Question of the Day - 27 May 2021

[Editor's Note: This epic two-part answer is the work of David McKee.]

That property is the once and future Fontainebleau.

The longest and strangest construction project in Las Vegas history, its gestation has spanned four presidential administrations and an equal number of owners, beginning in April 2007. It arose on the former sites of the El Rancho and Algiers hotels, the dream project of Miami Beach-based hotelier Jeffrey Soffer and his family. Work began promisingly enough, topping off in November of the following year. A portent of problems to come arose when condo owners in Soffer’s Turnberry Place discovered that the Fontainebleau parking garage would not be the promised five stories but 23, obstructing their Strip views. Much ill-will was engendered.

With his unerring knack for bad casino investments, Aussie tycoon James Packer bought into "F-blue," his 20% stake (for $65 million) part of $300 million in duff Vegas expenditures that were soon written off. Meanwhile, the premised 1,018 condos became a millstone around the resort’s neck: Early in 2009, F-blue’s viability as a going concern was reported to be in doubt, as it fell further and further behind schedule.

Fontainebleau was then one of a quartet of megaresorts in various stages of development on the North Strip: MGM’s CityCenter North, Boyd Gaming’s Echelon, El-Ad Development’s Plaza, and F-blue. Two were abandoned and Echelon became, after a significant delay, Genting Group’s Resorts World Las Vegas. Standard & Poor’s prophesied default for Fontainebleau with senior debtors getting 30 cents on the dollar and a “negligible” return for second-position lenders.

Three months later, Deutsche Bank pulled $80 million in financing out from under F-blue, causing the Soffers to accuse Deutsche of being part of a 10-bank conspiracy to undermine the project, supposedly to improve the chances of the Cosmopolitan, in which Deutsche was heavily invested, to the tune of $3.9 billion. Fontainebleau execs, meanwhile, were jumping ship to other projects.

The hits kept on coming. In June, Packer’s Crown Ltd. wrote off $250 million in F-blue investment, stating that it felt “no obligation and has no current intention to contribute any further equity or debt to Fontainebleau or participate in any restructuring under any bankruptcy arrangements.” In other words, please excuse me whilst I push you under the nearest bus. At the same time, it emerged that former CEO Glenn Schaeffer and his team had spent $2.1 billion on the mega-project and only gotten 70% completed. Banks pulled the plug, not surprising for a project that had, by its own timetable, three months to finish the remaining 30 percent.

It also came out that F-blue had not been completely designed. Complained an engineer, “The opening date never moved. We always threw more money at it. You just have people work overtime to fix problems. We were building, redesigning, tearing stuff out, and starting again.”

To add injury to insult, the Soffers had been unable to sell a single timeshare. As the budget inched toward $3.2 billion, the Soffers suggested that some corner-cutting might be in the offing. At the time, Bank of America valued the project at $1.75 billion. Ouch!

As the opening was pushed back to July 1, 2010, Jeffrey Soffer proposed putting himself at the head of the loan-repayment queue, a suggestion that cannot have played well with other lenders.

Budget creep continued at the construction site, meanwhile, soon reaching $4.4 billion (some items, like the pool deck, hadn’t been included in the official budget). An unlikely rescuer temporarily entered the picture when Penn National Gaming sniffed around F-blue. However, having passed on a $1 billion-plus purchase of The Mirage, budget-conscious Penn seems to have balked at Fontainebleau’s $1.5 billion completion cost, offering no more than $300 million for the mess.

In October 2009, bowing to reality, Fontainebleau postponed all conventions and meetings for two years. It also revealed that a septet of high-ranking executives had been sacked, including ex-president Audrey Oswell. By this time, the project had downward-spiraled into bankruptcy court, where it devolved into a rivalry between Carl Icahn and a re-interested Penn National, which was making noises about scaling back the budget and repositioning the ultra-high-end resort at least partly for middle-market gamblers.

In one of the weirder of many odd Fontainebleau-related developments, a fly-by-night bankruptcy bidder called Craig Road Development surfaced with a $350 million offer and a plan to convert F-blue into a hotel for servicemen and their families. Mind you, Craig Road had a revoked Nevada business license and its pet project was a six-tower $6 billion retirement community cum casino. As it was, the company couldn’t even build a website and quickly vanished from the bidding process.

It was at approximately this juncture that Chief Restructuring Officer Howard Karawan, with a straight face, proposed gifting $1 million in bonuses to the remaining Fontainebleau execs. That included $300,000 Karawan wanted to award himself. Creditors took a dim view.

Penn, meanwhile, finally decided that F-blue was too quixotic of a tilt and Wall Street heaved a sigh of relief, with one analyst writing, “Management recognized that the true cost to complete was actually higher than their original estimates and, hence, the company prudently backed away.”

[Tomorrow: Enter Carl Icahn]