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Moving Money

Gaming tribes rushing to diversify economies

Moving Money

Congress enacted the Indian Gaming Regulatory Act (IGRA) of 1988 with the goal of providing largely impoverished American Indian tribes with the financial resources to strengthen their governments and build diversified economies.

But the notion of creating a diversified business portfolio was not initially embraced by many Indian governments that, before gambling, lacked resources, access to capital and financial acumen to build tribal economies.

Instead, tribes rewarded with statewide gambling exclusivity and little, if any, competition often didn’t bother to expand their business enterprises beyond hotels, travel plazas and other ventures linked to their already profitable gambling and tourism industries.

“They had monopolies, and they took advantage of that business opportunity,” says Matt Sodl, co-founder, president and managing director of Innovation Capital LLC, an investment bank doing business with tribal and commercial gambling companies.

That conservative business strategy is changing as IGRA nears its 30th anniversary and the $28.9 billion tribal gambling industry—after decades of double-digit growth—begins to level off.

Some 243 indigenous governments operated 489 facilities in 28 states in 2014, according to Casino City’s Indian Gaming Industry Report by economist Alan Meister of Nathan Associates, statistics that have grown only slightly since before the recession of 2008.

With casino markets saturating and profits leveling off, tribes are, finally, using their gambling resources and newfound financial savvy to explore new business ventures, both on and off the reservation—many that have little to do with casinos.

“Now that the business of gaming has slowed, it’s time to be looking to do other things,” Sodl says.

Funding Economic Diversity

Tribes diversifying their business portfolios are turning to investor and lender partnerships cultivated during the three decades they grew their casino and tourism industries.

Recent revisions in federal tax codes and Department of Interior lease rules should help tribes lure businesses to the reservation, leveraging existing tax and regulatory advantages for entrepreneurs willing to negotiate the legal minefield involved with operating on tribal lands.

And tribal lobbyists are asking Congress for parity with non-Indian governments on tax exemptions and the authority to issue tax-exempt bonds to finance infrastructure projects.

The goal is for more tribes to emulate the Salt River Pima-Maricopa Indian Community near Scottsdale, Arizona, which recently broke ground on a $60 million auto mall, expanding an already vast, sustainable economy that includes a sprawling shopping center, a minor league baseball facility and the upscale Talking Stick Resort and Casino.

“We’re going to see a lot more diversification over the next five years,” predicts Kristi Jackson, chairman of Tribal Financial Advisors, a firm recently expanded and rebranded as TFA Capital Partners to assist tribes seeking business ventures on and off their reservations.

“There’s going to be more tribes buying real estate and other businesses, some related to gaming and hospitality,” Jackson says. “Tribes will also go far afield from what they’ve been doing, from gravel operations to construction management to other non-gaming businesses.

“There’s definitely an evolution taking place. That’s precisely why we want to reform our company, to address this growing need.”

TFA Capital Partners hired Bill Newby to serve as president of the restructured and expanded company with the goal of assisting tribes in off-reservation gambling and non-gambling ventures.

“You haven’t seen a lot of that diversification, but you will see more of it in the next six months to a year. It’s going to surprise you,” says Newby, who like Jackson and TFA CEO David Howard is an alumnus of Bank of America’s gambling division.

Do What You Know Best

Tribes will investigate commercial gambling opportunities, he says, capitalizing on their casino operating experience while entering off-reservation markets that could prove competitive.

Those already making the leap include the Mohegan Tribe of Connecticut, owner of Mohegan Sun and Mohegan Sun Pocono, and operators of Resorts Atlantic City; Chickasaw Nation of Oklahoma, owner of racetracks in Oklahoma and Texas; and the Seminole Tribe of Florida, which in 2006 acquired Hard Rock International.

The Poarch Band of Creek Indians of Alabama in April purchased a casino site on the Mississippi Gulf Coast with the prospects of entering a highly competitive casino market. Poarch Creek also is exploring slots at a North Florida greyhound track.

“Many of these gaming tribes—and there’s quite a number of them—have been doing this for some time,” TFA’s Howard says. “They understand the gaming business and extensions of the gaming business such as hotels, hospitality and suppliers to those segments.”

Transferring that experience to other ventures should not be difficult.

“Tribes have learned to run large businesses,” Howard says. “They’ve learned to be business men and women. They are comfortable looking at other things.”

There have been a slew of new hotels, water parks, outlet malls and travel plazas going up on or near reservation casinos.

“We saw more of those in the past year than we’ve seen in the last five years,” Howard says.

Tribes are also exploring wealth management opportunities as well as investing in and acquiring non-gaming businesses rather than launching new enterprises.

