Failed Las Vegas resort is finally ready for its close-up

It was a Hollywood story with an unhappy ending.

When megastar George Clooney threw his name behind a planned megaresort just off the Strip a decade ago, the project didn’t go according to script.

Clooney and his development partners pictured an 11-tower set with gambling, condominium and hotel space on a 25-acre stage just east of Planet Hollywood. The scenery would evoke Barcelona’s famed central boulevard — a tree-lined pedestrian mall called La Rambla. Hence, the resort’s name: Las Ramblas.

But like an overbudget blockbuster with poor advance reviews, Las Ramblas was a flop. Its land ended up under the direction of lenders, where it sits awaiting a second shot at stardom as part of the largest available parcel on or around the resort corridor. It comes back on the market Monday, listed for sale through commercial brokerage CBRE Las Vegas.

The site’s latest act is both a symbol of the Las Vegas market’s recovery, and a reminder that things might never be the same as they were in those picture-perfect days of 2005.

“If you look at investment horizons and the development cycle, it’s going to be a long, gradual recovery,” said John Knott, an executive vice president with CBRE Las Vegas and head of the brokerage’s Global Gaming Group.

Revival might take a while, but Las Ramblas’ demise came fast.

THAT’S A WRAP

The developers, which included Town Square developer Centra Properties of Las Vegas and Florida condo builder The Related Group, announced Las Ramblas in August 2005, promising to “transform the Las Vegas skyline” with designs from actor Brad Pitt, plus retailers, restaurants, bars, lounges, a 30,000-square-foot spa and private bungalows with pools. Groundbreaking was scheduled for mid-2006.

Instead of turning over their first shovels of dirt, the developers scratched the project in June 2006, citing rising construction costs and slow sales on some of Las Ramblas’ 4,400 units. The developers sold their parcel to Edge Group, which already had 25 adjacent acres for its planned W Las Vegas condo-hotel project.

Another 11-acre parcel was committed to a D.R. Horton project that would include 1,000 residential units over a ground-level grocery store and retail district.

Neither of those projects worked out either, as the deepening recession made it impossible to find condo buyers or finance new construction in Southern Nevada.

Still, people took a chance on the land — a practically irresistible “blank canvas on which to create something that would be special worldwide,” said Michael Parks, first vice president of investment properties for CBRE’s Global Gaming Group.

A joint venture led by developer Africa Israel Group in 2007 bought the three parcels, by then combined into one 60.8-acre site, for $625 million, or $10.4 million per acre. The joint venture in January 2009 proposed what was to be the world’s largest hotel, with 6,745 rooms — and defaulted on its loans eight months later.

In January, Harko LLC — a Minneapolis-based consortium of more than a half-dozen lenders with positions in the property’s debt — bought the parcel at a foreclosure auction for $150 million, according to Clark County Assessor’s office records, which also show more than $432.6 million in unpaid debt on the property.

The creditors are unlikely to cover that debt through a sale.

To understand why, consider the Strip market’s ups and downs.

In the city’s frenzied, pre-recession period, land along the resort corridor peaked at around $35 million an acre — the 2007 price Israeli hotel operator Elad Group paid for the New Frontier site across from Wynn Las Vegas. Lenders were simply “handing out money” for new projects, Parks said.

The banking crisis of 2008 changed that. Financial firms overexposed to subprime mortgage funds stumbled. Bear Stearns failed and was sold to JPMorgan Chase. Lehman Brothers filed for bankruptcy.

Suddenly, “capital markets were in a shambles, and no one was able to do anything,” Parks said. “The whole (financing) spigot was completely turned off. There was no money for anything.”

Projects up and down the Strip ran out of money. Turnberry Associates pulled the plug on Fontainebleau, in which it had already invested $1 billion. Boyd Gaming Corp. stopped work on its $4 billion Echelon, on the former Stardust site.

