October 17, 1997
Goldman Sachs Credit Partners
85 Broad Street
New York, New York 10004
Subject: Valuation of the Vacant Land underlying the proposed Venetian and Lido
Resorts in Las Vegas, Nevada
Landauer File No. L131-97
Ladies and Gentlemen:
Pursuant to our engagement letter, we submit herewith our narrative appraisal
report of the referenced property. We have inspected the site and improvements,
evaluated the vacant land and casino hotel market conditions in the Las Vegas
market area, and considered the local forces influencing property values.
The purpose of this appraisal is to estimate the market value of the land as an
equity contribution. For that reason, we have valued the land under a
hypothetical situation, specifically as if it were vacant and ready for
development. Construction on the Venetian Project began on April 21, 1997. As of
the date of our most recent inspection on October 17, approximately $68,000,000
had been expended on excavations, piers, foundations and other structural
improvements. Therefore, the values stated below are not "as is" values. The
work completed to date would have a positive effect on value. Thus an "as is"
value would be greater than our hypothetical "as if vacant and ready for
development" assumption.
Based on the available data, along with our analyses, opinions and conclusions,
we are of the opinion that the market value of the fee simple interest in the
44.6 acres of land described in the attached report, as if vacant and ready for
development, as of October 17, 1997, would be:
TWO HUNDRED TWENTY FIVE MILLION DOLLARS
$225,000,000
Goldman Sachs Credit Partners
October 17, 1997
Page 2
The value of the 30.9 acre Venetian site, as of October 17, 1997, as if vacant
and ready for development, has been allocated as:
ONE HUNDRED FIFTY FIVE MILLION DOLLARS
$155,000,000
The value of the 13.7 acre Lido site, as of October 17, 1997, as if vacant and
ready for development, has been allocated as:
SEVENTY MILLION DOLLARS
$70,000,000
Landauer acknowledges that the value reported by the appraiser will be used and
reprinted for dissemination with regard to (a) borrowings being made from banks
and/or institutional lenders for the purpose of developing the property and (b)
in connection with a public offering or private placement of securities. The
attached Assumptions and Limiting Conditions contain a limitation regarding
dissemination of the appraisal.
At present the contiguous convention facility, the Sands Exposition and
Convention Center (SECC) encroaches onto 2.28 acres of the tax parcels that
include the subject site. The SECC is owned by an entity related to the
subject's current ownership. In order to maximize the allowable density of the
site, the related parties have entered into cross easement agreements that
enable them to take advantage of the complementary pattern of parking
utilization. The contiguous convention center would be a significant demand
generator for any casino hotel project, regardless of theming or market
orientation. We are of the opinion that any other prudent buyer would seek to
negotiate a physical connection to the SECC in exchange for shared parking.
We have made certain assumptions regarding the aforementioned encroachment and
provision of parking facilities based on our review of an unsigned copy the
Reciprocal Easement, Use and Operating Agreement, (REA) issued June 24, 1997.
This agreement is between Interface Group-Nevada, Inc. (Interface), which is the
current owner of the Sands Exposition and Convention Center (SECC), and Las
Vegas Sands, Inc. (LVSI), which owns the subject land upon which it or one or
more affiliates plans to develop the Venetian (Phase I) resort and the Lido
(Phase II) resort. However, some of the issues raised would be relevant to any
development on the subject site. The following assumptions were made to estimate
market value.
Goldman Sachs Mortgage Company
October 17, 1997
Page 3
1.) The site area utilized in our valuation, which is net of the encroachment
area, is based on the boundary line adjustment map prepared by Horizon Surveys
and a preliminary site plan as drafted by Martin & Martin Civil Engineers dated
February 17, 1997.
2.) Prior to consummation of the lot line modifications (as described in the
REA), the perpetual easement that permits the SECC to encroach are such that,
for practical purposes it is equivalent to a fee simple interest.
3.) The parties involved do complete the lot line modification with all due
diligence and as soon as reasonably possible as indicated in the REA or the SECC
encroachment easement remains in effect pursuant to the REA.(1)
4.) The REA places the onus of providing 800 of convenient parking spaces on the
owner/developer of the subject site. The SECC will be obliged to pay only
ordinary maintenance charges on the spaces used.
To address this, we have adjusted the concluded land value to reflect the
construction cost of 800 incremental parking spaces.
5.) During any construction on the subject parcel, the owner shall use
commercially reasonable efforts to minimize interference with the use, enjoyment
and occupancy of... the SECC. (2)
6.) There will be a series of reciprocal easements granted between the subject
and the SECC regarding access, egress, parking, and common area maintenance.
These easements will exist in perpetuity, and benefit any development on the
subject property.
The appraisal report is further subject to the following specific conditions and
assumptions, changes in which may materially affect the value conclusions
reported herein.
- ------------------------
(1) Reciprocal Easement, Use and Operating Agreement, issued June 24,
pages 10 and 11.
(2) Ibid, page 25
Goldman Sachs Mortgage Company
October 17, 1997
Page 4
We certify that we have no interest in the property and our employment and
compensation are not contingent upon our findings and conclusions. The following
appraisal report is subject to the assumptions and limiting conditions made
throughout the report.
Sincerely,
LANDAUER ASSOCIATES, INC.
Karen Johnson, MAI Rodney A. Wycoff, CRE, MAI
Managing Director Senior Managing Director
VACANT LAND UNDERLYING THE PROPOSED
VENETIAN AND LIDO RESORTS ON LAS VEGAS BOULEVARD SOUTH
IN LAS VEGAS, NEVADA
TABLE OF CONTENTS
SUMMARY OF SALIENT DATA AND CONCLUSIONS....................................... 1
SUBJECT PHOTOGRAPHS........................................................... 2
ASSUMPTIONS AND LIMITING CONDITIONS........................................... 3
CERTIFICATION................................................................. 5
INTRODUCTION.................................................................. 6
REGIONAL ANALYSIS.............................................................10
THE VISITOR INDUSTRY..........................................................16
NEIGHBORHOOD ANALYSIS.........................................................33
SITE ANALYSIS.................................................................37
HIGHEST AND BEST USE..........................................................44
VALUATION.....................................................................49
SALES ANALYSIS................................................................50
RESIDUAL ANALYSIS.............................................................64
RECONCILIATION................................................................71
Addenda
Legal Description
Engagement Letter
Photographs of the Subject Property
Photographs of the Subject Neighborhood
Comparable Land Sales
Hotel Investment OUTLOOK
Qualifications of the Appraisers
1
SUMMARY OF SALIENT DATA AND CONCLUSIONS
SUMMARY OF SALIENT DATA AND CONCLUSIONS
Subject: Vacant land.
Purpose of the Appraisal: To
estimate the market value
of the fee simple interest
in the subject property as
of October 17, 1997, as if
vacant and ready for
development.
Location: 3355 Las Vegas Boulevard South, Las Vegas,
Nevada.
Site: 1,940,571 square feet, or approximately
44.55 acres.
Improvements: None at present.
Zoning: H-1 which permits gaming and hotel use
by right.
Highest and Best Use: Resort Casino connected to the Sands
As Vacant Exposition and Convention Center.
Property Rights Appraised: Fee Simple Interest.
Marketing Period: Nine to twelve months.
Indications of Value:
Venetian Site Lido Site Both Sites
Sales Comparison Technique:
Value per acre $5,000,000 $5,100,000 $5,050,000
Acres 30.86 13.69 44.55
Total (rounded) Value $155,000,000 $70,000,000
$225,000,000
Residual Technique:
Value per acre: N/A N/A $8,300,000
Acres: N/A N/A 44.5
Total (rounded) Value: N/A N/A
$370,000,000
Valuation Date: October 17, 1997
2
SUMMARY OF SALIENT DATA AND CONCLUSIONS
Final Market Value Conclusion $155,000,000 $70,000,000
$225,000,000
3
SUBJECT PHOTOGRAPHS
SUBJECT PHOTOGRAPHS
[Photo of Assumed Condition Omitted]
Assumed Condition
[Photo of Actual Condition on Date of Value Omitted]
Actual Condition on Date of Value
4
ASSUMPTIONS AND LIMITING CONDITIONS
ASSUMPTIONS AND LIMITING CONDITIONS
This report is made expressly subject to the following conditions and
stipulations:
1. Date and definitions of value, together with other definitions and
assumptions on which our analyses are based, are set forth in
appropriate sections of this report. These are to be considered part
of these limiting conditions as if included here in their entirety.
2. The conclusions stated herein, including values which are expressed in
terms of the U. S. Dollar, apply only as of the date of value and are
based on prevailing physical and economic conditions and available
information at that time. Economic projections do not represent
forecasting of future events. Rather, they reflect a method commonly
used by investors to gauge the effect of anticipated trends on
investment yields. No representation is made as to the effect of
subsequent events which may significantly alter the conclusions
reported herein.
3. Title to the property is assumed to be marketable. The property is
considered as being under responsible ownership and free of all
encumbrances except as specifically discussed herein.
4. Information reported herein has been obtained from reliable sources
and, when feasible, has been verified. The appraisers reserve the
right to make appropriate revisions in the event of discovery of
additional or more accurate data.
5. No responsibility is accepted by Landauer for considerations requiring
expertise in other fields. Included in this category are ownership,
legal description and other legal matters, survey of property
boundaries, geologic considerations including soils and seismic
stability, civil, structural or other engineering, and identification
of hazardous or toxic substances. Data furnished or obtained from
public sources relative to these matters has been adopted and is
assumed to be correct.
6. Except where specifically noted, we have no cause to expect the
existence of undisclosed easements, encroachments or defects in title,
access, geology, structural integrity or mechanical systems. Any need
for further study indicated by our investigation has been disclosed to
the client and/or noted in the report; results of any such studies
furnished have been accepted and the source identified. Maps and other
graphic materials reproduced herein are for illustrative purposes only
and are not to be relied on for factual information.
7. The appraisers have inspected the subject property with the due
diligence expected of a professional real estate appraiser. The
appraisers are not qualified to detect hazardous waste and/or toxic
materials. Any comment by the appraisers that might suggest the
possibility of the presence of such substances should not be taken as
confirmation of the presence of hazardous waste and/or toxic material.
Such determination would require investigation by a qualified expert
in the field of environmental assessment.
4
ASSUMPTIONS AND LIMITING CONDITIONS
The presence of substances such as asbestos, urea-formaldehyde foam
insulation or other potentially hazardous material may affect the
value of a property. The appraisers' value estimate is predicated on
the assumption that there is no such material on or in the property
that would cause a loss in value.
No responsibility is assumed for any environmental conditions, or for
any expertise or engineering knowledge required to discover them. The
appraisers' descriptions and resulting comments are the result of the
routine observations made during the appraisal.
8. This appraisal covers only the real property described herein. Unless
specifically stated to the contrary, it does not include consideration
of mineral rights or related right of entry, nor personal property or
the removal thereof. Values reported herein are not intended to be
valid in any other context, nor are any conclusions as to unit values
applicable to any other property or utilization than that specifically
identified herein.
9. By reason of this assignment, testimony, attendance in court, any
government or other hearing with reference to the property is not
required without prior arrangements having been made relative to such
additional employment.
10. Use and disclosure of the contents of this report is governed by the
Bylaws and Regulations of the Appraisal Institute. The Appraisal
Institute reserves the right to authorize its representatives to
review this report and its supporting documentation. Except as set
forth in the engagement letter to which these limiting conditions are
attached, confidential distribution of copies of this report in its
entirety may be made subject to the sole control of the addressee,
however, excerpts may not be given to any third party without prior
written consent.
11. Except as set forth in the engagement letter to which these limiting
conditions were attached, neither all nor any part of the contents of
this report (especially any conclusions as to value, the identity of
the appraisers or the firm with which they are connected, any
reference to the Appraisal Institute or to the MAI or SRA designation)
shall be disseminated to the general public through advertising or
sales media, public relations media, news media or any other public
means of communication without prior written consent.
5
CERTIFICATION
CERTIFICATION
The undersigned certify that to the best of their knowledge and belief:
The statements of fact contained in this appraisal report and upon which the
analyses, opinions and conclusions expressed herein are based are true and
correct. This report is made subject to the Assumptions and Limiting Conditions
set forth on the following pages which contain all of the limiting conditions
(imposed by the terms of the assignment or by the appraisers) affecting the
analyses, opinions and conclusions in this report.
Employment and compensation for making this appraisal are in no way contingent
upon the value reported, and we certify that we have no direct or indirect
current or prospective personal interest or bias in the subject matter of this
appraisal report or to the parties involved.
No one other than the undersigned prepared the analyses, opinions or conclusions
concerning real estate that are set forth in this report.
This report has been made in conformity with the requirements of the Code of
Professional Ethics and the Standards of Professional Practice of the Appraisal
Institute. The use of this report is subject to the requirements of the
Appraisal Institute relating to reviews by its duly authorized representatives.
As of the date of this report, Rodney A. Wycoff, MAI and Karen Johnson, MAI have
completed the requirements of the continuing education program of the Appraisal
Institute.
Karen Johnson, MAI personally inspected the property which is the subject of
this report on February 10, 1997, March 7, 1997, August 4, 1997, and October 17,
1997. Rodney A. Wycoff, MAI, inspected the property on January 29, 1997.
Rodney A. Wycoff, CRE, MAI
Senior Managing Director
California Certified General Real Estate Appraiser License AG007074
Karen Johnson, MAI
Managing Director
Nevada Certified General Real Estate Appraiser License 02113
California Certified General Real Estate Appraiser License AG018739
7
INTRODUCTION
INTRODUCTION
IDENTIFICATION OF THE PROPERTY
The subject property is located at 3355 Las Vegas Boulevard South in what is
commonly referred to as Las Vegas, Nevada. The municipality governing the
subject property is Clark County. The subject is currently recorded on the
County's property tax records as all or portions of account numbers
162-16-202-008, 162-16-202-006 and 162-16-301-001.
The boundary lines of two tax parcels have not yet been relocated so that the
SECC currently encroaches on 2.28 acres of the subject site. A copy of the
proposed boundary line adjustment by Horizon Surveys is presented on page 38.
We have made certain assumptions regarding the aforementioned encroachment and
provision of parking facilities and utilities as indicated in an unsigned
Reciprocal Easement, Use and Operating Agreement (REA), issued June 24, 1997.
PURPOSE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the fee simple
interest in the land underlying the proposed Venetian and Lido Resorts as of
August 4, 1997, as if vacant and available for development.
HISTORY OF THE PROPERTY/BACKGROUND OF THE ENGAGEMENT
In the late 1950's, the first low-rise buildings of the Sands Hotel were
constructed on the larger assemblage comprised of approximately 59.0 acres which
includes the subject site. Additional buildings, and eventually a circular tower
were added in the 1960's and 1970's.
The Sands Hotel and its excess land were purchased in 1989 for $110,000,000 by
an affiliate of The Interface Group, doing business as Las Vegas Sands, Inc. An
additional $18,500,000 was funded at purchase for recapitalization and capital
improvements. The total investment in the original 59.0 acre property was
therefore $128,500,000.
To increase the large parcel's frontage on the Strip, the 1.53 acre Tam
O'Shanter Motel was bought in early 1996 for $12,400,000, or $8,104,575 per
acre, increasing the site to 60.5 acres. This site is held under different
ownership (Silver State Realty Trust) but is controlled by the same principal as
the larger parcel.
In 1990, approximately 13.7 acres of excess land on the eastern boundary of the
assemblage were developed with the Sands Exposition and Convention Center (Sands
Expo Center) at a cost of
8
INTRODUCTION
$55,000,000. In 1994, the lower level parking garage of the Expo Center was
converted into an additional 411,400 square feet of exhibit and meeting space at
a cost of $15,500,000. The conversion of the former parking garage brought the
net exhibit and meeting space total to 966,400 square feet. Pre-function areas
bring the revenue producing space up to 1,001,400 square feet.
In early 1996, the Sands Exposition and Convention Center (Sands Expo Center)
was transferred between affiliates. Las Vegas Sands Inc. (LVSI) sold the subject
to the Interface Group - Nevada, Inc. (Interface) for $66,594,000, its
approximate book value.
Between December 1996 and March 1997 the existing Sands Hotel and Casino complex
was demolished at a total cost of approximately $6,000,000 to make way for two
mega casino resorts, to be named the Venetian and the Lido. These casino hotels
are planned to be physically connected to each other through a retail area and
casino space and to the Sands Exposition and Convention Center by a common wall
and indoor corridor. Parking facilities and a utility plant are to be shared
also.
PROPERTY RIGHTS APPRAISED
The property rights appraised are what in mixed-use developments are considered
to be a fee simple estate. A fee simple estate is defined as absolute ownership
unencumbered by any other interest or estate; subject only to the limitations of
eminent domain, escheat, police power, and taxation.
The intent of the REA is to eliminate the current encroachment of the Sands Expo
Center (Interface land) onto 2.28 acres of the subject site by modifying the
parcel boundary lines. Our appraisal assumes that this is completed, and
...Until such time as the lot boundary lines are relocated to eliminate the
encroachment, Las Vegas Sands Inc. acknowledges that "(i) Interface owns
fee title to the SECC (including, without limitation, that portion of the
SECC that encroaches onto the Phase I land (the 'SECC Encroachment')) and
(ii) LVSI has no right, title, interest or claim in or to the SECC
(including, without limitation, the SECC encroachment)".
The subject is also encumbered by the obligation to provide 800 parking spaces
to the Sands Exposition and Convention Center.
The remaining easements assumed for the market value estimate are typical of
those encumbering regional malls and the individual fee components of mixed-used
developments.
9
INTRODUCTION
DEFINITION OF MARKET VALUE
For the purpose of this appraisal, Market Value is defined as follows:
The most probable price which a property should bring in a competitive and
open market under all conditions requisite to a fair sale, the buyer and
seller each acting prudently and knowledgeably, and assuming the price is
not affected by undue stimulus. Implicit in this definition is the
consummation of a sale on a specific date and the passing of title from
seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised and acting in what they
consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.(3)
As further clarification, NCREIF believes that it is reasonable under current
market conditions to assume up to one year to sell a property. Conversely, a
marketing period of three years would typically not be appropriate under the
Market Value definition. Further, Market Value does not assume a "liquidation
sale" (forced sale) which would place undue emphasis on time and cash.(4)
An estimate of market value requires that the appraisal reflect the attitudes
and behavior of typical investors and developers. In addition, an estimate of
market value considers the continuous attempt of market participants to maximize
real estate values, generate increased revenues and reduce risk. The market
value indications included in the Valuation Section are based upon the above
requirements.
