April 29, 2009 - Fontainebleau Resort, Las Vegas NV

Sued by Fontainebleau, banks could cite ‘act of God’ as defense for refusing funds

A lawsuit brought by officials of the Fontainebleau Las Vegas, accuse lenders of breaking the terms of an $800 million loan agreement. Fontainebleau committed “one or more events of default,” Bank of America says.

Lenders could argue economic downturn fulfills interpretation of termination clause in loan agreement

Legal experts say the banks attempting to back out of their commitment to finance the Fontainebleau Las Vegas might defend their decision by arguing the economic downturn that has created doubts about the project’s future is an act of God.

Fontainebleau has sued the banks, accusing them of breaking the terms of the $800 million loan agreement.

If it lands in court, the case could come down to the interpretation of the financing contract’s “material adverse change,” or MAC clause, the experts say. The clause gives lenders the right to terminate a loan before a project is completed for “any event or circumstance which has a material adverse effect on the business, assets, properties, liabilities (actual or contingent), operations or condition (financial or otherwise) of the companies, taken as a whole,” according to the Fontainebleau loan agreement, obtained by the Sun.

Definitions of what constitutes such an event — sometimes referred to as an act of God — are vaguely worded and often lead to intractable disputes, experts say.

“Companies will fight over what this means,” said Andy Gabriel, a commercial real estate attorney with McDonald Carano Wilson, which is not involved in the lawsuit.

One analyst, who asked not to be identified and is not connected to the Fontainebleau or its loans, said such clauses aren’t meant to apply to economic downturns. Rather, they are intended to apply to fires, floods, terrorist attacks and other events that cannot be anticipated by financial models.

“It would be idiocy for the banks not to include the ups and downs in business cycles in their analysis,” the analyst said. “It’s their job to analyze business risk. If an economic downturn can affect your loan, it’s not much of a commitment, then, is it?”

In its lawsuit, Fontainebleau says it attempted in March to draw $670 million available under its revolving loan, along with another $350 million available under a term loan. Bank of America refused and Fontainebleau resubmitted its request, this time arguing that the revolving funds, according to the loan agreement, should be made available once the term loan was fully drawn. Bank of America refused again and Fontainebleau eventually requested only the amount available under the term loan.

Fontainebleau’s request for money from the revolving line of credit may have been interpreted by the banks as a sign of trouble ahead, especially if Fontainebleau were to use the money to fund construction costs not anticipated in the original budget, financial experts say.

With earnings at some major Las Vegas casinos cut in half, room rates at historic lows and more than 10,000 additional hotel rooms expected to cannibalize business from Strip properties, the banks involved in the Fontainebleau loan in question have cause to worry.

Fontainebleau lenders Bank of America, Barclays Bank, Deutsche Bank and Royal Bank of Scotland already have lent money to Las Vegas casino companies at risk in the recession. Fontainebleau was financed before the economic meltdown, when many Las Vegas casinos were generating record profits.

Analysts say Fontainebleau presents a bigger financial risk than resorts built by other Las Vegas gaming giants, such as MGM Mirage’s CityCenter and Boyd’s Echelon, because it doesn’t have as large a customer list to draw from.

Fontainebleau officials have declined to discuss specifics of the loan agreement between the banks and the developer, which is confidential. In an April 20 letter to Fontainebleau Las Vegas Chief Financial Officer Jim Freeman, Bank of America — which arranged the $800 million loan among the banks — said Fontainebleau committed “one or more events of default” but does not elaborate.

However, during a private conference call last week among banks involved in the Fontainebleau loan, a representative of Bank of America said Fontainebleau had breached at least four elements of the loan agreement, according to a source familiar with the discussions who asked not to be identified. The alleged breaches mentioned included the test of “material adverse change” and representations of what Fontainebleau would cost to finish.

Also cited during the call was an “insolvency test,” which measures the fair market value of a project’s expected earnings as compared with its debts. Among other gloomy predictions of the Fontainebleau’s future, bond rating agency Standard & Poor’s said in February that Fontainebleau earnings after opening are expected to fall short of interest payments on the property’s debt, in part based on lackluster demand for condos. Fontainebleau hoped to raise as much as $800 million from the sale of more than 1,000 condo-hotel units.

The bank representatives also discussed an “in balance test,” a monthly examination of whether a project has as much money going in the door as it does going out. During the conference call the banks noted that Fontainebleau was “in balance” on March 25, when the company drew money from a term loan.

This month Fontainebleau notified lenders that the remaining costs needed to complete the project “appeared to exceed the available loan funds” and that the company likely wouldn’t pass the “in balance” test as required by the lenders.

Failure to pass the test does not constitute a default of the loan agreement, the lawsuit contends. “At most, it only delays the ability to draw funds,” it continues.

Bank of America spokeswoman Shirley Norton said Tuesday that the bank “continues to have discussions with Fontainebleau Las Vegas regarding a structured financing for the project.” She declined to comment further on the lawsuit.

Fontainebleau spokesman David Satterfield on Tuesday described the discussions as “constructive.”

“We expect (the banks) to abide by their contractual commitment and fund the $800 million we need to get this project completed,” he said.

Banks can’t simply walk out on their obligations unless the borrower breaks its end of the deal.

An argument that the banks could not have foreseen a recession wouldn’t stand up in court, the analysts said. It would also make the banks look incompetent, according to the analysts.

Another local attorney familiar with such loan agreements, who is not involved in the case, says invoking a MAC clause can tarnish a bank’s reputation. That’s why banks rarely invoke the clause — not even after the Sept. 11, 2001, terrorist attacks, when fears that banks would renege on loans were widespread, the attorney said.

