Why don’t integrated resorts seem to work in Europe? By Andrew Tottenham, Managing Director, Tottenham & Co July 20, 2018 at 12:01 am Given the success that integrated resorts have found elsewhere in the world, I am often asked why they seem to fail in Europe. Integrated resorts often generate taxes, employment, in-bound tourism and the like. To be clear, an integrated resort is a critical mass of components in which each is a driver for visitation, rather than a resort with a collection of amenities that you may often visit. In an integrated resort, the casino, the food and beverage offerings, the scheduled entertainment, and the retail options are in themselves drivers of visitation. Guests will, for example, come for the food and then, perhaps, watch a show or play in the casino. I do not believe there is a single answer to the question, but several reasons; poor location, an excess of ambition, the lack of political will, the wrong conditions, etc. I’ll take a look in this article at the projects that I remember – there might be others that I don’t remember or did not know about – and examine why each of them failed. First, a little trip over the ocean to provide an anecdote that will explain part of the problem. In the early 1990s I was doing some work with Native American tribes as the legal basis for offering casinos on reservations was becoming clearer. I was asked by one if I could help find $50 million to help a tribe upgrade their bingo hall to a small casino. My colleague and I visited the bingo hall and, convinced it would succeed, put together a presentation showing location, infrastructure, populations within certain drive times, and the demographics of potential customer segments, and started touring Wall Street, expecting to raise the money in seconds. Funding a Native American business on a reservation is not without its challenges. Tribal land is sovereign, and what is an investor to do if part of the money provided is debt? Perfecting a security over an asset on a reservation is very difficult: how are you going to collect the asset if payment stops? Anyway, most Wall St analysts focused on the same questions: “How do you know people will go to play there? How do you know they will gamble in such numbers? Will they play on Native American reservations?” and so forth. But we were ready for them. Out came the slides with tables of data showing customers travelling nine hours by bus from Chicago to Jackpot Junction, a casino in Morton, Minnesota that was truly in the middle of nowhere. We also showed them current visitation data for Atlantic City, a couple hundred miles down the coast from the bingo hall. My colleague and I failed with this tactic. We tried one last avenue, lease finance, but that proved to be a dud as well. The tribe eventually managed to borrow £50 million from Genting and became Foxwoods Casino, which at completion was the largest casino in the USA and held the title until the WinStar Casinos in Oklahoma expanded in 2009 and became WinStar World. At first, I railed against the dumb analysts, but then I realised that they had only been doing what was asked of them. Their job was not to finance what would become one of the most successful casinos of all times, but to state with confidence that their investment would be secure and would return a premium. In order to do this, they needed to see a comparable project to be able to make some assumptions with a level of confidence. A new, one-of-a-kind idea rarely gets financed from traditional sources, especially when it is bound in legal complexity. Casino gambling in Europe is highly taxed. It is impossible to get a return on investment on a large integrated resort with tax rates over 30% of GGR. Even at 30%, unless the operator has a monopoly, returns will not justify the investment. Customers do not recognise national borders, so monopolies must be regional, not national. And given that most countries in Europe already have casinos, regional monopolies are not possible. Therefore, the tax rates would have to be lower still. Although I do not consider them to be integrated resorts, I will include here the UK’s attempts in the early 2000s to legalise large scale casino gambling in so-called “regional casinos.” The press dubbed them “super casinos”, although they were hardly that. The proposed legislation also included two other categories of smaller casinos. Once the bill became public, a bruising battle followed with a coalition formed to oppose the measure, which included the incumbent gambling industry, faith groups, the media and other anti-gambling groups on one side, and the overseas interlopers on the other. The government floundered, the Minister responsible for the bill didn’t really support it, and the government’s message got lost in the cacophony of media opposition. Concession after concession was made in order to appease those opposing the bill. It eventually became law, but without any super casinos and with the number of other casinos severely reduced. Strong political leadership, which was lacking in that case, is required if a bill legalising large scale casino gambling is to become law. I think the first integrated resort project that I came across in Europe was called EuroVegas, in Hungary. The first one! It was on a piece of land near the border with Slovakia and Austria. The Hungarian Government had been persuaded to change the law to allow for a large-scale casino which would benefit from a low tax rate, approximately 15% of GGR. However, the amount of tax to be paid had a fixed minimum rate. Therefore, if you did not make your numbers, the actual rate could be higher. It turned out this project was one I’d put in the category of land promotion: somebody has a piece of land and decides that the way they are going to maximise its value is to put a casino on it. The larger the land, the larger the casino and the larger the uplift in value. There are two questions, though: is the land in question suitable for an integrated resort, and does the opportunity justify the price of the land? The owners did have the monopoly for a casino in that area of Hungary, but a better location and operating conditions might have been had in a neighbouring country. In this case, better conditions and location could be found elsewhere, meaning that the price of the project was clearly unjustified. A number of potential operators showed interest, but the project floundered for a while, and, ultimately, it failed. Harrah’s had an integrated resort project in Ciudad Real, 180 kilometres south