The Golden Goose’s Proper Care and Feeding

The new paradigm of declining economy across a broad range of consumer spending means that casinos are faced with unique challenges to ensure profitability while staying competitive. These factors are complicated by increasing tax rates in the commercial gambling sector, as well as rising taxes in the Indian gaming market. Additionally, there is a growing trend toward state-imposed fees and self-imposed contributions to tribal funds and/or per person distributions.

It’s a difficult task to decide how much “render unto Caesar” and keep enough funds in reserve to increase market penetration, maintain market share, improve profitability, and grow market share.

This article will discuss how to plan and prioritize a casino investment strategy.

Goose cooked

It seems obvious that the goose that laid the golden eggs should not be cooked, but it is shocking how little is done to ensure its continued proper care. Investors, financiers, tribal councils, and developers are all keen to reap the rewards of a new casino. However, there is a tendency for a lack of allocation of profits towards asset maintenance and enhancement. It begs the question: How much should the profits be reinvested and to what ends?

Because each project is unique, there aren’t any hard and fast rules ewallet casino. Major commercial casino operators rarely distribute net profits as dividends. Instead they reinvest them in improvements and new locations, while also looking for new venues. Some of these programs may be funded via additional debt instruments, equity stock offerings, or both. These programs will see a shift in the emphasis on these financing methods due to lower corporate dividend tax rates. While this will allow for greater prudence regarding on-going investment, profit allocation will remain the same. 

As a group, the net profit ratio of publicly held companies (earnings after income taxes & amortization) was on average 25%. This includes deductions for gross revenue taxes as well as interest payments. On average, two-thirds are used to reinvest or replace assets.

The tax base will benefit from casino operations that are located in low-income jurisdictions with a lower gross gaming tax rate. They will be more open to investing in their properties and thereby generating additional revenues. New Jersey is an excellent example. It mandates certain reinvestment allocations to stimulate revenue. Illinois and Indiana have lower effective rates. This may lead to reduced reinvestment, which can eventually affect the casinos’ ability grow market penetrations. The best management results in more profit, due to both efficient operations as well as favorable equity and borrowing offers.

The decision of a casino business to allocate its casino profit is critical in determining its long term viability. It should also be an integral part of its initial development plan. While it might be tempting to take out short term loans amortization/debt repayment programs to help you get out of the obligation as quickly as possible, this can drastically reduce your ability to invest/expand on an ongoing basis. This holds true for any distribution of profit, whether it is to investors or, in case of Indian gaming, to the tribe’s general funds for infrastructure/per person payments.

Also, many lenders make the fatal mistake of requiring too high a level of debt service reserves. These restrictions restrict reinvestment and leverage. This can seriously impact a project’s ability to compete and/or meet any available opportunities.

While we do not advocate for all profits to be reinvested into the operation we encourage the development of an allocation system that takes into consideration the “real costs” of maintaining the asset, and maximizes its impact.

Establishing Priorities

The following three key areas of capital allocation should be considered. They are listed in priority order.

1. Maintenance and replacement
2. Cost Savings
3. Revenue Enhancement/Growth

While the first two priorities are obvious in that they have an immediate effect on maintaining market position and improving profitability, the third is more complicated as it has more of an indirect effect that requires an understanding market dynamics and greater investment risks. All of these aspects are further discussed.