“Tribes are being pretty creative,” Howard says. “Sometimes it’s better to invest in other public companies than starting your own.”

Fred Schubkegel of Varnum Law LLP of Grand Rapids, Michigan, noted that a recent meeting with the Pokagon Band of Potawatomi consisted entirely of managers of non-gambling enterprises, from construction and engineering to plastic molding operations.

“Diversification was always the goal of IGRA, but, finally, it’s really taken off,” Schubkegel says. “Whether it’s the saturation of tribal gaming or whether it’s just the logical next step, there does appear to be acceleration in diversification out there.

“Tribes are getting smarter. Some of them are seeing a fall-off in their gaming revenue, so they’re looking for the next best thing.”

Sodl applauds the Mohegan tribe for a range of investments that include an Indiana wood chip pellet company and East Coast restaurant franchisees, including Arooga’s Grille House and Sports Bar.

“I really like that idea,” he says.

Investment Partnerships

Investment partnerships cultivated since the birth of state-compacted Indian casinos in 1988 are proving useful. Large banks and traditional lenders are now familiar with federal regulations and tax laws governing tribal business transactions.

“Most of our corporate partners have been with tribes for a long time,” says Dante Desiderio, executive director of the Native American Finance Officers Association (NAFOA). “Tribes go back to the people who have been helping Indian Country.

“It’s the seasoned banks and finance people that are getting the majority of the business. They know how tribes work. They know the risks. They know what it takes to get these projects done.”

“There’s a somewhat developed market for casino financing that has taken 20 years to evolve, maybe longer,” Howard says. “There are regular lenders—banks and funds and high-yield investors—that understand the business. But it’s a relatively small group.

“We’re going to see more opportunities and people—particularly some of the traditional gaming lenders—are going to say, ‘I’d better get on the train here, because this is where things are going,’” Howard says of emerging non-gambling business opportunities.

“They understand things. They should be able to do it.”

“The lenders these days are pretty sophisticated,” Schubkegel says. “They understand the sovereign immunity issues, that there has to be a waiver. They understand with trust lands they can’t mortgage the property.”

Some projects will involve new lenders.

“Depending upon the risk-return profile of a non-gaming business, you’ll see different lending players emerge,” Sodl says. “I would be shocked if you see a big bank go after a small manufacturing facility on tribal land. The big players will gravitate toward bigger deals.”

“There’s still some education to do with some of those in the lending community,” Howard says. “If a project is on Indian lands there are a number of things to consider. But because of the experience we have had with casino financing and other things, we know how to deal with it.

“You can take a loan on Indian land and structure it to make it look just as commercial as any other commercial deal. It just has more twists because of the laws and the fact a tribe is a sovereign nation.”

Revised Tax And Leasing Rules Could Lure Business

Recent federal tax code revisions limit state and local taxes applicable to leased tribal lands. And the Hearth Act of 2012 gives Indian governments more control and flexibility in leasing reservation land for commercial development without Interior Department approval.

The tax code and leasing revisions are intended to give tribes greater control over economic development of trust lands while reducing tax and regulatory encroachment from state and local governments.

The code revisions—which are subject to court review—potentially impact businesses on leased tribal lands currently paying possessory interest and business use taxes, privilege and utility taxes, excise taxes and gross revenue taxes to state and local governments.

They could prove crucial as tribal officials and potential investors run the numbers on a venture not expected to generate the margins of a gambling or casino-related business.

“If it’s a low-margin business opportunity, tax considerations certainly help,” Sodl says. “That will move the needle, perhaps a lot.”

“Unless there is a huge margin, taxes are a big part of the equation,” says attorney Troy Van Dongen of Winston & Strawn LLP, who is representing the Agua Caliente Band of Cahuilla Indians of Palm Springs, California, in possessory tax litigation with Riverside County.

“Counties don’t want to give up those taxes. It’s big money for them. But once there is some clarity in the law, tribes will be looking to non-Indian investing and building on tribal lands. It’s a big economic incentive.”

“It’s a huge incentive,” agrees indigenous tax law expert Kathleen Nilles of Holland & Knight LLC in Washington, D.C., “clarifying that when tribes lease their trust lands—say, for an office park—that income is not only tax-free to the tribes but it can be distributed, tax-free, to tribal members. But state and local tax laws applicable to businesses on tribal lands vary from one state to another. Some businesses on Indian trust lands or ‘fee’ lands within reservation borders may be subject to dual taxation.

“I’m certainly consulting with a lot of gaming tribes on non-gaming issues lately,” Nilles says. “Whether that’s part of a trend or people are more familiar with me, I just don’t know.”

