Tuesday, December 28, 2010

The Cosmo and Me, Part 1

Back in 2005, when investing in real estate still seemed like a good idea, we put down a deposit on a condominium at the new Cosmopolitan Resort and Casino. At the time, the Cosmo was a vacant lot sandwiched between the Bellagio and the new CityCenter development on the Las Vegas Strip.

The project has had numerous difficulties, not least of which were a foreclosure by its main creditor, Deutshche Bank, and a class-action lawsuit which was settled out of court last year. The upshot of the settlement was that most of the buyers of the 2000 or so condo units were released from their contracts and had their deposits partially refunded. We decided to opt out of the settlement because it seemed like a bad deal. With so many buyers released from their contract, we figured one of three things had to happen.

The first possibility was that the units would be allowed to sit empty until the real estate market improved. That seemed pretty unlikely.

The second possibility was that the units would be put back on the market, in which case we figured we might be able to renegotiate our purchase price. If they were trying to sell condos in the current climate, a happy customer would be worth a lot more to them than the difference between our contract price and current fair market values, especially a happy customer who wrote a blog.

The third possibility was that the units would not be put back on the market, but would instead be turned into hotel rooms. This is what ultimately happened. Instead of 2000 condos and 1000 hotel rooms, the Cosmo now has 200 condos (under contract to the people who opted out of the class action settlement) and 2800 hotel rooms.

There was a clause in the purchase contract that allowed us to unilaterally pull out of the deal if there were "material and adverse" changes to the building's floor plan. The change from 2000 condos to 200 certainly seemed "material and adverse" to us, so we sent a letter to the Cosmo notifying them that we were electing to terminate.

We were hoping that the Cosmo's response would be an offer to renegotiate the purchase price. We actually wanted the condo, we just didn't want to pay a height-of-the-bubble price for it if we could avoid it. But instead of negotiating, they decided instead to sic their lawyers on us. We received a letter not from the Cosmo, but from the law offices of Snell and Wilmer, saying:

This law firm represents Nevada Property 1 LLC, the owner and seller under your contract to purchase a condominium hotel unit in The Cosmopolitan of Las Vegas. We received your ... letter terminating your contract. However, we disagree with the premise of your termination, as there have been no material or adverse changes to the subdivision map. To the contrary, the final subdivision map reflects a project very much the same as reflected in the provisional subdivision map. Accordingly, your termination is without basis and is a default under section ... of your contract. You have 20 days from receipt of this letter to cure your default. If you fail to do so, we will proceed in accordance with your contract [and confiscate your security deposit].

That seemed a little harsh considering that our unit was not even scheduled to be completed until the middle of next year.

The notice of default backed us into a corner. We had to respond to it, so we had to consult with a lawyer. Happily, we were referred to a lawyer who was already representing a bunch of the remaining condo buyers in a new lawsuit against the Cosmo. The case was strong enough that he was prosecuting the case on contingency. Among the long list of documents that he had amassed in the case was a letter from a fellow named Matthew L. Lalli, one of the Cosmo's lawyers at Snell and Wilmer, and one of the people cc'd on the notice of default they had sent us. This letter read:

... [the contract] does not impose any contractual obligation on [the Cosmo] to record a final map with any particular details or requirements... It merely gives the buyer the option to terminate the contract if he/she believes the final map differs materially and adversely from the provisional map. [Emphasis added.]

I think Mr. Lalli's gonna have some 'splainin' to do. :-)

Frankly, I don't see how any reasonable person could argue that changing a project from 2/3 condo and 1/3 hotel to 7% condo and 93% hotel is not a material and adverse change. But it is becoming apparent that the Cosmo is not dealing in good faith. I can't help but wonder, though, what they think the end game is going to be here.

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