Dubai World Sues MGM Over Vegas Property Venture

Of all the large problems that Tim Geithner's plan intends to solve (i.e. not enough risk currently assumed by the taxpayer, budget deficit way too small, future risk of US currency crisis not quite alarming enough, runaway inflation too remote of a possibility etc.), here's one that it won't fix: the collapse of half-built commercial property development projects agreed to during the bubble.  Case in point:  Dubai World and MGM Mirage's $8.6 billion City Center Project that is currently under construction.  If there is anything that Dubai World, the developer of the manmade palm-shape island in Dubai, loves more than cranes scattered across a half-built landscape, I have yet to discover it.  But I suppose that the sight of the half-built City Center project and the reality of all the money required to finish construction has finally caused Dubai World to reassess the situation.  

The ambitious joint venture is running into major financing problems as the gambling industry threatens MGM Mirage's chances of fulfilling its obligations.  In an effort to protect itself, Dubai World is suing to limit its exposure to the expensive project.  Dubai World has asked the court to free it from making future payments and fulfilling other obligations.  It blames MGM Mirage for massive cost overruns and it has indicated that it will probably not make a $100 million payment on the City Center project that is due Friday.  Failure to make the payment could halt construction on the project and push it into bankruptcy.  Dubai claims that the current path of the project is unsustainable given MGM's financial situation, which is a very good point.  MGM Mirage won a temporary reprieve just last week from its lenders but warned that it faces potential default on loan obligations due in May.  Dubai's main beef is that it has been asked to make capital contributions far in excess of the levels originally estimated by MGM, the cost overruns to date are over $1 billion, despite a scaling back of parts of the ambitious project.  Now it's up to the court to decide how this debacle is resolved.  

The commercial real estate landscape is filled with half-finished large-scale projects across the country envisioned during a much better economy and financed on extremely friendly terms.  Investors and developers are hiring lawyers and preparing themselves for painful discussions with lenders.  One can only hope that the debt on this kind of debacle doesn't somehow wind up financed in a non-recourse loan in the TALF, because as a taxpayer I want no part of it.