- --------------------------
(3) Standards of Professional Appraisal Practice of the Appraisal Institute"
and Uniform Standards of Professional Appraisal Practice," The Appraisal
Foundation, 1994, page.
(4) "CREIF Clarification Statement Regarding 'Market Value' ", National Council
of Real Estate Investment Ficuciaries, 1991.
10
INTRODUCTION
MARKETING AND EXPOSURE PERIOD
There are a number of prospective buyers actively looking for an assembled,
developable site for mega casino resort development. We estimate that the actual
marketing period would require no more than six months. However, due diligence
periods prolong the effective marketing period by three to six months. A total
marketing and due diligence period of nine to twelve months is deemed
appropriate for the subject site.
The retrospective exposure period is estimated to be the same.
DATE OF VALUE ESTIMATE
In order to incorporate the most current information, the property is valued as
of October 17, 1997, the date of the most recent inspection. The value was first
estimated using the data available and under economic conditions prevailing as
of March 7, 1997. Negotiations regarding the Reciprocal Easement, Use and
Operating Agreement delayed the publishing of the report. The property was
inspected on January 29, February 10, March 7, 1997, August 4, 1997, and October
17, 1997 by Karen Johnson, MAI. Mr. Rodney A. Wycoff, MAI, CRE, inspected the
property on January 29, 1997.
SCOPE OF THE ASSIGNMENT
The scope of this appraisal involved the systematic research and analysis
necessary to reach a market value estimate for the land underlying the proposed
Venetian Resort.
Our research included a review of the current market for vacant land on the Las
Vegas Strip. Historical sales data was reviewed in order to estimate an
appropriate basis for our estimate of the current market value. Because of the
dated or less desirable nature of these comparables, a residual technique was
also considered. Our investigation included a thorough market overview in order
to gauge the current condition of the Las Vegas casino resort and convention
market. Historical development and absorption trends were analyzed. A summary of
projects currently planned and proposed was developed and their status in the
planning/approvals process was reviewed.
Last, a final value estimate was reached based on the above analyses, influenced
by the most reliable and appropriate data. This full narrative report is the
result of our findings and analyses.
11
REGIONAL ANALYSIS - LAS VEGAS, NEVADA
REGIONAL ANALYSIS
Geographical, social, political and economic trends are the factors that have
the most profound effect upon the real estate market. The following is a
discussion of these trends as they affect the economic base and strength of the
Las Vegas Metropolitan Statistical Area (MSA) and the City of Las Vegas in
particular.
GEOGRAPHICAL
The subject is located within the most southern region of Nevada consisting of
Clark and Nye Counties. Combined with Mohave County in Arizona, Clark and Nye
Counties compose the Las Vegas Metropolitan Statistical Area (MSA). The City of
Las Vegas is within the 864 square mile Las Vegas Valley of Clark County. Clark
County is approximately 7,910 square miles, most of which is undeveloped desert
and wildlife ranges owned by the Federal Government. To the north of Clark
County is Lincoln County, to the west is Nye County, also to the west and south
is California, and the Colorado River and Lake Mead are a natural eastern border
separating the county and state from Mohave County in Arizona. Las Vegas is
approximately 290 miles north-east of Los Angeles.
POPULATION
Since 1980, the Las Vegas MSA has experienced an average compound annual growth
rate of 4.9 percent per year. Historical population figures and projections are
shown in the following table.
LAS VEGAS MSA
Compound
Annual
Year Population Growth
- --------------------- ------------------- ---------------------
1980 538,000 N/A
1990 875,000 5.0%
1995 1,144,000 5.5%
1st Qtr. 1997 1,219,000 3.2%
Est. 2000 1,352,000 3.5%
Source: DRI/McGraw-Hill, U.S. Markets Review.
12
REGIONAL ANALYSIS - LAS VEGAS, NEVADA
Since 1970, the City proper has experienced population growth at an average
compound annual rate of 4.8 percent per year. The City's population figures and
estimates are shown in the following table.
CITY OF LAS VEGAS
Compound
Annual
Year Population Growth
- --------------------- ------------------- --------------------
1970 125,787 --
1980 164,674 2.7%
1990 258,295 4.6%
July 1996 401,703 7.6%
Source: Clark County Comprehensive Planning Department
Population in the City of Las Vegas has increased significantly since 1970 and
will continue to do so due to economic expansion. By the year 2000, DRI
estimates that population will increase to 1.35 million residents, an increase
of nearly 55% over 1990. Booming population growth will be driven by economic
growth. Along with the hotel, gaming and recreation industry, business and
personal services, trade, state and local government, transportation,
communications and utilities are areas of the economy that are expected to grow.
EMPLOYMENT
During 1996, total employment increased 8.1%. Much of this increase is the
result of new casino openings and construction of new properties. In absolute
numbers, the industry that created the most new jobs during 1996 was services,
but construction, trade and durable goods manufacturing grew at faster
percentage rates. Many new manufacturing firms relocated to Las Vegas from
California in the early 1990's as a result of the recessionary period California
experienced. Now that California's economy is recovering, the rate of growth in
local manufacturing jobs is expected to decline, but this should have little
effect on the Las Vegas economy. Current casino openings are expected to
increase services employment by about 15,000 jobs in both 1997 and 1998.
13
REGIONAL ANALYSIS - LAS VEGAS, NEVADA
Presented below is historical employment and unemployment data pertaining to the
Las Vegas MSA. The labor force has grown, on average, at a compound rate of 11.5
percent annually over the last four years, while the number of people employed
has grown at a greater rate of 12.0 percent per year. This has resulted in a
substantial decrease in the unemployment rate.
Employment and Unemployment
Las Vegas MSA
Compound
1st Qtr. Annual Growth
Year 1992 1994 1996 1997 Since 1992
----------------------------- ----------------- --------------- ------------- ---------------- -----------------------
Labor Force 422,800 572,000 648,000 654,000 11.5%
Employment 394,050 535,392 614,952 620,646 12.0%
Unemployment 28,750 36,608 33,048 33,354 3.8%
Unemployment Rate 6.8% 6.4% 5.1% 5.1%
Source: DRI/McGraw-Hill
The unemployment rate decreased from 1992 to 1994 by 0.4 of a percent. The
current unemployment rate is 5.1 percent, down from 6.8 percent in 1992. By
comparison, unemployment for the State of Nevada is presently 5.0 percent, while
the U.S. unemployment is 5.2 percent.
Nevada is one of the fastest growing states in the country. Due to a number of
factors including lower corporate and personal tax burdens, a lower cost of
doing business and the community's pro-business attitude, Nevada has been ranked
first as the fastest growing economy in the west by the DRI/McGraw Hill Regional
Forecast Summary over the last three years. It is forecasted to maintain that
ranking through 2001.
The MSA's economic vitality is closely related to the visitor industry which
directly provides, at the least, one out of three area jobs. Las Vegas is one of
the nation's favorite vacation destinations. During 1996, 29.7 million people
visited Las Vegas and spent $22.5 billion in the area including gaming revenues.
New developments increase employment opportunities, which in turn allow for
growth in related services.
The City has been striving to diversify its employment base particularly in the
manufacturing, distribution/warehousing and finance, insurance and real estate
(FIRE) sectors. The City forecasts that the greatest percentage increases in job
growth will occur in the non-gaming areas. However, in terms of absolute
numbers, the visitor industry is likely to continue to add the greatest number
of new jobs.
14
REGIONAL ANALYSIS - LAS VEGAS, NEVADA
This is evident from a review of the top ten employers in Las Vegas provided
below.
LAS VEGAS MSA
MAJOR EMPLOYERS
Company Business Type
- --------------------------------------------------------------------------------
1. MGM Grand Hotel, Casino Operations
2. Mirage Casino-Hotel Hotel, Casino Operations
3. University of Nevada--Las Vegas Education Services
4. Treasure Island at the Mirage Hotel, Casino Operations
5. Caesar's Palace Hotel, Casino Operations
6. Excalibur Hotel & Casino Hotel, Casino Operations
7. Hilton Corporation Hotel, Casino Operations
8. Luxor Hotel & Casino Hotel, Casino Operations
9. Circus Circus Casino Hotel, Casino Operations
10. The Monte Carlo Hotel, Casino Operations
Source: DRI/McGraw-Hill U.S. Markets Review, 1st Qtr. 1997.
Because of the relative importance of the visitor industry to Las Vegas' economy
and to the success of the subject's tradeshow facility, the local gaming market
and the local hotel market will be discussed at length.
15
REGIONAL ANALYSIS - LAS VEGAS, NEVADA
TRANSPORTATION
Freeways
Las Vegas is served by two major freeways and a number of smaller highways.
Interstate 15 extends north from the east/west 40 freeway through the southern
portion of the state and city and is the primary road link to Los Angeles.
Interstate 215 extends north and south through the central portion of the metro
area and is a branch of the 95 and 93 freeways. State Highways 159 and 160 form
a loop around the western and southern portions of the city. Highway 582 is a
link between Las Vegas and Henderson. And highways 146, 147 and 167 help provide
additional highway circulation to immediate surrounding areas. By the year 2000,
Las Vegas traffic counts are expected to increase by at least 30 percent above
1996 levels. As a result, Clark County is attempting to maintain and upgrade its
roadways through regular improvements.
Airports
The McCarran International Airport has an important role in Clark County's
business and development growth plan. McCarran is ranked the 10th busiest
airport in the United States, accommodating almost 30.5 million travelers in
1996, an estimate of 8.7 percent above 1995 levels. From 1988 through 1994,
total passenger count at the airport increased at a substantial compound annual
growth rate of 8.8 percent.
Since airport traffic is increasing at such rates, Clark County has committed to
spending $450 million in improvements to accommodate for anticipated future
levels of passenger traffic. During 1997 the ticketing lobby was expanded by 150
lineal feet to increase the number of ticketing positions and a small general
aviation runway was expanded to accommodate full-size commercial carriers,
bringing the total number of jet runways to four. In the summer of 1998 the
first 26 gates of a 50 gate "D" terminal expansion will be completed, along with
a baggage handling expansion and new people mover system. Because of its
superlative air service, Las Vegas has an advantage over many other convention
and vacation destinations.
Rail
Las Vegas is accessible via railroad for both freight and passenger service.
Both Union Pacific and Amtrak have lines running into the County and City
connecting Las Vegas with Los Angeles, Phoenix and Salt Lake City.
16
REGIONAL ANALYSIS - LAS VEGAS, NEVADA
Intercity Bus Lines
A number of bus lines are available in Las Vegas, some of which are the
following: Greyhound, Las Vegas-Tonapah-Reno Stage Line, Ray & Ross, Sun Valley,
Westside Charter Service, Funbus Luxury Travel and the Gray Line Tours. Also
available in the intracity is the Las Vegas Transit System.
CONCLUSION AND TRENDS
Las Vegas continues to be one of the fastest growing cities in the nation. Along
with rapid growth in tourism, the Las Vegas market also continues to expand into
other industries as well. Strong growth in tourism is projected to continue for
the next five years. A pro-business atmosphere and favorable tax climate will
support the growth of professional and service industries at a similar rate.
Employment is strong and will continue to strengthen as the economy diversifies.
17
THE VISITOR INDUSTRY
THE VISITOR INDUSTRY
Presented in the following subsections are discussions of the three critical
components of the Las Vegas Visitor Industry: The Convention Market, the Gaming
Market and the Hotel Market.
THE CONVENTION MARKET
Due to warm weather, the presence of two major convention centers, an extensive
hotel inventory with comparatively low room rates, affordable airfares and the
appeal of gaming, Las Vegas now hosts more major national conventions and trade
shows than any other destination. Two of the nation's five largest convention
centers are located in Las Vegas: the Las Vegas Convention Center and the Sands
Expo & Convention Center. The Sands Exposition & Convention Center (Sands Expo
Center) is located next to the subject site and boasts 935,000 square feet of
prime exhibit space. In addition to the exhibit space, the Sands Expo Center
also offers 23 meeting rooms totaling 31,400 square feet and a superior location
within one block of "The Strip."
The Las Vegas Convention Center (LVCC) has approximately 1,300,000 square feet
of indoor, finished area broken out as follows: 761,522 square feet of exhibit
space, 149,862 square feet of meeting space, 85,200 square feet of
lobby/registration space, a 14,623 square foot restaurant and 288,793 square
feet of access, circulation and support areas. An expansion broke in July of
1997 to increase exhibit space by 279,000 square feet and to add 42,400 square
feet of meeting space. The expansion is scheduled to be completed by the third
quarter of 1998.
The following table is a ten-year summary of the conventions, attendance and
revenue that have occurred in Las Vegas at the two major centers and in the
city's hotels.
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THE VISITOR INDUSTRY
CITYWIDE CONVENTION STATISTICS
Number of Annual Non-Gaming Annual
Year Conventions Attendance Growth Rate Economic Impact Growth Rate
- --------- ------------------ --------------------- ---------------- -------------------------- ----------------
1987 556 1,677,716 -- $1,197,168,704 --
1988 681 1,702,158 1.5% 1,242,227,536 3.8%
1989 711 1,508,842 -11.4% 1,140,912,624 -8.2%
1990 1,011 1,742,194 15.5% 1,358,243,318 19.1%
1991 1,655 1,794,444 3.0% 1,482,327,551 9.1%
1992 2,199 1,969,435 9.8% 1,693,074,125 14.2%
1993 2,443 2,439,734 23.9% 2,253,526,873 33.1%
1994 2,662 2,684,171 10.0% 3,034,267,004 34.7%
1995 2,826 2,924,879 9.0% 3,359,162,165 10.7%
1996 3,827 3,305,507 13.0% 3,943,105,480 17.4%
Source: Las Vegas Convention and Visitors Authority, January 1997.
Convention attendance growth and non-gaming economic revenue have increased at
annual compound average growth rates of 7.8 percent and 14.2 percent,
respectively over the last ten years. Growth in attendance and non-gaming impact
was positive in all but one year. The relatively low growth rate in 1991
coincided with the start of a national recession. A significant contributor to
the increase in 1993 was the maturation of the Sands Expo Center and opening of
an expansion at the Las Vegas Convention Center. Through May 1997, attendance at
conventions in Las Vegas increased by 5.1 percent over the same five months of
1996.
Over the past decade the number of new groups coming to Las Vegas has increased
at a compound annual average rate of 28.3 percent per year as depicted in the
following table.
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THE VISITOR INDUSTRY
LAS VEGAS CITY-WIDE CONVENTION AND TRADE SHOW SUMMARY
NEW VERSUS REPEAT GROUPS
Calendar Year No. Conventions New Repeat Repeat 5 plus
- ------------------- --------------------- -------------------- -------------------- ------------------
1976 325 38.5% 125 41.5% 135 20.0% 65
1981 515 51.8% 267 32.2% 166 15.9% 82
1986 564 50.0% 282 35.5% 200 14.5% 82
1991 1,655 80.6% 1,334 12.4% 205 7.0% 116
1996 3,827 89.0% 3,406 7.0% 268 3.9% 149
Compound Annual Growth Rates
1976 to 1996 8.6% -- 11.6% -- 2.3% 2.8%
1986 to 1996 21.1% -- 28.3% -- 3.0% 6.2%
1991 to 1996 18.3% -- 20.6% -- 5.5% 5.1%
Source: Las Vegas Convention and Visitors Authority.
Nearly 90 percent of the groups meeting in Las Vegas during 1996 had never met
there before. In absolute numbers, the number of new groups has doubled in the
past five years (3,406 groups in 1996 versus 1,334 groups in 1986). However,
when expressed as a percentage rate of growth the figure has moderated slightly
to 20.6 percent from a 28.3 percent growth period over the past ten years. Many
of the new groups are being retained, as demonstrated by the consistent growth
in the number of repeat groups. Las Vegas has been very successful in attracting
and retaining new group business.
Statistics from the Las Vegas Convention and Visitors Authority (LVCVA) indicate
that through July 1997, attendance at conventions in Las Vegas increased by 3.6
percent over the first seven months of 1996. Future growth will be facilitated
by the 1.0 million square feet of meeting space now under construction at the
LVCC, the Venetian, the MGM Grand, Caesar's, Bellagio, Paris and Project
Paradise.
20
THE VISITOR INDUSTRY
GAMING MARKET OVERVIEW
Las Vegas tourism is driven primarily by its gaming industry. Legalized in
Nevada in 1931, gaming distinguished this destination from every other in the
country (outside of Nevada) until its recent spread to other parts of the
nation. Today, Las Vegas' gaming revenues comprise just over 40 percent of the
total national gaming revenues. The legalization of gambling in many states has
not had a negative impact on gaming revenues in the state of Nevada, Clark
County or Las Vegas. In fact, gaming revenues in Clark County have steadily
increased over the years as the following chart shows.
CLARK COUNTY
GROSS GAMING REVENUE
Gross Percentage
- ---------------------- ------------------------ -------------------
Year Gaming Change
Revenues
- ---------------------- ------------------------ -------------------
1987 $2,789,336,000 --
1988 3,136,901,000 12.5%
1989 3,430,851,000 9.4%
1990 4,104,001,000 19.6%
1991 4,152,407,000 1.2%
1992 4,381,710,000 5.5%
1993 4,727,424,000 7.9%
1994 5,430,651,000 14.9%
1995 5,717,567,000 5.3%
1996 5,783,735,000 1.2%
Compound Annual 8.4%
Growth
Source: Las Vegas Convention and Visitors Authority, January 1997.
Through July 1997, gaming revenues in Clark County had increased by 4.6 percent
over the same seven months of 1996.
21
THE VISITOR INDUSTRY
The proliferation of gaming outside of Las Vegas, particularly in the Southern
and Midwestern States has promoted the social acceptance of gaming in these new
markets. Due to a conscious shift in market orientation, Las Vegas has shaken
off its former reputation as the vice capital of the country and has emerged as
a mainstream destination, billing itself as America's entertainment superstore.
