As of June 2009, the Las Vegas skyline is incomplete. Industrial cranes hang heavily in the air while half-finished towers loom over their smaller neighbors, and the Strip teems with more construction workers than tourists. To say the city’s largest industry is visibly in flux would be an understatement.

When the housing market crashed in 2007, few could have foreseen the struggle that some of the world’s biggest casino companies would experience in the face of tightening credit lines and nebulous financing. This year, those companies have soldiered on, but not without their share of legal and financial woes.

Three major Strip construction projects, CityCenter, Fontainebleau and Cosmopolitan, are now pushing toward the finish line, leaving employees, executives and bystanders wondering what the economic implications of those properties will be if or when they open.

The CityCenter Saga Thought by many to be a project too big to fail, MGM Mirage’s CityCenter is the grandest project ever undertaken in Las Vegas. The meta resort is a partnership between MGM and Dubai World, and the development process has been anything but smooth.

From construction worker deaths to Harmon tower defects and from lawsuits to financial struggles, the story of CityCenter is almost operatic in scope. Recent developments indicate that the project will be completed and that MGM Mirage will stave off bankruptcy. Of course, in Las Vegas, anything is possible.

CityCenter is comprised of a centerpiece, the ARIA resort and casino, the Vdara condo-hotel, the Harmon hotel and spa, the Veer Towers, a Mandarin Oriental Las Vegas hotel and a retail district called the Crystals. The project will open in phases, beginning with Vdara on October 1 and ARIA in December.

MGM Mirage and Dubai World’s collaboration is now out of the woods, but the two entities struggled to compromise. Dubai began to doubt the ability of MGM Mirage to complete the project, and filed a lawsuit demanding MGM resolve problems in the joint venture. In April, the two parties came to an agreement: MGM will cover any cost overruns the project incurs (beyond the $8.5 billion budget), and Dubai World will pay back loan obligations previously covered by MGM.

After the joint venture seemed stronger than ever, MGM Mirage was forced to deal with its own insolvency. Consulting firm Union Gaming Group recently advised MGM through a stock offering that raised more than $1 billion in exchange for 143 million shares. An additional $1.5 billion was raised through a private offering.

“They’re in better shape than they were in three months ago, and that’s reflected in their share price,” said William Eadington, professor of economics and director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada-Reno. “I’m not sure if they’re out of the woods yet. I think the tension we saw there a couple months ago was a reflection of not only the CityCenter project, but the distress both MGM Mirage and Dubai World were feeling. My suspicion is they certainly reduced the likelihood of it. If the economy continues to drag, it’s going to continue to put downward pressure on MGM’s company.”

Bill Lerner, former Deutsche Bank analyst and current partner of Las Vegas-based Union Gaming Group, said he thinks MGM Mirage is on the right path, though it may need to look at selling other properties. The company put up the Mirage and the Bellagio as collateral in its drive to avoid bankruptcy, so those two properties may not be for sale anytime soon.

“I believe bankruptcy is off the table for two reasons: MGM has obtained debt covenant relief from lenders, and the company has resolved near-term maturity risk in conjunction with its recent capital raise,” Lerner said. “I don’t think [the Mirage and Bellagio] are off the table entirely. If MGM wanted to sell either of these, it would need to replace them in the collateral package. We still believe the company would consider non-core asset sales, such as Michigan, Illinois, New Jersey, Mississippi [Tunica and Biloxi].”

Though the future of MGM Mirage may not be as rosy as some would like to think, CityCenter is closer to completion than its counterparts further north on the Strip.

Cosmopolitan Countdown Analysts did not expect the Cosmopolitan Resort and Casino to become the victim of bankruptcy, failed partnerships and an uncertain future, but the project is now on life support, with savior and owner Deutsche Bank struggling to shape the resort.

The Cosmopolitan broke ground in late 2005 on a strip of land between CityCenter and the Bellagio. Developer Ian Bruce Eichner and his firm, 3700 Associates, LLC, envisioned an upscale rock and roll resort, and saw the project through to the beginning of 2008, when Eichner’s company defaulted on a $760 million loan from Deutsche Bank. The bank took over the 3,000-room project during foreclosure proceedings, but has yet to find a partner to oversee the property’s gaming and hotel operations.

The Cosmopolitan has endured an identity crisis since Nevada Property I LLC (an extension of Deutsche Bank) took control of the in-progress resort. Throughout 2008, a variety of companies discussed operating the property for Deutsche Bank, but those talks were unsuccessful.

The bank even discussed giving the Cosmopolitan to MGM Mirage and providing financing for the CityCenter project, but that proposal fell through in March 2009. The following month, Deutsche Bank announced its partnership with the Hilton hotel chain. Hilton was prepared to launch its Denizen brand of upscale hotels, and had hoped to bring the brand to the Cosmopolitan. In mid-April, Hilton revealed that it would be suspending its Denizen brand due to allegations of corporate espionage from Starwood Hotels & Resorts Worldwide Inc.

Deutsche Bank is still searching for a partner—after all, banks are in the business of financing casinos, not owning or operating them.

“They’re bankers, not hoteliers or casino operators,” Eadington said. “It depends on how low a price they have to offer to dispose of them. It’s a microcosm of the dilemma of banks in general. These are toxic assets.

“I think the concern of Deutsche Bank is if they continue to own Cosmopolitan, it could be terribly distracting on management’s attention. It could possibly be a negative cash flow operation. They’re in a tough situation and obviously they would like to have someone to come over and take over ownership. That would be the best they could hope for. Short of that, they’re stuck with capital invested in a company that is nonperforming at present.”