Other state and local tax benefits and regulatory relief—including government contracting advantages of a tribally owned 8(a) business—provide additional incentive for those seeking to do business on Indian trust lands.

Meanwhile, the Hearth Act authorizes tribes to lease lands for business and other purposes for up to 75 years without review and approval by Interior, eliminating significant delays in efforts to lure business.

“Tribal leaders see state and local intrusion as a risk to development,” NAFOA’s Desiderio says of often-litigated disputes over the imposition of state and local sales and use taxes on tribal lands. “Why go all out and develop and diversify when you’re going to have the states reaching into your pocket and taking the margins away?

“We’re trying to mitigate that risk in different ways. The first are the leasing regulations in the Hearth Act. That was a huge step forward for permanent improvements on tribal, leased lands. There are still challenges, but those regulations have been reviewed by the courts and affirmed.”

Legislation was recently introduced in the U.S. House that would give tribes parity with state and local governments in issuing tax-exempt bonds to finance needed infrastructure.

Salt River Pima-Maricopa Setting An Example

The 52,000-acre remote reservation designated in the late 1880s for the farming Pima and Maricopa Indians has, a century later, become surrounded by urban sprawl, bordered by the Phoenix suburbs of Scottsdale, Mesa and Tempe, Arizona.

Descendants live under a sophisticated government with tax and building codes, commercial leases and a land-use plan restricting business development to a nine-mile stretch of a 101 Freeway loop which, in the early 2000s, sliced through the east border of the reservation.

“The community has always had visionary, forward-thinking leaders,” economic development manager Quannah Dallas says of the land-use plan drawn up in 1988. “The decision was made to put most development on the boundaries of the community.”

About 30,000 acres of reservation land is held in communal trust by the tribe, providing for housing, agricultural land and some 19,000 acres of preserves.

But the strip of commercial lease land adjacent to 101 largely runs through the 20,000 acres of federally allotted lands held by individual Pima and Maricopa families. The businesses pay sales taxes to the tribal government to fund services for Salt River citizens.

“Assuring that community members were taken care of has always been at the forefront,” Dallas says.

As is the case with most tribal governments, Salt River does not disclose financial information. The sales tax revenues, however, must be sizable.

Salt River’s 59 commercial leases cover 2,400 acres and include the Talking Stick casino resort, Pavilions shopping center, golf courses, a minor league baseball field for Arizona Diamondbacks and Colorado Rockies spring training, a butterfly conservatory, a Marriott Courtyard motel, office and industrial parks and the OdySea Aquarium, currently under construction.

The tribe last month broke ground on the Scottsdale AutoShow at Salt River, a $60 million, 70-acre auto mall, the first ever on Indian lands. Dealerships will pay sales tax to both the state and the Indian community.

 “We’ve been doing large-scale commercial leasing for several decades,” Dallas says. “Salt River has always been a model for other tribes in the nation.”

Business growth on the reservation appears to be increasing. The tribe’s location adjacent to a freeway in a growing metropolitan area makes it a prime spot for commercial development.

“We have not really offered financial incentives to lure developers here,” Dallas says. “We have our great location and our streamlined regulatory processes that really attract developers.

“If anything, we’ve seen an increase in inquiries this year from people with ideas and proposals for leasing in the community,” she says.

Risk-Taking Is Not Often Advisable

Payday lending and cannabis farming have been looked at by a number of tribes seeking economic growth but lacking more traditional business options.

“These are high-risk businesses that require a lot of study and thought and analysis before venturing into a deal,” Sodl says. “Payday lending is frowned upon by the federal government.

“I’m not going to say those are businesses that shouldn’t be pursued. Tribes have got to be thoughtful about it.”

Viewing business diversification from the perspective of a tribal government differs from a purely commercial vantage point. Tribes will seek options they view as culturally or environmentally appropriate.

“If there’s any kind of a theme, the tribes I work with put a high value on sustainability,” Schubkegel says. “You’re not seeing tribes team up with investors to buy, chainsaw costs and flip a company. That’s not been the tribal mindset.

“Tribes are looking at opportunities sustainable with respect to the environment. They’re looking at businesses from an ethical perspective, with the goal of more than just making money. Often they want to make sure there are employment opportunities made available to tribal citizens.”

“I think in general, tribes are doing the right thing,” Sodl says. “They are being prudent and exercising a fiduciary responsibility toward their tribal members.”

Dave Palermo is an award-winning metropolitan newspaper reporter. He has written about American Indian governments for more than 20 years, working as an advocate for several tribes and tribal associations. He also has co-authored books on gambling and gambling law. He can be reached at

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