The Las Vegas land grab game is getting a whole lot more interesting. During the last year prices for an acre of land along the Las Vegas Strip have been continually accelerating, but during the last month it seems prices have gone totally out of whack.
In a series of separate but equally astounding moves, the notion of what an acre of land on the Las Vegas Strip is worth has been entirely reset. Just last month analysts were scratching their heads at land being pegged at $17 million an acre. That figure was achieved when MGM-MIRAGE cut deals with a pair of landowners to purchase several parcels of land located at the southwest corner of Las Vegas Boulevard North and Sahara Avenue. The company bought a 26-acre parcel from Gordon Gaming Corporation for approximately $444 million, and has separately agreed to purchase several parcels, totaling approximately eight acres, from Concord Wilshire Acquisitions for a price of approximately $131 million. Both transactions reflect a purchase price of approximately $17 million per acre.
Then just last week El Ad Group, headed by Israeli mogul Yitzhak Tshuva paid $1.2 billion for the 984-room New Frontier. Of course it’s not the casino Tshuva wanted; it’s the land beneath it. Translation: The deal equates to about $34 million an acre for each of the site’s 34.5 acres.
Now El Ad plans to build a $5 billion multi-use development project has a two fold effect: It help to move the center of the Las Vegas strip farther north and it also essentially doubles land values in the area. And if you’re keeping score, El Ad is behind the Plaza redevelopment in New York City and will utilize the moniker for this Las Vegas project.
Commenting on the deal in an analyst’s letter, Deutsche Bank analyst Bill Lerner acknowledged this sale will severely affect Las Vegas land prices in prime areas.
"We believe this has profound implications on valuations for Las Vegas operators with significant land holdings," Lerner wrote. "Notably, this transaction makes MGM's most recent purchase appear attractive, and makes our current valuations for the operators' (particularly Wynn, MGM and Boyd) land seem conservative."
And of course every good story has additional layers. In yet another exciting twist to this real estate story, billionaire Kirk Kerkorian is now looking to purchase a portion of MGM-MIRAGE Corp. Though he already owns 56 percent of the company through his investment arm Tracinda Corporation, he now wants to buy outright the famed Bellagio as well as CityCenter. The latter project is a massive development containing a casino resort, retail, entertainment districts, additional hotels such as a Mandarin Oriental, and several buildings of condominiums. Though the price of that project has been publicly announced to cost about $7.4 billion when it’s complete in 2010, behind the scenes Hotel Interactive has heard from multiple sources its true cost will soar past $10 billion.
On May 21 Tracinda Corporation filed a form Schedule 13D with the Securities and Exchange Commission in which Tracinda stated: "[Tracinda] intends to enter into negotiations with MGM MIRAGE to purchase the Bellagio Hotel and Casino and City Center properties. Tracinda also wishes to pursue strategic alternatives with respect to its investment in MGM MIRAGE which may include financial restructuring transactions involving all or a substantial portion of the remainder of the Company. Tracinda has made no decision with respect to any such restructuring transactions and reserves the right not to engage in or approve any transaction,"
Bellagio is the top performing property in the MGM MIRAGE portfolio, accounting for about 20 percent of the company’s cash flow. And CityCenter is expected to rival Bellagio in quality and profitability.
Analysts are estimating that if a deal is consummated, the two properties could sell for more than $12 billion.
If this doesn’t amaze you, hear this. A little more than a year ago, Columbia Sussex Group won a ferocious bidding war and bought the company for $1.94 billion. In that deal, Columbia got the Tropicana Las Vegas as well as other assets. That purchase price valued that asset at about $14 million an acre. So in about 13 months, an acre of land has not only more than doubled; its soared $20 million. An acre!
Kirkorian tried to scoop up all of MGM-MIRAGE earlier this year, but was rebuffed. Last fall he tried to buy 15 million shares for $55 each. A 12 percent premium, but the stock soared on that move and have since traded higher.
Now MGM MIRAGE's Board of Directors has formed a Transactions Committee comprised of non-management, independent directors, not affiliated with Tracinda, to consider Tracinda's statement and strategic alternatives available to MGM MIRAGE. It’s engaged UBS Investment Bank, as its financial advisor, and Weil, Gotshal & Manges LLP, as its legal advisor, to assist it in this process.
At Bear Sterns, an analyst letter from Joe Greff said they are upgrading MGM MIRAGE share to Outperform from Peer Perform. He feels this could signal the beginning of the end for the company in its current form.
“We believe that [the] announcement from MGM’s majority stockholder, Tracinda Corp., should unlock significant value in the shares, and, potentially, could lead to a two or multi-stage takeout of the company,” wrote Greff.
A couple of recent mega-deals have pushed the value of Strip side land up $20 million in the last year to $34 million an acre. That’s right – one acre.
This is quickly developing into one of the more fascinating stories of 2007 for the lodging and casino gaming industries. It will be interesting to follow. Stay tuned and strap in for what is sure to be a wild ride.
The Greater Las Vegas Valley (Summerlin, North Las Vegas, Lake Las Vegas, Henderson, Green Valley, Southern Highlands, Mountain’s Edge, Downtown and the Strip) are highly zoned and many parcels have three different zonings. For example current zoning could be (R1), master plan zoning (CP or C1) and a different overlay zoning (H2 or C2). Additionally, two neighboring parcels of land with the same zoning could have different setbacks, depending on the neighboring parcels. Presently, how much can be built on a parcel of land is as important a factor in pricing a parcel of land as the location. Other factors include how far the land is from infrastructure, set backs, traffic studies, new construction in the vicinity and requirements of current planning and civil engineering of local governments.
Best returns on land purchases can be found on parcels which qualify for a higher zoning, for example from R3 to H2 . Zone change could be either conforming or non-conforming. Both processes are unpleasant and complicated, and can take anywhere from six months to a year, however the gain is worth the trouble. Parcels of land which are entitled command the highest prices. Entitlement involves getting an architectural drawing, doing traffic studies and jumping through all the hoops that local governments throw your way (we have been through a zone change and it is tough). However, if the parcel qualifies, this is the way to get the highest price. Builders like to buy entitled land parcels since it will save them time, money and they know exactly what they can build. No need to loose heart though, we know which law firms specialize in zone changes and will put you in touch with them.
