Fontainebleau, banks take steps to resume construction

By Steve Green

Monday, Aug. 17, 2009 | 10:04 a.m.

Progress is being made in court-ordered mediation aimed at settling disputes and lining up new financing so construction can resume on the big Fontainebleau casino-resort in Las Vegas.

That's according to a report issued Friday to a federal judge in Miami who is overseeing a lawsuit filed by Fontainebleau against big bank lenders that this spring halted $656 million in planned funding for the $2.9 billion resort because of cost overruns and other problems.

"On the basis of the proposals exchanged and discussions held to date, the parties to this proceeding and the mediator collectively believe that progress toward a resolution has been made and that the process of mediation should continue," said a report to the judge jointly filed by attorneys for Fontainebleau, Bank of America and other big lenders being sued. "While a resolution is not imminent, it would be unrealistic to expect that resolution of a complex set of disputes involving billions of dollars and the formulation of a business plan for potential completion of the project could be achieved in just over a month’s time."

The filing said parties in the mediation talks have included not just Fontainebleau and the revolving-loan banks led by Bank of America, but term-loan lenders who loaned $350 million to the project and that separately are suing the banks over the banks' cancellation of their funding.

Also participating in the talks are creditors and "two potential third-party investors," Friday's court filing said.

"The mediation process to date largely has focused on attempting to craft a business solution for completion of the Fontainebleau Las Vegas project and for a resulting release of all claims of the parties against each other in both this proceeding and the term lenders' action (lawsuit against the banks), although other less complex settlement structures also have been proposed," the filing said.

Miami businessman Jeffrey Soffer, developer of Fontainebleau, has expressed interest in pumping additional capital into the bankrupt project, according to court filings by his attorneys.

The potential third-party investors have not been identified, but sources have said private equity group Apollo Global Management LLC as well as Penn National Gaming have expressed interest in the 3,815-room project on Las Vegas Boulevard.

Apollo, one of the investment companies that owns Harrah's Entertainment Inc., is believed to have purchased some of Fontainebleau's debt.

It's unclear whether the proposals on the table involve an equity investment that would keep Soffer in control of Fontainebleau, or whether one or more investors would assume control of the bankrupt project, said to be 70 percent complete.

Court papers show the backdrop of any potential settlement is that under its current capital structure, Fontainebleau doesn't make economic sense because:

-- The banks say that its appraised value of $1.764 billion is far less than the additional $1.5 billion needed to complete the resort and what lenders are already owed, meaning the owners have negative equity. This in part is due to the weak economic climate that prompted Fontainebleau to suspend plans to sell condominium units at the resort, which would have covered substantial construction costs. The resort, if completed, may also struggle to line up retail tenants because of the weak economy.

-- Difficult business conditions in Las Vegas, where casino resorts have racked up hundreds of millions of dollars of losses this year because of a decline in visitation to the city -- a situation likely to worsen when the massive CityCenter complex begins to open in December and other room capacity additions come online.

And besides the interests of term and bank lenders, contractors' liens against Fontainebleau may need to be satisfied and second-mortgage holders owed $675 million will have to be dealt with.