In a 1996 survey by the American Society of Travel Agents, Las Vegas unseated
Orlando as the Number 1 tourist destination. The "must see" quality of the
newest mega resorts has enabled Clark County gaming revenues to increase at a
compound average annual growth rate of 8.4 percent since 1987.
The following table presents gaming revenue per area in Las Vegas and contrasts
performance in 1996 with 1995. Las Vegas revenues appear to have reached a level
of stabilization, and if further growth in revenues is going to occur, casino
operators believe that the number of guest rooms and gaming facilities must
increase.
LAS VEGAS
GAMING REVENUE BY AREA
County 1995 1996 Change
- ------------- ------------------------------------------------- ----------------
Clark County $5,717,567,000 $5,783,735,000 1.2%
Las Vegas MSA 4,557,331,000 4,618,674,000 1.3%
Strip 3,610,477,000 3,579,673,000 -0.9%
Downtown 641,853,000 678,852,000 5.8%
Boulder Strip 305,001,000 360,149,000 18.1%
Source: Las Vegas Convention and Visitors Authority, January 1997.
The decline in 1996 for "Strip" gaming revenues was caused almost entirely by an
isolated double digit decline in the month of November. Through October, growth
was positive. December 1996 and January 1997 revenues also showed increases.
Local observers attribute the decline to 1) a major swing in Baccarat play and
2) erroneous odds making on two nationally televised prize fights. There are a
handful of international Baccarat players that can affect annual gaming revenues
at any one casino by 30 to 40 percent.
Indicative of the changing profile of the Las Vegas visitor is the gaming
revenue on a per occupied room night basis. This is presented in the following
table.
22
THE VISITOR INDUSTRY
CLARK COUNTY
GAMING REVENUE PER HOTEL ROOM NIGHT
Estimated Room
Gaming Revenue Nights Occupied Revenue Per Occupied
Year (in 000's) (in 000's) Night
- ---------------------------------------------------------- ---------------------
1991 $4,152,407 22,530 $184
1992 $4,381,710 23,430 $187
1993 $4,727,424 24,617 $192
1994 $5,430,651 28,208 $193
1995 $5,717,567 28,695 $199
1996 $5,783,735 30,638 $189
Source: Las Vegas Convention and Visitors Authority, January 1997.
The rate of growth in gaming receipts, when expressed on a per occupied room
basis, is not keeping pace with inflation or the cost to construct many of these
new highly themed mega-resorts. Even if the decline in 1996 is omitted, the
compound annual rate of growth was only 2.0 percent per year between 1991 and
1995. If 1996 is indicative of the new market's profile, the rate of growth in
gaming revenues per occupied room has been only 0.5 percent per year. Hotel room
revenues, food and beverage revenues, and retail sales have, however, been
increasing at rates faster than inflation. From the standpoint of investors and
the lending community, this diversification is a positive change.
It is expected that Las Vegas will continue to attract a broader profile of
visitors in the future as more themed hotels, restaurants and retail centers are
developed. Visitor expenditures will be consumed by many attractions other than
gaming and thus, gaming revenues per occupied room night will likely flatten or
decrease consistent with the recent past.
Through July 1997, the gaming revenue per occupied room night declined to $188
from $191 for the same period of the previous year.
23
THE VISITOR INDUSTRY
LODGING MARKET OVERVIEW
The Las Vegas lodging market has experienced unprecedented growth during the
1980's, as well as an evolution of the concept of the casino/hotel.
LAS VEGAS AREA
HOTEL/MOTEL INVENTORY,
ROOMS AVAILABLE AS OF DECEMBER 31
Number of Percentage
- ---------- ------------------------------ ---------------------------
Year Hotel/Motel Rooms Change
- ---------- ------------------------------ ---------------------------
1987 58,474 --
1988 61,394 5.0%
1989 67,391 9.8%
1990 73,730 9.4%
1991 76,879 4.3%
1992 76,523 -0.5%
1993 86,053 12.5%
1994 88,560 2.9%
1995 90,046 1.7%
1996 99,072 10.0%
Source: Las Vegas Convention and Visitors Authority, January 1997.
Over the ten year period, the rooms inventory in Las Vegas grew at a compound
annual rate of 6.0 percent. Most recently the 1,500 room Stratosphere Hotel
opened in April, 1996 followed by the 3,014 room Monte Carlo in June. These two
properties and additions to the Luxor and the Rio are largely responsible for
the significant (10.0) percent increase in room inventory as of December 31 when
1996 is compared to 1995. In addition, the New York-New York Hotel and Casino
added another 2,035 rooms in January, 1997. The Las Vegas lodging market
contained 101,106 hotel and motel rooms as of January 3, 1997. This combined
with a number of other openings and expansions during 1997 have caused the
average supply during the first seven months of 1997 to be 10.5 percent greater
than in 1996.
24
THE VISITOR INDUSTRY
HISTORICAL PERFORMANCE
The historical occupancy performance of the aggregate Las Vegas hotel and motel
market from 1987 through 1996 is presented in the following table.
LAS VEGAS METRO-WIDE
HISTORICAL OCCUPANCY PERFORMANCE
Hotel Motel City-Wide
Year Occupancy Performance Occupancy Performance Occupancy Percentage
- ----------------------------------------------------------------------------------------------
1987 87.0% 74.0% 83.4%
1988 89.3% 73.7% 85.1%
1989 89.8% 72.5% 85.2%
1990 89.1% 69.8% 84.7%
1991 85.2% 62.6% 80.3%
1992 88.8% 66.1% 83.9%
1993 92.6% 69.7% 87.6%
1994 92.6% 73.2% 89.0%
1995 91.4% 72.4% 88.0%
1996 93.4% 75.7% 90.4%
Source: Las Vegas Convention and Visitors Authority, January 1997.
Despite the pace of additions, hotel and motel occupancy rates improved between
1987 and 1996. The pace of growth in demand has outstripped the rate of growth
in supply. However, through July 31, 1997, the overall metro-wide occupancy rate
has declined from 91.9 percent to 87.9 percent. This is attributable to the
recent increases in supply. According to statistics from the Convention and
Visitors Bureau, demand increased by 6.8 percent through July whereas supply
increased by 10.5 percent. Given the 6.8 percent growth rate in demand, we
believe that talk of Las Vegas having reached its
25
THE VISITOR INDUSTRY
saturation point is premature. In virtually any other community, a 6.8 percent
growth rate qualifies as "booming" demand. The market appears to be experiencing
a lag between the rate of growth in supply and the rate of growth in demand. The
rate of growth in supply will fall off slightly in the second half of 1997. The
only significant addition to open between now and the third quarter of 1998 is a
1,200 room expansion to Caesar's Palace.
The Las Vegas lodging market's performance is particularly successful when
contrasted against the performance of hotels and motels on a national basis.
LAS VEGAS
OCCUPANCY VS. NATIONAL AVERAGE
Year National Occupancy Las Vegas Occupancy Net Difference
- ---------- ------------------------ ------------------------- ------------------
1994 65.2% 89.0% 36.5%
1995 65.5% 88.0% 34.4%
1996 65.2% 90.4% 25.2%
Source: Las Vegas Convention and Visitors Authority.
As is evidenced by the growth in demand, these properties, which comprise the
majority of the recent additions to the supply, have demonstrated the strong
ability to induce significant demand into the Las Vegas market. These hotels,
through their themed attractions and extensive national and international
marketing efforts, have greatly broadened the potential Las Vegas visitor
market.
The cost of constructing these new mega-resorts is significant. As indicated in
the previous table on gaming revenue per occupied room night, the increased
levels of capital expenditures are not translating into higher gaming revenue on
a per unit (occupied room) basis. Thus, mega-resort operators are recognizing
that the increased costs must be borne by improved profitability in the rooms,
food and beverage, and entertainment departments. Pricing these items at "below
cost" can no longer be recovered by increased gaming revenues.
According to the Las Vegas Convention and Visitors Bureau, the average daily
room rate in Las Vegas is approximately $45. This figure factors complimentary
rooms in at zero revenue, when in fact the casino departments are required to
"buy" the rooms from the hotel rooms department at a predetermined rate. This
$45 rate is based on intercept interviews and not on any total room revenue or
transient occupancy tax figures. We consider it unreliable and meaningless.
26
THE VISITOR INDUSTRY
More reliable data is available from the Nevada Gaming Abstract. For Clark
County, the 132 gaming properties reported an average daily room rate of $61.27
in fiscal 1995/96. These properties accounted for 83,067 rooms or 93 percent of
the inventory estimated by the Convention and Visitors Bureau as 89,300 as of
December 31, 1995. (This would be the mid-point of the fiscal year and would be
less likely to overstate the average number of rooms available during the year.
For the 40 Strip Casino hotels with gaming revenues in excess of $1,000,000, the
average daily room rate in fiscal 1995/96 was $74.32. For the 19 largest casino
hotels which had gaming revenues of $72,000,000 and over, the average daily room
rate was $79.19 in fiscal 1995/96. Presented in the following table is a summary
of the growth in the average daily room rate for this most relevant category.
AVERAGE DAILY ROOM RATES FOR STRIP HOTELS
WITH $72.0 M PLUS IN GAMING REVENUES
Average Daily Percent
Fiscal Year Rate Change
- ----------------------------------- ----------------- --------- ----------------
1993/94 $66.20 N/A
1994/95 $74.61 12.7%
1995/96 $79.19 6.1%
Compound Annual Growth 9.4%
While growing at a rate that is roughly three times that of inflation, these
rates were still well below those at other major convention destinations. We
compiled a survey sample of the six other key trade show destinations, matching
the number of hotel rooms surveyed to each city's percentage contribution to the
trade show market. For the sample of headquarters hotels from these cities, the
average daily room rate in calendar 1996 was $139.25, an increase of 10.0
percent over 1995. We prepared a second survey of emerging sun-belt convention
destinations, to examine room rates in cities that are expanding their
Convention Centers - San Antonio, San Diego, and San Francisco. The average rate
for large, headquarters hotels in these cities was $140.42 and had grown 6.5
percent from the previous year.
Part of the reason that Las Vegas' rates are so low is that most of the casino
hotels have not constructed a material amount of meeting space on-site. For
example the 3,000 room Monte Carlo has only 35,000 square feet of meeting space.
With little commercial demand, these hotels mostly rely on the Las Vegas
convention center and the Sands Expo Center for mid-week convention businesses.
These
27
THE VISITOR INDUSTRY
facilities do not generate demand every day, and so the "under equipped" hotels
must fill-in with very low-rated tour and travel business.
The recent imbalance between the rates of growth in supply and demand in 1997
has resulted in lower average daily room rates during the summer months. Summer
is traditionally the lowest rated (priced) season because of the national
decline in convention activity and the softening of leisure demand due to the
high temperatures. It should not be surprising that the temporary imbalance in
supply and demand is being felt most during the summer months, and that it is
being felt most in room rates. With the Fall seasonal increase in convention
activity, more temperate weather, and the deceleration in the rate of supply
growth, the current discounting should abate. Further, the discounting has
affected the bottom of the market most severely. During the Second quarter of
1997, the Mirage, the Treasure Island and the MGM Grand were all able to
maintain or improve their average daily rates.
The room rates in these competitive cities are likely to continue to show real
growth in the near term due to the current shortage of rooms. A January 3, 1997
article in U.S.A. Today titled "Hotel Shortage Hits Big Cities" indicated that
hoteliers are forgoing the discounted group business associated with major
conventions in favor of higher rated commercial demand. The City of Chicago
recently lost its bid to host a major Tradeshow 200 event, the Pittcon
Scientific Convention, because of an inability to procure a 26,000-room block
for exhibitors and attendees. Rising rates and availability issues in the
competitive cities bode well for the Las Vegas hotel industry, which could
accommodate this room block in ten hotels with room to spare.
The fundamentals for continued growth are favorable. The diversification of its
market away from the core gamblers' market to "Middle America" continues to
attract first-time visitors. And while the number of international visitors is
small relative to the total, the potential for growth from this market is
immense. Europeans in particular are awed by the scale and spectacle of the
mega-resorts and are adding Las Vegas to the Western tour circuit that
previously included only Los Angeles, the Grand Canyon, Yosemite and San
Francisco.
Presented in the following chart is a summary of the states and countries of
origin for visitors to Las Vegas between 1990 and 1996.
28
THE VISITOR INDUSTRY
ORIGIN OF VISITORS BY PLACE OF RESIDENCE
1990 1991 1992 1993 1994 1995 1996
----------- ---------- ---------- ----------- ---------- ----------- -----------
U.S.
Total 90% 88% 85% 85% 86% 87% 82%
Eastern States 9% 9% 10% 8% 9% 10% 9%
Southern States 13% 14% 13% 11% 12% 12% 12%
Midwestern States 17% 15% 17% 17% 14% 13% 15%
Western States 51% 48% 45% 49% 50% 51% 46%
California 33% 33% 30% 32% 33% 35% 30%
Arizona 4% 5% 4% 6% 5% 3% 4%
Other 14% 11% 10% 11% 12% 12% 12%
No Zip Code Given 0% 1% 1% 0% 1% 1% 0%
Foreign
Total 10% 12% 15% 15% 14% 13% 18%
Canada 4% 5% 6% 6% 6% 5% --
Germany -- 2% 3% 3% 4% 1% --
England 2% 2% 2% 2% 2% 3% --
Other European 2% 2% 3% 2% 2% 2% --
Other Non-European 2% 2% 2% 2% 2% 2% --
Source: Las Vegas Convention and Visitors Bureau
The percentage of foreign visitation previously peaked in 1992 and 1993, then
declined with a resurgence in the percentage of visitors from California. In
1996, the percentage of foreign visitation spiked upward again. No detail was
provided in the most recent publication that would indicate the countries of
origin that contributed to the gain. The table also shows an uneven pattern for
California which has consistently been the largest single market for Las Vegas.
The effects of California's restructuring are reflected in the decline in
percentage contributions in 1992; its recovery pattern is evidenced from the
gradual increase until 1995. The decline in the percentage contribution in 1996
is not a reflection of worsening economic conditions in this source market. San
Diego and Orange Counties finally recovered the jobs lost since the 1989
employment peak in mid-to-late-1996. Los Angeles County is expected to fully
regain its lost jobs by 1997. Rather, we believe that the percentage
29
THE VISITOR INDUSTRY
decline from California in 1996 is related to the high levels of repeat
visitation from this market, and the absence of any openings of new "must-see"
attractions in 1996. What is noteworthy about the source market data is that Las
Vegas' tremendous growth in recent years has been achieved in spite of a severe
and prolonged recession in its primary source market.
California's increasing ethnic diversity bodes well for the gaming industry in
Las Vegas. According to surveys conducted for the Travel Industry Association of
America (TIAA) and presented at the 1997 Outlook for Travel and Tourism, the
propensity to take gambling vacations is greater among Hispanic and Asian
Americans than among Anglo Americans.
While there is no data in the TIAA report on the number of Hispanic Americans
that have the wherewithal to vacation, the numbers of this ethnic group that do
vacation stay longer than average (5.1 versus 4.5 nights) and spend considerably
more per trip ($559 versus $421). Asian Americans spend the highest amount of
any group, at $678 per trip.
Presented in the following table is evidence of California's broader national
demographic trends.
ETHNICITY OF VISITORS TO LAS VEGAS
1990 1991 1992 1993 1994 1995 1996
----------- ------------ ----------- ----------- ----------- ------------ -----------
Ethnicity
White 85% 83% 85% 85% 80% 79% 81%
African American 6% 6% 4% 4% 7% 7% 6%
Asian/Asian American 4% 5% 5% 5% 7% 7% 7%
Hispanic/Latino 4% 6% 5% 5% 6% 6% 5%
Other 1% 0% 1% 0% 1% 1% 1%
Source: Las Vegas Convention and Visitors Bureau
ADDITIONS TO THE COMPETITIVE SUPPLY
The following three tables present a construction report summary of the Hotels
and Casinos that may be developed in Las Vegas over the next three years.
30
THE VISITOR INDUSTRY
LAS VEGAS
HOTEL AND CASINO CONSTRUCTION REPORT
1997 OPENINGS
Project Location Rooms
- ----------------------------- --------------------------------------------------
New York-New York Las Vegas Blvd S. & Tropicana 2,035
Rio Suites Expansion 3700 W. Flamingo Rd. 1,025
Budget Suites of America 2219 N. Rancho Drive 704
Hawthorne Suites Duke Ellington Way & Tropicana 282
Harrah's Las Vegas 3475 Las Vegas Blvd So. 986
Budget Suites of America 3655 West Tropicana 480
Sunset Station Sunset Rd. & Stephanie, Henderson 450
The Desert Inn Renovation Las Vegas Boulevard (106)
Caesars Palace Expansion 3570 Las Vegas Blvd S. 1,200
Courtyard by Marriott Green Valley Parkway, Henderson 154
Total: 7,210
*Bold face type indicates that a property is likely to be competitive with a
high-end mega-casino resort.
Source: Las Vegas Convention and Visitors Authority, July 1997, and Landauer
Associates.
All but two of the above hotels opened in the first half of 1997.
Quarterly reports filed by the owners of New York New York indicate it is
exceeding developer expectations. Its owners have purchased a 2.06 acre site in
order to expand this project. This is discussed in the Land Sales Analysis.
31
THE VISITOR INDUSTRY
LAS VEGAS
HOTEL AND CASINO CONSTRUCTION REPORT CONTINUED
1998 OPENINGS
Project Location Rooms
- --------------------------------------------------------------------------------
Marriott Suites Convention Center Dr. 280
AmeriSuites Paradise Rd. & Harmon Ave. 200
Residence Inn by Marriott Green Valley Pkwy. & Sunset Rd. 126
Bellagio (Mirage Resorts) 3650 Las Vegas Blvd So. 3,000
Residence Inn by Marriott Paradise Rd. & Flamingo Rd. 300
**Polo Towers Time Share Las Vegas Blvd. So & Harmon 199
**Resort at Summerlin Summerlin Pkwy. & Rampart Blvd. 307
**McCarron Plaza Suites Las Vegas Blvd. & I-215 344
**Doubletree Hotel Warm Springs & Pollack 200
Total: 4,956
**Not Yet Under Construction
Source: Las Vegas Convention and Visitors Authority, July 1997 and
Landauer Associates.