Another of the bank’s issues with its property is the room décor, which was given a rock glamour theme by original developer Eichner and then remodeled by real estate company Related Cos. Deutsche Bank executives were unhappy with the second, more muted look, and went back to square one to redesign the resort’s interiors.

The redesign slowed the construction process on the $3 billion property, which is expected to open in June 2010. Though Deutsche Bank has taken a $653 million loss on the property due to declining property values and numerous setbacks, the bank is determined to see the project through to the end.

Financing Fontainebleau While Deutsche Bank is guiding the Cosmopolitan through to completion, the bank has also provided financing to Fontainebleau Las Vegas, which has led to the property’s current troubles.

This spring, Fontainebleau officials filed suit against 11 of its lenders, who refused to release additional financing due to an alleged loan default. Fontainebleau denies defaulting on its agreements.

In May, the property, which has been developed as a partnership between Fontainebleau Las Vegas and Turnberry Associates, amended its lawsuit, accusing Deutsche Bank of conspiring to sabotage Fontainebleau because of the bank’s desire to see the Cosmopolitan succeed. Fontainebleau also alleged that Deutsche Bank was preventing the resort from coming to an agreement with its other lenders, including Bank of America and Royal Bank of Scotland. Without the additional $770 million in financing, Fontainebleau cannot be completed.

“I would be very surprised that [Deutsche Bank is] doing this to reduce the supply in the marketplace, which is the implication,” Eadington said. “It’s not at all unusual for a bank to be involved in a market like Las Vegas in multiple projects. You’ll find quite a few banks that were involved in multiple projects. They view the projects on their individual merits and then the market as a whole. Deutsche Bank did not want, but inherited the situation at Cosmopolitan. There has to be a legal basis for Deutsche Bank and the other banks in the consortium to withdraw their financing.”

Fontainebleau is slated to open in October 2009, but without the remainder of its financing, the resort has been forced to lay off both on-site and corporate employees, putting the future of the project in jeopardy. Fontainebleau is also defending itself against a lawsuit from consulting firm CCCS International, who has accused the resort of firing the firm unfairly. Fontainebleau denies the charges.

At the end of May, Fontainebleau Las Vegas CEO Glenn Schaeffer, former executive of Mandalay Resort Group, left the company amidst its efforts to obtain financing. At this point, it is unclear what direction the property will take if its legal and financial tangles are not resolved.

“You have projects that are 90 percent or more toward completion, and there’s no chance whatsoever of success if there’s no financing to complete,” Eadington said. “Whatever strategy the bank is undertaking on its side, I doubt they’re doing to it prevent Fontainebleau from succeeding.”

Both Fontainebleau Las Vegas spokesman Lance Ignon and former Deutsche Bank analyst Lerner declined to comment on Fontainebleau’s lawsuit against its lenders.

The Aftermath As CityCenter, Cosmopolitan and Fontainebleau join the ranks of elite resorts in Las Vegas, the question remains: How will these new projects affect the city, the state and the gaming industry as a whole?

The three hotels are expected to add approximately 12,000 rooms to the market between them, and with room rates being aggressively lowered to attract tourists during the recession, some industry insiders are concerned that CityCenter, Cosmopolitan and Fontainebleau will essentially flood the market with too much product. The end result could be a disaster for Las Vegas’ hospitality sector.

“Obviously, it’s going to be good news for consumers,” Eadington said. “You’re going to increase product, and historically if you look at periods of multiple openings, they have typically created a real upward tick in demand. This time around, it’s different. This has been such a significant recession, and has had such a disproportionate effect on the new Las Vegas. Palazzo and Wynn have had no response on the market. This has to be chilling.”

The only other alternative would be to leave the resorts closed upon completion, which Eadington said would be a far more damaging prospect.

“It’s bad timing, but there’s not much you can do about it when you start a project five years ago,” he said. “A nonperforming $10 billion asset costs you roughly $1 billion in interest alone. You want to transform them into performing properties. Supply and demand may fall out of balance.”

Though there is a risk that the new resorts will cannibalize the older products, there are no other projects currently in the pipeline, and the industry may be able to absorb the “excess capacity,” Eadington said. However, that does not preclude the possibility of older casinos undergoing renovations to expand their properties without tapping huge credit lines.

“I think it will be years before new development projects with typical financing begin in Vegas, despite the reduction in land, commodity, and labor costs—a function of the supply glut that needs to be absorbed,” Lerner said. “Renovations appear more likely.”

Indeed, it appears as though the age of the meta resort is over before it ever really began. The problem was not ambition—Las Vegas is known for its forward-thinking entrepreneurs and successful innovations—but the unrealistic, grandiose financial schemes that landed several of the those very entrepreneurs in hot water.

“We’ve seen the last of the $10 billion-plus projects,” Eadington said. “Both CityCenter and Cotai Strip have demonstrated the difficulty of a project this large. The gestation period is too long. From planning to market, it takes too long. The market can change. Coordination of a project of that size is impossible. A project of that magnitude is unwieldy from a logistical perspective. The financial community is no longer going to consider the gaming industry the favored child.

“The challenge for Las Vegas as it ages is can its properties stay fresh? Will it stay as popular as it has been? Part of its history of that role is that it’s always been so new. It’s going to lose that newness over the next decade or so. So creativity in marketing is necessary… [boosting] entertainment, convention opportunities and other activities that will keep it fresh in [visitors’] minds. It has a good history of rising to that challenge.”

By Caitlin McGarry