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LAS VEGAS-The stalled 3,800-room, $3-billion Fontainebleau resort development on the Las Vegas Strip could become one of four Department of Defense resort properties around the world if you believe Craig Road Development Corp. We suggest you do not.The Las Vegas-based entity last week sent the bankruptcy judge a non-binding cash offer of $350-million but with the stalking horse bid already set at $156.2 million and the auction already scheduled for Jan. 21, 2010, the judge directed the company toward Fontainebleau, which will conduct the auction, and the examiner, which will supervise it. Fontainebleau’s financial advisor and investment banker Augusto Sasso of Moelis & Company testified in court recently that as a result of the stalking horse process at least 17 new parties have emerged with an interest in the project.

That total includes Craig Road Development, whose interest is “based upon discussions we are having with the US Army Family Morale and Welfare Command to acquire a Las Vegas resort for DOD military and veteran personnel,” the company states in its letter of interest to the judge dated Nov. 30. The company states in the letter that its partner in the investment would be Heroes Property Group LLC, for which no information was immediately available. Tentative plans call for spending $800 million to finish the resort as “one of three Department of Defense resort properties in the US,” the letter states. The partnership’s stated anticipated capital structure “targets senior financing of approximately $300 million, $650 million in subordinated debt and $200 million of equity.” Its planned management structure is for “the remaining members of the Fontainebleau senior management team…to continue with Fontainebleau under the same terms and conditions as currently in place.”

The DOD agency of which Craig Road speaks, however, is actually called the Family and Morale, Welfare and Recreation Command, and while Craig Road Development did not respond to a request for comment, William Bradner of the Family and MWR Command did respond. The Army currently operates four resort-style hotels on behalf of all the military services that are called Armed Forces Recreation Centers–in Hawaii, Korea, Germany, and Orlando, FL—and a fifth is currently under development on the Mid-Atlantic coast. “We have no plans at this time to participate in the purchase or operation of a facility in Las Vegas,” he wrote.

That still leaves at 16 others, however, including a group of mechanical contractors who claim to be owed more than $450 million for their work to date on the project and want to be able to submit a bid based on what they are owed. The bankruptcy judge this week denied their motion to have a determination made as to the priority and extent of their liens for the purpose of facilitating said credit bid, saying there is not sufficient time to determine the status of all liens prior to the sale. He also granted a motion to stay proceedings in the case so the contractors could appeal rulings against credit bidding but is requiring the group put up $200 million in cash and bond to cover the value potentially lost by the Fontainebleau estate should their efforts ultimately interfere with the sale. At issue is whether they or the lenders on the project are in first position to be repaid with any proceeds from the auction.

“There are five groups of mechanics and materialmen lien claimants, each represented by independent counsel, plus additional lien claimants not represented by counsel,” the judge states in his denial of the group’s motion. “Each of the over three hundred lien claimants has a discrete claim of lien for a different amount, all of which are unliquidated and disputed as to priority. The Court is given discretion to allow credit bidding; however, credit bidding is not a right to which all creditors are entitled, particularly in instances such as the one before the Court, where there are too many alleged liens, and other variables, that will affect the determination of validity, priority and amount of each claim of lien or encumbrance. Delay of the sale would only deny all creditors the potential benefits of the…sale while continuing the erosion of value of the subject property at a rate between $100,000 and $200,000 per week.”

Anchored by a 63-story hotel tower, the stalled 3.4-million-square-foot project with 3,800 hotel rooms sits 70% complete on 24 acres at the north end of the Las Vegas Strip. Fontainebleau LV’s three development entities–Fontainebleau Las Vegas, Fontainebleau Holdings LLC and Fontainebleau Las Vegas Capital Corp.–filed for protection from creditors under Ch. 11 of the US Bankruptcy code on June 9. The main person behind the entities is Miami businessman Jeffrey Soffer.

In addition its hotel rooms, Fontainebleau Las Vegas is designed to include a 100,000-square-foot casino; 27 restaurants, nightclubs and bars; 300,000 square feet of retail space; a 3,200-seat performing arts center; 60,000-square-foot spa; and 390,000 square feet of conference area and meeting rooms. Penn National Gaming, which lost a bidding war with Carl Icahn to become the stalking horse bidder for the property, believes the $2-billion already invested in the project by contractors, lenders and bondholders is now worth absolutely nothing because the estimated $1.5-billion cost to complete the project is at the edge of its value based on the amount of revenue it would generate upon opening. Clearly, Craig Road Development Corp., at least for its purposes, does not agree.

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