A Castaways hotel-casino executive on Wednesday detailed problems at the struggling Las Vegas property, saying it was denied its best shot at raising funds to convert into a Holiday Inn franchise.
Attorneys for Vestin Mortgage of Las Vegas, the Castaways' primary lender owed more than $20 million, questioned the value of that franchise and moved aggressively to thwart a motion in bankruptcy court by the casino to obtain an emergency loan of $1 million from another lender.
The U.S. Bankruptcy Court hearing before Judge Linda Riegle comes roughly three weeks after the Castaways filed for Chapter 11 bankruptcy protection and about a month after the property defaulted on the Vestin loan. At the first hearing, Riegle granted an emergency order for the casino to borrow $1 million from USA Capital, which is expected to fund casino operations through at least this month. The casino is seeking another $1 million to keep the casino running through August.
Central to the fight is what the property, which dates from the mid-50s, is worth. Castaways attorneys say the property was appraised at around $60 million in July 2002, though the company believes it could ultimately be worth more than $105 million as a Holiday Inn franchise and isn't expected to depreciate if operated normally.
Vestin has theorized that the property could be worth closer to $20 million based on an analysis from another lender. Vestin also has accused the Castaways of "squandering" the $20 million it lent the property. Testimony is expected to continue next Wednesday, after which Riegle may decide whether to allow the property to secure the additional $1 million loan.
The Boulder Highway casino at 2800 E. Fremont St. has about 460 rooms and is best known for bingo as well as a bowling alley that claims to be the nation's largest.
In testimony Wednesday, Castaways partner Dan Shaw said the property has consistently lost money and also failed to pay employees' health insurance premiums while it sought more funds to finance the planned Holiday Inn conversion. The Castaways employs about 830 people.
Shaw said the property lost about $1.5 million in 2001 and about $2.5 million in 2002. According to a company financial statement, the Castaways cash flow losses this year through May accelerated to about $3.7 million, he said. Worse-case scenario estimates put the company's cash flow losses for July and August at around $350,000 per month.
The company also owes about $3.5 million, including penalties, in federal payroll taxes, Shaw said.
The property owes roughly $854,000 in health benefits to nonunion workers, Culinary Union attorney Richard McCracken said Wednesday. The property also owes money to the union's pension fund. Under a new contract struck with the Culinary Union last year, hotel and restaurant employees are entitled to significantly higher payments that the Castaways and other casinos pay directly into a union health fund on workers' behalf, he said.
Shaw pinned the company's troubles on the tourism decline after the Sept. 11 attacks, the general economic decline and an informational picket line held by Culinary Union members during last summer's contract negotiations.
VSS Enterprises bought the property, then known as the Showboat, from Harrah's Entertainment Inc. in March 2000. VSS financed the initial purchase price of $23.5 million with a $15 million loan from Foothill Capital Corp., a Wells Fargo subsidiary. The company refinanced the Foothill note in March 2002 with a one-year, $20 million loan from Vestin and Owens Financial Group Inc. at a 13 percent interest rate.
Shaw said he has personally loaned the property about $18 million, or $21.5 million with interest. Shaw, a Las Vegas real estate developer, said he has been unable to loan the property more money because much of his net worth is tied to real estate that can't be easily sold.
After the sale from Harrah's, the casino cages and slots needed to be stocked with cash and some remodeling was needed -- resulting in at least $5 million in costs funded by Shaw.
Under the Holiday Inn contract, the Castaways is required to completely remodel rooms, including replacing furniture, linens and carpeting. This first phase of the project, which ends in September, has been extended by a verbal agreement with Holiday Inn through the end of the year, Shaw said. The Castaways doesn't have a plan in place yet for how it will complete the project's second phase, which involves building another 440 rooms, Shaw said.
To help fund the conversion, the Castaways approached Vestin for another loan on top of the $20 million note. Vestin initially agreed to partially fund a $6 million loan, Shaw said. Vestin stalled for several weeks on the loan, which would have been too expensive for the company, he said.
Had the property known it would not get the extra money, it would have extended its original $20 million loan with Vestin by paying an extension fee plus interest. Instead, the Vestin loan became overdue, with Castaways now owing roughly $3 million in penalties on top of the loan, Shaw said.
The company has since approached other lenders, receiving about $400,000 from one lender and smaller amounts from other individuals.
The Holiday Inn brand has the potential to boost the hotel's occupancy and room rates into the profit category, Shaw said. The Castaways now gets an average rate of $40 to $45 per night but hopes to charge $60 to $65 as a Holiday Inn. The new brand could push the property's occupancy rate into the high 80 to low 90 percent range, generating consistent profits, he said.
Current occupancy levels weren't disclosed.
Aside from all the money plowed into the property, the Castaways has improved its bingo product and successfully marketed its bowling alley to groups -- agreements that Harrah's had let lapse at the end of its ownership.
During its days as a Holiday Inn franchise, Fitzgeralds managers said the downtown property had occupancy rates in the high 80s and 90s and average daily rates of $55 to $60, Shaw said.
The Fitzgeralds casino downtown was a Holiday Inn franchisee when it filed for bankruptcy, Vestin attorneys said. The downtown casino was later bought out of bankruptcy by Detroit casino executive Don Barden. Fitzgeralds, which now plays up its Irish theme, is no longer part of the Holiday Inn franchise.
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