Casino Reinvestment and Expansion

The proper Care & Feeding of the Golden Goose

Under the new paradigm of regressing economic conditions across a broad selection range of consumer spending, casinos face a unique challenge in addressing SA Gaming how they both maintain profitability while also remaining competitive. These factors are further complicated within the commercial gaming sector with increasing tax rates, and within the Indian gaming sector by self added contributions to tribal general funds, and/or per capita distributions, in addition to a growing trend in state added fees.

Determining how much to “render unto Caesar, ” while reserving the needed funds to maintain market share, grow market puncture and improve profitability, is a daunting task that must be well planned and executed.

It is in this particular context and the author’s perspective that includes time and grade hands-on experience in the development and management of these types of investments, that this article associates ways in which to plan and prioritize a casino reinvestment strategy.

Cooked Goose

Although it would seem axiomatic not to cook the goose that lies the golden offspring, it is amazing how little thought is oft times made available to its on-going proper care and feeding. With the advent of a new casino, developers/tribal councils, investors & financiers are rightfully anxious to gather the rewards and there is a tendency not to budget for a sufficient amount of the gains towards asset maintenance & enhancement. Thereby begging the question of just how much of the profits should be allocated to reinvestment, and towards what goals.

Inasmuch as each project has a particular set of circumstances, there are no hard and fast rules. For the most part, many of the major commercial casino operators do not distribute net profits as off to their stockholders, but rather reinvest them in improvements to their existing venues while also seeking new locations. Some of these programs are also funded through additional debt instruments and/or justness stock offerings. The lowered tax rates on corporate off will likely shift the emphasis of these financing methods, while still maintaining the core business prudence of on-going reinvestment.
Profit Allocation

As a group, and prior to the current economic conditions, the freely held companies had a net profit ratio (earnings before income taxes & depreciation) that averages 25% of income after deduction of the gross revenue taxes and interest payments. Typically, almost two thirds of the remaining profits are utilized for reinvestment and asset replacement.

Casino operations in low gross gaming tax rate jurisdictions are more readily able to reinvest in their properties, thereby further enhancing revenues that will eventually benefit the tax base. New jersey is a good example, as it mandates certain reinvestment allocations, as a revenue stimulant. Other states, such as Illinois and Indianapolis with higher effective rates, run the risk of reducing reinvestment that may eventually erode the ability of the casinos to grow market demand penetrations, especially as neighboring states are more competitive. Moreover, effective management can generate higher available profit for reinvestment, stemming from both efficient operations and favorable borrowing & justness offerings.

How a casino enterprise decides to budget for its casino profits is a critical element in determining its long-term viability, and may be an integral aspect of the initial development strategy. While short term loan amortization/debt prepayment programs may at first seem desirable so as to quickly come out from under the obligation, they can also sharply reduce the ability to reinvest/expand on a timely basis. This is especially valid for any profit distribution, whether to investors or in the case of Indian gaming projects, distributions to a tribe’s general fund for infrastructure/per capita payments.

Moreover, many lenders make the mistake of requiring excessive debt service reserves and place polices on reinvestment or further leverage which can seriously limit a given project’s power to maintain its competitiveness and/or meet available opportunities.

Whereas we are not advocating that all profits be plowed-back into the operation, we are encouraging the consideration of an allocation program that takes into account the “real” costs of maintaining the asset and maximizing its impact.

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