Last week's announcement by Nochi Dankner's Property and Building Ltd. (TASE: PTBL) and Yitzhak Tshuva's Elad Properties of an accumulated $500 million write-off on the land they bought in Las Vegas for the Plaza Casino and Hotel was not the first bad bet by Israeli developers in the city.
Some of the developers fled before they began to build, while others transferred their almost completed, but empty, projects to their creditor banks. The losers include Lev Leviev, through Africa-Israel Investments Ltd. (TASE:AFIL), Nachshon Kavity, through BSR Projects Ltd. (TASE: BSRP), Shalom Atia, through Atia Group Ltd. (LSE: ATIA; TASE: ATIA), and Ezra Doron, through Overland Financial Services LLC.
"The dream to turn Las Vegas into a settlement of Israeli developers is no more," Avner Koppel, who invested in the city, told "Globes". "We've frozen everything. This isn't the time to build. There are no buyers and the momentum is toward rental properties. There are also properties that I've decided to give back to the bank, recognize the loss, and not fantasize that the situation will stabilize. It's legitimate to recognize a mistake, however painful it may be."
In 2005, Koppel and Reuven Ofir, partners in OR Investments Inc., bought a 6.75-acre lot four kilometers from the Strip from a local bank, on which they planned to build 310 apartments in two 16-storey high-rises. Las Vegas was growing rapidly up to the 2008 crisis, with thousands of new residents seeking homes.
"During the boom, from the purchase to the sale took just six to nine months, and the profit was 20-100%," says Koppel. "There was a fantastic bubble in which the banks gave money to anyone who asked, creating a great system of deals: sellers got a lot of money from buyers, who got cheap money from the banks. The result was artificial deals at unbelievable prices. I don’t know any businessman who didn’t want to join the party - buy today and sell tomorrow for certain, honestly and respectably."
But the party ended in late 2007, and instead of real estate prices skyrocketing, the subsequent years have been characterized by a freefall, with little or no recovery. It is only necessary to see homes that were selling for $300,000 during the boom years going for a tenth of the price today.
Koppel says, "When it rains, everyone gets wet. Things have changed with 100 insolvent banks and falling land values in Las Vegas. There is no demand and money became air. This may only be temporary, but I won't make predictions. In any case, you need a lot of patience to get a return on the money. The problem is that there are financing costs and how long can you hold on to a property?"
In 2007, Elad bought the 35-acre site on the Las Vegas Strip occupied by the historic New Frontier Casino for a mindboggling $1.24 billion, financing half of the purchase with a loan. A few months later, Tshuva sold half the project to Dankner. They planned to build the grandiose Plaza Casino and Hotel on the site, as well as residential and commercial space, at an investment of $7 billion. The demolished the old casino in a glittering ceremony, but were never able to build on the site, which now serves as a parking lot.
On top of the $500 million that Elad and Property and Building have already written off on the Plaza, analysts believe that they will have to cut their losses and hand the property over to its creditors. This will leave them with the challenge of paying the $620 million loan to the banking syndicate by its August 2012 deadline.
Koppel says, "The location isn't central, although it's good. Tshuva and Dankner's mistake was to demolish the old hotel, otherwise they could have had tourists and at least covered the cost of the money, or part of it. Their haste to demolish the hotel was a critical mistake. They made a foul that I cannot understand to this day."
Dankner's losses in Las Vegas are not limited to the Plaza. Property and Building made a NIS 390 million write-off on Las Vegas projects for the third quarter, including NIS 111 million for its Queensridge Towers commercial project and Queensridge Towers residential project. The company estimates the construction cost of the Great Wash Park project at $560 million, of which $140 million has already been invested, and the project company has a shareholders' equity deficit of $202 million.
Property and Building is struggling to sell the remaining 74 condos in the 219-unit Queensridge Towers project, after selling just two condos in 2010 and one this year. The company has invested $420 million in the project, and the project company's shareholders' equity deficit is $81 million.
Property and Building's third Las Vegas project, Sahara Hualapay office and residential complex has been suspended after an investment of $7 million.
Lev Leviev's Las Vegas boondoggle
Leviev began operating in Las Vegas in 2004, both through Africa-Israel and though his personal venture with Shaya Boymelgreen, who together bought a 17-acre lot in the city. When Leviev and Boymelgreen liquidated their venture, Boymelgreen sold his stake in the project to Africa-Israel for $160 million, and Africa-Israel reported a $54 million net profit on the deal.
Encouraged, in May 2007, Africa-Israel bought a 60-acre lot adjacent to the Hard Rock Hotel & Casino, together with Credit Suisse Group AG (NYSE: CS; SWX: CSGN; XETRA: CSGZ) and other partners, for $625 million. They planned to build a casino, hotel and commercial complex on the site, but when Africa-Israel's loan came due to August 2009, it could not pay and the bank foreclosed. Africa-Israel recognized a NIS 360 million loss on the land, and the shareholders' equity invested in it was totally lost.
Even as large Israeli developers took a bath in Las Vegas, small companies were wiped out. BSR Projects entered Las Vegas in 2004, planned an impressive residential project - One Las Vegas - and lost the investment when 164 buyers cancelled their purchases when the housing crisis broke out. After investing $140 million in the project, BSR sold it to the bank in 2009 for $46 million as part of a foreclosure process. BSR Projects wrote off the project's entire $13 million shareholders' equity.
Atia Group tried to build the Verge, a six-story residential and residential project, after buying an empty building and adjacent parking lot for $3 million in 2006. During 2008, the company optimistically predicted more than $160 million revenue from the project, after announcing the sale of 229 of its planned 296 condos, but within months it was forced to halt operations and write off the several million in shareholders' equity invested in it. The company reported that some of its partners - banks and real estate agencies - had gone bankrupt.
Overland raised NIS 100 million in a bond issue during the boom, but its investment in Las Vegas brought the company to ruin, and a receiver was appointed earlier this year. The company's unsecured creditors are fighting over the outstanding NIS 60 million in debt by suing the company's officers and attempting to recover its remaining assets in the US.
Delek Group Ltd. (TASE: DLEKG) rose 1% and Israel Corporation (TASE: ILCO) rose 3%, but its subsidiary, Israel Chemicals Ltd. (TASE: ICL), fell 1.3% on the day's biggest turnover of NIS 142.6 million.
Published by Globes [online], Israel business news - www.globes-online.com - on December 11, 2011
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