CRE N Illinois

Quite the gamble: “Onerous tax and fee structure” could scuttle Chicago casino

Quite the gamble: Onerous tax and fee structure could scuttle Chicago casino,ph1

According to the independent report from Union Gaming Analytics (UGA)—the firm engaged by the Illinois Gaming Board to perform a feasibility analysis of developing a casino in the Chicago city limits—the very legislation allowing for the new casino is weighed down with a burdensome tax and fee structure that may scare off potential investors.

UGA evaluated five potential casino sites in Chicago: near the Harborside International Golf Center at 111th Street and the Bishop Ford Freeway, the former Michael Reese site at 31st Street and Cottage Grove Avenue, erstwhile public housing at Pershing Road and State Street, the South Works site at 80th Street and Lake Shore Drive and the lone West Side location, Roosevelt Road and Kostner Avenue. Chicago Mayor Lori Lightfoot submitted the five South and West Side locations as possible sites for a future casino, but later expressed willingness to consider a downtown location.

According to the report, the amount of profit generated relative to total development costs, inclusive of licensing and reconciliation fees, represents at best a 1 or 2 percent return annually—hardly an acceptable rate of return for a casino developer on a greenfield project. In some cases, their findings suggest that taxes, fees, operating and other expenses could exceed any revenue generated.

As the legislation is written, the city of Chicago casino would pay an additional 33 and 1/3 percent privilege tax on top of the existing tax structure on adjusted gross receipts (AGR) that all Illinois casinos forfeit. Setting aside operational costs, the prevailing AGR and admissions taxes alone mean that a Chicago casino would pay approximately $311 million in AGR and admissions taxes, or an effective rate of approximately 39 percent relative to AGR of $806 million. When combined with the additional privilege tax on AGR specific for the city of Chicago casino, the effective tax rate is approximately 72 percent.

“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 percent range,” the report states. “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, 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. The UGA report expects that no traditional financing would be available for such a development as debt servicing would likely well exceed any modest profits generated.

“Under a scenario where an operator generates a low-single-digit profit margin as detailed herein for some of the five sites, cumulative operating profits vanish (along with any profits generated while operating a temporary casino during the construction phase) when contemplating the reconciliation fee equal to 75 percent of AGR for the most lucrative 12-month period of operations that is to be imposed after three years of operation,” the report states.

Were it not for the onerous tax and fee structure, the report found, the forecast for a casino in the City of Chicago would be much brighter. The current market-leading Rivers Casino in Des Plaines, Illinois generated $441.8 million in AGR in 2018, but this would pale in comparison to the potential revenue that a Chicago casino could realize. For example, the former Michael Reese site had the highest AGR potential of the five sites selected for the study, which UGA estimated to be approximately $806 million in AGR.

The report goes on to point out that a casino’s operating expenses such as advertising, marketing, payroll, rent and utilities can easily approach the equivalent of 30 percent of AGR or higher. Combined with the effective tax rate of 72 percent, a casino in this scenario would be operating at a loss.

“Ultimately the additional privilege tax on AGR specific to the City of Chicago results in none of the five sites being financially feasible,” the report states.

Also hurting the prospects for a Chicago casino was the expansion of gambling throughout the metropolitan area. The legislation allows for casinos in Waukegan and south suburban Cook County, among other locations. Without the special privilege tax on AGR, those suburban gaming facilities would be operating at a significant advantage to a Chicago casino—forcing the future Chicago to increase its marketing budget in order to stay competitive, which would in turn drive operating profits down further.