Las Vegas Sun

September 17, 2019

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Icahn hopes to ease resort’s mall headache by buying it

Stratosphere hotel-casino owner Carl Icahn is negotiating to purchase the long-struggling Tower Shops mall -- but local retail observers say he'll still face a tough climb in turning the mall's fortunes.

In a transaction announced last week, Icahn's American Real Estate Partners said it plans to purchase the 49 percent of Stratosphere's stock it does not own. The $44.3 million transaction would finally remove Stratosphere's stock from the public markets.

Only about 10 percent of Stratosphere's shares are not held by Icahn-controlled entities. Those shareholders will receive $45.32 for each Stratosphere share they own, or about $9.57 million. Meanwhile, Icahn will sell the 38.6 percent stake he personally owns to AREP for $34.72 million, or $44.33 per share. Icahn controls 85 percent of AREP. The transaction is expected to close early next year.

Perhaps the most significant element of the transaction is the cash infusion it will bring to the Stratosphere. In a Sept. 19 statement, AREP said it would advance roughly $100 million to the property.

A majority of those funds would go to the completion of a 1,000-room hotel tower at the Stratosphere, where construction resumed in April. But the remainder would be used to buy out Strato-Retail LLC at the Tower Shops -- a move Icahn has been considering for some time.

"Hopefully we will be able to make money with it," said Bill Bischoff, senior vice president and chief financial officer of the Stratosphere. "It only makes sense to own it, because from day one we've dealt with all kinds of issues and claims with Strato-Retail. It takes away time from doing more productive things.

"Hopefully we can get it to the point where we're making a reasonable return on investment."

Strato-Retail is a partnership between Simon DeBartolo Group -- developer of the Forum Shops at Caesars -- and Gordon Group Holdings.

The 69,000-square-foot mall, located on the second floor of the Stratosphere complex, was supposed to have been expanded within months of the hotel-casino's April 1996 opening. But that expansion was delayed indefinitely when the Stratosphere went bankrupt in early 1997. The anchor tenant of the second phase, Rainforest Cafe, pulled out several months later.

Disappointing results caused some retailers to stop paying rent to Strato-Retail or to break their leases early. Strato-Retail sued, though the retailers claimed the failure to expand the mall helped cause its struggles. Strato-Retail still has lawsuits pending against five former retailers who broke their leases early; these cases are scheduled to go to trial in 2001 and 2002.

Currently, the mall is almost entirely leased, though mall traffic is minimal compared to malls further down on the Strip.

One issue that could be immediately resolved by a sale is a legal battle between Stratosphere and Strato-Retail. Last year, Strato-Retail sued after the Stratosphere received a permit to place an escalator between the casino and the showroom, located at the end of the Tower Shops. Currently, patrons of the showroom and the tower must walk through the entire mall.

Though Stratosphere argued the escalator would be used solely by showroom patrons, Strato-Retail claimed it could be used by patrons to bypass the mall. Strato-Retail prevailed several months later, when a state judge issued a permanent injunction against Stratosphere blocking it from building the showroom escalator.

In a court hearing earlier this month, a Strato-Retail attorney said the matter between the companies was about to be resolved out of court, but did not elaborate. The legal issues between Strato-Retail and its tenants must also be resolved before a sale can be completed.

Even though AREP will soon take over the mall, Bischoff said there aren't any immediate plans to expand the Tower Shops as originally planned in 1996.

"We have no plans to do that, but it is always possible that we could," Bischoff said. "We have to look at it and evaluate it."

The goal of the 1,000-room tower is to boost business for both the casino and the mall. Separated from the rest of the Strip by several blocks, the Stratosphere has been unable to convince enough tourists to make the trip north.

"That's always been the downfall of this property, in that we're not in the major traffic patterns," Bischoff said. "This way we will have that many more people who are staying here."

But will another 1,000 rooms turn around the mall? George Connor, senior vice president of retail and resort properties for Colliers International, isn't convinced rooms alone will do the job.

"It won't hurt, but I don't think there will be any drastic change in traffic by adding 1,000 rooms," Connor said. "I think they need to take a hard look at repositioning some traffic generators on that second floor, or creating some traffic generators on the second floor."

The Stratosphere Tower and rides were supposed to be that traffic generator. But the problem, Connor said, is that a typical tower patron is a "20-something thrill-seeker with 50 bucks in his pocket."

"These people are in a rush to get to the tower, and after they come down, they're in a rush to get out," Connor said. "They really need to find some kind of activity on that floor to get the bodies going back and forth that could support the retail."

AREP's move to acquire the Stratosphere and its mall are apparently part of a larger gaming-oriented focus by the company. In its press release, the company said the buyout "is the beginning of a new focus for AREP which could take it deeper into the entertainment and gaming industries."

"(AREP) believes that, with respect to the entertainment and media businesses, there may be synergies between production companies for movies and live entertainment and supplying entertainment content to hotels and casinos," the release read. "AREP will also be looking at other companies in these fields."

AREP officials could not be reached for comment.

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