Since I’ve had a lot of people ask me for status updates on the Cosmopolitan, here are some article jumps if you just want to get to a certain point:

I’ve been a subscriber to the Wall Street Journal online since it first became a paying website - I remember trying to convince my mother that putting $59 (thats how much it was when it first came out) on her credit card every year was a good investment. Once I finally had my own credit card when I was 18, I remember it was always the largest purchase I made each year for a few years.

One of the most valuable pieces of the WSJ to me is their “Page One” where besides any major business or financial news, it always includes one or two articles which take extensive reporting, and even if those articles have noting to do with what I’m interested in, they are always a very informative read.

On Friday, the WSJ published an article about Bruce Eichner, the developer of the Cosmopolitan Resort & Casino in Las Vegas where they described the issues he is currently having with the Cosmopolitan Resort in Las Vegas, as well as some of his last problems when he was involved in huge building projects (one was profiled in a book: How 1,000 Men and Women Worked Around the Clock for Five Years and Lost $200 Million Building a Sky Scraper“. It’s a pretty interesting article which they describe how he seemed to be getting himself more and more into debt and taking on more and more loans from different banks to complete the project.

It brings up how he initially found the site for the Cosmopolitan (right in between Caesars & MGM’s CityCenter Project) and only put in about $10 million of his own money - it doesn’t really state in the article, but it does insinuate that that is all the money that he put into the project. Lets do the math, $10 million of your own money, and borrowed the other billion for what will be an eventual 3 or 4 billion dollar project? Wow. No wonder this mortgage financing mess occurred!

In all seriousness though, its clear that Bruce & his wife (who designed the interiors of the hotel/casino) do have a personal attachment to the project that has sold $280 million worth of deposits ($1.4 billion worth of final sales) and the project is clearly going to be a success - once its finished - but will probably not be able to enjoy the fruits of their labor it as they wish they could.

Here is what caused Eichner’s problems:

Prices for material and labor shot up, throwing all previous cost estimates out the window, in fact Deutsche Bank (the biggest lender) even asked for a construction contract asking for a maximum price on the project.

Secondly, Eichner may be wealthy, but his company is not a publicly traded company, limiting their ability to get capital. As far as I know he does not even have very many assets. It’s not like MGM Mirage who has billions of dollars worth of assets which they can borrow against, or even sell if worse comes to worse in a financial bind. Eichner having very little assets puts the banks in a perilous situation because if the project does end up defaulting it ends up being a complete loss.

Lastly, most of the major bank loans for this project was based on certain groups providing equity in the project, yet they didn’t seem to do the in depth underwriting, or due diligence on the project which may have caused them to think harder about their decision. George Soros originally provided some equity, and Deutsche Bank originally provided a loan based on his participation - figuring if he was in, then it was a good deal. Then Hyatt became involved to run the hotel, and due to Hyatt’s participation (they signed on as the hotel operator, and also contributed $50 million to the project), Deutsche Bank loaned more money. Money was loaned based on money loaned, and too many eggs were put into one basket.

Currently the project is under foreclosure by Deutsche Bank - who currently is owed almost 1 billion dollars, and the project is only 1/3 completed, yet still being built. Deutsche has too much invested in the project and there is actual progress occurring on the site for them to just shut it down and call it a loss. The project is still due to be opened by the end of 2009, and it sounds as though all of the sales deposits are safe, but one thing that isn’t safe is Eichner’s affiliation with the project. It seems as though the lenders are pushing him out of the project.

The article doesn’t say much about the status of any takeover by W Hotels or the Related Companies - except that the Related Companies have been talking to Deutsche Bank about buying the project out of foreclosure, so it’s anyones guess as to where that stands.

I think that the Cosmopolitan project will still be finished without any major changes or scale backs, although it’s a good possibility that Hyatt will no longer be affiliated with the project, and the Eichners will also be no longer be involved. For all those who have deposits put down on a unit at the Cosmopolitan - don’t worry, I really don’t see any issues with losing a deposit since the project is partially built. As for W Hotels becoming involved with the project - I still see it as a definite possibility since its a very high profile location and W has been wanting to come back into Las Vegas in a big way.

I’ll keep you posted.

andrew@alconic-inc.com