32
THE VISITOR INDUSTRY
LAS VEGAS
HOTEL AND CASINO CONSTRUCTION REPORT CONT.
1999 OPENINGS
Project Location Rooms
- --------------------------------------------------------------------------------
Project Paradise Las Vegas Blvd. S. of Russell Rd. 3,800
Subject Venetian Resort 3355 Las Vegas Blvd S. 3,100
Paris Las Vegas Blvd S. 3,000
**Ritz Carlton Mountain Spa
Resort Rainbow Blvd. & Iron Mountain Rd. 526
**Four Seasons Resort Las Vegas Blvd. S. of Russell Rd. 400
Total: 10,826
** Not Yet Under Construction
Source: Las Vegas Convention and Visitors Authority, July 1997.
and Landauer Associates, Inc.
Of the above properties that are not presently under construction, it is
unlikely that all will be built. For example, the 3,200 room Planet Hollywood
project was recently delayed by two years and no longer appears on the
Convention and Visitors' Authority list. Circus Circus is receiving a great deal
of criticism from major institutional investors for its rapid rooms expansion on
Las Vegas Boulevard. We question whether these same investors will endorse the
construction of an entirely different quality development such as a Four Seasons
at this time. The Ritz-Carlton Mountain Spa has no financing and is currently in
the market for both debt and equity investment.
CONCLUSION
The Las Vegas lodging market has already absorbed the room expansions of 1993
and 1994, the largest expansions in its history, and is currently operating at
higher occupancy levels than those prior to the expansions. Over the long term,
average daily room rates are likely to grow at a faster rate than inflation due
to the "resort" versus purely "casino" market orientation of the new properties.
At present, there are 27,520 hotel and motel rooms in Las Vegas either under
construction or proposed through 1999. Of these, a significant number will
likely be postponed or will not be built. Based on historical performance, the
Las Vegas lodging market appears capable of absorbing a significant number of
new rooms. During the second quarter of 1997, the Mirage, Treasure Island and
MGM
33
THE VISITOR INDUSTRY
Grand were all able to maintain or improve their average daily rates. In the
third quarter of 1997, Mirage Resorts increased its net income by 12 percent,
led by the Mirage, which posted a 19 percent increase in cash flow. Rio reported
an 81 percent increase in earnings due to the rapid market acceptance of its
expansion. Analyst Todd Jordan of Raymond James and Associates said that Rio was
able to increase room rates by about 10 to 15 percent. Analyst Naomi Talish of
Merrill Lynch and Co. said that the MGM Grand cut rates by about 5 percent for
the third quarter but was running at 100 percent occupancy. The gaming divisions
of Hilton and ITT have or are expected to report strong third quarter
performance, due mainly to the strength of operations in Las Vegas. Only Circus
Circus appears to be suffering. Earnings per share were expected to decline 15
percent despite their recent rooms expansions. The demand fundamentals are good
and the Convention Center expansion and airport expansion will facilitate
further growth. Our conclusion is that the Las Vegas lodging market will
continue to generate sufficient lodging demand to maintain occupancy levels in
the high 80's and low 90's.
34
NEIGHBORHOOD ANALYSIS
NEIGHBORHOOD ANALYSIS
The subject Property is located in the Strip neighborhood of Las Vegas, more
specifically in the most desirable portion of the Strip which extends from
Spring Mountain Road /Sands Drive in the north to Tropicana in the south.
Up until the recent bankruptcy of the Stratosphere, a casino hotel's site on the
Strip was not considered paramount to success. In fact, the success of two
non-Strip properties, the Hard Rock Cafe Hotel and Casino and the Rio Hotel and
Casino, appeared to indicate that a Strip location was not even crucial for
success. It should be noted that the Hard Rock has only 348 hotel rooms and that
its chain-branded concept and Paradise Road location has not yet been tested
with a 2,000 room inventory. Initially the Rio Hotel and Casino started with 549
hotel rooms. Its concept, an outsize guest room with a large seating area, was
perceived of as a good value. Through superlative management, this property,
located on the "wrong" side of the I-15 Freeway, was able to garner an
impressive array of Zagat awards for "best room", "best food" and "best
service".
For a while, it appeared that as long as the casino hotel was in Las Vegas, it
was bound to be a success. In late December, 1995, a few months before the first
phase of the Stratosphere project was completed, a public offering raised $78.0
million to finance the second phase of the project and was oversubscribed in a
matter of weeks. While mechanical problems with some of the tower's thrill rides
and inadequate vertical lift may have contributed to its poor market acceptance,
the primary reason for its underperforming projections and subsequent bankruptcy
is attributed to its location. Grand Casinos, Inc., which bought out the
project's developer during the "anywhere in Vegas" euphoria, acknowledges that
the Stratosphere is "two blocks north of success".
A January 27, 1997 article in the Las Vegas Business Press titled "High Tech
Future for the Strip" indicated that "the limits of the Strip may be Russell
Road at the south and Sahara Avenue in the north; lenders have a tendency to
avoid risky areas. And risky on the Strip means anywhere in the vicinity of
Stratosphere Tower."
The fall-out of the Stratosphere bankruptcy has caused problems even for
developers attempting projects south of Sahara. A New Jersey based horse racing
concern, ITB, which bought a 20-acre parcel on the Strip just north of Riviera
in February, 1996 was stymied in its attempts to finance a major casino resort
and has announced that it will renovate the El Rancho rather than redevelop the
site. A second parcel on the northwest corner of Sahara and the Strip fell out
of escrow earlier this year due to the prospective developer's inability to
obtain financing.
35
NEIGHBORHOOD ANALYSIS
Numerous buyers who are active in the market confirmed that the core and most
desirable area of the Strip is located between Spring Mountain/Sands Boulevard
and Tropicana. The subject property is at the northern end of this core area,
across from two of the most successful casino resorts in Las Vegas, the Mirage
and Treasure Island. According to the same Las Vegas Business Press article
". . .the next best thing to being a Mirage is to be next to the Mirage. That
means that companies will build near popular locations like Spring Mountain and
the Strip."
Land prices in this core area will present a barrier to many developers. The few
blocks at either end of this core area appear to be costly locations, but would
be expected to be priced well below the core area. Judging from the interest in
acquiring The Frontier for redevelopment, the area for which financing could
likely be obtained for a new mega resort development is somewhat larger, likely
marked by Convention Center Drive on the North and Russell Road on the south.
Opportunities for new development on the south end of this area are somewhat
limited. Circus Circus controls the west side of the Strip between Tropicana and
Russell Road. The east side of the Strip consists of a number of small parcels
that back up to the airport. With each block one moves south, the depth and
utility of these east side parcels decreases. And, both sides of the Strip in
this southerly area are subject to a veritable "wildcard" in the form of FAA
approvals. While the FAA has the right to review all plans for buildings over 9
stories tall in Clark County, approvals for the conditional use permit height
variances are by no means certain in these areas near the airport. Circus
Circus' Project Paradise Development was delayed by several months due to its
application for a variance to permit a 450 foot height.
With the exception of the Circus Circus development in this southerly area, the
majority of the new mega-resort developments can be expected to occur as
redevelopments in the core and northerly areas of the Strip.
IMMEDIATE ENVIRONS
The immediate neighborhood surrounding the subject contains uses that are geared
to Las Vegas' 30 million visitors per year.
To The North
To the north of the Lido section of the larger subject assemblage is Sands
Avenue/ Spring Mountain Road. A "hold-out" to the assemblage occupies
approximately 2.0 acres on the corner of their intersection with the Strip. It
is possible that this hold-out, a two-story Vagabond motel and one-story retail
building could be replaced with a mid-rise structure but it is unlikely that the
developer of
36
NEIGHBORHOOD ANALYSIS
such a non-gaming facility could afford to pay a market rate for the site. (In
order to obtain a non-restricted gaming license, state law requires that a
casino provide a minimum of 200 rooms.)
North, across Sands Avenue is excess land belonging to the Desert Inn upon which
ITT Sheraton plans to build a Planet Hollywood Casino hotel. This 3,200-room
highly-themed project has been postponed by two years with the hostile take-over
attempt launched by Hilton (and Hilton has vowed not to go forward with the
project because of the costliness of licensing the Planet Hollywood name).
However, this site is a likely candidate for redevelopment. In the meantime, the
views to the north will be of the Desert Inn Golf Course and Desert Inn Hotel
which is currently undergoing a $190,000,000 renovation.
To the East
To the immediate east of the Venetian site is the Sands Exposition and
Convention Center, an approximately one million square foot tradeshow and
convention venue. This facility is a significant demand generator for hotel
guests, gamblers, restaurant patrons and retail customers. Beyond the Expo and
Convention Center is Koval Lane and a multi-family residential development. The
Las Vegas Convention Center is approximately two miles to the northeast.
To the South
Immediately South of the subject is Harrah's 35-story hotel tower and one of its
parking structures, and, fronting on the Strip, the Casino Royale. This small
free-standing casino pre-dates the minimum hotel room requirement and is
equivalent to a two-story structure. With only 3.23 acres, it is unlikely that
this parcel could be redeveloped to its highest and best use without being
assembled by the subject or Harrah's to the south.
To the West
Located to the West of the Subject site is the Las Vegas Strip, the Casino
Royale and Rosewood Grill restaurant. The owners of the Rosewood Grill
restaurant declined to sell their property to the Sands current owner. This
parcel, with 100 feet of frontage on the strip and a depth averaging 304 feet,
provides a partial separation of the Venetian and Lido project sites. This 0.64
acre site is a low density use that is unlikely ever to be expanded to more than
its current two stories. The site plan for the Venetian (Phase I) provides for
approximately 490 feet of frontage on Las Vegas Boulevard South (the Strip). On
the opposite side of the Strip due West, is the Mirage Resort, a major local
attraction. The more northerly Lido site will have 480 feet of frontage on the
Strip. To the northwest is the Treasure Island Resort, also a major local "must
see." The west facing hotel rooms in the
37
NEIGHBORHOOD ANALYSIS
Venetian Resort will have unparalleled views of the Volcano eruptions on the
Mirage's front lawn. Many will also have views of the pirate ship battle in
front of Treasure Island as will the west facing rooms of the Lido. Due to the
fact that both of the Mirage Resorts' attractions were designed to draw people
in from the street, the views from the subject will be better than from either
of the two "hosting" resorts for the same reason that a theater's loge seating
provides better views than from backstage.
To the northwest across from the intersection of Sands Avenue and the Strip, the
name of the east-west street changes to Spring Mountain. On the northwest corner
is one of Las Vegas' largest malls, the Fashion Show Mall. This mall is anchored
by a diverse mix of major department stores: Neiman Marcus, Saks Fifth Ave,
Robinson's May, Macy's and Dillards. The roster of in-line stores is very
diverse as well to have the broadest market appeal. These stores run the gamut
from Bally and Luis Vuitton to Miller's Outpost and Casual Corner. Because of
the success of this facility and location, an expansion is contemplated. A
recent Las Vegas Business Press article indicates that the sales per square foot
at this mall approximate $500.
CONCLUSION
The subject's larger neighborhood, the Las Vegas Strip, is the premier location
for casino hotel development. The subject site enjoys a very good location
within its neighborhood due to its location within the core area extending from
Spring Mountain/Sands to Tropicana. The proximity of the Sands Expo Center, and
the views it will offer of two of Las Vegas' major attractions should enable a
hotel on this site to avoid much of the low-rated tour and travel demand that
other, more remote casino hotels rely on mid-week, so as to achieve significant
room rate premiums.
38
SITE ANALYSIS
SITE ANALYSIS
PHYSICAL DESCRIPTION
Location
The subject property is located in the most desirable portion of the Strip
neighborhood of Las Vegas, Clark County, Nevada. The site is located
approximately 350 feet south of the intersection of Spring Mountain Road/Sands
Avenue with the Strip, between Las Vegas Boulevard South to the west and the
Sands Expo Center to the east.
Shape and Dimension
The subject is an irregularly shaped parcel. Its 970 feet of frontage along Las
Vegas Boulevard South is interrupted by one small narrow restaurant site with
100 feet of frontage. It has approximately 60 feet of frontage along Sands
Avenue. After the boundary line adjustment, as described earlier, the site is to
contain a gross area of approximately 44.5 acres or approximately 1,940,270
square feet. Please refer to the proposed parcel map on the facing page.
To determine the exact area of the subject parcel it is necessary to add the
site area of the Tam O'Shanter Motel as follows:
Phase I 1,344,378 S.F.
Phase II 524,533
Tam O'Shanter site 71,660
---------
Net Site area for Lido and Venetian Sites 1,940,571 S.F.
Expressed in Acres 44.55
The Tam O'Shanter site is currently held under separate ownership (Silver State
Realty Trust) and is currently developed with an interim motel use. This smaller
site is identified for tax purposes as 162-016-202-006.
Of these, the Venetian site is to contain 30.9 acre (rounded) comprised of
approximately 28.1 acres in what is currently tax plat 162-016-301-001 and 2.8
acres in the southwestern corner of tax plat 162-016-202-008. The 13.7 acre
(rounded) Lido site is comprised of 12.0 acres of tax plat 162-016-202-008 and
entirety (1.7 acres) of tax plat 162-016-202-006.
39
SITE ANALYSIS
[SANDS/VENETIAN PHASE MAP OMITTED]
40
SITE ANALYSIS
Topography
Prior to the commencement of excavations on April 21, 1997, the site was mostly
level and situated at street grade.
Environment and Soil
A soil report was not available for review. The site was previously improved in
the 1950's, 60's and 70's with the Sands Hotel. When it was demolished, all
asbestos was removed as were all underground storage tanks. Once excavations
began however, some contaminated water and soil were found. A letter from
Converse Environmental Consultants Southwest, Inc. dated August 7, 1997
indicates that "this soil contamination is relatively immobile and will become
more so as soon as the new buildings are constructed above it. If no human
intervention is taken to remediate the soil at an accelerated pace, the soil
will likely naturally degrade by biological attenuation over the next 15 to 30
years."
The contaminated groundwater is being treated with an on-site filtering process
and is being released into the storm drains. A permanent "dewatering" system
will be constructed as part of the physical plant. According to Converse, "the
length of time it will take to remediate the contaminated groundwater is
unknown; however an estimate can be made of 10 to 15 years to remediate the
aquifer". The cost of this dewatering is presently $5,600 per month. It is
possible that the permanent facility may be less expensive to operate. However,
for the purposes of this appraisal, we have assumed that this cost continues for
15 years. To determine the net present value of this cost, the annual cost of
$67,200 has been discounted back at a safe rate of 8.0 percent. The net present
value of the ongoing mitigation is $575,200. To this we have added a 20 percent
premium for ongoing consulting and supervision, which increases the cost of
mitigation to approximately $700,000.
Numerous surrounding improvements are of very dense highrise construction,
suggesting that soils are of adequate loadbearing capacity to support
improvements which are consistent with the highest and best use of the property.
No signs of soil problems were noted in our inspection.
Because it is located in such an urbanized area, we have also assumed that the
site is free of any desert tortoise environmental issues.
Access
The Sands hotel had direct access from both north- and south-bound traffic on
Las Vegas Boulevard South. The site also has access from both east- and
west-bound traffic along Sands Avenue. While we have not been provided with a
site plan showing the specific curb cuts, we have assumed that the
41
SITE ANALYSIS
subject will share a traffic light on Las Vegas Boulevard South with the Mirage
Resort, which is due west.
Utilities
All municipal utilities and services necessary to support the subject are in
service and include water, sewer, electrical, gas and telephone.
Streets
Las Vegas Boulevard South extends along the western border of the
property. It is a publicly dedicated right-of-way consisting of six lanes
traveling north and south with a center turn lane and median. Las Vegas
Boulevard South is improved with asphalt paving, concrete curbs, gutters,
sidewalks, street lighting, and has a width of approximately 100 feet. Las
Vegas Boulevard extends north into the city of Las Vegas.
Sands Avenue meets the subject at the eastern border of the property. It
is a publicly dedicated right-of-way consisting of four lanes and a center
turning lane traveling east and west, changing names at Las Vegas
Boulevard to Spring Mountain Road. Sands Avenue is improved with asphalt
paving, concrete curbs and sidewalks in front of the subject, and a gravel
shoulder opposite the entrance to the subject. At Spring Mountain Road, it
provides northbound access and southbound egress from I-15. Arrivals from
the South (Los Angeles) would likely exit I-15 at Flamingo, to the south
of the subject. Sands Avenue continues east to Paradise Road, the
neighborhood's second north-south arterial and the generally less
congested one. Airport arrivals would be equally as likely to use Paradise
Road and to avoid I-15 and the Strip.
LEGAL CHARACTERISTICS
Zoning
The subject is zoned H-1 (Limit Resort and Apartment District), as designated by
Clark County, Nevada. The purpose of the H-1 district is to provide areas for
hotel and/or apartment development. The building standards for the H-1 zone are
summarized as follows:
42
SITE ANALYSIS
FAR (Floor Area Ratio) No minimum or maximum stated.
Building Height Limit 100 feet or higher with a conditional use
permit.
Building Setbacks
Front: 10 feet.
Side: 5 feet plus one foot for every story above
40 feet.
Rear: none.
Site Coverage 60 percent.
Parking Requirements Guest room parking requirements:
1.0 spaces for each guest room for each room
up to 500 rooms.
0.5 spaces for each guest room from 501 to
1,000 rooms.
0.25 spaces for each guest room above 1,001
rooms.
Non guest room, public area parking
requirements:
20 spaces for each 1,000 square feet for the
first 40,000 square feet of floor space.
10 spaces for each 1,000 square feet from
40,001 square feet to 100,000 square feet of
floor area.
5 spaces for each 1,000 square feet in excess
of 100,001 square feet of floor area.
Administrative office parking requirements:
One space for every 300 square feet of floor
area.
*Includes casino, showroom, bars, lounges, commercial shops and stores, dining
rooms, and related spaces.
Assessed Valuation and Taxes
As depicted by the proposed Parcel Map, the subject site will include:
All but the easterly 1.59 acres of tax parcel 162-016-301-001
All but the southeasterly 0.70 acres of tax parcel 162-016-202-008
All of tax parcel 162-016-202-006
43
SITE ANALYSIS
Property taxes are paid in arrears and are measured on a June 30th measurement
date basis. Land taxes are based on a standard price per foot as computed for
the area by the Clark County assessor's office.
