Management contracts a key to tribal casino industry growth

Mashpee Wampanoag Indians who welcomed the Pilgrims in 1607—only to wait 400 years for federal recognition—recently contracted with the Genting Group of Malaysia to finance and manage their $1 billion First Light Resort & Casino going up near Taunton, Massachusetts.

A similar management/finance partnership between the Jamul Indian Village in California and Penn National Gaming of Pennsylvania is developing the 12-story, $390 million Hollywood Jamul Casino on Interstate 8, 20 miles east of San Diego.

And Station Casinos of Las Vegas tipped the Indian gaming industry scales quite a bit in 2010 with its finance and management deal with the Federated Indians of Graton Rancheria, owners of the upscale, $800 million Graton Resort & Casino in Rohnert Park, California, near San Francisco, and the smaller casino owned by the Gun Lake tribe in Michigan.

The explosive growth of American Indian casinos that began with the Indian Gaming Regulatory Act (IGRA) of 1988 and continues today—albeit at a much slower pace—has been greatly aided by the financial assistance and expertise of U.S. and foreign gambling companies.

Many of the 243 tribes now operating casinos were victims of cyclical poverty and high unemployment, and lacked business experience and financial acumen.

As a result, it was common in the late 1980s and early ’90s for tribes in potentially lucrative markets to partner with deep-pocketed gambling companies in Nevada and elsewhere for the funds and operational expertise needed to launch casinos. Other tribes were assisted by “newbie” casino investment and management teams.

These tribal-private partnerships would help ignite a gambling industry that in 2014 generated $28.9 billion from 489 facilities in 28 states, according to Casino City’s Indian Gaming Industry Report by economist Alan Meister of Nathan Associates.

Mature Market

The double-digit growth plateaued with the 2008 recession and maturation of the Native American gambling market. But tribal-casino company partnerships occasionally surface with greenfield projects such as the Wampanoag, Jamul and Graton casinos.

These partnerships were anticipated by Congress in its grand plan to create a legislative response to the 1987 U.S. Supreme Court ruling that recognized the right of indigenous Americans to operate casinos on tribal trust lands.

Aware many tribes lacked the skills and finances needed to get into the casino business, framers of IGRA included in the act a version of Title 25 U.S. Code Section 81, the federal law which gives Interior and the Bureau of Indian Affairs (BIA), as trustee for Indian tribes, authority to approve private-sector contracts with indigenous governments.

“That law came about after a lot of unscrupulous traders and crooked Indian agents and superintendents ripped tribes off,” says Phil Hogen, former chairman of the National Indian Gaming Commission (NIGC), which oversees the regulation of tribal casinos.

IGRA guidelines restrict casino management agreements to seven years and caps revenue sharing at 30 percent of pre-tax profits. The limits are intended to ensure that tribes—and not finance and management companies—maintain proprietary interest in the casinos, which by law are intended to fund health care, education and other government services for tribal citizens.

“When I came on the scene in ’92 or so, there were a lot of shady consulting agreements,” Hogen says of the early days of Indian casinos. “The contractual arrangements weren’t being reviewed or approved because they weren’t called management agreements.

“The concept has since become somewhat obsolete, as tribes have become considerably more sophisticated than they were at the time IGRA was written, some extremely so.

“But there are still tribes that haven’t really put it together yet in terms of doing business in the white man’s world. A few of them are in my part of the country,” says Hogen, an Oglala Lakota from the Pine Ridge, South Dakota Indian reservation.

The NIGC website lists 64 federally approved tribal casino management agreements. The list does not include the Jamul/Penn and Wampanoag/ Genting partnerships, which are awaiting federal scrutiny. Nor does it include agreements approved by BIA prior to passage of IGRA in 1988 and establishment of the NIGC five years later.

Many of the listed agreements have expired, and some management companies have filed for bankruptcy. The last agreements were approved in 2010.

Partners and Teachers

Most tribal gambling authorities believe IGRA’s casino management provisions met the needs of both tribes and their business partners and investors.

“Overall, Indian Country was well-served by having the proposition that the federal trustee is going to look carefully at the agreement between the gaming tribe and the folks who are going to finance and manage the gaming for them,” Hogen says.

“There were some bad deals. But I think in most cases where tribes began with management companies and later took control of the operation, they were well-served by that arrangement.”

Lyle Berman, founder of Lakes Entertainment of Minnetonka, Minnesota, and a pioneer in the management of tribal casinos, also believes the regulations worked. Lakes (formerly Grand Casinos) opened and managed six tribal casinos in Minnesota, Louisiana and Oklahoma. Lakes Entertainment recently merged with Golden Gaming to become Golden Entertainment.

Berman does, however, believe IGRA restrictions—particularly the seven-year limitation—discouraged many premier casino companies from partnering with tribes.

“When you think about it, it’s one of the most unfair contractual arrangements you could envision,” Berman says. “We put up all the money, took all the risks and had all the expertise. Yet we only got 30 percent for seven years.

