Second City no longer

It looks like all systems go for a Chicago casino. By David McKee

hat if they gave a casino and nobody W came? That’s what happened to the city of Chicago when the state Legislature authorized a downtown casino – at a 72 percent tax rate. Number of expressions of interest? Zero, zip, nada. Earlier this year lawmakers were persuaded by Windy City Mayor Lori Lightfoot to ratchet the usurious tax level down to 40 percent. As a result, Chicago has, like Spinal Tap’s amplifiers, gone from zero to 11. That’s the number of companies that responded to the city’s formal request for preliminary proposals. The answers to a civic questionnaire will form the basis for a Chicago request for proposals, which is when prospective casino owners will really talk turkey.

First, a bit of history. In the summer of 2019, the Illinois Legislature and Gov. J.B. Pritzker authorized six new casinos and racinos in the state. One was earmarked for Chicago but for it and it alone a confiscatory tax rate was attached. That’s in addition to a $250,000 application fee, a $15 million “reconciliation fee,” as well as $120 million in gambling-position fees, predicated on the assumption of 4,000 slots and table-game positions (some of the slots could be farmed out to slot parlors at Midway Airport and O’Hare International Airport). On top of all this was a $500 million impost, payable over two years.

To say enthusiasm for this was tepid would be an understatement. Not one would-be casino developer bit at the hook and area politicians gave the back of their hands to Lightfoot’s choice of casino sites— mostly in various and sundry ghettos. “Put another way, tourists generally will not patronize a casino in an area that is inconvenient relative to where they are staying or perceived as unsafe, nor will tourists be eager to book a room at a casino’s hotel if there are no other easily accessed attractions nearby,” opined Union Gaming Group, in a study of the project.

Union Gaming ran the numbers on the enabling legislation and deemed them “very onerous.” It

elaborated, “The amount of profit generated relative to total development costs … 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.” Adjust the tax rate to bring it in line with other Illinois casinos, the study said, and the profit margin would shoot up to 20 percent or more. As things stood, “total enterprise profit margin would, in a best-case scenario, likely equate to a few pennies on the dollar,” assuming the casino could be built without incurring any debt— highly unlikely, not mention that the taxes and fees would scare off potential lenders.

Armed with Union Gaming’s calculations, Lightfoot returned to the Legislature in search of relief. A foray to Springfield last winter proved fruitless but by summer, with Covid-19 shutting down the state’s casinos and budgetary needs taking on the cold, hard nature of reality, lawmakers were more tractable. They substantially reduced the tax rate and stretched the half-billion assessment (still massive) over six years, interest-free.

Union took another look at the numbers and now liked what it saw. Indiana casinos would lose $260 million in revenue to the Chicago megaresort, plus another $37 million captured by the airport slot routes. And a “tourist-centric location” would generate $350 million in annual gaming revenue, especially if a fivestar hotel is a component of the resort. Put the casino in the heart of Chicago, and not at one of Lightfoot’s five peripheral sites, and cannibalization of existing Chicagoland casinos could be minimized, the study read.

The bare-bones cost of a metro casino, according to one survey commissioned by Lightfoot, is $750 million. However, it was pointed that such comparable facilities as MGM National Harbor ($1.4 billion) and Encore Boston Harbor ($2.6 billion) came with substantially higher price tags, and Chicago leaders want a destination property, not ‘slots in a box.’ As an enticement, Lightfoot projects annual megaresort revenue of $1.2 billion, almost three times the amount grossed by Rivers Casino Des Plaines, by far the state’s best-performing casino. Wall Street, more conservatively, forecasts $833 million during Year One, ramping up to $929 million, then $1 billion in Year Three. Before you get excited, bear in mind that the final product likely won’t open until 2025. In the interim, operators have the offer of running a two-year temporary casino at a discrete site, with the prospect of a third-year option.