The Clark County assessor weighs strip frontage feet into the assessment
formula. These parcels are currently assessed at an average of $1,200,000 per
acre and the average equalization rate is 35 percent as depicted in the
following table.
Assessed Value
---------------------------------------------
Taxable
PIN 162-016- Land Improvements Total Value Taxes
301-001 $12,267,400 $ 767,440 $13,034,840 $37,242,400 $357,937
202-008 4,857,690 0 4,857,690 13,879,110 133,392
202-006 642,490 428,020* 1,070,510* 2,920,180 29,396
----------- ---------- ----------- ----------- --------
Total $17,767,580 $1,195,460 $18,963,040 $54,041,690 $520,725
*Includes $48,450 in assessed value for personal property.
Properties are generally appraised by the assessor's office every three years
with inflationary adjustments during non-appraisal years. Land is subject to
reassessment if improved upon or if it becomes out of equalization with
surrounding properties. It is reasonable to assume that the tax obligation for
the subject site will increase in the near term as assessed values along the
Strip increase.
Earthquake
The subject is not located in an earthquake hazard zone.
Flood Hazards
The site is an area zoned "X", outside of the 500 year flood zone, according to
the Flood Insurance Rate Maps of the Federal Emergency Management Agency, on Map
32003 1225 B recorded September 29, 1989.
44
SITE ANALYSIS
Easements
As is typical for mixed-use developments and is becoming increasingly common in
Las Vegas, the subject site is envisioned to be encumbered by a series of mutual
easements with the contiguous convention center that will enhance its functional
utility. The subject site will be favored with a zero lot line and access egress
easements such that it may connect seamlessly to the 1.0 million square foot
Sands Expo Center. This is a key source of hotel guests, gamblers, restaurant
patrons and retail customers. The opportunity to walk from the Expo Center to
the hotel and back without ever getting hot, cold, wet or windblown would
provide any casino hotel with a competitive advantage. In exchange, the owners
of the subject are to provide the owners of the Expo Center with no fewer than
800 parking spaces at a convenient location. These easements will enable the
density of the site to be maximized.
Parking Easement
A prospective developer would likely take into account the benefit of a seamless
connection to the Expo Center in preparing the project pro-forma. In negotiating
for the land, the cost of providing these spaces would most likely also be taken
into account. We have reviewed the Bovis cost estimates for the Venetian project
which indicate that hard costs and signage for structured parking will
approximate $7,500 per space. We will increase this estimate by 20 percent for
soft costs for a total cost per space of $9,000.
The cost to accommodate 800 additional parking spaces is estimated at
$7,200,000. This will be deducted from our preliminary land value estimate
before concluding to a final value.
45
HIGHEST AND BEST USE
HIGHEST AND BEST USE
Highest and best use is defined as follows:
The reasonably probable and legal use of vacant land or an improved
property, which is physically possible, appropriately supported,
financially feasible, and that results in the highest value. The four
criteria the highest and best use must meet are legal permissibility,
physical possibility, financial feasibility, and maximum
profitability.(F5)
In developed urban neighborhoods like the subject, the highest and best use is
typically that use which is permitted by zoning, the specific plan, the general
plan and/or private deed restrictions. Determination of the highest and best use
of a site depends upon the quantity, quality and durability of the income stream
of the development anticipated.
The determination of highest and best use includes an analysis of the subject
property as though it were vacant and an analysis as it is currently improved.
The definition of each analysis is as follows:
Highest and Best Use of land or a site as though vacant - Among all
reasonable, alternative uses, the use that yields the highest present land
value, after payments are made for labor, capital and coordination. The
use of a property based on the assumption that the parcel of land is
vacant or can be made vacant by demolishing any improvements.(F6)
Highest and Best Use of property as improved - The use that should be made
of a property as it exists. An existing property should be renovated or
retained "As Is" so long as it continues to contribute to the total market
value of the property, or until the return from a new improvement would
more than offset the cost of demolishing the existing building and
constructing a new one.(F7)
- ----------
(F5) The Dictionary of Real Estate Appraisal, Third Edition, Chicago: Appraisal
Institute, 1993 (pp. 171).
(F6) Ibid pp. 171.
(F7) Ibid pp. 171.
46
HIGHEST AND BEST USE
AS VACANT
Legally Permissible
Under the zoning ordinances established by Clark County, the subject is zoned
H-1, as previously described in The Land subsection of the Physical Description
section, and allows only for the development of a hotel, resort, inn, or motel.
This zone has a maximum height of 100 feet or nine stories and a maximum site
coverage of 60 percent. The height limit may be increased with a conditional use
permit after a review by the FAA of flight paths at McCarran International
Airport. Conditional use permits can also be sought to change the land use to a
number of alternative uses including multiple family residential, retail,
institutional buildings, casinos and office buildings. Specifically omitted are
single family residences and industrial buildings. Parking requirements vary
depending upon the specific uses and their respective areas included in a
development.
Physically Possible
The subject site encompasses a total land area of approximately 44.5 acres, or
1,940,270 square feet situated along the east side of Las Vegas Boulevard, south
of Spring Mountain Road/Sands Avenue. The assemblage has nearly 970 feet of
frontage along Las Vegas Boulevard, directly opposite the Mirage and Treasure
Island Hotels. Other adjacent uses include restaurant, retail and casino hotels,
generally determined by site area. Larger, multi-acre sites tend to attract
casino/hotels. While no specific soil survey was provided, the improvements in
the area would indicate adequate soil conditions to support substantial
improvements, such as high-rise casino hotel or offices.
The site has an irregular rectangular shape with a greater depth than width.
Primary access is midway along Las Vegas Boulevard with secondary access
available at the northwest corner from Sands Avenue.
The subject, due to its size, dimension and access would be able to support a
variety of uses which would conform to the zoning regulations and surrounding
uses. The comparatively large size would indicate a casino hotel development,
possibly incorporating mixed use retail and convention facilities as indicated
by the recent development of large Strip sites. Alternatives, subject to CUP
approval, include office park and retail mall.
47
HIGHEST AND BEST USE
Financially Feasible/Maximally Productive
As a vacant site under current zoning, only a lodging use would be allowed under
the existing H-1 classification subject to a 60 percent lot coverage and
9-story/100 foot height maximums. Conditional use permits could be obtained in
order to increase site density. In fact, many of the recently completed resort
developments along the Strip have obtained CUPs for higher density. The trend of
the newest projects and those under construction reflects increasing land
utilization and density.
As previously indicated in the Hotel Market Overview, 1996 city-wide hotel and
motel occupancy rates in Las Vegas are strong with an area average of 90.4
percent. The hotel sector indicated an average occupancy of 93.4 percent. The
average daily rate has been increasing at a compound annual rate of 9.4 percent
since fiscal 1993/94 due to the recent completion of several large
resort-oriented casino hotel properties. Recent activity for prominent casino
hotel developments along the Strip appear to be occurring between Reno Avenue
(south of Tropicana Avenue) and Spring Mountain Road. An exception is the
Stratosphere Tower located several blocks north which has been well publicized
for its financial difficulties. This evidence seems to support a large scale
resort-oriented casino hotel for the subject core Strip site.
The alternative land uses considered for this comparatively large tract of land
located along Las Vegas Boulevard include an office park and/or retail mall.
There has been much discussion in the city concerning the lack of first
generation Class A office space. The Howard Hughes Center, located at Flamingo
and Paradise Roads southeast of the subject, is the largest and most prominent
office park in the area. With approximately 750,000 square feet of Class A
office space in several high and low-rise buildings and among the highest rents
in the Valley, this center reported a vacancy rate of around 15 percent. The 120
acre development is the most proximate to "The Strip". Most new office park
development is occurring near the airport and in the Summerlin and Green Valley
master planned communities. Virtually no new office space has been completed
with, or is planned for, a Las Vegas Boulevard address. The office market has
clearly ceded this location to other uses, notably casino hotel and commercial,
and is seeking to establish beachheads near evolving residential population
centers.
Retail use for a site of the subject's size would entail a regional mall similar
to the 840,000 square foot Fashion Show Mall located along the west side of the
Strip at Spring Mountain Road. Another prominent Strip located mall is the
250,000
48
HIGHEST AND BEST USE
square foot Forum Shops at Caesar's which is adjacent to Caesar's Palace
and The Mirage casino hotels. The Caesar's hotel is undergoing an expansion,
with the Forum Shops adding a 225,000 square foot expansion. This mall makes a
strong case for retail development ancillary to casino hotel development as
opposed to a free standing regional or subregional mall. Due to the size of the
subject site, development with a dedicated retail mall would add a substantial
amount of retail space to "The Strip". The Forum expansion and another project
located at Tropicana Avenue, the Showcase Mall (developed by Forest Cities and
is due to open fully by mid-1997), will add just under 500,000 square feet of
new retail space to the Strip.
SUMMARY OF SELECTED RECENT/PLANNED PROJECTS
LAS VEGAS BOULEVARD RESORTS
Year Building No. Rooms/ Casino Meeting Land
Proiect/Location Completed Height Rooms/AC Area in SF Area in SF Area in AC
- ---------------- --------- ------ -------- ---------- ---------- ----------
New Projects
New York, New York 1996 48 2,035 84,000 N/A 20
NEC Tropicana & LVB 102
Monte Carlo 1995 32 3,024 90,000 35,000 46
WS LVB, North of Tropicana 66
MGM Grand 1993 32 5,005 171,500 120,000 79
NWC Tropicana & LVB 63
Luxor Las Vegas 1993/95 30 4,500 100,000 20,000 64
SWC Tropicana & LVB 70
Treasure Island 1993 36 2,900 78,400 18,000 120
SWC Spring Mountain & LVB 50
Mirage 1989 29 3,044 95,500 82,000 See Above
WS LVB, South of Spring Mountain 50
Under Development
Bellagio 1998 35 3,000 N/A N/A 120
SWC Flamingo & LVB 25
Paris 1999 40+ 2,900 85,000 160,000 24
ES LVB, South of Flamingo 121
Notes
MGM Grand land area is net of 33-acre amusement park.
Luxor Las Vegas includes recent room addition.
Treasure Island and Mirage share the site.
Bellagio is planned for subsequent hotel phases.
Paris improvement height is a preliminary estimate; Eiffel Tower replica will be
54 stories.
Source: Landauer Associates, Inc., March 1997.
49
HIGHEST AND BEST USE
Outside of these projects, new and proposed dedicated retail development is
occurring in the growth areas of the Valley, notably Green Valley, Summerlin and
North Las Vegas.
The primary indication of the subject's land use is best suggested by a review
of the recently completed resort projects along Las Vegas Boulevard as well as
planned new projects. Additionally, many of the existing casino hotel projects
are planning for expansions of their sites, which would increase their
respective overall land utilization. It should be noted that many of these
projects include several complementary components in addition to hotel rooms
such as casino areas, meeting rooms, retail arcades, entertainment centers
and/or a "thrill ride". This is in response to the market's demand for a more
balanced entertainment offering. The facing table summarizes these projects.
The data on the table shows some interesting trends. Primarily, newer projects
reflect increasing land utilization as expressed in hotel units developed per
land acre. Each of these developments has received a variance to the height
limit of nine stories, with the newest projects over 35 stories. As well-located
Las Vegas Boulevard land values increase, and core Strip development/expansion
land has been consumed, casino hotel developers have shown a notable trend
towards greater densities. Virtually all of these projects are located along the
Strip between Spring Mountain Road/Sands Avenue and just south of Tropicana
Avenue. This area has generally been acknowledged as the primary activity center
of the Strip and has the greatest pedestrian and vehicular traffic.
Of particular note to the subject are the recently completed New York-New York
and proposed Paris projects. Both are on comparatively smaller sites of 20 and
24 acres, respectively, which support a two phased development for the subject.
These two projects indicate hotel development ratios of 102 and 121 rooms per
acre, nearly double the average of the remaining hotel projects listed,
excluding Bellagio. Improvement heights are 48 and over 40 stories,
respectively. Paris will have a replica of the Eiffel Tower which is planned to
reach 54 stories. We feel that the densities of these two projects provide the
best indication of the subject's highest, best and most productive use.
Not shown on this chart is the planned Convention Center for the MGM Grand
Hotel. This resort is planning to redevelop a portion of its amusement park with
an approximately 380,000 square foot Convention Center to enable it to replace
low-rated tour and travel business with more lucrative meetings business.
50
HIGHEST AND BEST USE
Additional consideration was given to existing Las Vegas Boulevard hotel
projects which are either undergoing or are planned for expansion. Projects such
as Caesar's Palace, Harrah's, The Las Vegas Hilton, The Flamingo Hilton and
Excalibur are adding hotel towers of between 25 and 35 stories on underutilized
portions of their original sites.
CONCLUSION - AS IF VACANT
In consideration of the subject's location, size, surrounding uses, zoning,
hotel market characteristics and recent development trends, it is our opinion
that the highest, best and most productive use of the subject 44.5-acre site is
for development with two hotel casinos similar to and competitive with recent
newly completed and planned projects. This would reflect a hotel room ratio of
over 100 rooms per land acre and a building height in excess of 35 stories.
Consistent with recent trends, the development would incorporate mixed uses of
casino, meeting and retail space of appropriate size in consideration of the
massing of the project. This land use would return the greatest value to the
land through the inclusion of the basic market accepted use found in this
location of the Strip, in particular casino hotel enhanced by the synergy
resulting from additional ancillary uses demanded by the evolving Las Vegas
tourism market.
Legal Descriptions
See Addenda.
CONCLUSION
Given the subject's central Strip location, ease of access, proximity to the
Sands Expo Center and overall configuration, it is our opinion that the subject
site possesses suitable characteristics for development of a mega resort.
51
VALUATION
VALUATION
The appraisal process is the orderly program in which the data used to estimate
the value of the subject property are acquired, classified, analyzed and
presented. The first step is defining the appraisal problem - i.e.,
identification of the real estate, the effective date of the value estimate, the
property rights being appraised and the type of value sought. Once this has been
accomplished, factors that affect the market value of the subject property are
investigated and analyzed. These include area and neighborhood analysis, site
and improvement analysis, highest and best use analysis and the application of
the possible techniques in a site's value.
A final step in the appraisal is the reconciliation of the value indicators. In
the reconciliation, the appraiser considers the relative applicability of each
of the methodologies used, examines the range between the value indications, and
places major emphasis on the analytical techniques that appear to produce the
most reliable solution to the specific appraisal problem. The purpose of the
appraisal, the type of property, and the adequacy and reliability of the data
are analyzed; these considerations influence the weight given to each of the
techniques in valuation.
There are six possible valuation techniques that may be used to value land. They
are:
1. Sales Comparison
2. Allocation
3. Extraction
4. Subdivision Development
5. Land Residual
6. Ground Rent Capitalization
The Sales Comparison technique is the most commonly used. However, when there
are an inadequate number of comparable sales, other techniques are applied. In
the case of the subject property, the comparables are either very dated, poorly
located, too complicated, or too small to be considered good comparables. The
number and magnitude of adjustments is considerable. For this reason, we will
also consider the Land residual methodology.
While this is normally a fairly arcane technique used only by appraisers in this
market, we believe a larger number of market participants (read Sellers) are
performing both simplified and sophisticated versions of this technique. Vast
quantities of data on casino net income levels and construction costs are in the
annual reports and SEC filings of the publicly traded gaming companies.
52
SALES ANALYSIS
SALES ANALYSIS
For the sales comparison approach of our analysis, we reviewed the available
body of information on consummated sales of large, comparable H-1 zoned parcels
on the Las Vegas strip. Unfortunately, the consummated sales involved sites that
are outside of the core strip area, are too small, or are too dated to reflect
today's' market conditions.
The large sales transactions within the subject's core Strip neighborhood
pre-date the opening of the previous wave of mega-casino resorts and were
influenced by the concerns regarding overbuilding that preceded the opening of
the MGM Grand, the Luxor, and Treasure Island in 1994. Asking prices have
appreciated considerably since then, both in the core Strip area and the
secondary or peripheral areas.
In the absence of truly comparable current sales it is an acceptable alternative
to rely on transactions that are in escrow, rejected offers and asking prices.
The paucity of truly comparable consummated transactions requires that we
consider an imputed price, a very small but recent sale, an asking price, as
well as sales in secondary locations.
These transactions are summarized in the chart on the following page. The
locations of these sales are depicted in the Map on its facing page. Detailed
data sheets may be found in the Addenda to this report.
We are aware of one proposed transaction that was announced on August 3, 1997,
which would have involved the sale of a 50 percent interest in the 715 room
Desert Inn and Country Club, plus the site of the proposed Planet Hollywood Mega
resort to investor Marvin Davis. An October 17, 1997 article in the Wall Street
Journal indicated that the negotiations have now run into a serious obstacle.
This proposed transaction was precipitated by the hostile take-over attempt
launched by Hilton in February to take control of ITT Sheraton. In order to
thwart this attempt, ITT Sheraton is selling-off a number of significant assets.
The seller is under duress. The proposed transaction is structured more along
the lines of a participating loan, an issue which has caused the recent hitch.
According to the October 17 article, "Mr. Davis insisted on the provision
because he felt ITT's $400 million valuation for the Desert Inn was too high and
he wanted a safety valve, according to people familiar with the situation.
People close to Mr. Davis said that ITT's change of heart came about because the
company's accountants wouldn't condone recording the agreement as an outright
sale as long as the provision was part of the deal. An ITT spokesman said the
company never intended to account for the transaction as a sale because it is a
joint venture." If the 715-room resort fails to produce $25 million in earnings
before interest, taxes and dividends of $25.0 million in the year 2001, the
buyer could force ITT Sheraton to buy back his 50 percent equity interest in
that component for $100
53
SALES ANALYSIS
million. Sheraton recently spent $190 million on the renovation of that asset.
