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Deutsche Bank Gambles on Casino

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Banks roll the dice on commercial real estate.

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Bloomberg reports Deutsche Bank (DB) is trying its hand at interior decorating.

The German banking giant is now the proud owner of the 40% completed Cosmopolitan Resort & Casino, the latest project going up on the Las Vegas strip and adjacent to The Bellagio and MGM Grand (MGM).

After New York developer Ian Bruce Eichner defaulted on his $760 million loan in January, Deutsche Bank took over the multi-billion dollar development. Bank representatives are getting their hands dirty, touring the site and even critiquing plans for a black-and-white décor, according to Bloomberg.

Deutsche Bank is one of the many financial firms now sifting through the rubble of its self-inflicted real estate woes. Although defaults on commercial real estate loans are still relatively low, Wall Street banks like Lehman Brothers (LEH), Morgan Stanley (MS) and Merrill Lynch (MER) are being dragged down by eroding value of commercial mortgage-backed securities, or CMBS.

And while CMBS holdings are wreaking havoc on already battered balance sheets, defaults on bridge and construction loans may cause bigger headaches for the banks.

When these loans go sour, lenders end up owning properties. Unfamiliar with how to build a massive resort-casino or soaring condo complex, banks are now begrudgingly becoming real estate developers and property managers.

The trend is mirroring a similar one on the residential side of the fence, as foreclosures leave banks holding thousands of individual homes and condos. Property upkeep and sales efforts are creating huge cost centers, not to mention absorbing precious human resources badly needed to address a myriad of other problems.

Whether it's a McMansion in California's central valley, a condo in Miami Beach or a casino on the Vegas strip, banks are faced with a difficult choice: Pony up millions in development costs or dump assets at fire sale prices. The former creates a slow bleed of cash, while the latter means banks take a big hit now. Without the infrastructure to handle owning properties or the balance sheet to absorb more losses, most banks are ill-equipped for either choice.

The result will be years of real estate supply, both commercial and residential, that owners aren't crazy about holding on to. Seasoned developers are readying themselves for the opportunity of a lifetime to snatch up unwanted properties. The catch, of course, is that there may be no one left to lend them money to do so.

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