Proximity to tourist-frequented areas is important, beyond the obvious reason, because most of the potential rivals are well outside the immediate metro area. That would mean weaning customers away from well-established properties like Rivers and Harrah’s Joliet, not to mention creating a destination casino so alluring that patrons would be willing to brave rush-hour traffic on the Dan Ryan Expressway, for instance. A metropolitan casino would be of convenience mainly to tourists, conventioneers (an important customer tranche) and downtown residents.

With this in mind, Lightfoot’s administration crafted a request for information (RFI), essentially a questionnaire to gauge developer interest in the more investor-friendly Chicago casino. It drew 11 responses, although some industry heavyweights like Caesars Entertainment (already heavily invested in the region) and Las Vegas Sands took a pass. The respondents included three companies known for their ability to craft destination properties: Wynn Resorts, MGM Resorts International and Hard Rock International.

An MGM stalking horse in the form of wellcapitalized real estate investment trust MGM Growth Properties also cantered in, as did Rush Street Gaming. The latter is particularly interesting as it formerly owned Rivers Casino but sold the majority of it to Churchill Downs, which is making out like a bandit. Sellers remorse, Rush Street? (The company is Chicago-based, giving it favorite-son status.)

The remainder of the field are dark horses such as Chicago Neighborhood Initiative, Christiansen Capital Advisors, Development Management Associates, DL3 Realty, R2 Companies and Related Midwest. What they have in common—except for Related Midwest— is a lack of gaming experience (and all want brand equity) and each would probably have to mate with a name-brand operator to emerge from the pack.

While RFI responses weren’t broken out by operator, six of the 11 would want a temporary casino, partly to develop a patron database, partly to generate cash flow. Disincentives included the additional cost and “confusion in the marketplace.” (Christiansen and MGP did not answer that question.) All in favor would want the temporary casino near their downtown location—emphasis added. Navy Pier was suggested as possible site.

Eight of the respondents want to be downtown, one wanted to be in the Harborside complex (which

includes a golf course) near the Indiana border and two expressed no preference. Easy access, “adequate parking,” juxtaposition to existing Chicago attractions and ability to exploit the Chicago River’s shores were also among the desiderata. Some developers expressed a willingness to let the city choose the site, which could bring locations like the defunct Michael Reese Hospital (which Union concluded had strong revenue-generation potential) back into play.

All respondents indicated that the final product should have the same repertory of amenities as any other full-service casino, including hotel (as many as 750 rooms) and meeting space. One applicant, a casino operator, probably endeared themselves to Chicago hoteliers by saying it would rely on existing, nearby hotels and build a small hostelry of its own at a later date. Steakhouses, sports bars and, believe it or not, buffets were wanted by all, with a universal desire expressed to “leverage local culinary talent.” Given the preponderance of convention space already in the Windy City, applicants pitched the idea of multipurpose space that would be as amenable to concerts as to meetings. A modicum of retail was also mooted.

As for other amenities, particularly entertainment, the consensus was that further study of extant Second City alternatives is needed. After all, this isn’t Las Vegas or Atlantic City, where the casinos are the only entertainment game in town. Besides, the opportunity is great to partner with area sports teams, theaters and museums. Even Covid-19 is being taken into account, with regimens being outlined that would include cashless check-in, thermal imaging, greaterthan-planned outdoor space, easy-to-clean furniture and fixtures, up-to-date air filtration and automatic entry. One casino operator, perhaps tactlessly, noted that Coronavirus economic fallout meant the potential labor force would be plentiful.

Now the ball is in the city’s court. It will take the RFIs and use them to formulate them into a request for proposals, one that indicates some of the things Lightfoot’s administration wants to hear from its supplicants. It’s a tricky time to be entering the casino market in Illinois: Revenues have declined for the last seven years (going on eight) and the state’s appetite for new casinos is gluttonous. However, given a sufficiently must-see attraction and isolation from competing properties, the Windy City could have a bonanza on its hands.