of Madrid. A group of real estate developers had the idea to build a Don Quixote theme park around a residential and golf development. With Harrahs’ involvement, the project morphed into an integrated resort with multiple hotels, casino, retail, conferencing, and a lake with lakeside restaurants, golf, spas and residential. Regional authorities reduced the gaming tax to a reasonable level that would support the investment. The project got very close to happening before the 2008 financial crisis, but then Harrah’s underwent a private equity buy out and was choked with debt, and the Spanish partners, all property developers, fell like dominoes, one by one, into bankruptcy. Again, this was a land promotion. The Spanish partners had a piece of land and sought out a partner who could help them bring forward a development that would enhance the value of the residential surrounding the leisure development. Shortly thereafter came Gran Scala, an ambitious project in Aragon. Here, promoters had a piece of land and wanted investors and operators to develop 6 large integrated resorts. There were just a few problems with this concept. For starters, it was in the middle of nowhere, with virtually no infrastructure. In such a situation, sometimes the cost of building roads and bringing utilities to the site is more that the cost of the buildings themselves. And without roads, how would customers get there? Secondly, there was no local population to speak of to drive visitation, especially in the crucial early days while the operator is building the regional and international segments. And then there’s the biggest challenge: sequencing. Who moves first? If you’re the first operator to open, will your enterprise alone attract sufficient people from further afield to make your business profitable? Don’t forget that, if the other properties are moving ahead, you are likely to be surrounded by a building site. Perhaps you’ll be able to coordinate matters so that all six of the resorts open around the same time. You’d then have critical mass, but now you have to build enough visitation to fill six resorts. I can foresee years of sucking up losses until customer numbers grow sufficiently to get to breakeven. In the interim, some of the operators will likely fail. Again, this was land looking for a project. Las Vegas Sands’ foray into Spain was the other way round, a project looking for land. In this case, a very large piece of land, one sufficient to build the equivalent of half the Las Vegas strip in either Madrid or Barcelona. Sheldon Adelson had a vision. He believed Europeans liked Las Vegas and wanted integrated resorts with 3,000 keys. A great deal of work went into analysing potential sites to determine suitability and to negotiate terms with the owners and with national, regional and local governments to obtain conditions that would enable the project to be built and to operate successfully. A site was ultimately chosen in Madrid, and the regional government passed a law with a generous tax rate and other conditions that were conducive to this type of development. And yet it failed. Why, after all the work, especially considering Sands could have financed it? It failed because it was so large and complex, that, despite good faith on all sides, it did not achieve enough concessions from various levels of government to facilitate it. Once the Catalan Government heard that Las Vegas Sands had decided against Cataluña, they announced Barcelona World, a leisure residential development, and began looking for casino hotel investors. Despite its name, the land in question was not in Barcelona, but about an hour’s drive from Barcelona, near Tarragona, next to a theme park and near a beautiful coast known for bucket and spade tourism and the closest town where, during the holiday season, teenagers get drunk and party all night. There were many legal issues around the land, but I believe these have been cleared up; Hard Rock has been selected as the operator, and Value Retail will create the shopping district. They’re currently in the market seeking financing. Land looking for a project. The Cypriot Government decided an integrated resort would be part of its strategy to increase tourism and held a public tender to award the license. No single piece of land was selected for the site, but interested parties could bid with their project on a piece of land of their choosing. A suitable tax rate was proposed, and operating conditions were made conducive to a large integrated resort. A joint venture between Hard Rock, Melco and a local partner eventually won the tender on a site in Limassol. The project has been financed, and an official ground-breaking ceremony held, although Hard Rock has since withdrawn to focus their efforts on the Tarragona project. The Greek economy has suffered greatly in the last ten years. Under pressure from international banks the government has been selling off assets and privatising national businesses in order to raise money. An old airport site on the coast in downtown Athens was selected some months ago for an ambitious multi-use development: leisure, retail, parks, marina, hotels, beachfront, the works. The winning bid included a casino. The problem here was that a casino license was not included in the initial RFP. The government has since been persuaded by the selected developers to hold a tender for a license to build an integrated resort on part of the land. The tax rate has been reduced and operating conditions are now more amenable to an integrated resort. The tender will be held some time later this year or early next, and who knows? Europe might very quickly wind up seeing its third integrated resort. Despite the above-cited Cypriot project being promoted by some of the best-known names in the international casino industry, however, winning the tender is not the hardest part. Though that project has been financed, getting financing is by no means a walk in the park. Remember, the financial community has nothing to base its analysis on; there are no integrated resorts open for business in Europe yet. In order to obtain financing, the banks will want to reduce their risk, so the amount of equity required is likely to be larger than in other parts of the world, and the interest rates higher. If you have everything else in place – the right piece of land, a sensible tax rate, suitable operating conditions, and financing – is it then safe to say a integrated resort will succeed in Europe? That depends on one more thing: the public. And we know how fickle they can be.