If the buyer elected not to become
54
SALES ANALYSIS
COMPARABLE LAND SALES SUMMARY
Sale Sales
No. Location Date Price Acres $/Acre Zoning
- --- ------------------ ---- ------------- ----- ---------- ---
1 Monte Carlo Casino 9/95 $146,000,000 45.72 $3,193,351 H-1
Las Vegas, Nevada
2 N.W. Corner Harmon & Listing $66,000,000 11.32 $5,830,389 H-1
Strip
Las Vegas, Nevada
3 La Quinta Carrows Site 3/97 $13,500,000 2.06 $6,553,398 H-1
Las Vegas, Nevada
4 S.W. Corner Las Vegas 8/95 $80,000,000 47.29 $1,691,690 H-1
Blvd. South & Hacienda
Las Vegas, Nevada
5 N.W. Corner Las Vegas 3/95 $73,000,000 73.74 $989,965 H-1
Blvd. & Russell Road
Las Vegas, Nevada
6 2755 Las Vegas Blvd. 1/95 $43,500,000 20.86 $2,085,331 H-1
Las Vegas, Nevada
7 2600, 2601 Las Vegas 10/95 $61,738,500 66.04 $934,865 H-1
Blvd. South
Las Vegas, Nevada
55
SALES ANALYSIS
[Map Omitted]
Land Sales Map
56
SALES ANALYSIS
involved in the development of the 34-acre Planet Hollywood site, he could
compel the seller to buy back his 50 percent interest in that site for $50
million. This suggests that the 100 percent interest in the 34-acre site would
have been sold for $100 million, or $2,900,000 per acre. The combined
allocations of $150 million suggest that ITT is willing to sell a 50 percent
interest in these assets at a 25 percent discount from their internal values.
Because of the distressed circumstances surrounding this transaction, the
probability that it will not occur, and the complexity of the transaction, it is
provided for informational purposes only and has not been included in our
analysis.
ADJUSTMENTS
Each sale must be reviewed to determine whether adjustments are necessary in
order to render a price that is more meaningful to the subject property. A
number of adjustments are generally considered when evaluating any land sales
comparables. For the key non-physical adjustments, The Appraisal of Real Estate
prescribes a series of adjustments and the sequence in which they should be
made. The factors that may suggest the need for any of the prescribed sequential
adjustments are summarized briefly, in the order in which they are to be
performed:
Property Rights Conveyed - The price paid for real property can vary with
the different ownership interests that are conveyed. Typically price
diminishes as the bundle of right conveyed diminishes. The subject site is
owned in fee simple estate. However the planned development has
encumbrances in the form of reciprocal easements between the casino hotels
and the retail space, between the two planned hotels, and with the
contiguous Sands Expo Center. These easements will affect the common area
of connecting hallways, walls and shared parking garages. These easements
are beneficial to the subject sites, as an indoor connection to a major
convention center provides the connected hotel(s) with a relatively
"captive" demand source and, typically room rate premiums. No other Strip
casino resort has the seamless connection to large amounts of convention
space. We believe that any third party would attempt to negotiate
easements between the hotel pads and the Sands Expo Center. However, we
have adjusted the concluded land sale price by the cost of providing 800
spaces to the Sands Expo Center, as required in the REA. Two of the sales
involved leased fee estates. The necessary adjustments are handled in a
separate specific adjustment, as these buy-outs are not likely to increase
as the fee interest appreciates.
Financing Terms - The market value definition used in this valuation
specifically states that value is predicated on cash or its equivalent.
Transactions involving stock or seller financing at below market interest
rates would require adjustments. One sale involved a stock transfer; the
value of the stock used in the transaction was discounted by 30 percent as
recommended
57
SALES ANALYSIS
by the investment bank involved in the transaction. None of the other
sales involved unusual amounts or terms for any seller financing.
Conditions of Sale - When the circumstances surrounding a sale are
unusual, the price obtained may be lower or higher than under "normal"
conditions. Adjustments are typically made for distressed sales (under
threat of bankruptcy), liquidation sales (out of bankruptcy), non-arm's
length transactions, eminent domain sales, or sales with a lack of
exposure on the open market. A transaction that was in escrow or a listing
would require an adjustment under the "conditions of sale" category
because of the tenuousness of these price indicators. The one comparable
that is an asking price has been adjusted downward.
Market Conditions - Sometime referred to as the "time adjustment" this
factor is taken into account when there has been appreciation or
depreciation between the date of sale and the date of value. Frequently
the rate of adjustment is arrived at by a paired sales analysis, in which
otherwise like sales are compared to determine price movement. Concluding
to a rate of change on the basis of one transaction is not sound practice
from a statistical point of view. Other, broader samples may also be used
to determine price trends. To determine an appropriate rate of adjustment
for improving market conditions, we considered both the broader market
appreciation trends and the rates of increase suggested by paired
transactions. Five of the comparables required market condition
adjustments.
A second set of adjustments is generally made having to do with the physical
characteristics of the site. These adjustments are not made sequentially; thus
the order in which they are considered is of less importance. Adjustments for
physical characteristics are more affected by local market behavior. In the Las
Vegas market, and for parcels such as the subject, the following physical
characteristics should be considered:
Location - There are superior and inferior locations in nearly every
market. As indicated earlier, there is a significant difference between
core Strip and peripheral Strip pricing. We have made locational
adjustments to four of the sales because of their secondary locations.
Size - In many communities, a larger parcel would be expected to transact
at a lower price per acre/foot than a smaller parcel. In Las Vegas however
changes in gaming law preclude the issuance of any new "unrestricted"
gaming licenses to facilities that do not have at least 200 hotel rooms.
This, and the dominance of the Mega-Resort casinos appear to have
eliminated any premium for a small lot unless that lot is crucial to the
assemblage of a buildable parcel. A modest adjustment between 20 to 30
acre sites and 60 to 70 acre sites may exist however.
Assemblage - Sites which are crucial to the formation of one larger parcel
of superior utility frequently command a premium. This is also frequently
the case when a specific site is
58
SALES ANALYSIS
required for an expansion. After considering the residual technique, we
are of the opinion that the prices paid earlier for smaller parcels that
appear to have had assemblage value, may have been "at market". However,
the current small transaction used (Sale Number 3) does appear to have
been priced at a premium since it is necessary if the contiguous resort is
to expand. Assemblage adjustments in this market can work in reverse if a
smaller parcel appears difficult to integrate into a large developable
parcel.
Zoning - The subject's zoning is the primary designation that permits
casino hotel development. Comparisons to land sales that were not zoned
H-1 would not be meaningful in this market unless the probability of
rezoning were high. All of the sales or listings used were zoned with H-1
zoning, however, two of the sales were located in an area affected by FAA
height limitations. As this is a governmental restriction similar to
zoning, we will classify this factor as a zoning adjustment.
Demolition - The costs of demolishing an existing building that were borne
by the buyer would drive up the cost of the parcel acquisition. The Sands
Hotel was recently demolished at a cost of $6,000,000, including the cost
of removing asbestos and underground storage tanks. This amounted to
$8,333 per guest room, and will be used as the basis for demolition cost
estimates when no specific information is available for a comparable.
Lease buy-outs - In order to adjust for the cost of converting a lease fee
estate to a buildable fee simple estate, we have adjusted two of the
comparable sales for the cost of buying-out a lease.
Interim Use - The ability to generate income from a site and reduce its
carrying costs prior to its redevelopment might have a positive effect on
price. This should be weighed against any costs for demolition.
Presented in the following paragraphs are the discussions of the sales and the
necessary adjustments. The value conclusion will be compared to value indicated
by the residual methodology.
59
SALES ANALYSIS
Land Sale Adjustment Grid
Comparable 1 Comparable 2 Comparable 3 Comparable 4 Comparable 5 Comparable 6 Comparable 7
Imputed Value Listing La Quinta Site Hacienda Site NWC Russell El Rancho Site NWC Sahara &
Monte Carlo NWC Harmon next to NYNY Redevelopment Wet'n Wild Site
Transaction Details
Sales Price $ 146,000,000 $66,000,000 $13,500,000 $80,000,000 $73,000,000 43,500,000 $ 61,738,500
Date of Sale Sep-95 listing Mar-96 Jan-95 Mar-95 Jan-96 Oct-95
Site Size in Acres 45.72 11.32 2.06 47.29 73.74 20.86 66.04
Price per Acre $ 3,193,351 $ 5,830,389 $ 6,553,398 1,691,690 989,965 $ 2,085,331 $ 934,865
Sequential Adjustments
Interest Conveyed -- -- -- -- -- -- --
Adjusted Price
Financing Terms -- -- -- -- -- -- --
Adjusted Price
Conditions of Sale -- 0% 0% -- -- -- --
Adjusted Price 5,830,389 6,553,398
Market Conditions 1.56 1.00 1.10 1.73 1.68 1.44 1.53
Adjusted Price 4,967,435 5,830,389 7,208,738 2,918,165 1,660,253 2,997,663 1,431,512
Non-sequential Adjustments
Location -- -- -- 63% 88% 1.63 188%
Zoning -- -- -- 63% 88% -- --
Assemblage -- 0% -40% -- -- -- --
Demolition -- 0% 3% 0% -- 5% 0%
Interim Use -- 0% 0% 0% -- -- 0%
Lease Buy-outs -- 0% 7% -- -- -- 11%
Size -- 0% 0% -- 20% -- 20%
Other -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net non-sequential Adjstmnts 0 0% -30% 125% 195% 168% 219%
- - (2,162,621) 3,647,706 3,237,494 5,021,086 3,129,383
--------- --------- --------- --------- --------- --------- ---------
Adjusted Value 4,967,435 5,830,389 5,046,117 6,565,870 4,897,747 8,018,749 4,560,895
5,000,000 5,800,000 5,000,000 6,600,000 4,900,000 8,000,000 4,600,000
Range 4,600,000 to 8,000,000
Average 5,698,172
Rounded 5,700,000
[GRAPH OF LAND SALE ADJUSTMENT OMITTED]
60
SALES ANALYSIS
Comparable Sale Number 1 is an imputed fair market price of the site later
developed with the Monte Carlo. This roundly 44 acre site was contributed into a
partnership with Gold Strike Casinos by Mirage Resorts in 1994 and was valued at
$47.0 million or $1,068,181 per acre in setting up the partnership.(8) In March,
1995, Circus Circus announced its intention to acquire Gold Strike, which, among
other things, included their 50 percent interest in the Monte Carlo development.
In addition to the interest in the Monte Carlo Site, Gold Strike owned two
casinos in Jean, Nevada, one in Henderson, Nevada, and a 50 percent interest in
a riverboat in Elgin, Illinois. The corporate acquisition was valued at roundly
$477,475,000 after discounting the stock component of the transaction by 30
percent. We have estimated the value of Gold Strike's other assets at
approximately $397,000,000 based on published data on Earnings Before Income
Taxes (EBIT). The details of the transaction and our assumptions are included in
the data sheet in the Addenda. Our analysis indicates that Circus Circus paid
approximately $80,475,000 for a 50 percent interest in the Monte Carlo, which
was at that time, the land and plans. The 100 percent interest in the project,
still in its nascence, would be $160,950,000. After an estimate of $14,650,000
for the Monte Carlo's design, engineering and architectural fees (5 percent of
cost), it appears that the land was valued at roundly $146,000,000, or
$3,193,351 per acre. An approximately 2.0 acre parcel, the former Desert Rose
motel, was acquired in early 1995 bringing the total site size to 45.72 acres.
This imputed price of $3,193,351 would need to be adjusted for two years'
improvement in market conditions. Data collected by Comps Inc. aggregates
information on sales for the Strip and Paradise Road (combined) market.
According to this data, the average price per acre has increased at a compound
annual rate of 34 percent between the year ended 12/31/94 and the year ended
12/31/96. The median price per foot has increased at a rate of 46 percent over
the course of 1995 and 1996. These high rates of appreciation are consistent
with anecdotal comments made by prospective buyers regarding Paradise Road and
Las Vegas Boulevard in the extreme south between Blue Diamond and Lake Mead
sites, but are probably less representative of central Strip appreciation. The
vast majority of the Comps Inc. transactions occurred in lower priced areas, as
is indicated by the average sales price of only $645,559 per acre. To check
these broader market-wide indicators, we will compare two sets of sales
transaction data under consideration.
Our first paired sale transaction is the purchase by the New York New York
partnership of the Rodeway Inn in February, 1995. In order to increase the Strip
frontage and utility of the site, the
- ----------
(8) Mirage had acquired this site as part of a larger acquisition of the 163.6
acre Dunes hotel and golf course from the bankruptcy court in December 1993 for
$75,000,000 or $458,575 per acre. Due to the distressed nature of the sale, and
the unwillingness of other investors to make such a large expenditure at the
time when Las Vegas had 12,000 room under construction, this was approximately
one-half of what was generally considered to be market value at the time, even
for such a large parcel.
61
SALES ANALYSIS
resort developers paid $8,000,000 or $3,864,734 per acre for a 2.07 acre parcel.
In February, 1997, this same partnership put the 2.06 acre parcel occupied by
the La Quinta Carrows into escrow for $13,500,000 or $6,553,398 per acre,
included in our analysis as sale Number 3. This price does not include any costs
for buying out the remaining term of the restaurant's lease on the site that
actually fronts on Las Vegas Boulevard. The remaining term of the lease is
unknown and the lessee is a competitor of the buyer. Even without factoring in a
lease buy-out, these two transactions indicate that the rate of appreciation
between early 1995 and early 1997, for a core strip location would be at least
30 percent.
The second paired transaction we will consider is in a secondary location and
involves one of the two distinct parcels included in Comparable Sale Number 7.
The price per acre in the sale which was negotiated in May 1995 and consummated
in October, 1995 was $934,865 per acre for both sites, which straddled Las Vegas
Boulevard South. Gordon Gaming, which kept title to the westerly parcel, was
required to buy-out a lease immediately for $3,500,000, which brought the cost
of their 39.17 acre site up to $1,024,219 per acre. The company's owner, Mr.
Bill Bennett, developed serious health problems after completing the
transaction, and has scaled back development plans for the sites he assembled at
the north end of the Strip. In late 1996, the 39.17 acre site fell out of escrow
at a price of $55,000,000 or $1,404,136 per acre. The company's Chief Counsel
indicated that negotiations have been opened with other buyers at the same
approximate price. This escrowed price indicates appreciation of approximately
32 percent over a one year period. It could be argued that the separation of the
two parcels contributed to the increase in price, however, we understand that
either could have been purchased separately. Since the parcel fell out of
escrow, it could be argued that the current asking price is too high, and that
its eventual sales price will be lower.
After considering the Strip/Paradise Road sample for the area-wide appreciation
figures, the buyer motivation for the assemblage value comparison, and the
lapsed escrow of the latter paired transaction, we will temper our estimates of
the average rate of appreciation to a uniform 25 percent per year during 1995
and 1996 for all of the transactions, regardless of location. However, during
1997, we believe that the number of new resorts under construction has caused
this to abate, to 20 percent per year.
The imputed price of the Monte Carlo partnership purchase transaction will be
adjusted upward for 16 months at an annual rate of 25 percent and ten months at
20 percent. No other adjustments are warranted.
The adjusted price for Sale Number 1 becomes $5,000,000 per acre.
Comparable Number 2 is a listing involving an 11.32 acre parcel on the Northwest
corner of Harmon and the Strip. The owner, who is reported to be ineligible for
a gaming license, is asking from $66,000,000 (or $5,830,000 per acre) to
$100,000,000 (or $8,834,000 per acre) for the site. The
62
SALES ANALYSIS
lower asking price was reported to have been conditioned upon the seller
retaining air rights over the site in order to develop a retail component. The
higher asking price is for the entire bundle of rights. We spoke with one
investor who reported offering $60,000,000 that was rejected summarily. An
article on June 22 in the Las Vegas Sun on a prospective San Francisco themed
resort indicated that Harvey's Casino Resorts offered $80.0 million (or
$7,067,138 per acre) for the site and was rejected. We were unable to
substantiate this account. Presumably, the rejected offer was for an
unencumbered fee simple interest.
A number of investors or brokers commented that it was too small for mega resort
development. Harmon Road precludes assemblage to the South without a skybridge.
The land owner to the North is the owner of the common areas associated with a
timeshare project known as the Jockey Club. Redevelopment with that northerly
land owner would likely be problematic because of the approximately 14,000
individual timeshare owners' concerns about parking and access and egress to
their units.
Because of our inability to substantiate the rejected offer, and the relatively
small size of this site, we will employ the lowest asking price of $66,000,000
or $5,830,000 per acre but will not adjust for conditions of sale. Interest in
the site by Harvey's and the prospective developer of the San Francisco themed
casino resort refutes the assertion that the site is too small. We will make no
other adjustments to this sale.
The adjusted price of Comparable Number 2 becomes $5,800,000 per acre.
Comparable Number 3 involves a very small parcel, of 2.06 acres that was
recorded on March 17, 1997 for $13,500,000 or $6,553,400 per acre. On March 17,
1997, La Quinta Development Partners sold its fee simple interest in the 1.48
acre La Quinta motel site to the partnership that owns New York New York, which
will use the site for a new rooms tower. The transaction also included La
Quinta's leased fee interest in the contiguous 0.58 acre parcel that actually
fronts on the Strip, and the assignment of the associated lease. The original
lessee's interest was assigned to Victoria Partners the developers of the Monte
Carlo, its northerly neighbor and competitor. We were unable to obtain a copy of
the original lease to ascertain its remaining term. The original lease was
signed in March, 1979. La Quinta Development Partners signed a confidentiality
agreement which they interpret to mean that they may not discuss any aspect of
the sale.
This sale supports our contention that strip land prices have appreciated
considerably over the past two years, as described earlier. In addition, this
most recent transaction, at $6,553,400 per acre, demonstrates that sellers are
increasingly aware of the huge profit potential of core Strip real estate.
Six months have elapsed since the sale was recorded. We will adjust this sale
for 6 months of appreciation at an annual rate of 20 percent.
63
SALES ANALYSIS
To estimate an appropriate adjustment for the assemblage value, we will compare
the assemblage value adjustment of an earlier New York, New York assemblage. The
2.07 acre Rodeway Inn parcel that was acquired in February, 1995 cost the owners
of New York New York $3,864,734 per acre. The original 17.62 acre parcel was
acquired in late 1992 for $1,789,843 per acre. If we adjust this sale upward for
two years' appreciation at 20 percent, the equivalent price in early 1995 values
grows to $2,577,000 per acre. This $1,287,734 difference suggests a 33 percent
discount for the smaller sale. The imputed value of the Monte Carlo transaction
of $3,193,319 per acre reflects a discount of 34 percent from the 2.07 Desert
Rose Motel acquisition at $4,830,917 per acre, a few months before the Gold
Strike acquisition was announced.
