Casino Enterprise Management

With a new year, new fiscal budgets approved and a slow but steady debt market recovery underway, many tribal nations are seeking to expand their gaming facilities. Whether building a brand-new (“greenfield”) casino or adding on to an existing facility, the steps taken and the order of those steps in pulling together the team, planning, scope and budget are critical.

Feasibility/Market Studies
When first discussing new construction, the earliest stage should involve the hiring of a feasibility consultant. Once the tribe has determined that they (and typically their management) believe there is a need for expansion, a third party feasibility study should be completed to truly determine if the demographics, scope and needs envisioned by the tribe are in fact realistic. A gaming market study generally includes population demographics, household income averages, propensity to gamble, average visits expected, notes on competing facilities and their amenities, hotel rooms available in the area, recommended scope of the project, and pro forma projections of revenue for the specific project. Most studies will have several drafts and updates based on the findings and conclusions. For example, a tribe may think it needs to build a 100-room hotel adjacent to its gaming facility, but the study may show that in fact 75 rooms would be a better number based on the data, or conversely, that the expanded or new facility really needs 200 rooms to support it. A feasibility study is extremely important for the tribe’s own internal discussions and decision-making process, but it becomes crucial when financing with capital markets and institutional investors. Not only will investors expect an updated, current market study, but they will expect it to be authored by a nationally well-recognized firm that has a solid track record in the sector.

Common Mistakes to Avoid
Tribes should avoid hiring other team members prior to receiving the feasibility report, as the scope of the project can change and the needs may vary. For example, if a tribe hired and paid an architect to design a hotel or travel center and then the feasibility study determined that the scope needed to change, the architect would most likely (and be warranted to) charge additional fees to redo the drawings. It is always best to understand the scope of a project first. Identifying other team members is fine, and perhaps having some early conceptual discussions is wise, but retaining and paying for actual services too early can be a costly mistake.

Management
If expanding onto an existing facility, tribes will already have gaming management in place and their in-house project teams will include management’s input from the beginning of the discussions. However, if it is a brand-new construction, or if for some reason the tribe does not have management in place, it is extremely imperative that proper gaming management assists with the planning. In some cases, hiring a gaming consultant for the project’s planning can be beneficial. Gaming operations are extremely unique and operate very differently from hospitality that is absent of the gaming component. Architects and construction companies are hired to design and build per the owner’s requirements, but they are not gaming managers and operators. Extremely beautiful facilities can be non-functional as gaming properties. I once worked for a gaming facility that was one of the most exquisite properties I have ever visited. But the tourists were so attracted to the sightseeing and the views outside that the gaming floor was often left unnoticed. This was a crucial mistake, since gaming was the largest generator of revenue.

Years ago I had a meeting with Steve Wynn when he was planning the new construction of the Wynn resort in Las Vegas. He spent about an hour showing me the placement of the elevator banks and why he felt their exact locations were imperative to the success of the future gaming resort. Even simple considerations like egress/ingress, parking access, machine view sight lines, elevator and restroom placement all add to the success or detriment of the gaming operations.

Common Mistakes to Avoid
Avoid planning any gaming project without management’s or operators’ input. The design of the facility and the overall construction footprint should be focused on the gaming customers’ needs as a priority, with all other amenities as secondary.

Financial Advisor/Banker
Once a feasibility study has been completed, the tribe will have a good idea of the overall revenue and EBITDA (earnings after costs of operations but before interest, taxes, debt and amortization). From these projections, a financial advisor or investment banker can advise the tribe on the market’s appetite for financing, how much leverage is realistic (meaning how many multiples of EBITDA can be raised as debt) and, based on any other outstanding loans or leases on their balance sheet, what the tribe’s particular overall financial situation will allow. In many cases, a multi-faceted capital structure will be recommended. Because tribal gaming facilities are owned by governments, achieving the lowest cost of capital for any given project may include combining taxable capital market funds with tax-exempt issuances and government grants or BIA/USDA-backed loans. However, in most cases, tax-exempt and government funds have strict prohibitions on financing the actual gaming building, so if necessary, based on the financing structure recommended, the design may be affected (such as requiring a separate building for the hotel or conference center).

