* Breaking news…
* From the study…
Not feasible due to the onerous tax and fee structure
The gaming expansion legislation that allows for a casino in the City of Chicago is very onerous from a tax and fee perspective. Our understanding is that on top of the existing tax structure on Adjusted Gross Receipts (“AGR”) paid by all Illinois casinos, the City of Chicago casino would also pay an additional 33 1/3% privilege tax on AGR. The developmental impact of high taxes and fees notwithstanding, we forecast that a casino in the City of Chicago has the potential to become the highest grossing casino in Illinois, significantly higher than the current market leading Rivers Casino in Des Plaines, which generated $441.8 million in AGR in calendar 2018. For example, the highest AGR potential for the five sites selected for the study by the City of Chicago is approximately $806 million (Former Michael Reese Hospital, 31st St. and Cottage Grove Ave.). Based on the prevailing AGR and admissions taxes alone (set aside for the moment other operational-phase taxes and fees), a casino in the City of Chicago would pay approximately $311 million in AGR and admissions taxes, or an effective rate of approximately 39% relative to AGR of $806 million. When combined with the 33 1/3% additional privilege tax on AGR specific for the City of Chicago casino, the effective tax rate is approximately 72%. AGR projections for all of the five sites result in a broadly similar effective tax rate.
It can be further expected that a casino’s operating expenses (e.g. advertising, marketing, payroll, rent, utilities, etc.) can easily approach the equivalent of 30% of AGR, if not higher. Combined with the effective tax rate of 72% yields an expense structure that could exceed casino revenue. Ultimately the additional privilege tax on AGR specific to the City of Chicago results in none of the five sites being financially feasible. The amount of profit generated relative to total development costs, inclusive of licensing and reconciliation fees, represents at best a 1% or 2% return annually, which is not an acceptable rate of return for a casino developer on a greenfield project. But for this incremental tax, any of the sites analyzed herein would likely have a profit margin broadly in line with the Illinois and regional casino peer group average in the low-to-mid 20% range. However, we believe a reasonable casino developer would not move forward with a greenfield casino project that has, at best, a low single digit profit margin.
To the extent a casino operator could pare down expenses and realize modest revenue and profits from non-gaming amenities (as we have projected herein), total enterprise profit margin would, in a best-case scenario, likely equate to a few pennies on the dollar – and that would require the casino to be developed without incurring any debt as we believe no traditional financing would be available for such a development as debt servicing would likely well exceed any modest profits generated. […]
Casino profit margins can’t support the special privilege tax
Noted above, it is not unreasonable to think that the operating expenses of a casino in Illinois could approximate 30% of AGR or higher. By way of example, and while Illinois casinos are not required to report detailed financial information publicly, we were able to calculate various financial margins for the Grand Victoria in Elgin that was recently sold. Based on press releases provided by the acquiring company, 2017 EBITDA was calculated to be approximately $36.4 million. Based on data available from the IGB, the casino generated $168.7 million in AGR in 2017 and paid $55.5 million in gaming and admissions taxes and fees. With these data points available, operating and other expenses can then be estimated at approximately $76.9 million, or 46% of AGR (and well above the 30% estimate above). […]
The absence of the special privilege tax would yield a profitable casino
Our analyses suggest that, at best, the highest earning of the five sites would operate on very thin profit margins of around 3%, which compares very unfavorably to the in-state and regional peers in the low-to-mid 20% range. In the absence of the special privilege tax on AGR specific to Chicago, the profitability of a casino in the City of Chicago would receive a material boost. While not all of the tax “savings” would drop to the bottom line in the event the special privilege tax is rescinded, most of it would. In this scenario, and while the casino would certainly allocate some of the savings to, for example, increased marketing efforts, the lack of the special privilege tax would allow a casino to operate with margins broadly in line with the in-state peers.
* Mayor Lightfoot has been claiming all along that the tax structure wouldn’t work. The latest from the Tribune…
With word on the odds of success for potential Chicago casino sites due this week, Mayor Lori Lightfoot said Monday she isn’t sure whether a gambling operator can make enough money given the upfront costs they must pay under the current state law.
Consultants at Union Gaming Analytics are expected to deliver their view of a city casino’s feasibility by Tuesday — and supercharge speculation about where a massive gambling hall could stand, and if it can make enough money to soften the city’s budget burden. […]
As it stands, state law would send one-third of a Chicago casino’s adjusted gross receipts to the city. Currently, the city casino operator also would have to pay a $250,000 application fee upfront, a $15 million “reconciliation” fee when the license is issued and up to $120 million in gambling position fees — which cost $30,000 each. […]
“We asked for the feasibility study, as you know, because we were very concerned that the tax structure that the legislature put in place was one that wouldn’t lend itself to funding of a casino,” the mayor told reporters Monday at City Hall.
*** UPDATE *** From Emily Bittner at the governor’s office…
This study provides valuable insights that will help make sure a Chicago casino works right for the both the city and state. We look forward to working with stakeholders, including the Mayor and General Assembly, to refine this approach and ensure that we maximize the opportunities for jobs for residents and revenue to address our financial obligations.
In other words, expect a trailer bill in veto session.