For the current La Quinta transactions, we will adjust the sale downward by 40
percent to account for the assemblage premium. As will be shown in the residual
value analysis, it could easily be argued that there is no need for an
adjustment, as the entire parcel, built out at the density that it is, could be
worth as much as $14,400,000 per acre.
One more adjustment would be required for the lease buy-out. The lease buy-out
to Gordon Gaming for the as yet unbuilt St. Andrews golf attraction on the
westerly portion of Sale Number 7 was $3,500,000. The lease-buy-out for the
Wet'n Wild water theme park on the easterly component of that transaction
started at $7.0 million and declined as the improvements depreciated. While both
parcels were significantly larger than the 0.58 acre restaurant site involved in
Comparable Sale Number 3, neither involved buying out a direct competitor. There
were no improvements on the St. Andrews Golf site, and the cost of the Wet'n
Wild improvements were the basis of the buy-out.
We will assume that the cost of buying out the remaining term of the restaurant
lease is approximately $1,000,000. This equates to an approximately 7 percent
adjustment. Because of the two story, stick frame construction, we will estimate
demolition costs at one-third of the high rise rate, or $2,775 per guest room
(8,333 x .333) for a 114-room property. Demolition costs are estimated at
roundly $300,000, or 3 percent of the sales price per acre.
The adjusted price per acre of Sale Number 3 becomes $5,000,000.
Sale Number 4 is of the 47.3 acre site formerly occupied by the Hacienda Hotel.
This site was acquired in August, 1995 by Circus Circus for $80,000,000 or
$1,691,650 per acre with the intent to redevelop the site. No adjustments are
necessary for interest conveyed, financing or conditions of sale. The price was
set eight months earlier, in January of 1995, by a former Circus Circus
executive, Mr. Bill Bennett, who was forced to relinquish the deal due to a
perceived conflict of interest. This history is important for two reasons: 1) it
establishes that there was no assemblage motivation in the setting of a sale
price; and 2) the number of months used for the market condition adjustment
should be greater than would be suggested by the date escrow closed. This sale
should be adjusted for a market condition adjustment for the longer period.
64
SALES ANALYSIS
When paired with Sale Number 5, the Hacienda sale provides our first indication
of the magnitude of location adjustments.
The Hacienda sold at the approximate same time as Sale Number 5, which is
located immediately south. The primary differences between Sales 4 and 5 are in:
site improvements, size, and location.
Unless the cash flow generated by the Hacienda increased materially after its
sale, the value of the interim use was not likely to have offset the costs
associated with demolishing the 1,115-room hotel; and the mitigation of any
environmental issues caused by the 363-space Recreational Vehicle park.(9) The
remaining differences are in size and location.
Sale Number 5 involved a 73-acre parcel that sold in March 1995 for $989,965 per
acre. We can find no evidence from other sales that the entirety of this 70
percent price differential is attributable to the increase in size from a 40- to
45- acre site to a 70- to 75-acre site. We believe that the primary reason that
Sale Number 4 sold at a premium over Sale Number 5 was because Sale Number 5 is
1,000 lineal feet further South. We will attribute 20 percentage points of the
price differential to the size issue, and 50 percentage points of the
differential to location.
The 1,000 foot distances had ramifications from an air rights standpoint as well
as a traffic perspective. The seller of the Hacienda expressed a belief that
both sales are affected by the sites' proximity to McCarran Airport and the
uncertainty caused by the FAA's ability to limit the building height. While any
building in Clark County requires FAA approval to exceed 100 feet (or 9
stories), this approval is not a formality in the vicinity of the airport. Until
the approval was granted in April, 1997 for the height variance, the FAA would
make no prognostications as to whether it would likely permit a significant
variance or the recommended 167 feet (approximately 17 stories). The Hacienda's
tower was only 11 stories tall. However, the Luxor, located immediately north of
the Hacienda was approved for 30 stories, which is the current average height
for the existing major casino resorts.
We will split the remaining 50 percent adjustment evenly between a location
factor relating to distance from the core area and a zoning adjustment for the
FAA issue. These adjustments will be made at a rate of 25 percent for each 1,000
feet a site is located in the "wrong" direction.
At a rate of 25 percent for every 1,000 lineal feet of distance, Sale Number 4,
the Hacienda, would need to be adjusted upward for location and for the FAA
related zoning issue by 63 percent (for each), since it is located approximately
2,500 feet south of Tropicana (2,500/1,000 x .25). Sale
- ------------------
(9) Circus Circus would not disclose demolition costs, or the EBITDA of the
Hacienda during its interim operation. The costs of demolishing the Sands,
combined with asbestos and underground storage tank clean up suggest that the
Hacienda's demolition costs could be $9,300,000 (1,115 x $8,333).
65
SALES ANALYSIS
Number 2 would require 88 percent location and zoning adjustments, since it is
3,500 feet south of Tropicana (3,500/1,000 x .25). Prior to the location and FAA
zoning issues, the time of sale adjustments of nearly three years on Sale Number
4 and two and one half years on Sale Number 5 must be applied.
The adjusted price per acre for Comparable Sale Number 4 becomes $6,600,000,
compared to an adjusted price per acre for Comparable Sale Number 5 of
$4,900,000.
Comparable Number 6 is the 20.86 acre site of the El Rancho Casino hotel, which
sold in January of 1996 for $2,285,331 per acre. The developers, a New Jersey
group, intended to redevelop the site with the Orion project, which was to have
210,000 square feet of casino space, 300,000 square feet of retail space, and
2,400 hotel rooms. Shortly after this transaction they attempted to purchase an
additional 15.0 acres on the back side of the El Rancho site, but allowed that
transaction to fall out of escrow when they encountered difficulties in
obtaining financing in the wake of the negative publicity surrounding the
Stratosphere.
Seller financing was provided for $16,500,000 or 40 percent of the purchase
price. The first $6,500,000 note to the seller was paid off within two months of
the transaction. No cash equivalent adjustment is warranted. This sale requires
a market condition adjustment for the nearly two years that have transpired
since it occurred, and a 163 percent locational adjustment to account for its
6,500 foot distance from the northern boundary of the core Strip area (6,500 /
1,000 x .25). When compared to Comparable Sale Number 7, which is immediately
north of Comparable 6, and particularly in light of the events that have
transpired since then, it appears that the out-of-town buyers of Comparable 6
over-paid for it.
The adjusted price per acre of Comparable Number 6 is $8,000,000, which provides
the high end of the range.
Comparable Sale Number 7 is immediately north of Comparable 6 but spans both
sides of the Strip. This 66.04 acre assemblage was technically acquired by
Gordon Gaming which then flipped the easterly and smaller of the two parcels to
Sahara Gaming as part of a 1031 tax free exchange. Sahara Gaming traded a
separate 22 acre site on the east side of Paradise for the easterly site
included in this comparable sale, in conjunction with their sale of the Sahara
Hotel to Gordon Gaming. There is no need for a cash equivalency adjustment, as
the Howard Hughes Corporation received $61,738,500 in cash ($934,865 per acre)
for the site.
The 66.04 acre comparable is located approximately 7,500 feet north of the
Spring Mountain/Sands Avenue intersection, and so should be adjusted upward 188
percent for its inferior location (7,500/1,000 x .25.)
Both parcels were affected by leases, although the lessee for the parcel on the
western side of the Strip had not yet constructed any improvements. The cost of
lease buy-out for the westerly parcel
66
SALES ANALYSIS
was $3,500,000. Sahara Gaming negotiated a stepped down lease buy-out, starting
at $7,000,000 which diminished to a nominal sum over time. It had no imminent
plans for development, and sought only to keep a foothold on the Strip.
Demolition costs for the Wet'n Wild improvements were estimated by the buyer at
$1,500,000. The subject is a vacant, buildable site with no leases encumbering
it. To adjust this sale to be comparable to the subject requires recognizing the
two years appreciation, leasehold buy-outs, and demolition costs. We will assume
however that a prudent buyer would have allowed the water theme park to operate
during his design, approval and financing phase, and that this savings in the
buy-out formula would offset the demolition costs. The transaction will be
adjusted upward for a net $10,500,000 for the lease buy-outs and demolition
costs. This equates to $158,995 per acre, or 11 percent of the time-adjusted
price per acre. Because of the comparable's approximately 66 acre size, we will
adjust this comparable upward by 20 percent, as was done for Sales Comparable 5.
The adjusted price of Comparable Number 7 equates to $4,600,000 per acre.
SALES COMPARISON CONCLUSION
After adjustments, the range of prices for our land sales comparables ranged
from roundly $4,600,000 to $8,000,000 per acre, with an average price of
$5,700,000 per acre. Unfortunately all of the sales were either extremely
complicated, or required significant levels of adjustment. The three closest
sales, which required the lowest total percentage adjustments, ranged from
$5,000,000 to $5,800,000 per acre, with an average of $5,250,000 per acre.
In addition to the sales verification process, we spoke with a number of persons
who are attempting to purchase sites in the core Strip area. Two participants,
unwilling to pay more than $3,000,000 per acre, have been unable to find
anything with an acceptable location in their price range. A third buyer, who
wishes to remain anonymous, has begun the painstaking process of assembling a
site in the core Strip area. When the assemblage is complete, and after demotion
and mitigation costs, this buyer expects to have spent between $5,000,000 and
$7,000,000 per acre.
The subject parcel is fairly unique. It is located in the core Strip area, and
will offer better views of the Mirage and Treasure Island attractions than are
available from either of those resorts. More importantly perhaps its physical
proximity to the 1.0 million square foot Sands Expo Center, which will provide a
significant source of higher rated mid-week business. As there was no empirical
way to determine an appropriate adjustment for this factor, none was included in
our analysis. The subject's assumed easements situation can be likened to a golf
resort site, in which the golf course itself has already been developed and the
hotel developer needs only to purchase a hotel pad. This adds a premium to the
hotel site over sites that are close to, but not part, of the golf course.
67
SALES ANALYSIS
However, considering the magnitude of some of the adjustments, we will select
the average value of $5,250,000 per acre or $233,889,000. From this, we will
deduct the cost of the 800 parking spaces are required in the easement
($7,200,000) and the cost of the environmental mitigation ($700,000). The net
value is therefore $225,000,000 rounded or approximately $5,050,000 per acre.
68
RESIDUAL ANALYSIS
RESIDUAL ANALYSIS
Because of the widespread availability of net operating income data for the
publicly traded gaming companies, a large number of land owners along the Las
Vegas Strip appear to have priced their land using a residual approach, assuming
casino hotel use. This is true even for land owners who are believed to be
ineligible for gaming licenses, as is the case in Comparable Number 2 in the
Sales analysis, and in cases where the site is too small for such a use on a
stand-alone basis.
To perform our residual analysis, we performed a residual analysis on two
recently completed mega resorts utilizing available data on earnings before
income taxes, depreciation and amortization (EBITDA) and reported construction
costs. The assumptions and methodology for our analysis is discussed below.
BASIC ASSUMPTIONS
To determine market value, it is important to use a fairly generic set of
assumptions as opposed to a specific investor's assumptions. To do otherwise
would be to produce an estimate of Investment Value. The current parcelization
proposed for the subject site, assumes a two-phase development in which the site
area for Phase I, is 30.1 acres as it will contain the shared power plant. The
Phase II Lido site, comprised of the remaining 14.4 acres, would be smaller than
is typical, for mega-resort development on a stand-alone basis. The New York New
York project will, after the most recent assemblage, have a site area of
approximately 22 acres. For our residual analysis that is intended to determine
market value, we will assume a more even apportionment of the larger parcel into
two like sized parcels. For our residual analysis, we will assume a site size
for the subject of 22.25 acres.
Similar issues arise in determining a capitalization rate. Too specific
assumptions regarding borrowing power or required returns would yield an
Investment Value. For example, the Circus Circus and Mirage Partnership is
likely to be able to finance debt at a relatively advantageous rate. The
capitalization rate used for the residual calculation for the Monte Carlo will
assume a buyer that is subject to market rate terms.
And finally, the cost estimates in our analysis will be based on "market costs"
rather than the developer's specific costs for the proposed Venetian resort. The
developer's cost estimates are based upon a facility that will have
significantly larger room size and significantly higher quantities of meeting
space and retail space than are typical for the Las Vegas market today. No other
resort in Las Vegas has a basic guest room of the size and quality envisioned
for the Venetian. To equal the approximately 225,000 square feet of meeting and
convention space planned for the Venetian Resort one would have to add together
the space presently offered at the Mirage, Treasure Island, and Caesar's. These
three hotels have a combined room inventory of 7,430 rooms. Only Caesar's offers
69
RESIDUAL ANALYSIS
a similar quantity of retail space. The Venetian's superior accommodations,
meeting space and retail space enhancements, should logically contribute to a
higher stream of income from the property. However, the market standard for Las
Vegas' casino resorts is a tradition of providing a mediocre guest room product
and of depending on the Convention Center and the Sands Expo Center to generate
convention demand.
The subject's costs are further complicated by the inclusion of the costs of the
shared physical plant and parking. Because of the above-market physical product
envisioned, and the common facility costs that are included in the subject's
cost estimates, we will base our cost estimates on a more generic market
standard product. The denser utilization of the site, as planned for the
Venetian which incorporates an all-suite guest room configuration and 415,000
square feet of retail space should logically produce a greater return to the
land than the generic market standard casino hotel.
ESTIMATING AN APPROPRIATE CAPITALIZATION RATE
There have been no sales of single new mega casino resorts. Current rules of
thumb prescribe that gaming properties should transact at multipliers of 5.0 to
7.0 times the Earnings Before Income Taxes, Depreciation and Amortization
(EBITDA) which equates to a capitalization rate range of 14.3 percent ( 1 / 7 )
to 20 percent ( 1 / 5 ).
To determine an appropriate capitalization rate that is specific to a new mega
resort on the best section of the Strip, we will use the band of investment
technique. This technique is based upon assumptions of debt to equity ratios,
interest rates, and rates of return to the owner. To determine an appropriate
debt to equity ratio, we talked to a lending officer with Bank of America's
Gaming department. The interest rates charged are a function of debt to equity
ratios and are influenced by the size and number of other casino hotel projects
a borrower may have. Larger gaming companies with representation in numerous
markets are perceived to have less risk than one casino company. However, a very
good core Strip location would be deemed to also reduce risk.
Prior to its opening, the New York New York loan was arranged at an
approximately 50 percent loan to value basis with a floating interest rate that
is 175 basis points over LIBOR.
The MGM Grand was able to retire its construction financing at a floating rate
that is approximately 250 basis points over LIBOR. The loan to value was
typical, which we infer from other comments made to be approximately 55 to 60
percent.
The Rio, which is not on the strip and is a single property enterprise, is
currently paying an interest rate that is 300 basis points over LIBOR. This is
attributable to its highly leveraged position during the expansion. Prior to its
taking on more debt for the expansion, the Rio's interest rate was only 200
basis points over LIBOR.
70
RESIDUAL ANALYSIS
As of the date of value, LIBOR was approximately 6.1 percent on a one-year note.
Thus, the interest rates discussed ranged from a low of 7.85 percent for New
York New York, to a high of 9.1 for The Rio. It is interesting to note that
these rates, which are floating, are lower than the fixed rates for full-service
hotels. The most recent issue of the Landauer Hotel Investment Outlook indicates
that the average interest rate for a full-service hotel loan is approximately
8.79 percent, based on an average loan to value ratio of 64 percent. We
attribute the relatively low casino hotel interest rates to the increasing
diversification of the stream of income and the perceived strength of the Las
Vegas market. Bank of America sponsored a conference for Gaming lenders in late
February of 1997. A March 3, 1997 Las Vegas Business Press cover story reported
that a representative of PNC Bank "was comforted by the diversification of the
Las Vegas casino revenue away from straight gaming...'Many of the casinos have
shown increased cash flow despite the decline in gaming win. They have more
room, food and entertainment revenue--it is a better balanced source of cash
flow' ".
We will assume that the subject property receives a loan to value ratio of 60
percent. To take into account that today's rates may be relatively low from a
historical standpoint, we will assume that an appropriate interest rate for a
stand alone mega resort with a core Strip location would be 9.0 percent. Given
that this rate is currently being paid by the Rio, with its off-strip location
and relatively highly leveraged situation, this appears to be a conservative
assumption. We will assume a 20 year amortization schedule and monthly payments,
which yields a debt constant of .10797.
On the equity side, we will assume that a typical mega casino resort owner would
expect a 26 percent return on his equity. This compares to an average leveraged
yield rate of 21.4 percent for generic full-service hotels at this time.
These assumptions yield a capitalization rate of 17.0 percent, as indicated in
the following calculation:
Debt: 60% x .10797 = .06478
Equity: 40% x .26 = .10400
------
Total 100% x .16878
Rounded .17
COST ESTIMATES
To determine appropriate cost estimates, we reviewed annual reports and the
quarterly SEC filings of the partners involved in constructing the Monte Carlo
and the New York New York project.
The Monte Carlo is a middle market product, consistent with Circus Circus'
orientation in that market. (Mirage Resorts, Inc. was a passive partner in the
development of the project.) The total
71
RESIDUAL ANALYSIS
costs, including land and all financing and pre-opening expenses, have been
reported in the annual reports for Mirage and Circus Circus as $350,000,000.
From this, the book value of the land contribution must be deducted
($47,000,000), along with another roundly $10,000,000 that was expended to
purchase a 2.0 acre site formerly occupied by the Desert Inn Motel. The hard and
soft costs were a total of $293,000,000 (350.0 - 47.0 - 10.0), or $97,213 per
guest room. We will use this figure only for the Monte Carlo residual
calculation, as we do not believe such a low quality product would start
construction today in a core Strip location.
The New York New York project has a reported cost of $460,000,000. None of the
data we were able to obtain indicated whether land or capitalized interest were
included in the calculation. On a per room basis, this cost was $226,044 per
guest room, well over twice the cost reported for the Monte Carlo. Since it can
be argued that, at 2,035 rooms, New York New York has a lower ratio of rooms for
the casino and public spaces provided, and that the costs of construction on a
relatively tight site would be much higher, we will assume that this cost
includes all hard and soft costs but not the book value of the land.
