Cedar Rapids would see less revenue than other Iowa casino towns

Costs, high risk make casino deal fair for Cedar Rapids, developers say

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Backers of casinos in Iowa say that the gaming venues have much to offer a community — new jobs; more visitors; a boost to the local economy.

A central selling point for casinos in Iowa, too, long has been the state’s requirement that a certain percentage of gaming revenue be directed to a local non-profit entity, called a “qualified sponsoring organization.”

This entity not only holds the state gaming license for the local community, but sees that a certain percentage of the casino’s revenue is dispensed into the community.

However, the percentage of gaming revenue that ends up in the hands of the local sponsoring organization is determined by agreements reached by each casino owner and its sponsoring organization.

And as a result, the percentage of revenue going to the sponsoring organization in each of the 15 Iowa communities with non-race track casinos varies — from under 1 percent to 6 percent of the casino’s annual adjusted gross receipts, according to reports filed with the Iowa Racing & Gaming Commission.

The majority of the 15 casinos are paying their sponsoring organizations more than 3 percent, which has been the state-required minimum percentage since 2004.

The minimum is what the Steve Gray-led investor group, Cedar Rapids Development Group LLC, has agreed to pay if it succeeds in building a casino in the Cedar Rapids area.

That 3-percent amount is established in an agreement, signed on Oct. 2, 2012, by Cedar Rapids Development Group LLC, and the five-member board of the new sponsoring organization, called Linn County Gaming Association Inc. which the Gray-led group helped to create — as is common with prospective casino owners in Iowa. The 10-year agreement calls for the casino to pay the association 3 percent of adjusted gross receipts for the first 10 years of the casino’s life.

Only smaller Iowa casinos in Marquette and Osceola pay a smaller percentage, though both are operating with agreements signed before the state set the minimum percentage at 3 percent in 2004.

Comparing numbers

By way of comparison, in Waterloo, the local sponsoring organization for the casino, which opened in mid-2007, has negotiated an agreement that pays the organization 5.75 percent of adjusted gross receipts. That percentage brings in about $5 million a year to the sponsoring organization for distribution into the community, or about twice as much as the Cedar Rapids Development Group and the new Linn County Gaming Association Inc. say their agreement will provide for now.

In addition, both Davenport and Sioux City are in the process of replacing their older riverboat casinos with new land-based casinos. And in both instances, the local sponsoring organizations are seeking higher percentages of the casino earnings than is called for in the Cedar Rapids agreement.

In Dubuque, the Dubuque Racing Association renegotiated its agreement with the Diamond Jo Casino after the casino built a new land-based casino in 2010. The agreement pays 4.5 percent to the association.

Steve Gray, founder of Gray Venture Partners, pointed out last week that his investor group is facing a $20 million state license fee to be paid over four years if they are successful in securing a state gaming license. That upfront cost impacts what his investor group can pay to the non-profit sponsoring organization, he said. It is a cost that cities with established casinos like Davenport, Sioux City and Dubuque are not confronted with now. However, the Waterloo casino faced the same fee as part of getting its license in 2005.

Gray insisted, too, that the Cedar Rapids Development Group is not going so ask for any local tax breaks, which he said other casinos in Iowa have gotten.

But former Waterloo Mayor Tim Hurley, who is president of the Black Hawk County Gaming Association, said that was not the case, for instance, in Waterloo.

Money a casino doesn’t pay a city because of tax breaks means more to send to the non-profit organization, Gray said.

“You have to look at the totality of the economics,” he said.

Meet the board

The five-member board of the Linn County Gaming Association Inc. is comprised of Keith Rippy, CEO of the non-profit Area Ambulance Service; Leah Rodenberg, who works in corporate philanthropy; Cedar Rapids City Council member Justin Shields; Linn County Supervisor Brent Oleson; and Linda Seger, president of the Northwest Neighbors Neighborhood Association in Cedar Rapids.

Rodenberg and Oleson said last week that the agreement that has emerged between the Steve Gray-led group and the non-profit gaming association board was thoughtfully negotiated, is fair and is intended to give the Cedar Rapids Development Group a chance to get a casino up and running and, as Rodenberg put it, “get their feet on the ground.”

