On August 7, Chicago Mayor Lori Lightfoot extended the deadline for casino proposals in the city by two months, to October 29.
In a statement, the mayor said, “Extending the deadline for interested bidders will allow the city to collect as many robust, impactful and transformative proposals as possible. I look forward to seeing these bids roll in.”
So far, they’re not rolling, and operators aren’t exactly fighting each other for a chance at a Windy City license.
Biggest Names Walk
Lightfoot has repeatedly called the concession a “once-in-a lifetime opportunity” for some lucky gaming operator. But MGM Resorts, which was expected to participate, declined to do so. Wynn Resorts also has bowed out of the race. Even Rush Street Gaming seems on the fence, though it’s the only contender based in the Windy City.
To attract quality bidders, will Chicago have to revisit its requirements, including what many consider an unrealistically high tax rate of 40 percent?
Steve Gallaway, managing partner of Global Market Advisors, told GGB News the tax rate and a required minimum investment of $1 billion have combined to scare off bidders. “It starts becoming too onerous to make sense for many.”
The original bill to authorize a Chicago casino set the tax rate at a breathtaking 70 percent. Slashed to 40 percent, said Gallaway, “it’s difficult but potentially viable. However, if you’re looking to build a higher-end casino to attract a more attractive customer, a 40 percent rate is very challenging, as these players have a higher proclivity to play tables rather than slots.”
Gallaway said he doesn’t know how lawmakers came up with the percentages. “I just know the reality of it—40 percent is doable from a slots-only perspective. If you pay 40 percent taxes on your table revenue and reinvest 20 percent on your players—discounts on loss, comps, etc.—that only gives you 40 percent left over for all labor and operating expenses, which results in a very skinny level of profit.”
Low profit, he said, means low capital investment. “The developer needs to make an acceptable return. It’s tough to do so at these levels. What makes the most sense would be a slots parlor with some grind table games and comparatively few amenities. But that’s not what the city wants to see.”
Gallaway is also philosophically opposed to a government dictating a minimum investment. “You need to let the market dictate the size of the investment,” he said. “I can’t think of a situation where it’s worked out well when the government dictated the minimum investment size.”
Pluses and Minuses
There is a perk in store for the Chicago casino licensee, he added. “The winner is allowed to use part of the 4,000-slot concession and install VLTs at Midway and O’Hare airports. While O’Hare, in particular, is difficult due to lack of available space, this is a real opportunity. People are typically at the airport for a short period of time, so these machines are usually set at a high hold.”
He compared the potential to the 1,400 slot machines that greet travelers coming into Las Vegas’ McCarran International Airport. “With the right machines strategically placed at O’Hare and Midway, this would be a nice concession to have.
Another factor that makes a Chicago license a challenge for any operator is the Hard Rock project that’s yet to open in Rockford, Illinois, about a two-hour drive from downtown Chicago.
“That’s going to be a competitive force, as well as the South Chicago and Waukegan licenses that haven’t been awarded. You have such competing pressure there that you’re impacting the revenue levels that can be generated at the Chicago facility,” said Gallaway.
A Waukegan casino would be even closer to Chicago than Rockford—about an hour away.
The ongoing Covid-19 pandemic has likely affected the RFP’s attractiveness—while making the city more eager for new revenues. (The lion’s share of gaming revenues paid to the city would go to fund pensions, which are expected to reach $2 billion in 2022, up from $1.25 billion in 2019.)
Timing Matters
“I would say it’s a difficult time to launch an RFP, because when it was launched we were smack-dab in the middle of lockdowns, and companies had very little cash flow,” said Gallaway. “That being said, had they launched it in 2019 they still would have found apprehension in the market.”
One discouraging factor is the higher expenses associated with building a casino in an urban environment. “When you go vertical, it costs more. The costs are higher than a rural casino. You can do it, but the reason you are willing to do it is because the market of opportunity is supposed to be more robust.”
There are exceptions, of course—like the Big Apple. “In terms of a casino in Manhattan, that’s a highly attractive location and you’d be willing to spend the money for that. Manhattan has a very strong demographic and large levels of tourism that make it a robust opportunity.”
One brand that dropped out of the bidding would probably be a good fit for Chicago: Hard Rock.
The company “is clearly working to be a force in that market,” said Gallaway. “They’re utilizing one of the Majestic Star licenses for their new Gary, Indiana development, and are under construction with their facility in Rockford, Illinois. For them to have another casino in the market would make sense” and be “synergistic.” Nevertheless, the company is currently not part of the bidding.
Meanwhile, casinos in Illinois are making money. According to the Chicago Tribune, collectively they brought in more than $120 million in gross gaming revenues in July—outpacing the same month in 2019.
A Chicago casino will come down to economics, Gallaway said, and whether the profit potential can justify the capital expense. “While there’s a project that would make sense in Chicago, the question is, will it be the one that Lightfoot envisioned? Probably not.”