Because of the unique attributes of the subject site, we will assume that a high
quality product is completed on the subject site. Consistent with our conclusion
as to highest and best use, we will assume that a significant retail component
and some meeting space is included. To estimate a "market cost" for the more
generic product assumed in this analysis, we will increase the per room cost
estimate of New York New York by 20 percent, to approximately $270,000 per key.
For a 3,000 room project, the total hard and soft costs are estimated at
$810,000,000.
This compares to the Venetian cost budget of approximately $293,000 per key,
before entrepreneurial profit. The subject's superior features and amenities
accounts for a budgeted cost per room that is considerably above either the
Monte Carlo or New York New York.
THE MONTE CARLO RESIDUAL CALCULATION
The Monte Carlo opened on June 21, 1996. In its first full 193 days of
operation, its partners reported that it generated $147,300,000 in gross
revenues and $70,600,000 in EBITDA. We assumed that any "novelty effect" would
be offset by the likely inefficiency in the initial months' operation.
(Typically casino hotels overstaff for the initial months of operation, and
anticipate that a certain number of the new hires will fail to meet management's
performance expectations.) On an annual level, it appears that the Monte Carlo
will have gross revenues of $278,600,000 and EBITDA of approximately
$92,900,000. This estimate appears conservative relative to other Circus Circus
managed hotels given the Monte Carlo's superior location.
EBIDTA does not include any reserves for the replacement of short lived items.
This is the custom in the local market. Returns to the investor are relatively
high to take capital expenditures into
72
RESIDUAL ANALYSIS
account, which are funded from cash flow on an as-needed basis. Neither are
third-party management fees deducted, as these properties are almost uniformly
owner-managed.
The net cash flow that may be capitalized for an estimate of value is
$92,900,000. The estimated value for the Monte Carlo is $546,000,000, rounded
(92,900,000 / .17)
As related above, the total hard and soft construction costs of the Monte Carlo
were $293,000,000. Deducting this from the estimated value produces a value of
the land and entrepreneurial profit of $257,000,000 (550.0 - 293.0).
According to the annual reports, Circus Circus took no developer's fee for
managing the construction of this hotel. We will however factor in
entrepreneurial profit. Because of the scale of the project, we have estimated
entrepreneurial profit at 25 percent of the hard and soft costs of $293,000,000,
or roundly $73,250,000. The residual land value is $179,750,000 (rounded). With
a site size of 45.72 acres, the residual land value is $3,933,000 or $3,900,000
per acre, rounded. This is within 2.0 percent of our time adjusted land value
via the Sales Comparison Approach.
NEW YORK NEW YORK RESIDUAL
As of the writing of this appraisal, only 179 days operating data was available
on the EBITDA for New York New York. We will annualize the 179 days EBITDA of
$70,600,000 without factoring in any seasonality This equates to $144,000,000 in
EBITDA annually [70,600,000 / (179/365)]. As with the Monte Carlo, this assumes
that any novelty effect in the revenues is offset by inefficiencies in the
initial month's operations.
Applying a 17 percent capitalization rate to this figure yields a value of
approximately $850,000,000 (144,400,000/.17). As described earlier, hard and
soft costs were estimated at $460,000,000 leaving $390,000,000 in value for land
and entrepreneurial profit. Deducting entrepreneurial profit of approximately
$92,000,000 (almost 20 percent) leaves a value for the land of $295,000,000.
With a total site area of 20.5 acres, the residual value is approximately
$14,400,000 per acre.
This exercise also indicates to us that the consumer market prefers highly
themed casino resorts that are attractions in and of themselves. The Monte
Carlo, a low-cost project with very little in the way of sightseeing
attractions, is not as successful as New York New York, which is a sightseeing
attraction.
THEORETICAL RESIDUAL CALCULATION FOR THE SUBJECT PROPERTY
For our residual approach, we have assumed a generic but high quality product.
Its location and proximity to the Sands Expo Center should enable a casino hotel
on the subject site to achieve gross
73
RESIDUAL ANALYSIS
and net revenues that are comparable to the top tier of mega casino resorts. To
estimate an appropriate level of EBITDA for this theoretical property, we
utilized the blended results of its nearest neighbors, the Mirage and Treasure
Island. While the Mirage is one of the most profitable resorts on a per room
basis, the Treasure Island resort has an EBITDA that is very consistent with
generic mega-resort performance. The 1996 Annual Report for Mirage Resorts
indicated that the combined EBIDTA for these properties in 1996 was $354,400,000
or approximately $59,600 per hotel room.
We will multiply this figure by the assumed 3,000 rooms for a EBITDA for the
theoretical subject property of $178,800,000 (rounded).
Applying a capitalization rate of 17 percent derives a value of approximately
$1,050,000,000 for the generic project.
After deducting the assumed hard and soft costs of roundly $810,000,000 (as
described earlier) from the estimated value of $1,052,000,000, we are left with
$242,000,000 in value for the generic product's land and entrepreneurial profit.
We estimated entrepreneurial profit of $121,500,000 on this nearly billion
dollar deal, 15 percent of the hard and soft costs. This is more than eight
times the amount at which Marriott recently bought out Doubletree Hotels'
contract to buy the Renaissance Hotel Company in a deal of a similar scale.
For the reasons described above, we have assumed a more typical split of the
larger 44.6 acre parcel and have calculated the value per acre based on a
theoretical 22.3 acre parcel. This produces a rounded value per acre of
$5,400,000 (120,500,000 / 22.3).
The residual values calculations are summarized in the following table:
Theoretical
Monte Carlo New York New York Subject
-------------- ------------------- ---------------
EBITDA $923,900,000 $144,400,000 $178,800,000
Capitalization Rate .17 .17 .17
Estimated Value $546,000,000 $850,000,000 $1,052,000,000
Cost $293,000,000 $460,000,000 $810,000,000
Entrepreneurial Profit $73,250,000 $92,000,000 $121,500,000
-------------- ----------------- ---------------
Land Value $179,750,000 $295,000,000 $120,500,000
Acres 45.7 20.5 22.3
Value Per Acre $3,933,000 $14,290,000 $5,404,000
Rounded $3,900,000 $14,400,000 $5,400,000
74
RESIDUAL ANALYSIS
Clearly, the density of development has profound effects on value estimates
using the residual approach. We question whether the Monte Carlo would be
constructed on 45.7 acres of core Strip land given today's market conditions.
Using a residual methodology, the average price per acre is $7,900,000.
From the residual technique, we estimate a land value of $5,400,000 per acre,
based on the most generic assumption of our residual calculations.
The residual technique suggests a value of $240,570,000 for the 44.55 acre
subject site. From this, we must deduct the cost of the 800 incremental parking
stalls ($7,200,000) and the environmental mitigation of $700,000. This reduces
the concluded value via the residual approach to $232,670,000 rounded or
$5,200,000 per acre.
The developer's proposed site plan calls for the Venetian to be constructed on a
30.9 acre parcel and the second phase 3,000-room tower to be constructed on an
approximately 13.7 acre parcel. Because of the disproportionate land allocation,
a market based residual allocation is not meaningful for the specific investor's
site planning.
75
RECONCILIATION
RECONCILIATION
To appraise the subject parcel, we used the sales comparison technique and the
residual technique. The value conclusion from the sales comparison technique was
$225,000,000, rounded, or $5,050,000 per acre. The comparables used were
complicated transactions requiring numerous adjustments. The magnitude of
adjustments was considerable.
From the residual technique we derived a market value of $233,000,000, rounded,
or $5,200,000 per acre. This scenario assumed a relatively high density, but one
that is supported by the New York New York project and by the expansion activity
on other mega resorts sites.
This technique involved a key of assumptions regarding capitalization rates and
appropriate levels of entrepreneurial profit. However, the residual approach
supports that the net $5,050,000 per acre price estimated for the subject parcel
using the sales comparison technique is a reasonable, economically viable price
per acre.
We conclude that on October 17, 1997, the market value of the fee simple
interest in the 44.55 acre subject site, as if vacant and ready for development
and encumbered by the mutual easements previously described, was:
TWO HUNDRED TWENTY FIVE MILLION DOLLARS
$225,000,000
We conclude that on October 17, 1997, the market value of the fee simple
interest in the 30.86 acre Venetian site, as if vacant and level, was:
ONE HUNDRED FIFTY FIVE MILLION DOLLARS
$155,000,000
We conclude that on October 17, 1997, the market value of the fee simple
interest in the 13.69 acre Lido Site, as if vacant and level, was:
SEVENTY MILLION DOLLARS
$70,000,000
This value is subject to the assumptions and limiting conditions as set forth in
the Addenda to this document.
LAND COMPARABLE NO. 1
IDENTIFICATION:
Location: Monte Carlo Casino Site
City, State: Las Vegas, Nevada
Assessor's Parcel No. 162-20-701-020 /after consolidation with
3.0 acre parcel.
Estate: Fee Simple
TRANSACTION DATA:
Sale Date: September 1995
Sale Price: $147,000,000
Terms: Imputed price for 100% interest; part of
company acquisition
Grantor: Gold Strike Resorts
Grantee: Circus Circus Enterprises
Document: Not recorded
SITE DESCRIPTION:
Land Area: 45.72 acres
Improvement of Sale: Vacant w/ plans and approvals
Utilities: All to site
Topography: Level
Zoning: H-1
VALUE INDICATOR:
Price Per Acre: $3,193,351
COMMENTS:
Acquired along with 50% interest in the Elgin Illinois Riverboat, 2
casinos in Jean, NV and 1 casino in Henderson, NV. See attached work
sheet.
Monte Carlo Worksheet
From Circus Circus' annual report on Gold Strike Acquisition
Cash $ 12,000,000
Assumed Debt 165,000,000
17.0 m share stock discounted at 30% (price $25.15 on 3/19 announc.) 300,475,000
Market value acquisition 477,475,000
Assets Acquired:
50% interests in Elgin Riverboat. 8 months EBIT for Circus in '95 was $32.6 m
$ 32.6 / 8 x 12 months = $48.9 / 17% 287,647,059
Estimated for 100% interest in riverboat is $575.3 million
3 casinos; 2 in Jean, 1 in Henderson; 8 months EBIT for Circus in '95 was $12.4
$12.4 / 8 x 12 months = $18.6 / 17% 109,411,765
Estimate is $36.5 million per casino
Value of 50% interest in Monte Carlo, at time plans, approvals, and dirt 80,416,176
2
Value of 100% interest 160,832,353
160,830,000
Less estimated design fees, arch fees etc. based on Venetian's $34.3 cost on
a total project cost of $967.6, or 3.5%) $293.0 5.0% 14,650,000
Dirt Value 146,300,000
Rounded 146,000,000
Acres (gross) 45.72
Price per acre 3,319,351
The Elgin Riverboat is personal property; its dock-side facilities are a
leasehold interest. After the investors have recovered their $112 m investment,
the partnership is required to pay 20 percent of its after tax income to the
city of Elgin and Kane County.
The 17 percent capitalization rate used takes into account the greater dilution
of the income stream in EBIT (depreciation and amortization have been deducted)
but also the offsetting factors relating to the interest involved (personal
property and a leasehold estate in the case of the Riverboat) and the secondary
locations involved in the land based casinos. These casinos receive nearly all
of their net income from gaming operations.
LAND COMPARABLE NO. 2
IDENTIFICATION:
Location: N.W. Corner of Harmon & Strip Site
City, State: Las Vegas, Nevada
Assessor's Parcel No.: 162-20-603-005,006
Estate: Fee Simple
TRANSACTION DATA:
Sale Date: Listing
Sale Price: $66,000,000
Terms: Not applicable
Grantor: R & Z Corporation
Grantee: Not applicable
Document: Not applicable
SITE DESCRIPTION:
Land Area: 11.32 acres
Improvement of Sale: Vacant
Utilities: All to site
Topography: Level
Zoning: H-1
VALUE INDICATOR:
Price Per Acre: $5,830,389
COMMENTS:
Too small for mega resort development, Harmon Street to the south
affects southerly assemblage. Parcel to immediate North is owned by the
same entity that has title to the common areas of the Jockey Club
timeshare project. Joining and developing these two sites would require
concessions to and from the approximately 14,000 individual owners of
the timeshare project.
LAND COMPARABLE NO. 3
IDENTIFICATION:
Location: La Quinta Site
City, State: Las Vegas, Nevada
Assessor's Parcel No.: 162-20-801-002,003
Estate: Fee Simple (1.48 acres) and Leased Fee 0.58
TRANSACTION DATA:
Sale Date: March 1997
Sale Price: $13,500,000
Terms: All cash
Grantor: La Quinta Development Partners
Grantee: MGM Grand & Primadonna
Document: 970317.01522
SITE DESCRIPTION:
Land Area: 2.06 acres
Improvement of Sale: Inn and restaurant
Utilities: All to site
Topography: Level at street grade
Zoning: H-1
VALUE INDICATOR:
Price Per Acre: $6,553,398
COMMENTS:
The fee simple interest in the land which is improved with the La
Quinta Inn was sold concurrently with the leased fee interest in the
0.58-acre Carrows Restaurant site. New York-New York needs the
2.06-acre site if it is to expand. It is not clear whether this can be
done without the frontage portion occupied by the restaurant. No
information was available on the costs to buy-out the lease, or
demolition costs.
LAND COMPARABLE NO. 4
IDENTIFICATION:
Location: S.W. Corner of Las Vegas Boulevard
South and Hacienda
City, State: Las Vegas, Nevada
Assessor's Parcel No.: 169-29-701-001
Estate: Fee Simple
TRANSACTION DATA:
Sale Date: August 31, 1995
Sale Price: $80,000,000
Terms: All cash
Grantor: Sahara Gaming Corporation dba
as Hacienda Hotel, Inc.
Grantee: Circus Circus, dba Pinkless, Inc.
Document: 9508310249
SITE DESCRIPTION:
Land Area: 47.29 acres
Improvement of Sale: 1,115 room hotel
Utilities: All to site
Topography: Level at street grade
Zoning: H-1
VALUE INDICATOR:
Price Per Acre: $1,691,690
COMMENTS:
This is the sale of the Hacienda Hotel for redevelopment purposes. The
buildings were demolished on December 31, 1996. The sales price was
initially negotiated by another buyer, a former Circus Circus executive
who, due to a conflict of interests, was forced to relinquish the deal
to Circus Circus. The buyer owns the remainder of the block to the
south and most or all of the block to the north. Circus Circus would
not disclose demolition costs or interim EBITDA.
LAND COMPARABLE NO. 5
IDENTIFICATION:
Location: N.W. Corner of Las Vegas Blvd. and
Russell Road
City, State: Las Vegas, Nevada
Assessor's Parcel No.: 162-29-701-002 and 162-29-801-001
TRANSACTION DATA:
Sale Date: March 1995
Sale Price: $73,000,000
Terms: All Cash
Grantor: West State Land
Grantee: Circus Circus Enterprises
Document: 950303:01059
SITE DESCRIPTION:
Land Area: 73.74 acres
Improvement of Sale: Vacant
Utilities: Off-sites installed, available
Topography: Level
Zoning: H-1
VALUE INDICATOR:
Price Per Acre: $989,965
COMMENTS:
This property is located south of Hacienda Hotel/Casino. It is planned
for development of the Millennium project, a multi-phased,
multi-property, gaming development.
LAND COMPARABLE NO. 6
IDENTIFICATION:
Location: 2755 Las Vegas Boulevard South
City, State: Las Vegas, Nevada
Assessor's Parcel No.: 162-09-602-002
Estate: Fee Simple
TRANSACTION DATA:
Sale Date: January 26, 1996
Sale Price: $43,500,000
Terms: All cash and notes
Grantor: Las Vegas Entertainment Network
Grantee: Orion Casino Corporation, a wholly
owned subsidiary of International
Thoroughbred Breeders
Document: 960124-1152 recorded 1/24/96
SITE DESCRIPTION:
Land Area: 20.86 acres
Improvement of Sale: El Rancho Hotel and Casino
Utilities: All to site
Topography: Level
Zoning: H-1
VALUE INDICATOR:
Price Per Acre: $2,085,331
COMMENTS:
Planning to raze site and redevelop as the Starship Orion Resort with
7 separately owned and operated casinos. Casinos to be structured like
anchor tenants in a shopping mall. The seller received one of the
casino spaces as a continued participatory interest.
LAND COMPARABLE NO. 7
IDENTIFICATION:
Location: 2600 and 2601 Las Vegas Boulevard South
City, State: Las Vegas, Nevada
Assessor's Parcel No.: 162-09-602-001 005 plus 2nd parcel
Fee Simple Fee Simple
TRANSACTION DATA:
Sale Date: October 2, 1995
Sale Price: $61,738,500
Terms: All cash
Grantor: Howard Hughes Corporation
Grantee: The Gordon Gaming Corporation and
Sahara Gaming Corporation
Document: 951002-73
SITE DESCRIPTION:
Land Area: 66.04 acres
Improvement of Sale: Vacant
Utilities: All to site
Topography: Level at street grade
Zoning: H-1
VALUE INDICATOR:
Price Per Acre: $934,865
COMMENTS:
Transaction involving two parcels was negotiated in conjunction with
the 20.87 acre Wet'N' Wild site and the 39.17 acre St. Andrews Golf
site parcel located directly across Las Vegas Boulevard South. Cost to
buy out the lease for the as of then undeveloped St. Andrews Golf lease
was $3.0 million. Cost to buy out Wet'N Wild lease was $7.0 million if
exercised immediately and stepped down to zero after 4 to 5 years.
Rental income from Wet'N Wild which is open only part of the year, was
nominal. Demolition costs estimated at $1.5 million.
SUBJECT PHOTOGRAPHS
View into site looking East from the Mirage,
one remaining Sands Building is visible.
The Sands Expo Center is visible behind this building.
View North from site looking into what is planned as the Lido Site,
and beyond into the Desert Inn Golf Course.
SUBJECT PHOTOGRAPHS
View from back of site towards Las Vegas Boulevard South.
Harrah's is on the left. The back of the Casino Royale is in the center,
and the Mirage is visible to the right.
Likely view into the Mirage from West facing guest rooms.
NEIGHBORHOOD PHOTOGRAPHS
The Strip looking South, in the vicinity of the subject site.
The Sands Expo Center.