“There’s so little case law out there as to what constitutes a MAC that you’re walking into pretty unknown territory,” the Las Vegas attorney said.

“I haven’t yet seen banks using this as a reason ... but this would be the type of lending environment where you might see this happen,” Gabriel added.

Original Story - Las Vegas Sun

Fontainebleau: Bank wanted to minimize Cosmopolitan competition

In an amended lawsuit filed Tuesday, developers of the Fontainebleau Las Vegas resort allege that Deutsche Bank – among a group of lenders that had agreed to finance the property's construction – conspired to hurt Fontainebleau to minimize competition with the Cosmopolitan, an under-construction resort the bank acquired out of foreclosure last year.

The future of the Fontainebleau Las Vegas, which is more than halfway complete, remains in jeopardy after lenders last month pulled $770 million in financing needed to finish the property. Fontainebleau developers have filed suit, alleging the banks unlawfully reneged on their financing obligations.

The amended complaint states that Deutsche Bank also sought to persuade other banks to pull funding for Fontainebleau Las Vegas and has worked to discourage other banks from working out their differences with the project's developers.

"This claim is an attempt by the Fontainebleau's developers to distract from the fact that they have breached their loan covenants," Deutsche Bank spokesman John Gallagher said. " We will defend ourselves vigorously against this meritless allegation."

The Cosmopolitan, with nearly 3,000 rooms, is under construction at the corner of Harmon Avenue and Las Vegas Boulevard for an expected opening next year. Fontainebleau was scheduled to open in October with more than 3,800 rooms between the Riviera and Sahara casinos. Both multibillion-dollar resorts plan to offer condominium-hotel units that owners purchase and rent to visitors.

In a letter sent to Fontainebleau Las Vegas, Bank of America – the lead bank arranging the $770 million loan – said developers defaulted on a loan agreement but did not elaborate. Fontainebleau denies any default on their part.

Work has slowed dramatically on the Fontainebleau and many construction workers have been laid off.

Deutsche Bank also provided funding for CityCenter, an $8.6 billion resort complex owned by MGM Mirage and Dubai World that will in open in stages this year.

Bank of America, Royal Bank of Scotland and Sumitomo Mitsui bank, which also loaned money for CityCenter, are Fontainebleau lenders named in the suit but are not the subject of conflict of interest allegations.

Deutsche Bank acquired the Cosmopolitan for about $1 billion after the developer defaulted on a construction loan. The developer had put less than $50 million into the project as equity.

Update Story - Las Vegas Sun

Update June 6, 2009

Fontainebleau in Las Vegas files for bankruptcy

The Fontainebleau Las Vegas filed for bankruptcy protection late Tuesday night, weeks after lenders refused to fund more construction at the $3 billion project.

The Chapter 11 filing marked the biggest setback yet for the Soffers, one of South Florida's legendary real estate families, and adds to the woes facing the project's namesake, the Fontainebleau Miami Beach.

Both properties are owned by Fontainebleau Resorts, which Jeffrey Soffer formed after purchasing the iconic Miami Beach hotel in 2005. He is a partner in Turnberry Associates, the real estate firm founded by his father, Donald, who made his fortune developing Aventura out of swampland.

Along with funding a $500 million renovation of the original Fontainebleau, Soffer announced plans for the Vegas property, a 3,000-unit condo-hotel on the famous Strip. The project fell victim to cost overruns, a depressed condominium market and expectations for a slow recovery to a severe downturn in Vegas tourism.

In a statement issued late Tuesday, Fontainebleau executives said the bankruptcy filing for the Vegas project will not affect the Fontainebleau Miami Beach, which did not rely on condo-hotel sales for its lavish redo. The executives blamed the bankruptcy petition on banks cutting off the Vegas project, which Fontainebleau Resorts attempted to reverse with a lawsuit.

''It is unfortunate that our lenders forced us to take this step. By reneging on the revolving credit facility, they effectively shut down the project and put thousands of people out of work,'' said Howard Karawan, the chief operating officer now carrying the title ``chief restructuring officer of Fontainebleau Las Vegas.''

''Our goal now is to secure funding to complete this world-class project and restructure our existing debt,'' Karawan's statement continued.

Though Fontainebleau Resorts was headquartered in Las Vegas, the Vegas project filed for bankruptcy in a federal court in Miami.

It's unknown how extensive the corporate ties might be between the Vegas Fontainebleau and Turnberry Associates. The Aventura company lists boths projects on its website, and Turnberry Associates issued a $100 million completion guarantee for the Vegas project.

A Fontainebleau spokesman said Tuesday that guarantee would apply to cost overruns once the project was completed, and was not payable if construction halted.

The Miami Beach hotel suffered a rocky opening with months of costly construction delays, and still faces millions of dollars in claims from contractors. Executives said the severe downturn in conventions and meetings also battered revenue forecasts at the 1,400-room hotel, the largest in South Florida.

While the Miami Beach project was under construction, Soffer sold a 50 percent stake in the oceanfront hotel to an arm of the Dubai government. He then took $275 million of the proceeds and shifted them to Vegas to cover cost overruns there, according to reports by debt analysts.

The statement says Fontainebleau Resorts has secured financing to pay for its bankruptcy, and now is searching for a lender to finish construction on the project, which is described as 70 percent complete.

The filing comes weeks after Glenn Schaeffer, former president of the Mandalay Bay casino, left his post as CEO of Fontainebleau Resorts.

Original Story - Miami Herald