurants, spa and hammam (the only one in Vegas); the Trump property, on the other hand, has no casino (by design) and only two restaurants. The ancillary potential is a lot less. "The condo-hotel, for the [casino-based] developer is a genius idea," says Jim Brooks, referring specifically to Palms Place with its 599 rooms and a hipster clientele clamoring to stay there. "People help to pay the costs for upkeep and to run it. And they're adding another 600 high-end clients into retail, gaming and restaurants."

Whether you can get a good deal on a spot in Palms Place has yet to be seen. That will depend entirely on the Vegas real estate market and the owners' collective stomach for hanging in there as it goes through what is hoped to be a final set of gyrations. Regardless, to hear the locals tell it, it's not a matter of if the Vegas high-rise condo market will turn around, but when. "When things do turn around, Las Vegas will still be the entertainment capital of the world; it will still be a great place for dining, shopping and gambling," says Brooks, not needing to mention that money lost may never be recovered and that bargains are there for the taking. "I believe that the values of properties currently listed at the bottom of the market will double in seven to 10 years." He doesn't go so far as to say he would bet on it, but one can assume that he already has. v

Michael Kaplan is a Cigar Aficionado contributing editor.

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