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Sunday, May 22, 2005
Copyright © Las Vegas Review-Journal
'MANHATTANIZATION' OF LAS VEGAS
Las Vegas fast becoming one of nation's hottest high-rise condo markets, but legal problems plaguing some projects
By HUBBLE SMITH
REVIEW-JOURNAL
Construction
continues on the fourth and final tower at Turnberry Place, one of the
pioneers in Las Vegas luxury condominium development. Homeowners in
Tower One at Turnberry are suing the Florida-based developer over
alleged construction defects.
Photo by John Locher.
Panorama
Towers is taking shape on the west side of Interstate 15, south of
Harmon Avenue. Developer Sasson Hallier has filed a lawsuit against
Related Cos., developer of the proposed Icon high-rise condo project,
on allegations of stealing proprietary information during discussions
about a possible joint venture.
Photo by John Locher.
Panorama
Towers is shown under construction on April 19. Developers of the
project are suing the Related Group of Florida over alleged
misappropriation of proprietary information.
Photo by Shelly Donahue
Vegas Grand, a midrise luxury condo project, is under construction at Flamingo Road and Swenson Street.
Photo by John Locher.
Las
Vegas resident Sally Miller stands in front of a sign advertising
condos at Vegas Grand from the $200s. She reserved a unit there, only
to have the price increased by more than 50 percent before the contract
was finalized.
Photo by John Locher.
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A
mountain of litigation is rising along with the many planned high-rise
condominium tower projects that are reshaping Las Vegas' skyline.
• Buyers at Krystle Sands, the first high-rise condo project that was
canceled in Las Vegas, for instance, have filed a class-action lawsuit
accusing the developers of breach of contract.
• Homeowners at Turnberry Place, a pioneer in Las Vegas' luxury condo market, have filed a construction defect lawsuit.
• Developers of Panorama Towers are suing Related Cos. over alleged misappropriation of proprietary information.
•
Vegas Grand, a midrise luxury condo project under construction at
Flamingo Road and Swenson Street, also may be "heading for trouble,"
said Bruce Hiatt, owner and broker of Luxury Realty Group.
"They are apparently getting ready to cancel all existing reservations,
change designs of the project and re-price the entire project due to
construction costs being much higher than originally forecasted," Hiatt
said. "They made their existing sales staff sign new contracts which
includes, I am told, a nasty noncompete clause. Some of their sales
staff quit over that."
Several people who reserved units at Vegas Grand have filed
class-action lawsuits against developer Del American for raising prices
by more than 50 percent, though such conditions are stated in
nonbinding contracts that may be canceled at any time by either the
buyer or developer.
"Breach of contract is one thing. Misrepresentation is another," said a
Los Angeles attorney who has reserved a unit at Vegas Grand.
Despite this recent spate of lawsuits over sales and development of
high-rise condos, many real estate experts predict Las Vegas, which is
fast becoming one of the nation's hottest high-rise markets, will be
able to overcome any resulting negative perceptions.
"I think it's important to watch, but I don't think it provides any
negative impact to Las Vegas," said Marc Falcone, gaming and lodging
analyst for Deutsche Bank in New York.
He said some projects clearly have the financing and will get built,
while a select handful of others is doubtful. Ultimately, he believes
that no more than half of the 100 towers and 37,000 units will come to
fruition, possibly closer to 30 percent or 40 percent. "There's only so
much demand for that (luxury condo) product," Falcone said.
Larry Murphy, president of Las Vegas-based SalesTraq, believes in the
Darwinian principle that only the fittest of the Las Vegas high-rises
will survive.
"If this happens to one of these places, it probably will happen to all
of them because they're all in the same pool of water," he said.
"There's going to be some fallout and disappointment. I don't think
it's the death knell of Las Vegas. There's a lot of people looking for
a fast buck in this town. You can bet on the roulette wheel or you can
bet on the real estate wheel."
Murphy said he's heard of other projects in a similar predicament as
Vegas Grand, developers who priced their units based on 2003 economics
and then got caught up in a unique period in the Las Vegas housing
market when real estate values increased by 50 percent.
Las Vegas attracts national attention with new developments, and
consumers are going to have to take a hard look at high-rise projects
to determine which ones are for real, said Richard Lee, director of
public relations for First American Title Co. of Nevada.
"I'm not too concerned, to tell you the truth," Lee said of the legal
problems. "Nobody's been left high and dry yet. There's a lot of
thoughts running through my mind. Certainly there's excitement and an
abundance of dialogue over the high-rise market. Some of it may be
hype. Look at the developer's record. That's where people need to
look."
Building in Las Vegas costs more than other places, causing many
developers to step back and re-evaluate all aspects of their condo
projects, he said.
