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LAS VEGAS-Publicly traded Morgans Hotel Group Co. and its equity partner gained approval this week from the Nevada Gaming Commission to operate the casino portion of the Hard Rock Hotel & Casino they are in the process of expanding. New York City-based Morgans and DLJ Merchant Banking Partners acquired the gaming resort here early last year for $770 million. It immediately took over hotel operations but had to farm out the casino operation until it gained an operator’s license from the Commission. Morgans expects to begin operating the casino in February.

Meantime, an affiliate of locally based Golden Gaming Inc. will continue to operate the casino per the lease agreement that commenced upon the closing of the acquisition in February 2007. Under the lease, which has a term of up to two years, the base rent is $20.7 million per year payable monthly, plus reimbursements for certain expenses, according to SEC filings.

Golden Gaming is entitled to a management fee of $3.3 million, also payable monthly. In addition, Golden Gaming will receive 25% of casino EBITDA in excess of the rent and management fee amounts. The other 75% will go to Hard Rock for payment of principal and interest on the gaming asset note and any other loans to the lessee. As part of the deal, the casino’s gaming assets were sold to Golden Gaming for a note with a principal amount equal to the net book value of the gaming assets.

“By operating the casino ourselves we can provide a more integrated environment for our hotel and casino guests, which we believe will help increase profitability at the casino,” says MHG president and CEO Fred Kleisner, adding that the ongoing expansion will further add to the property’s profitability.

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 adjacent land was acquired with plans and entitlements in place for a $1.2-billion hotel expansion and condominium development.

The hotel expansion will bring 950 additional rooms, 60,000 sf of meeting space, 35,000 sf of retail, a new spa and a new nightclub. The new hotel rooms will come in two new 15-story towers, one on the existing casino-hotel property that will have 500 rooms and one 400-room, all-suite tower on a piece of the adjacent 23 acres that were included in the sale. The project also includes a renovation of the existing facilities including and an expansion of the casino and pool that is slated for completion in the next few months. The hotel expansion is slated for completion by mid-2009. No information was available regarding the residential component, which is not under construction.

Morgans agreed to acquire the assets of Hard Rock Hotel Inc. from Peter Morton in May 2006 and added DLJMB as an equity partner prior to closing the deal. MHG put 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 obtain the loan 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, not including a construction loan of up to $600 million for the expansion. The initial term of the loan is two years (or three years in the event that the construction loan is advanced), with a possible extension of up to two terms of one year each under certain conditions.

The interest rate on the loan will be 415 basis points above 30-day Libor, subject to increase if the completion date of the expansion project is delayed and under certain other conditions. The security for the loan includes the hotel & casino, the Hard Rock Cafe property, the adjacent parcel, the intellectual property and certain reserve funds and accounts. Morgans is required to qualify for the construction loan, and the first advance under the construction loan is required to be made, by April 1.

Morgans Hotel Group Co. controls by ownership interest or operating contract resort properties in London, New York, Miami, Las Vegas Los Angeles, San Francisco and Scottsdale, AZ. Earlier this month, it announced a joint venture to develop the Palm Springs Hotel & Residences. Edward Scheetz resigned as president and chief executive of the company in September and was officially replaced in December by Fred Kleisner, formerly chairman and chief executive of Dallas-based Wyndham International Inc., which was acquired by Blackstone in 2005.

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