Question of the Day - 28 May 2021

Yesterday we recapitulated the saga of Fontainebleau, its troubled financing and construction history, and ensuing bankruptcy. Penn National Gaming and corporate raider Carl Icahn went to the mat for the insolvent half-completed project, which Penn eventually decided was too rich for its blood.

The withdrawal of Penn National from the bankruptcy auction meant that Fontainebleau fell into the hands of Icahn for the pittance of $148 million. Although he made noises about turning it into a resort for people on $49/night budgets, Icahn seems to have soured on that idea — and any notion of completing F-blue — quickly. Instead, he set about partially dismantling the property, selling its furniture to various low-roller casinos like the Plaza Hotel and Buffalo Bill’s and palming off the custom-built escalator, which can now be ridden at the Downtown Grand. Out the door went “top-flight wallpaper, carpet, tile, sofas, chairs, desks, dressers, side tables and bed frames.”

To make his point clearer, Icahn even removed the construction crane from the site.

As for Soffer’s assertion that Fontainebleau could have been finished in three months, Icahn estimated that a year and a half of work was still needed … work he had absolutely no intention of bankrolling. He postponed any action on the site until 2015 at the earliest. As Treasure Island owner Phil Ruffin said at the time, Fontainebleau was “toxic” and the Las Vegas Strip condo market “dead.” Hammering another nail in the coffin, nearby Echelon sold for $4 million/acre, temporarily putting paid to Icahn’s $5 million/acre price target for F-blue.

In November 2015, good to his word, Icahn finally put Fontainebleau back on the market — at $650 million, quite a markup for a stripped-down husk. “I’d rather sell it than take the time and energy to build it out, which we have been considering doing,” Icahn told the Wall Street Journal. It would take him almost two years to find a buyer, although there was some nibbling in the interim; in August 2017, Icahn bagged Steven Witkoff, who ponied up $600 million for the incredible hulk. 

Putting the best spin they could on a hugely risky gambit, Witkoff’s PR people defensively described Fontainebleau as a “significantly undervalued resort hotel."

The press release continued, "Witkoff has spent four months conducting his due diligence on the resort and market prior to the acquisition, and has identified numerous ways to unlock the significant underlying value of the property to generate strong returns for its business and the Las Vegas community.” Witkoff himself described the massive structure as “one of the best physical assets in the country” and “ideally located.”

And then … nothing. Problems were evident from the first. Witkoff’s purchase group lacked a resort- or casino-oriented partner, seemingly a prerequisite for such a product. In another bad omen, Witkoff’s specialty was condos. “The new owners definitely plan on keeping it as a casino and high-end hotel. They did their due diligence, and [the building is] very structurally sound,” reported then-Clark County Commissioner Chris Giunchigliani. Witkoff’s plan was to make 40% of his revenue off the casino and the remainder from high-end room rates.

As for Icahn, he made what he wanted and much more: $22 million an acre. He rejoiced that he “acquired this asset when others were unwilling to invest, and the sale has resulted in a gain of approximately $457 million for our unit holders.” That was more than Witkoff could say, as he was staring in the face of a completion cost that had ballooned to $3 billion (meaning a finished Fontainebleau would be a $6.1 billion proposition). In a dubious move, he swapped out the project’s original name in favor of “The Drew,” a tribute to his late son. At least he was able to bring JW Marriott aboard as a market partner for the hotel.

(At about this time, it emerged that Virgin Las Vegas investor Richard Bosworth had wanted to buy F-blue himself, mixing Waldorf Astoria hotel rooms with timeshares and a casino managed by either Mohegan Sun or Foxwoods. He settled for the former Hard Rock Hotel as not-so-sloppy seconds.)

Meanwhile, Witkoff pushed The Drew’s opening back to 2020, then 2022. Witkoff hired the architecture firm of Diller Scofido & Renfro to make lemonade out of lemons. Unmentioned was whether Soffer’s billion-dollar midair pool deck still figured in the plans, which included 62 (!) restaurants and 3,780 hotel rooms. 

Saying that The Drew was in “final preparations for construction,” Witkoff brought former CityCenter CEO Bobby Baldwin out of retirement to head the megaresort. The building would be divided into three hotels: The Reserve by Drew, Edition by Marriott International and a JW Marriott. The press release promised that The Drew would “set the standard … truly unique … state-of-the-art … innovative … vibrant … and groundbreaking.”

There was only one little problem: money. When Witkoff got his gaming license in January 2020, he still hadn’t lined up completion financing. By June, word was out that The Drew was in default, having only $490 million, a pitifully inadequate sum, mostly raised from a smattering of Pacific Rim investors, including a South Korean casino. (A March stoppage of work on The Drew had been blamed on the coronavirus, but that doesn’t quite wash, as construction of adjacent Resorts World continued through the pandemic.) 

Our story might have ended there — if not for a moment of déjà vu. Who should return to the scene but Jeffrey Soffer? In tandem with Koch Real Estate Investments — as in the Koch Brothers — the original developer bought Fontainebleau/The Drew from Witkoff for an undisclosed price. (The property was contemporaneously appraised at $615.5 million.)

So now, the Drew was through, Fontainebleau was back as the working name (though no actual work has been seen on the site).

"We believe strongly in the Las Vegas market and see the property as a great opportunity to contribute to the long-term success and positive trajectory of this vibrant and innovative region,” said KREI President Jake Francis.

KREI’s mission statement assures its investors that it practices “an agnostic approach to product, geography, and capital position,” which is presumably meant to assure them that this isn’t a leap of faith. Koch and Soffer seem to have their eyes on the long game, or as VitalVegas.com blogger Scott Roeben forecast, “We suspect Koch will take a wait-and-see approach, sitting on this asset until market conditions improve, should that ever happen.” In other words, Fontainebleau is neither going anywhere nor is it coming anytime soon.