Crown JV Drops $475M Option, Loses $70M

June 05, 2008 - LAS VEGAS-With one month left to pull the trigger--and having made an estimated $70 million in non-refundable payments--a group of investors has dropped their option to acquire 27-acres on the Las Vegas Strip from Archon Corp. for $475 million.

Crown Ltd. of Australia said Wednesday morning that the option has been terminated and it will write off its $42-million investment in the project and the partnership, LVTI LLC, in which it had a 37.5% interest. The two other partners in the LLC, Texas developer Christopher Milam’s IDM Properties and New York City-based fund manager York Capital Management, could not be reached Wednesday morning for additional comment.

One day earlier, Archon Corp. sent a letter to the partnership terminating the option, according to a filing with the SEC that became available online late Wednesday. Archon cited the partnership's failure to make a $2.86-million "carry option payment" that was due Monday, June 2, as the reason for the termination.

“The recent upheavals in world credit markets has made it increasingly difficult for Crown and its partners to develop a commercially viable project on what remains an attractive location on the Las Vegas strip,” Crown CEO Rowen Craigie said in a prepared statement. “Accordingly, we took the decision to stop making further payments to the vendors of the site and concentrate our focus on other areas of our business.”

Located immediately south of the Sahara hotel-casino, the site is one of the last large available properties on the Strip that has not recently traded. Milam tied up the property in June 2006. In May 2007, Crown Ltd., which is controlled by Australian billionaire James Packer, invested $22.5 million to gain a 37.5% interest in the ownership entity, which initially had plans for a multi-billion-dollar, 5,000-room casino resort on the property that would include the tallest building in the Western Hemisphere at 1,888 feet. Milam reportedly retained Paul Steelman Group for the casino, RTKL for the retail component and Skidmore, Owings and Merrill for the hotel tower.

Later that year, those plans were shot down by the Federal Aviation Administration due to its proximity to McCarran International Airport. In December, Clark County commissioners approved the site for 1,064-foot tower, which would be the tallest building in the US, but plans had since been revised to a shorter, twin tower concept, sources familiar with the situation recently told GlobeSt.com.

Two months ago, published reports out of Australia stated that Packer was growing wary of the opportunity and was looking to be bought out of the Wet ‘n Wild site but would remain invested in the adjacent Fontainebleau Casino and Resort development. Milam, meanwhile, was reportedly hoping to retain his interest in the property.

According to filings by Archon Corp., LVTI has made approximately $70 million of non-refundable payments to obtain and maintain the option. The carry option payments, which LVTI has been making since September, do not count toward the purchase price. Had it gone through with the purchase, $46 million of the total paid would have been applied toward the purchase price, which jumped from $450 million last year, following a missed option payment.

LVTI would have paid a total of approximately $508 million for the property, or just under $19 million per acre. The price is in-line with one recent acquisition and well below another.

In September 2007, a partnership formed between MGM Mirage Inc. and Kerzner International Holdings valued 40 acres abutting the Strip and MGM’s Circus Circus resort at $20 million per acre. One month earlier, Israeli billionaire Yitzhak Tshuva’s New York City-based El-Ad Properties paid $1.24 billion or $34.7 million per acre for the 34.5-acre former New Frontier casino-resort site immediately north of Fashion Show Mall, across from Wynn Las Vegas.

Despite the seemingly good price, LVTI’s costs would have soared well beyond $508 million had it acquired the site. If LVTI could have obtained the debt necessary to close on the Archon property its interest rate may very well have been upward of 10%, industry sources tell GlobeSt.com. As a result, LVTI would have had to make tens of millions in additional interest payments just to carry the land through to construction.