Arbitration Kills Homebuyers in Las Vegas Luxury Condos

By: samschoenfeld  //  Editorial & Opinion

Black jack and roulette. Johnnie Walker Blue Label and Belvedere. The Cosmopolitan and Trump Towers. Stealing and arbitration? The last two words may throw you for a loop, but they certainly fit into the bigger picture that is Las Vegas. Over the past few decades Las Vegas has been built up from a dusty desert pothole to an ultra luxury oasis for refuge, but along the way corruption, gambling, and greed have become the key sources of revenue, leaving the everyman trying to catch up in the dust.

Due to a series of laws and Supreme Court decisions on arbitration clauses, corporate entities have been able to sit atop customers with increasing ease. This was evident in a recent examples of homeowners being pushed aside during the housing market implosion following the 2008 national economic downturn.

The Las Vegas Review-Journal reports that during the boom in the years that followed the crash nearly 12,800 condominiums were built on the strip in Las Vegas, most of them luxury or even ultra-luxury. The prime real estate garnered deposits from lusting homeowners that soared into the tens and hundreds of thousands on what seemed, at the time, like a fantastic investment. What the buyers didn’t know was that the development companies were misleading purchasers about how occupied the buildings were, making them seem more coveted and valuable than they actually were. When the bubble burst and construction took longer than expected, values plummeted and buyers could not move into their new unfinished homes.

Remorseful buyers sought to regain their deposits through class action litigation, and the developers fought back tooth and nail to halt losing their entire financing. What the buyers found were road blocks as tall as the new 24 karat gold-plated towers being built: they were bound by clauses in the deposit contracts that prohibited suing and required arbitration to settle disputes. And the developers weren’t going to lie down easily since the deposits help finance the construction of the projects, which weren’t completed when buyers sought to reclaim their money.

The Cosmopolitan of Las Vegas broke ground in 2005 with the intention of being a hotel, casino, and luxury condo complex. The original developer, Bruce Eichner, was foreclosed on in 2008 by Deutsche Bank, which transformed the concept into a hotel, retail space, restaurant, and casino, but cancelled plans for condos. Instead, the hotel rooms were a mix of studio and one-bedrooms with kitchenettes and balconies.

Thus buyers sued the developers for breach of contract. While 1,800 settled for a return of about two-thirds of their deposit, others held out, claiming that the change in project design and delays in construction meant they deserved all of their deposit back. They lost. Because these unhappy souls were required to use arbitration to settle the claims, and had to abide by whatever the arbitrator decided without recourse for appeal, the buyers lost $1 million of their $1.35 million deposits and had to pay the developer’s legal bill.

A worse result faced the buyers of condos at the Trump International, where in the improved 2012 market condos sold for an average price in the high $500,000s. The arbitrator in that case decided against refunding any of the 300 buyers’ deposits—which the Las Vegas Sun says amounted to $40 million in escrow—or letting them out of their purchase contracts, which The Cosmopolitan buyers did get. They appealed to a judge, but the arbitration clause stood.

The Trump case was a bit different than The Cosmopolitan one, and was based more on perception than breach of contract. The 300 buyers who sued in 2011 had put down deposits during the construction phase in 2005 and 2006 when the market was doing great. They claimed that once the market tanked, the value of the condos was truly revealed, and that their purchases had been at inflated prices. The suit claimed “Trump took full advantage of that boom and aggressively spread the message that the units were in short supply and rapidly rising in price…manufactur[ing] a purchasing frenzy in which potential purchasers believed they were in a now-or-never situation.”

The buyers’ main basis for lawsuit was the Interstate Land Sales Full Disclosure Act, which protects homebuyers from fraud and abuse in the sale of land. They claimed that, in fact, the “short supply” was merely non-binding reservations from prospective buyers and that the value wasn’t actually increasing, that Trump just “manipulated market perceptions.” They also claimed that the project was misrepresented to them as a 64-story tower when it only ended up being 56 stories. Trump won, but it has changed the industry.

Other cases were brought against the Signature at MGM Grand in Las Vegas. Property investors bought condos in the tower adjacent to the hotel and casino between January 2004 and October 2005 under the impression that it was an investment purchased to be rented out for income, not a home, and that the Securities Exchange Commission would regulate it as a security, according to The Wall Street Journal. Purchases regulated by the SEC must release detailed prospectuses. The developers deny claims that they marketed the condos as investments.

One such buyer at the MGM Grand’s property said he was promised $600 per night rents and told developers he didn’t plan to use the property himself, but developers disabuse those claims. Online legal publication Law 360 reported that the class action suit claimed the contracts were not understandable by just reading them, and that they led buyers to believe they’d get 60 percent of the revenues of renting their condos, but later found out that hidden fees resulted in a net of only 33 percent. In the end the units were sold for upwards of $600,000 in the mid-2000s, and now sell for less then $300,000. The decrease in value has resulted in rooms renting for a mere $60 to $200 a night instead of the promised $300-plus.

The problem in all these cases is that the concept of condo-hotels was terrible once the market crashed. Developers would finance construction through sales to buyers, and both would rake in the dough by renting the rooms as hotel suites when the homeowners weren’t around, or if they didn’t live on the property. But the market crash eviscerated the value of the condos, stopped people from buying homes, and prevented consumers from travelling and staying at hotels. And new amendments to the Interstate Land Sales Full Disclosure Act at the heart of the Trump case will make things more difficult for buyers. This year the House passed a resolution to exempt all new construction condos from the law’s registration and disclosure requirements meant to protect against scams, which will make it easier for developers to one-up buyers.

No new major condominiums or hotel and casinos have been built since the completion of The Cosmopolitan in 2010, due to an influx of construction in the preceding three years. It will be interesting to see how the arbitration settlements, Supreme Court arbitration decisions, and new laws impact the future of condo-hotels and arbitration clauses in housing contracts in the upcoming years. (Samantha Shoenfeld) (Image: Flickr | jimg944)