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Banking Indian casinos

What investors need to understand at the outset

This year will mark the 20th anniversary of the Indian Gaming Regulatory Act. During the last two decades, a large number of partnerships have been created which have resulted in the establishment of an extremely successful Native American casino industry.

Native American governments have flourished as a result of the economic development opportunities provided by tribal gaming, while a number of investors have earned financial gains by providing seed capital and management experience to assist these sovereign tribes.

When one looks at the numbers, it becomes clear why the industry continues to receive attention from the investment community, and why some investors get overly eager to contribute before completing the appropriate due diligence.

In fiscal year 2006, tribal gaming revenue topped $25 billion. According to the National Indian Gaming Commission, in 2006, tribal gaming was offered by 226 out of the 562 federally recognized tribes, at 419 locations in 28 states.

Complicated Process

Today, though, most if not all of the “easy” projects-with federally recognized tribes holding gaming-eligible land in good markets and states that favor gaming-have been completed. But there is still no shortage of tribal gaming proposals, often touted by “middlemen” who claim to have deals that are “easy” or “a sure thing.”

The truth is that there are some very unique and complicated processes that Native American casino projects must navigate before becoming a reality. Consequently, it is important for anyone seeking to enter the arena of investment in a tribal casino project to understand that although opportunities are out there, they must be properly vetted to ensure that a project has merit.

There are several key points that an investor looking at committing capital should examine before moving forward with a tribal gaming investment.

First, even before traditional due diligence, it is important to have an understanding of the key variables that should be immediately understood when an investor is faced with a tribal gaming proposal.

Land eligibility: If the casino site was not held in trust for the tribe in 1988, what is the basis for it to meet one of the IGRA exceptions to the general rule that land acquired post-IGRA cannot host gaming? Does that exception fit the circumstances?

If the land is not yet in trust, getting it placed into trust and within one of the IGRA exceptions almost certainly will take years of effort and require detailed environmental reviews that provide ample opportunity for competitors or other opponents to file suit and delay the project. Be especially wary of claimed “shortcuts,” as they rarely exist.

Federal recognition: If the tribe isn’t federally recognized, where is it in the process? What do independent experts say about the tribe’s case? The Department of the Interior’s recognition process takes many, many years, and is famously difficult. Congressional action is relatively rare, and requires enormous political support.

Tribal government: Is there a valid tribal government in place? Is the leadership of the tribal government properly elected, and do these governmental leaders have the authority to enter into management or development agreement discussions?

Politics, politics, politics: Is there a willing state and host community? If not, what leverage does the tribe have to win support? Without state and local support, be prepared for years of legal wrangling. More importantly, what are the tribal politics like? An unstable tribal government may make the most lucrative project too much of a headache to be worthwhile.

Too good to be true? Apply some common sense. The most cautious, conservative business people often lose their minds at the prospect of a gaming deal. Approach tribal gaming proposals with even more skepticism and caution than a more traditional business proposition. If a promoter says his project is absolutely going to happen, and offers a 1 percent interest in a $400 million annual return for $100,000, does this even come close to passing the smell test? (This was honestly a sales pitch that I saw in the past, and a number of investors bought it.)

Unique Differences

Unlike non-Indian casino projects, the investor cannot own a piece of the casino itself. Investment instead typically comes in the form of a management or development agreement, each of which brings the NIGC and federal government oversight into play. The NIGC’s role is one of protecting the tribe. In the case of a management agreement, IGRA limits the duration and amount of the management fee, with the fee only being paid after payment of most other expenses. Apart from background reviews of the participants in the management company (which would come in any gaming jurisdiction), NIGC approval also triggers review under federal environmental law.

While use of a development or consulting agreement may avoid some of these thickets, it eliminates any control the investor would have over the project. And, if such an agreement were later determined to grant management rights or an ownership interest to the investor, it becomes void ab initio-as if it had never even existed.

Consequently, the smart investor will still deal with the NIGC to seek a “declination letter” finding the development or consulting agreement to be consistent with NIGC’s interpretation of the relevant law and rules.

Advice Upon Entering

Once due diligence is complete, and a decision is made to invest in a tribal gaming project, what are the most important pieces of advice?

First, while an attractive project will be one with a clear path to the finish line, investors need to be prepared to be flexible. Native American law and the politics surrounding Indian gaming are both constantly in flux, and the playing field changes frequently. Proposed changes to IGRA and new regulations are always bubbling, and some changes take place outside of the appropriate statutory and rule-making process.

For example, just three years ago, for a project taking place on new lands, an appropriate early step was obtaining a gaming compact with the state, to lock in the parameters of a project and state support. Then, by means of a mere letter, the Department of the Interior changed the rules of the game, deciding that a compact cannot be approved until the land upon which gaming is proposed is held in trust.

In January 2008, with no notice or consultation with tribes or the public, the Department of the Interior put in place a whole new substantive requirement that new lands for gaming generally be within a “commutable” distance of a tribe’s reservation.

Second, given ongoing changes and the complexities of these projects, it is necessary for all investors to manage expectations-both their own and those of the tribe. Tribal gaming projects can be extremely beneficial for both the tribe and the investor, but they are high-risk endeavors, and both parties need to be prepared to be in a project for the long haul. If a project was “easy,” it would already be done.

As Native American gaming under IGRA enters its third decade, it is important that any future investors acknowledge the accomplishment that Native Americans have achieved in creating this new industry and developing a number of new jobs. To reach this same level of success, a cautious and well-considered approach on behalf of tribal gaming investors is in order.

And, though the process may indeed be complicated, it is important to recognize that there are still great opportunities for both tribes and properly educated investors.

Lance Boldrey is a member of the Lansing, Michigan office of the Dykema law firm. He leads the firm’s Indian law practice, with an emphasis on gaming, economic development and state-tribal relations. His work includes performing due diligence on tribal gaming projects and proposals for consultants, developers and gaming management companies. Boldrey can be reached at 517-374-9162.

Lance Boldrey is a member of the Lansing, Michigan office of the Dykema law firm. He leads the firm's Indian law practice, with an emphasis on gaming, economic development and state-tribal relations. His work includes performing due diligence on tribal gaming projects and proposals for consultants, developers and gaming management companies. Boldrey can be reached at 517-374-9162.

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