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LAS VEGAS-The $770-million sale of the assets of Hard Rock Hotel Inc. closed this week. New York City-based Morgans Hotel Group agreed in May to acquire the 647-room Hard Rock Hotel & Casino here and a neighboring 544-unit apartment complex from Hard Rock founder Peter Morton. MHG took on DLJ Merchant Banking Partners as a partner in the deal in November.

Per the agreement, DLJMB and affiliates will invest up to $250 million in the joint venture, Hard Rock Holdings, which will own, manage, renovate and develop the various operating assets, land and intellectual property assets of Hard Rock. The acquisition includes the rights to use the “Hard Rock Hotel” and “Hard Rock Casino” trademarks in connection with casinos and hotel/casinos in specified locations, as well as certain other intellectual property such as merchandising and retail rights.

The 11-story Hard Rock Hotel & Casino sits on 16.7 acres on the burgeoning Harmon Avenue corridor. The popular music scene destination was built in 1995 and expanded in 1999. Amenities include a 30,000-sf casino; a beach club; the Body English nightclub; the Joint concert hall; five restaurants; three cocktail lounges; several retail stores; and an 8,000-sf spa, salon and fitness center.

The apartment complex sits on 23 acres adjacent to the hotel. MHG said in May that the apartment parcel will be held for future development, with a portion of it possibly available for sale to another developer. Morton had plans and entitlements in place for a $1.2-billion hotel expansion and condominium development for the apartment parcel. Those plans are being acquired as part of the overall acquisition.

MHG president and CEO Ed Sheetz has said the land involved in the transaction was valued at $10 million per acre. Backing out the value of the land and intellectual property, MHG believes it paid $450 million for the hotel.

MHG is putting up one-third of the acquisition equity, which is approximately $57.5 million, and DLJMB is funding the remainder, which is approximately $115 million. In addition, DLJMB has agreed to fund 100% of the capital required to expand the Hard Rock property, up to a total of an additional $150 million, though MHG will have the option to fund the expansion project proportionate to its equity interest in the joint venture.

The remainder of the purchase price consists of a $760-million loan for the acquisition including renovation and financing costs and reserves, and a loan of up to $600 million for future expansion of the Hard Rock. The secured term loan facility has a term of two years or more.

MHG and DLJMB have entered into a Management Services Agreement under which MHG will manage the Hard Rock Hotel, retail, food and beverage and all other business related to operating the Hard Rock. Under the terms of the agreement, MHG will receive a management fee equal to 4% and a chain service expense reimbursement of all non-gaming revenue including casino rents and all other rental income. MHG can also earn an incentive management fee of 10% of EBITDA above certain levels. The term of the contract is 20 years with two 10-year renewals and is subject to certain performance tests beginning in 2009.

MHG, in turn, has executed a definitive lease agreement for operation of the casino with an affiliate of Golden Gaming Inc., a major gaming enterprise in Nevada. The lease, which has a term of up to two years, commenced upon the closing of the acquisition. Under the lease, the base rent is $20.7 million per year payable monthly, plus reimbursements for certain expenses. Golden Gaming is entitled to a management fee of $3.3 million, also payable monthly. The gaming assets were sold to Golden Gaming for a note with a principal amount equal to the net book value of the gaming assets. Casino EBITDA in excess of the rent and management fee amounts will be distributed 75% to Hard Rock for payment of principal and interest on the gaming asset note and any other loans to the lessee and 25% to Golden Gaming.

Despite the planned billion-dollar investment in the Hard Rock property, it is the smaller of MHG’s projects in Las Vegas. MHG is a joint venture partner with Boyd Gaming for the development of Echelon Place, a $4-billion redevelopment of the Stardust property that will be anchored by 1,600 hotel rooms flying the MHG hotel brands Delano and Mondrian. Completion is slated for 2010.

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