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* Breaking news…
Chicago casino feasibility study concludes that the tax structure set up by the Illinois General Assembly (where the operator only keeps 33% of the revenues) would be too onerous and make it virtually unprofitable. That said, Michael Reese site would make most $$$
— Paris Schutz (@paschutz) August 13, 2019
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.
posted by Rich Miller
Tuesday, Aug 13, 19 @ 9:32 am
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Math… is math.
Comment by Oswego Willy Tuesday, Aug 13, 19 @ 9:42 am
“Ah, so it’s a profit deal.”
Comment by FFS Tuesday, Aug 13, 19 @ 9:45 am
Probably the best place for a casino would be right near McCormick Place . Gambling probably can’t succeed to far away from downtown Chicago.
Comment by Steve Tuesday, Aug 13, 19 @ 9:46 am
“we forecast that a casino in the City of Chicago has the potential to become the highest grossing casino in Illinois”
Only line I read.
Comment by Bruce( no not him) Tuesday, Aug 13, 19 @ 9:47 am
Not to mention which regional casino will close up shop as the result of the competition.
Comment by Blue Dog Dem Tuesday, Aug 13, 19 @ 10:03 am
Can’t tax a casino if a casino isn’t built. Back to the drawing board.
Comment by CubsFan16 Tuesday, Aug 13, 19 @ 10:03 am
Oops?
Comment by Louis G. Atsaves Tuesday, Aug 13, 19 @ 10:07 am
Solution. Legalize pot. Tax the heck out of it. Revenue and jobs galore. Snark. Did ya see that Oregon raised enough pot last year to fufill 6 years of demand
Comment by Blue Dog Dem Tuesday, Aug 13, 19 @ 10:07 am
Hope they account for $13 then $15 min wage and the costs of UNITE HERE Local 1 representation.
Comment by Donnie Elgin Tuesday, Aug 13, 19 @ 10:09 am
” In [well-developed] markets, the percentage of income typically allocated to gaming is approximately 1%… we estimate the
Chicago metro area allocates just 0.6% of income to casino gaming…This suggests there is significant upside potential in terms of total gaming revenue that can be supported by the Chicago metro area as supply is added throughout the market.”
Most interesting part in the study, at least the part of it that I was able to read in the office.
Comment by DarkDante Tuesday, Aug 13, 19 @ 10:11 am
kinda expected. In terms of raised revenue, Michael Reese site first, site near the Rate second. Interesting information on drive times and income of residents.
Comment by Amalia Tuesday, Aug 13, 19 @ 10:15 am
BDD, dude, ranting against legalized pot is like ranting against gay marriage.
It’s over, done.
You don’t have to accept, but dragging it into every conversation is boring at least.
Comment by efudd Tuesday, Aug 13, 19 @ 10:16 am
Efudd. I am for legalization. It just wont produce the expected revenue. And ho.e grow should be legal.
Comment by Blue Dog Dem Tuesday, Aug 13, 19 @ 10:19 am
From page 8 of the study:
“…a municipally owned casino, managed by a third-party casino operator, could make sense.”
That’s the line the mayor was looking for. I’m guessing we end up with a city/state jointly owned casino. Make it part of the proposed McCormick Place expansion that stalled the last week of spring session.
Comment by Roman Tuesday, Aug 13, 19 @ 10:25 am
===It just wont produce the expected revenue.===
https://www.bizjournals.com/portland/news/2019/07/25/oregon-cannabis-tax-revenue-gets-higher-and-higher.html
“In their first forecast, state analysts in March 2017 said they expected to see $157 million in receipts in the biennium just concluded; the actual figure was nearly 18 percent higher, at $184.3 million.”
BDD, would like to see your sources for these forecast shortfalls.
Comment by njt Tuesday, Aug 13, 19 @ 10:27 am
BDD, apologies. However, going to need to see hard research that it won’t produce the expected revenue.
And if it doesn’t, is it still more than zero?
Comment by efudd Tuesday, Aug 13, 19 @ 10:33 am
“…a municipally owned casino, managed by a third-party casino operator, could make sense.”
–That’s the line the mayor was looking for. I’m guessing we end up with a city/state jointly owned casino. Make it part of the proposed McCormick Place expansion that stalled the last week of spring session.–
It only makes sense if the City overhead is limited to 30%, as posited by the study. If the casino requires greater overhead, that overhead can dramatically reduce the City’s take.
Comment by anon Tuesday, Aug 13, 19 @ 10:37 am
Let me make sure I understand: a consultant that provides gambling advisory services to owners of casinos has said gambling taxes are too high?
I’m shocked.
Comment by Just Me 2 Tuesday, Aug 13, 19 @ 10:42 am
Perhaps a joint casino-dispensary. Imagine the possibilities.
Thats win-win for us all.
Comment by Bruce (no not him) Tuesday, Aug 13, 19 @ 10:44 am
Of course a study like this should been done BEFORE the GA took a vote on this legislation. But, then, how many in the GA would have voted for the legislation if it originally called for the City to own the casino?
Comment by Occam Tuesday, Aug 13, 19 @ 11:51 am
I imagine the casino operator would gladly accept a share of the city’s portion if they are offering.
Comment by thechampaignlife Tuesday, Aug 13, 19 @ 12:13 pm
Gambling is a desperate exploitation.
Comment by Dotnonymous Tuesday, Aug 13, 19 @ 12:18 pm
The people who own “gaming” don’t gamble…they much prefer a sure thing.
Comment by Dotnonymous Tuesday, Aug 13, 19 @ 12:20 pm
Sounds like Common Core Math was used to determine profits. Time to drag out some the pocket caculator…
Comment by Nieva Tuesday, Aug 13, 19 @ 12:35 pm
“the effective tax rate is approximately 72%”
-but thought that was the rate the squad wanted for corps nationwide anyway?
Comment by and? Tuesday, Aug 13, 19 @ 1:24 pm
The study is surprisingly bullish about placing some of the allotted gaming position at O’Hare and Midway, but it does not address the possible conflict between federal law and state law on what’s done with the revenue. The feds generally require that municipalities must plug airport revenue back into the airport. State law requires Chicago to dedicate all gaming revenue to their pensions.
Comment by BC Tuesday, Aug 13, 19 @ 1:25 pm
So this level of taxation is too much, allegedly. What is the maximum level that can support a viable casino? That is a question that needs to be posed, although an answer is not likely forthcoming because no one will know the real level until someone agrees to operate a casino. But take this study and every other statement from operators with a grain of salt, since negotiations clearly have begun.
Comment by Jibba Tuesday, Aug 13, 19 @ 3:48 pm
“In other words, expect a trailer bill in veto session.”
Bet on it.
– MrJM
Comment by @misterjayem Tuesday, Aug 13, 19 @ 4:02 pm
Trailer bill would have what in it? City owned casino? Who in the GA outside of Chicago wants to vote for that? Reduce the city privilege tax? I doubt the mayor would be for that. Reduce the taxes paid to the state? Bond Houses may have a problem here. No good options.
Comment by Nagidam Tuesday, Aug 13, 19 @ 4:56 pm
A study based on 5 non-ideal sites revealing that operators won’t make enough money to be profitable isn’t that surprising. Solution could be city owned downtown casino. Thompson Center and other downtown locations should be explored.
Comment by Spagnost Tuesday, Aug 13, 19 @ 5:12 pm