“Everybody thinks because this is a casino they’re going to be raking in profits,” Oleson said. “But it’s like any other business. There’s a lot of upfront costs.”

Both Rodenberg and Oleson noted that the agreement calls for an escalation of the percentage of revenue that goes to the non-profit gaming association in the 11th year of the agreement if gaming revenues exceed a certain amount. The percentage can reach 5 percent a year if annual adjusted gross receipts revenue in the 11th year and beyond exceed $95 million.

The escalation factor comes with a caveat, though, which states that the percentage will remain at 3 percent in any year through the 20th year of the agreement if the Cedar Rapids Development Group has “substantial debt obligations” for the costs of land or parking.

Gray has said that he expects the casino’s adjusted gross revenue to be about $80 million once it is up and running.

Both Rodenberg and Oleson emphasized that the Cedar Rapids Development Group is comprised of people known in the community and who have contributed to the community for years.

“That’s the good thing about working with a group of investors who are all local, who have given back substantially to the community,” Oleson said. “There is a little bit of good faith built in there.”

Both Rodenberg and Oleson also suggested that the investors and the non-profit association would revisit that agreement in the years ahead as it becomes clear just how successful a Cedar Rapids casino might be. However, both the owners and the association must to agree before any amendments in the agreement are made.

The agreement is for 10 years and gives the owner Cedar Rapids Development Group the exclusive option to automatically extend the agreement for eight five-year periods.

Other communities

In Davenport, Mary Ellen Chamberlain, longtime president of the non-profit Riverboat Development Authority there, said last week that the formula for determining how much the riverboat casino in Davenport would provide the Authority was complicated when the casino first opened in 1991. By 2000, though, the casino owner and the Authority had settled on giving the non-profit Authority 4.1 percent of adjusted gross receipts and, in more recent years, agreed to set the minimum annual payment at $2 million. The 4.1-percent figure equates to about the minimum, she said.

However, Chamberlain said the city of Davenport is in the midst of buying the casino and building a new one away from the river. As a result, the city and the Authority are negotiating a new agreement, which Chamberlain said is apt to increase the annual percentage coming to the Authority to 4.5 percent of gross annual receipts, with a $2.5 million minimum for the first year the new casino is open. The hope is to increase the percentage to 5 percent after, perhaps, five years, she said.

In Waterloo, Don Hoth, a retired IBM systems engineer and marketing representative and a former vice president of development at Covenant Medical Center, is credited with being the key driving force behind bringing a casino to Waterloo in 2007.

Hoth said last week that at some point his group of casino backers aligned with casino company Isle of Capri, which had the winning proposal among three for the Waterloo casino. Hoth was among members of the non-profit Black Hawk County Gaming Association — and still is — that negotiated the agreement with Isle of Capri on how much revenue should come to the non-profit association for distribution into the community.

Hoth said, in part, he looked at the 4.1 percent that Chamberlain’s Davenport non-profit Authority was receiving, and noted that the city of Davenport also got additional special money from the casino for a docking fee. Hoth said he factored in the Davenport docking fee, promised the Isle of Capri that he would secure the backing of the Waterloo City Council for its casino proposal, which he did, and then “had the audacity, I guess,” to ask for 5.75 percent for the non-profit.

“It was hard work, but they agreed,” he said of the casino owner.

The state’s other new casinos, in Riverside, Emmetsburg, Lyon County and Worth County, paid a state license fee, which is based on county population, of $5 million each.

Mike Van Milligen, Dubuque’s longtime city manager and a member of the Dubuque Racing Association, said the association and the owners of the Diamond Jo Casino there negotiated at length before they agreed that the Diamond Jo’s new land-based casino would increase what it paid the association to 4.5 percent of adjusted gross receipts each year.

“We wanted to get to what we thought was fair,” Van Milligen said. “It didn’t matter to us that somebody else (some other casino city in Iowa) was getting 5.7 percent. It was the value for these two parties.”

Linn Gaming Association Agreement (PDF)

Linn Gaming Association Agreement (Text)

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