"I'm not sure we've reached doomsday on high-rises just because of the
big price jumps at various projects or the demise of Krystle Sands,"
said Shawn Cunningham, a Realtor with Re/Max Advantage who had 18
clients at Vegas Grand. "I think that the consumer and developer are
now educated on the price-per-square-foot it will take to build a
high-rise successfully in Las Vegas, given the soaring costs of
materials and the extremely tight supply of labor.
"I haven't seen any indication that $600 and up a square foot is too
much to bear in the high-rise market, but we'll see what happens in
2007 when a huge supply of investor speculations come back on the
market as resales. I think the big question is how will the high-rise
market handle that expansion of supply."
Falcone said Las Vegas is a mirror image of the condo market in
Florida, and reputable developers with quality architects are going to
have an easier time getting the appropriate financing than those who
are entering the market for the first time.
"We would caution investors that this is not necessarily a negative.
Instead, we would view it as a positive, encouraging safe investment
while at the same time not creating oversupply, which could be the case
in a scenario where all of the proposed developments were actually
built," Falcone said.
The homeowners association in Tower One at Turnberry Place has filed a
$21 million construction defect lawsuit against Turnberry Pavilion
Partners, alleging rain and wind intrusion into their million-dollar
condo units on Paradise Road.
A Turnberry resident who requested anonymity said the defects date back
to 1999, when the first tower was built. The lawsuit was filed in 2004.
The defect allegations are primarily related to the exterior finish and
interior surfaces.
"Tower Three owners are lining up to do the same thing," the resident
said. "With all of these towers going up, problems with shoddy
construction and then selling them for these amounts is not going to be
good for the scene."
In addition to the defect lawsuit, Turnberry is in the middle of a
separate class-action lawsuit filed in April by the buyers at Krystle
Sands, a high-rise condo-hotel that had been planned for the site of
the former Algiers hotel on the Strip. Turnberry purchased the project
from Florida developer Freddie Schinz in March for about $90 million.
"When they bought Krystle (Sands) Tower, they bought headaches," said a
local luxury broker who claims to have lost some $300,000 in
commissions.
Buyers who put down deposits of upward of $100,000 for condo units at
Krystle Sands are astute, sophisticated people, the broker said. They
aren't satisfied with simply getting their money back.
They signed a purchase and sale agreement, a binding contract that
required 20 percent of the purchase price in total earnest money, Las
Vegas attorney Will Kemp said. Had they not been able to come up with
the full price upon closing, they would have forfeited their earnest
money.
Kemp said Turnberry purchased not just the land but the entire Krystle
Towers project, which had changed its name from Krystle Sands after Las
Vegas Sands Chairman Sheldon Adelson disputed the use of the name. The
title for the land is still in the name of that entity.
"The bottom line is they do not have the right to terminate this
agreement to go build a casino," said Kemp, who represents about 85
buyers. "They can terminate if they can't get financing. I think when
you see all of the evidence, you'll see that they can get financed if
they really wanted to."
In one of his motions filed in District Court, Kemp seeks to obtain
records from Hypo Bank in New York, one of the potential lenders for
the project, and CVS, a national drugstore chain that had contracted to
occupy space at Krystle Sands.
Turnberry principal Jeff Soffer said Krystle Sands did not meet
presales requirements, and buyers are upset because the project did not
go forward.
"We're not under any obligation to build it, and we're not going to build it," Soffer said.
Section 20 of the purchase and sale agreement states that "this
agreement is contingent upon the seller's satisfying the presale
requirements of the lender providing construction financing for the
condominium and the project generally."
Sasson Hallier Properties, developer of Panorama Towers, under
construction on Industrial Road at Harmon Avenue, recently filed a
lawsuit in District Court against the Related Group of Florida, naming
all of its partnerships, including Related Las Vegas, and former sales
executive Andrew "Ike" Prinsloo as defendants.
The lawsuit claims that the defendants misappropriated Sasson Hallier's
personal property, including a customer database of personal
information such as names, addresses, telephone numbers, sales prices
and the identity of sales agents for units sold at Panorama, along with
commission amounts.
Andrew Sasson, principal in the firm, said Related Cos. approached him
about becoming a partner in Panorama, just as it did in the World
Market Center downtown, and during negotiations stole the intellectual
property and recruited top sales executives.
"We decided we were fine by ourselves," he said. "They go out and
solicit our salespeople and take information from our database and all
of our hard work and actually, physically use the database."
Prinsloo, the sales manager, and his wife, Sarah, a luxury condo broker
formerly with Vegas Grand, joined Related Cos. under their own
brokerage firm.
Marty Burger, president of Related Las Vegas, said he hasn't had a chance to review the lawsuit.
"We just got it. At first blush, it looks absolutely ridiculous. We'll be responding to it appropriately," he said.
Another lawsuit is expected to be filed against Related Cos. by
Majestic Las Vegas after a Clark County Commission vote that allows
Related to use an easement for commercial traffic to and from its Icon
high-rise project on Convention Center Drive. Lorenzo Doumani, chief
executive officer of Majestic, said the easement is owned by Ross Dress
for Less and the Peppermill Lounge and can only be used by emergency
vehicles.
