Bloomberg has an interesting real estate story showing how banks are getting entangled in the wreckage of their loans.
Deutsche Bank forced developer Ian Bruce Eichner to hand it the keys to his Cosmopolitan Resort & Casino in Las Vegas. Well, not exactly the keys. The project is still far from complete and, in some nice color, Bloomberg reports up high that it’s literally and figuratively under water. It “requires 24-hour pumps and containment walls after workers hit an aquifer below the Nevada desert floor.”
Banks in downturns often have to get their hands dirty taking over projects (or whole companies, as this good WSJ story about JPMorgan Chase showed recently) since they don’t want to sell an unfinished development in a fire sale for pennies on the dollar. That will happen many times across the country anyway, and developers and vulture capitalists will make lots of money taking over projects at fire-sale prices over the next several years. There’s an old real estate saying I recall hearing from my days covering the business that says the second or third owner of mega-projects is the one who makes the money.
But Deutsche Bank’s going all-in on this spot in Vegas, which is already overbuilt, and even though the future casino is surrounded by other troubled projects like CityCenter, one of the biggest developments ($8.5 billion) ever built anywhere and the bankrupt, 70 percent-built Fountainebleau.
Bloomberg hints that others are skeptical Deutsche Bank will make much or any return. You have to wonder if the gamble’s calculus prominently includes delaying more writedowns, especially when the project’s cost has, incredibly, more than doubled from $1.9 billion in 2005 to $3.8 billion now.
Whatever, Deutsche Bank is now a casino developer, with all the unintended consequences that entails:
Deutsche Bank executives who have applied for gaming licenses from Nevada casino regulators include Jon Vaccaro, global head of commercial real estate; Jeffrey Baer, head of global logistic services; Donna Milrod, head of regional oversight and strategy; and Eric Schwartz, a managing director in the bank’s commercial real estate group, according to Deutsche Bank and the Nevada Gaming Control Board. They are all based in New York.
The four may become the first Las Vegas Strip casino-owning bankers to obtain the credential.
Insert bankers-gambling joke here.