Common Mistakes to Avoid
A tribe should avoid committing to a project before knowing with a fair amount of certainty that funds can in fact be raised. Just because a market study indicates a project is feasible, it does not guarantee sufficient financing is available for the project based on current market conditions, the tribe’s needs and existing balance sheet considerations. To design a project prior to understanding the tribe’s budget limitations can be a costly mistake if the financial advisors and bankers are not involved. Additionally, there may be financing considerations that dictate certain design requirements worth incorporating into the project early on.

Architect
The tribal gaming sector is fortunate because there are many talented and experienced architectural firms available, including some that are American Indian-owned or that have American Indian-focused divisions. The collective work of architects and designers throughout Indian country is vast and breathtaking, with some recent projects being award-winning standouts. Because there are so many firms, tribes should talk to several and make a thoughtful decision, as the architect will work very closely with the tribe in achieving its overall vision for the project. Many architects have come to understand tribal cultures and traditions extremely well and are able to incorporate accepted concepts into the design of projects if the tribe so wishes. My recommendation is to hire an architect once the scope and financial budgetary parameters of the project have been determined.

Common Mistakes to Avoid
Many a tribe has paid for beautiful architectural renderings of a project only to find it cannot finance the project at that scope and then has to pay the architect to redo the drawings at a smaller scale or with a phased approach. While it is wise to identify the architect early on in the process, committing to pay fees and commissioning work should be done only after understanding the financing and budget parameters of the project.

Contractor
The construction company for any project is one of the most important elements in the overall success and execution. The lenders and investors will most likely expect a Guaranteed Maximum Price (GMP) from the contractor, which guarantees completion of the project without budget overruns. The investors and lenders will expect the company to be nationally recognized, licensed and bonded with appropriate insurance. Like architects, there are many great firms to choose from, but the difference is the scrutiny the lenders and investors will demand and expect with regards to the firm’s qualifications. It is often recommended that the architect and construction company work together even in the early stages, as the construction budget will be based on the architect’s drawings and firms that have an established working relationship often benefit the client with a streamlined process.

Common Mistakes to Avoid
Tribes should avoid selection of the construction company without the input of their bankers or financial advisors, since the investors and lenders require certain qualifications and experience levels. If a construction company is hired and then is determined unsuitable by investors, the tribe may have to pay a breakage fee to the construction company. It is best to have confirmation that the firm will be suitable before signing any contractual agreements.

Legal Advisor(s)
One would assume that all tribes have legal advisors available on a regular basis. The order of sequencing in terms of when to bring on the legal team, particularly for an expansion, varies depending on the project. If a tribe has in-house counsel, that person or firm would most likely give input from the very beginning, as early as the market study discussions, and stay involved through completion of the project. However, most general tribal attorneys have specialty backgrounds in federal Indian law or tribal governmental law, and they may not be suited for the specific law expertise required for a project financing. When issuing debt for a gaming resort project, there is typically the need to hire securities counsel and, in some cases, bond or tax counsel as well. On a new construction project where the tribe is issuing debt to finance the costs, the tribal attorneys will need to provide input for the investors’ and lenders’ due diligence—i.e., certifying the tribe’s right to game, validating the compact and trust land status, authoring resolutions, etc. The importance of good legal counsel should never be underestimated.

Common Mistakes to Avoid
Just like doctors, not all attorneys cover all specialty areas of practice; tribes need to be prepared to hire specialists when necessary.

Expansion and construction can be exciting and empowering for a tribe, but it can also be stressful and divisive. Compiling a strong team in the appropriate order can alleviate wasteful spending and unrealistic plans while providing for a streamlined and successful execution of the project.


Valerie Red-Horse is an investment banker and financial advisor to tribal governments in her role as President/Owner of Red-Horse Financial Group Inc., offering securities through Western International Securities Inc., a FINRA and SIPC member firm. Red-Horse Financial Group and Western International Securities Inc. are separate and unrelated companies. Red-Horse can be reached at valerie[at]wisdirect.com.