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Defects may implode Las Vegas hotel project

Defects may implode Las Vegas hotel project

LAS VEGAS—A dispute over construction defects at a newly built Las Vegas hotel may end with the building being demolished before it welcomes a single guest.

That's the way CityCenter Las Vegas, a community of hotels and shops, would like to see the standoff end over its Harmon Hotel. Construction on the nearly completed 28-story hotel was halted in 2008 when steel reinforcements were found to be faulty. CityCenter is pushing to have the building imploded, saying it is unsafe and beyond repair.

While CityCenter and its parent, MGM Resorts International, argue that it is in the interest of public safety to destroy the structure, Perini Building Co. Inc., the hotel's Las Vegas-based builder, alleges the owner simply came to the realization that the tower would be a bad bet in the current economy.

Perini argues that the Harmon Hotel was defectively designed but is structurally sound, and any construction defects can be repaired.

The dispute has spawned not only litigation in state courts, but also debate over the unusual measures that the hotel owner is taking to prevent the building from opening.

“This is the first time I've heard of an owner wanting to knock down a building of this size because of construction defects,” said Jonathan Cass, a partner in the law firm Cohen Seglias Pallas Greenhall & Furman P.C. in Philadelphia.

Ed Seglias, a partner in the firm, said, “We usually don't see an owner responding this way. This is highly unusual.”

“This definitely is an unusual event,” agreed Michael Herlihy, Boston-based executive vp at broker Ames & Gough Inc. “It's not the type of thing we're used to seeing out there.”

Perini officials declined comment on the controversy, but said in a July statement that the hotel's owner wants it destroyed because it is “worth more dead than alive to MGM. Otherwise, MGM would allow Perini to repair it. MGM never intended to complete the Harmon after the economic downturn,” the statement said.

“If market conditions were better and MGM found that demand existed for the Harmon hotel rooms, MGM would not be claiming that the Harmon is unstable,” Perini said.

MGM argues that the hotel is so riddled with defects that it is unsafe, and the extent and cost of repairs are nearly beyond estimation.

An MGM spokesman said an engineer it hired backs up its position.

He provided a July 11, 2011, letter from Chukwuma G. Ekwueme, an associate principal with Weidlinger Associates Inc., the engineering firm hired by MGM, to William Ham, vp of facility operations at CityCenter. In it, Mr. Ekwueme said reinforcing steel was missing or misplaced throughout the structure below the 21st floor.

“In addition,” Mr. Ekwueme wrote, “there is insufficient concrete cover to reinforcing steel in numerous structural members, resulting in inadequate fire resistance in the tower.”

In the letter, Mr. Ekwueme said it is likely that the hotel would suffer a “partial or complete collapse” if there were an earthquake that would not be expected to damage structures built to local earthquake code standards.

These types of structural defects would be unusual because engineers usually make certain there are no such defects, as structural design and construction are such critical aspects of a building, Mr. Herlihy said.

But when such defects occur, “they are difficult to fix,” Mr. Herlihy said.

The MGM spokesman said the engineer's report proved that repairing the hotel would be “problematic at best. We're still unsure what it would take to repair it. Our team came to the conclusion that it would be best to remove it by implosion.”

A plan to implode the building was filed with local authorities in August, the spokesman said, but no decision had been made as of mid-October on when that might happen.

Perini has disputed the Weidlinger report, referring to a previous study commissioned by the Clark County, Nev., Building Department and carried out by Walter P. Moore & Associates Inc. That report agrees with Perini's assessment that the Harman is structurally sound, the builder said in an August statement.

The Moore & Associates report “placed blame on MGM for improper design and required MGM to address those design deficiencies,” Perini said in the statement, which led MGM to “buy another opinion, which Weidlinger has provided.”

CityCenter has lost hundreds of millions of dollars on the project, according to MGM's financial reports.

In its 2010 annual report, MGM said CityCenter recorded an “impairment charge of $279 million in the third quarter of 2010” after the company decided it was unlikely that the Harmon Hotel would be completed.

Perini filed suit in Nevada state court in Clark County in March 2010 against MGM unit MGM Mirage Design Group and other defendants, alleging that the builder was owed about $490 million for its work. It also charged that the defendants failed to provide complete design documents, among other allegations.

Aside from the $490 million, Perini also alleges that it and CityCenter subcontractors are owed more than $200 million, much of it unrelated to the Harmon Hotel project but delayed while MGM uses allegations of hotel construction defects “as a ruse” not to pay. The litigation is stalled over procedural issues.

Regardless of how the dispute over the Harmon Hotel is resolved, it is unlikely that anyone, whether it's the owner, builder or design firm, has the amount of insurance it would take to cover the damages being alleged, Mr. Seglias said.

Even if MGM or CityCenter has insurance that would apply, it is unlikely to be written to limits that would cover losses of more than $200 million due to construction defects, he said. “There's no way anybody is paying off like that,” Mr. Seglias said.

Mr. Cass pointed out that commercial general liability policies usually preclude coverage of faulty workmanship.

In its annual report, MGM noted that it carries a $1 million per-occurrence deductible on its general liability claims.

Regardless of who is found at fault, defense costs are piling up for the parties involved in litigation.

“There are times when the insurer will step up and provide a defense even though they are not technically required to do so,” said Mr. Seglias. “But they may reserve their right to pay.”