NEWH - May 2003 - (Page 31)

putting the pieces together: the steps it takes to develop a casino by: Benjamin Mammina, MGM Grand Development, Inc. editor: Lisa A. Haude, Paradigm Design Group, LLC CASINOS TODAY ARE not only known as a place to play games, but have become a destination - a place to explore, relax and experience an environment that mimics the real thing. But, one wonders, what does it really take to turn an idea or a dream into a reality? We recently caught up with Mr. Benjamin Mammina, the Senior Vice President of Construction for MGM Grand Development and asked him to explain what it takes to develop a casino from scratch. Unlike the hotel business, one cannot build a casino in any state or location they choose. Whereas hotels are legal everywhere; casinos are not. Operating a casino is a “privilege” that is granted to casino developers in areas that have legalized gaming. In some states, the number of casino licenses permitted is regulated. In order to obtain a license, extensive background checks are done by governmental authorities to determine the “suitability” of a company/person owning or operating a casino. These companies must give full access to all information pertaining to their character, business experience and personal history. However, prior to obtaining a license, a developer must first consider the gaming market. How much annual volume can it produce? How much competition exists from the total market volume? And, what is the market share that a developer can expect? Once these questions are answered, the developer can then determine what the project program would need to be in order to generate that income. A basic program is developed which includes the number of slot machines, number of gaming tables, number of rooms, number of restaurants/seating and type of entertainment to offer besides gaming. These programs then produce the size of the required staff, amount of guest/employee parking required, and the size of the back-of-house areas and all other operational support areas. Once the overall building size has been determined, the developmental costs can be calculated. By combing the initial program and the income producing components of the project, the Return on Investment (ROI) is calculated. If the initial ROI calculations are favorable then Schematic Drawings are created using the developed program. Funding for casinos can be somewhat complex. State gaming regulators are very concerned about the sources of money used to build new casinos. They want to make certain that no elements of organized crime or persons of unacceptable character get involved in casinos activities. As a result, the scrutiny can be so intensive that many good sources of legal funding are not even interested. Large casino companies use lines of credit with large nationally recognized financial institutions while smaller casino developers use a long list of creative financing techniques. Regardless of who ultimately lends them money, most developers are required to put more than 50% of the total project cost up in cash equity. Whether a casino is profitable or not can vary greatly. Normally when calculating ROI, a developer will consider a 10 year period as being the time needed to pay off all development costs. In the casino industry, profitability is considered on two levels. The first level is EBITDA (earnings before interest, taxes, depreciation and amortization). EBITDA is a basic measurement of the “working” profitability of the casino. It does not include debt service, income taxes or depreciation. But, it does indicate the amount of revenue compared to operating costs. EBITDA values typically range from 0% to 50%. The second level of profitability measurement is IRR (Internal Rate of Return) which looks at the entire operation of the business. It is expressed as a ratio of EBITDA to total project investment. IRR is a good measurement for risk. If one could invest their money safely in a certificate of deposit and earn 5%, then how much more return would a person need in order to take the risk of investing in a casino project? Levels of acceptable IRRs can vary also by developers. A well-seasoned casino developer who had extensive experience and some certainty in operating results might want an IRR around 13% to 18%. Less experienced developers might need 25% to 30%. Aside from initial ROI projections, there are many other important issues that must be addressed as well. The 31

Table of Contents for the Digital Edition of NEWH - May 2003

NEWH - May 2003
Contents
Letter From the Editor
Hospitality News
Spotlight on NEWH
Tips on Specs....Chandeliers
On the Road Again
Did You Know?
Ancient Storytelling Comes to Life
Indian Gaming: Developing the Latest Gaming Trend
You Can’t Sue an Indian Tribe, Can You?
Putting the Pieces Together: The Steps It Takes to Develop a Casino
Building the Fantasy
The Icing on the Cake: The Importance of Architectural Millwork in Casino Design
Designing Today’s Casino Resort: How to Make Entertainment Memorable and Distinctive
Casino Advertising: A Sure Bet!
Understanding Code Issues Related to Riverboat Casinos
Purchasing on a Dime
Under Wraps
Small Business Advice
Working With Team Players...
In My Opinion...
Taking the Gambling Out of Specifying Gaming Furniture
Industry Partner Education
Bios

NEWH - May 2003