One of the problems encountered by high-rise developers in Las Vegas is
the skyrocketing cost of construction, something many of them did not
factor into prices when units were "presold."
Turner Construction, which had originally been contracted to build
Vegas Grand, pulled out of the job after costs went up during permit
delays. Summit Builders of Arizona is the new contractor.
Randy Lund, a buyer at Vegas Grand, said he was quoted an exact price
when he signed his reservation contract more than a year ago, and there
was nothing in the contract about raising prices.
"This is a new saga in high-rises," Lund said. "We got a letter that
said they're raising prices on us due to higher construction costs and
so forth. If steel prices had gone down, would they have reduced prices
for buyers?"
Florida-based Del American recently issued a statement to its buyers
that construction is expected to go vertical in August, despite a
dramatic increase in construction costs, including steel, concrete and
labor rates. The company is in the process of adding two floors and 114
units to its six-story buildings, bringing the total units to 994.
"Based on the increase in these core construction prices, we are
offering reservation holders an option to execute a new offer agreement
for their Vegas Grand home on a one-time basis, below the current
published price of comparable units in the market," Del American Chief
Executive Officer Chris Del Guidice said in the statement. The company
is paying 5 percent interest on refunded deposits.
Bob Sullivan of Pittsburgh bought a 590-square-foot unit at Vegas Grand
for $203,000 and was looking to retire there. After the price increase
and a 12 percent discount for those who had reserved early, the unit
now costs $297,000.
"The part that bothers me the most is the extreme lack of communication
over 14 months," Sullivan said. "They're building it. They know costs
are going up. They could have said, `We're having trouble getting
permits and getting a builder. You may want to consider looking
elsewhere.' "
Sullivan still wants to retire in Las Vegas, but he's looking at condos and townhomes in the outlying areas of the valley.
"I want to get away from the Strip because of the pricing, and the
(Vegas Grand) experience and the questionable everything-in-the-world
has driven me away from that market," he said.
Sally Miller signed a reservation contract with Vegas Grand for
$310,000 in December 2003 and said she started getting "skittish" when
a year went by and she still didn't have a final sales contract.
During that time, she had checked out Sky Las Vegas, a high-rise
project on the Strip, but decided to stay with Vegas Grand because she
supposedly had built equity on her unit. Del American then raised her
price to approximately $500,000.
"I'm one of the few people that was not buying as an investment,"
Miller said. "I teach at UNLV and was planning to live there, and
basically I sold another condo to reserve a unit there when they
started selling, so I sold a property at a lot less money than what I
would've got a few months later.
"The big problem is they weren't honest with us. The (sales) push was
to reserve the price, to lock in the price. I could have bought
anything in 2003. I had a huge opportunity at Sky Las Vegas, and now I
can't come within $100,000 of what I had, so I've lost an opportunity
to invest in anything else."
More lawsuits may be on the horizon as developers fail to fulfill
promises, said Chet Nichols, executive vice president of Las
Vegas-based Amland Development. Amland opened public sales of its One
Las Vegas high-rise on Las Vegas Boulevard South on April 7.
"The Manhattanization of Las Vegas is full of Miami hype, or I should say, South Florida hype," Nichols said.
His philosophy is to "underpromise and overdeliver," to quote a high
price and come in under that. He said the average price at One Las
Vegas is $390 a square foot.
Most developers have to meet a requirement of about 50 percent presales
to receive a construction loan, and that's all they want to sell,
Nichols said.
"You're not going to deliver (units) for 18 to 24 months, and you want
to get as much price increase as you can in that time. The profit is
never in the first phase. That's why those are typically a good deal,"
he said.
Randall Davis, a developer from Houston who built Metropolis on Desert
Inn Road, said he was told to anticipate a difference of 15 percent to
20 percent between what he usually pays for high-rise construction and
what it would cost in Las Vegas.
"It was way off. It's more like 50 percent," Davis said. "A good bit of
it is labor. You've got to pay a guy $28 an hour to sweep the floors.
In Houston, it's $9 an hour for cleanup work. I think part of it is the
mind-set of Las Vegas contractors. They would like to get as much money
as they can as quick as they can. General contractors can name their
prices."
Land prices have escalated since Davis announced his project about
three years ago. He paid $32 a square foot for his 1.5-acre site, the
former Royal Aloha time share. Turnberry paid more than $500 a square
foot for the Krystle Sands site.
At those prices, a high-rise is the only project that makes sense,
Davis said. But what happens when investors and speculators who are
driving the high-rise market in Las Vegas back out of paying these
prices, which are heading north of $1,000 a square foot?
"The project won't sell and construction stops and the last guy on the
Ferris wheel gets stuck," Davis said. "If they can't sell, what's the
land worth? What's it good for?"
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