Hotel group puts Echelon on hold

Oct 8, 2008 5:05 AM

by Staff & wire reports | The slowing economy and deepening credit crunch continue to take its toll on planned casino projects in Las Vegas and beyond.

Last week, Morgans Hotel Group announced that it has amended its agreement with Boyd Gaming Corporation regarding their joint venture to develop a Mondrian and Delano hotel within Boyds Echelon development on the site of the old Stardust.

The amended agreement, among other things, provides for the following: the immediate return to MHG of its $30 million deposit provided for the project, plus interest, the elimination of MHGs future funding obligations of approximately $41 million, the elimination of any obligation by MHG to provide a construction loan guaranty, and sole control by MHG over the use of its Delano and Mondrian brands in connection with the project.

The amended agreement also limits the amounts that MHG and Boyd are required to continue to fund for pre-development and related costs to approximately $420,000 each. The deadline to obtain construction financing has been extended to Dec. 31, 2009. Each party has the right to terminate the joint venture for any reason prior to Dec. 31, 2009. Additionally, the terms of the management agreement, which provide for an MHG affiliate to operate the joint venture hotels upon their completion, remain unchanged.

Translation: MHG can pull the plug if it feels economic conditions become too burdensome.

"We believe that the amended agreement provides substantial flexibility and represents a sensible framework for MHG to move forward with the Echelon project on the basis of a vastly reduced capital commitment," said Fred Kleisner, President and Chief Executive Officer of MHG. "We will continue to evaluate the project as we move forward and continue to act in the best interests of our stockholders."

The decision to place the Echelon project on hold wasnt a surprise to industry experts.

"Now is one of the worst times to raise capital because lenders are willing to lend less, and the cost of capital is significantly more expensive than it was a year ago," said gambling analyst Andrew of Zarnett of Deutsche Bank.

Earlier this summer Australian billionaire James Packer gave up on his plan to build a $5 billion megaresort on the site of the old Wet n Wild water park, just south of the Sahara Hotel.

Packers Crown Limited bought an option to purchase the 27 acres for $475 million from Paul Lowdens company in 2006. That option expired in June.

Packers company has already committed $1.8 billion to purchase Cannery Resorts, and is investing $3 billion in the Fontainebleau resort project, next to Turnberry on the Strip.

Also earlier this year, Las Vegas-based Pinnacle Entertainment announced that it was holding off on building a $1.5 billion gambling palace in Atlantic City.

"Ive been asked, How the hell are you going to build in Atlantic City? " Lee said in an earnings conference call. "The answer is, if credit markets dont improve, we wont build. Were not going to go broke building in Atlantic City."

The problem of financing new and existing casinos isnt endemic to Las Vegas and Atlantic City, according to industry experts.

"This is an issue impacting gaming and other developments around the country," Joe Weinert, senior vice president of Spectrum Gaming Group L.L.C. told the Press of Atlantic City. "Every gaming company considering a large-scale development at this time has to take into account the availability of affordable capital."