Brookfield US Holdings LLC has abandoned its plans to purchase the Revel Casino, according to a Press of Atlantic City article on Wednesday evening. With Brookfield backing out of the sale, the future of Revel Casino is far from certain.
With the sale falling through (Brookfield intended to reopen Revel as a casino) it’s likely Atlantic City will be down to and remain at seven casinos in the very near future, as Trump Taj Mahal has filed paperwork to close on December 12. Should this occur, Atlantic City’s brick & mortar gaming industry will start 2015 with just seven of the 12 operators it had at the start of 2014.
This reshaping of the Atlantic City skyline has been nothing short of astonishing, both in terms of its swiftness and totality.
Brookfield placed the winning bid of $110 million on Revel during a contentious and downright fascinating bankruptcy auction where developer Glenn Straub (who got the ball rolling on the auction with his $90 million stalking horse bid) stole the show and the headlines with his bizarre proclamations (Tower of Geniuses anyone) and statements about his intentions for the property.
Despite complaints later filed by Straub where he sought to have Brookfield’s bid tossed out, the company was approved to purchase Revel for the $110 million price tag – a good bargain for a property that opened in 2012 at a total cost of $2.4 billion.
But now Brookfield has decided to walk away from the deal, as Brookfield spokeswomen Melissa Coley told the Press of AC, “bondholders controlling debt connected to construction of Revel’s plant refuse to rework fixed costs connected to the plant’s construction.”
It’s the electricity stupid!
Coley is referring to the creative initiative that began under Revel’s previous owners that would see the Revel build and maintain its own power plant on property adjacent to the casino proper. The creation of the power plant would help put an end to the robust energy bill Revel was paying – estimated to be about $1.25 million per month.
However, the construction of the power plant required a ton of startup money, with energy savings only being realized many years down the road. Generally speaking, this type of foresight is good business, but for a casino hemorrhaging money in a shrinking market, it was a clear overshoot.
What ended up happening was anything but cost effective, and likely hastened Revel’s demise.
After pumping in $42 million of their own money, Revel ran out of cash while building the power plant and sought outside financing, which they found in the form of ACR Energy Partners. ACR completed the power plant at a total cost of $158 million, which Revel would now have to repay.
Their deal with ACR called for Revel to repay ACR for “construction costs with interest — 11.67 percent annually for the bonds, and 15 to 18 percent for ACR’s equity investment,” according to the Press of Atlantic City.
These payments stretch over a 20-year period and require Revel to pay $1.5 million per month on top of their $1.25 million utility bill.
ACR’s unwillingness to renegotiate the deal with Brookfield effectively kyboshed the sale – a risky move by ACR considering most analysts don’t see anyone taking over the Revel without a renegotiated deal with ACR.
What’s next for Revel?
For lack of a better analogy, Revel Casino is turning into Atlantic City’s Oak Island, an absolute money pit.
The Revel is beautiful, an absolutely stunning hotel and casino, but the multi-billion dollar property is now likely suffering from sunk-cost bias, as it seems unfathomable to everyone that the property could lay dormant or be razed to the ground. That’s what should happen with the Atlantic Club, not Revel.
Like Oak Island, it’s hard to dig down 110 feet, run into a problem, and then just abandon the entire operation. Instead you try to find new, creative workarounds for the obstacles in your way. Problem is, these creative methods are costly and often don’t produce any results.
One of the main reasons is the exorbitant utility costs outlined above, but on top of that the Revel was a poorly conceived idea, with rushed and harried design changes that simply doesn’t fit into the market.
Unfortunately, if a sweetheart deal cannot be struck, the Revel is worthless to investors.
In its first year of operation, the casino lost at least $35 million each quarter. In the quarter before it filed for Chapter 11 bankruptcy protection in 2013, Revel lost a staggering $81 million. Even after bankruptcy restructuring (their first filing) the casino was routinely losing $20 million each and every quarter.
A near $3 million monthly bill for utilities is just the tip of the iceberg, as the property needs a complete overhaul inside (no more 11th floor hotel lobby or lack of direct access to the casino floor from the hotel) in order to turn it into a working hotel/casino.