As real estate prices skyrocketed, operators were under great pressure to maximize the use of their land holdings. This meant, among other things, packing as many rooms as possible into new building projects. With horizontal growth prohibitively expensive, the only way to go was up. It was, after all, referred to in Las Vegas, at least, as a Manhattanization.
The condo craze swept through the city. Following on the initial success of some residential offerings, casino and hotel operators saw an interesting opportunity. They could finance new construction through selling condo units of their own. And these condo units would largely be second homes and investment properties for the buyers; they would be unoccupied, and if the buyer was so inclined, he or she could put the unit back into the hotel room inventory.
It seemed like a good idea. In essence, new property developers were able to add rooms without footing the bill to do so. Every project being introduced suddenly had a large condo component. But, as has now been seen, there was definitely a risk.
“What this presumably was, was additional guest rooms that someone else was paying for,” says Terry Dougall. “I don’t know that they actually built these with the assumption that the return on investment was going to be through the condos; it’s just that someone was giving you the money, so why not?
“When you have places that have 3,000 to 5,000 rooms, you can build 2,000 rooms and have someone else build the rest for you. It wasn’t a return on investment as it was building a bunch of guest rooms for free.”
It was a great approach, but Dougall says some clients had expressed concern early.
“Many of our clients looked around and said, ‘This is dangerous,'” he says.
And, in a way, they were right. With a sizable amount of financing expected to come through these private condo sales, operators did put themselves in a precarious position. But at first, everything looked so good that it’s easy to see how things ended up going so wrong.
These were times when a valet making $65,000 a year could qualify for a stated-income loan to purchase a $450,000 home. Credit was easy and the condo sales looked promising.
“The selling of the condos was instrumental in funding the program and they pre-sold very, very well, virtually selling out,” says Dick Rizzo of Perini. “But the trouble came when financing for the condos became hard to fine. When the market fell apart, when financing for condos fell off, all funding became difficult.”
No one is criticizing the developers for pursuing this essentially free money, however.
“I don’t think it was bad thinking, per se, but maybe a little optimistic in regards to the condos,” says George Bergman.
As it stands, condo components have seen a dramatic reduction in importance. The condo portion of the Harmon Hotel at CityCenter was dropped entirely. It wasn’t 100 percent related to financing, there was a structural problem that was best addressed by not building the top 20 floors, but the difficulty in closing the sales probably made the decision easier. As did looking around Las Vegas and seeing the Trump tower become the Trump International Hotel after condo sales dropped off and seeing Palms Place struggling to close sales, too, and essentially converting to a hotel tower as well.
It was a great idea and had the real estate bottom not fallen out as it did, it probably would have worked and the developers would have been hailed as geniuses. But that’s not how it happened, and in a way, the idea came across as looking too clever by half.
“They certainly got caught with their pants down, didn’t they?” Dougall says. “but would we still be making that statement had the economy not collapsed and they opened just fine? You can’t take an anomaly and predict the future from it.”
