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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

(continued from page 1)

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.

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