As the financial crisis rippled across other industries, it slipped into the daily lives of Americans in the form of lost jobs and curtailed work hours. That meant less money for travel: Citywide hotel occupancy slumped from 94 percent in 2007 to 83.5 percent in 2010, as CityCenter and The Cosmopolitan of Las Vegas cannibalized a market that had nearly 5 percent fewer visitors in the period. The average daily room rate fell from $132.09 in 2007 to $94.91 in 2010, according to the Las Vegas Convention and Visitors Authority.

Strip land prices plummeted to a post-recession low in 2013, when Genting Group bought the 87-acre Echelon site for $350 million, or $4 million an acre — an 88.6 percent drop from that peak price for the New Frontier in 2007.

Credit markets have since thawed. Development has restarted. SLS Las Vegas, formerly the Sahara, reopened in August after a $415 million makeover. Genting broke ground May 5 on its $4 billion Resorts World Las Vegas. MGM Resorts International and AEG are building a $350 million arena next to New York-New York.

The consumer has made a comeback as well: The city’s visitor volume breached the 40 million mark for the first time in 2014, after hitting a recession-era low of 36.4 million in 2009.

There’s also been fresh movement in the Strip land market. Most recently, the Las Vegas Convention and Visitors Authority dropped $182.5 million, or $7 million per acre, to buy the 26-acre Riviera site, where it plans to expand its Global Business District.

Parcels just off the Strip usually sell at a 50 percent discount compared to land with Las Vegas Boulevard frontage, Knott said. So the brokers said the Las Ramblas site could reasonably command $3.5 million per acre.

That sale price would allow Harko LLC to recoup $212.8 million — less than half of the unpaid debt on the parcel.

In its decision to sell now, Harko LLC seems to be betting the market has stabilized, and land prices won’t dramatically improve.

“If they thought the market could get $10 million an acre for dirt in the next two years, they wouldn’t be selling it today,” Knott said.

Chris Jones, managing director and head of equity research in North America for investment bank Union Gaming Group, agreed now is as good a time as any to unload the property. Interest rates are set to rise in late 2015, and higher rates hurt property values, he said.

“The window is perhaps closing. They could maybe get a little more for it if they wait, but the cost of borrowing is going to go up if interest rates go up,” Jones said. “How long can you wait before you service that debt? You realize you have to get what you can and move on.”

COMING ATTRACTION

It remains to be seen if the Las Ramblas site will end up in the hands of another developer or under the control of a speculator who will sit on the property and sell later, maybe in smaller chunks.

Brian Gordon, a principal in local research firm Applied Analysis, said both categories of buyers “are in play,” but developers in particular might find appeal in the large swath of land. There aren’t many empty parcels of that size around the resort district, and the property is “pretty well-positioned” between the Strip and the Paradise Road corridor that leads to McCarran International Airport and the Las Vegas Convention Center, he said.

Nearby property owners might also make a strategic move to add to their holdings, Gordon said.

The most likely scenario that would bring the highest price would be sale to a developer with a specific use in mind. Developers are typically willing to pay more because they’ll have cash flow from the finished product.

“At the end of the day, what happens with the parcel is going to boil down to supply-and-demand of vacant land within the Strip corridor, and there are relatively few options there,” he said.

There’s a hitch in any development plan, though.

The market already has a significant pipeline of proposed construction, with Genting’s plans for more than 6,000 rooms at Resorts World Las Vegas, plus whatever Crown Resorts Ltd. and Oaktree Capital Management decide to build on the New Frontier site, which they bought in August for $280 million.

Hotel occupancy still lags boom levels, averaging 89.1 percent. The average daily room rate last year was $116.73, also below its high.

So it will be years before the resort corridor needs more planned development, Gordon said.

That makes it most likely that a buyer would ultimately spin off the site into smaller parcels, Jones said.

“It would make a lot more sense to buy it for that. They’re not making any more land, and certainly, one street down from the Las Vegas Strip isn’t a bad place to make a bet. If you have cash, you’re interest-rate sensitive and you want something that will be a hedge against inflation, this would be an option,” he said.

That may not be the ending that Las Ramblas’ movie-star cast of original developers envisioned, but there’s sure to be at least one sequel to this project’s story.

Contact Jennifer Robison at jrobison@reviewjournal.com. Follow @J_Robison1 on Twitter.