Fontainebleau Las Vegas dries up
The immediate cause of the Fontainebleau's woes is its financiers. In April, the company filed suit against JP Morgan Chase, Bank of America, Deutsche Bank, Goldman Sachs, UBS, Wells-Fargo and five other lenders. According to Fontainebleau Las Vegas LLC, the owners of the project, the eleven lenders had promised $800 million in revolving credit, but were reneging on the deal.
The lenders justified the move by citing "events of default" by Fontainebleau. However, according to the developers, the company did not default on its contracts. Fontainebleau is currently suing its lenders in the U.S. Bankruptcy Court in the Southern District of Florida, Miami, where it has filed for bankruptcy
Fontainebleau further claims that one of its lenders, Deutsche Bank, has interfered with its finances out of a desire to protect another Vegas property. The bank apparently owns a resort that is scheduled to open in 2010. In all likelihood, however, the banks' actions are based more on the prevailing state of Vegas real estate. In 2008, median home prices in the city dropped by an average of 27.7 percent, with some areas reporting declines of up to 64 percent.
While real estate on the strip doesn't necessarily go hand-in-hand with prices in the suburbs, the plunging property values represent a much larger problem. With many people struggling to put food on the table, trips to Sin City are out of the question. As hotel rooms go empty and gaming tables gather dust, Vegas is no longer the prime investment opportunity that it was a few years ago.
In this environment, the idea of building another sprawling complex on the strip seems ill-advised, so it is logical that Fontainebleau's lenders would want to pull out of the project. However, contracts being what they are, simply withdrawing from an $800 million deal would be fraught with legal peril. In this context, the gambits currently being employed by JP Morgan and company should seem very familiar to many homeowners and credit card holders. Citing non-existent defaults and arbitrarily shutting down lines of credit seems only a short jump from altering interest rates and other consumer credit tactics.
Although some sources suggest that the decline in Las Vegas' tourism is slowing, many casino companies are seeking brighter pastures in Macau. Between the fall in real estate, the declines in tourism, and the mercurial attentions of its major employers, it is clear that Vegas has a long way to go before it begins to recover. With 3,000 construction jobs and an estimated 6,000 hotel and casino jobs, the Fontainebleau could potentially offer a step toward recovery. It remains to be seen if the company will have a chance to do so.