“The rules discouraged many name companies from getting involved. I recall casino owner Steve Wynn saying, ‘Why in the world would I ever do something like that? Why would I give the tribes all my expertise and then have to go away in seven years?’”

Prior to IGRA, some California Indian bands along with the Seminole Tribe of Florida, Poarch Band of Creek Indians of Alabama and others operated high-stakes bingo or casinos with “gray area” slot machines not found in regulated casinos in Nevada and Atlantic City.

Upon passage of IGRA, many of these tribes had the finances and operation skills to “morph” into more elaborate, well-regulated casinos.

“They basically were able to make the transition on their own,” Berman recalls. “But other tribes didn’t have the money or the management expertise. The majority of them initially did need some kind of help in financing and managing their operations.

“We got in early and we made good deals,” Berman says of Grand Casinos, which opened two Grand Casino resorts in Mille Lacs and Hinckley, Minnesota, for the Mille Lacs Band of Ojibwe Indians, as well as the Coushatta and Paragon casino resorts in Kinder and Marksville, Louisiana. Park Place Entertainment (later Caesars Entertainment) bought Grand Casinos in 1998, but after the tribal compacts had ended.

“Both our company and the tribes were happy with each other,” Berman says. “We made a fair amount of money.”

Management Pioneers

A few large, branded companies such as Harrah’s (now Caesars Entertainment), Boyd Gaming and Station Casinos, and a handful of newcomers such as Lakes, led the way in partnering with a number of Indian tribes in gambling and hotel ventures.

“Back in the old days, we had a lot of sleazy types trying to manage smaller casinos,” former NIGC Commissioner Jana McKeag, an Oklahoma Cherokee, told GamblingCompliance.com. “They figured you throw some slot machines in a double-wide, you have a casino.

 “Then there were (Boyd Gaming CEO) Bill Boyd, Lakes Entertainment and Harrah’s, who saw the potential. It was helpful for tribes to have people and companies of that stature involved in Indian gaming.”

Harrah’s under CEO Phil Satre from 1994 to 2003 reached out to tribal governments while most Nevada companies lobbied to block the fledgling industry, particularly ballot Proposition 1A, which led to compacted Indian casinos in California. California is the most successful Indian casino state with 63 tribes generating $7.3 billion in 2014, according to Meister’s report.

“All the casino companies put up money to defeat tribal gaming in California except Harrah’s,” says Jan Jones, vice president of government affairs for Caesars Entertainment. “Phil Satre didn’t think that was right. He believed in competition. He thought we should support the expansion of gaming in the country.”

Satre also believed partnering with tribes and riverboat casinos would grow his company, which had a business strategy of developing small-market casinos in numerous jurisdictions.

Satre and Harrah’s executives Janet Beronio and James Baum, who recently resigned as vice president of development for Penn National, also believed in tribal self-governance.

“Satre was very respectful,” Jones says. “He stressed these were not our casinos. They were the tribes’ casinos. We had expertise and we had capital to help them open. Then we learned along with them.”

“That kind of respect is incredibly important,” says Satre, who today serves as board chairman for International Game Technology. “Harrah’s had that empathy. It’s important because the tribe has to trust the company with what is probably the tribe’s most important economic asset.

“Tribal leaders have to trust that we’re going to both run the government casino responsibly and achieve their goals, which are a better economic outcome for the tribe, job creation and reinvesting in things like education and health facilities.”

Penn National will make the Jamul Indian Village casino its first tribal management operation.

“It is important to understand Jamul Indian Village is a sovereign nation,” says Eric Schippers, Penn National director of public affairs. “We are managing the operation. But this is about helping the tribe find a sustainable source of income to stand on its own and have financial independence. This is very important to the tribe in terms of developing a health clinic, providing education and other benefits to tribal members.”

The appreciation Harrah’s had for tribal sovereignty is not lost on its tribal partners, the Cherokee Nation of North Carolina, Ak-Chin Indian Community of Maricopa, Arizona, and Rincon Band of Luiseño Indians in Valley Center, California.

“One thing I’ve always recognized with the company is an expression of respect for tribes and tribal governments, the fact tribes have a unique set of opportunities and constraints,” says Steve Stallings, a Rincon tribal council member.

The late Phillip Martin, chief of the Mississippi Band of Choctaw Indians, spoke glowingly of his partnership with Boyd Gaming and company CEO Bill Boyd, who financed and managed the tribe’s Silver Star Resort & Casino in Philadelphia, Mississippi.

Although the Choctaw bought out Boyd Gaming after three years, Martin and Boyd remained fast friends until the chief’s death in 2010. When visiting Las Vegas, Martin was a fixture in the coffee shop of Boyd’s Stardust Casino on the Strip long after the partnership ended.

More Opportunity

Boyd is reportedly in a partnership with the Wilton Rancheria of Miwok Indians, which is pursuing a casino in rural Galt, California. Cannery Resorts of Las Vegas has been in talks with the recently restored Tejon Indian Tribe near Bakersfield. The Mohegan Tribe of Connecticut has arranged a partnership with the Cowlitz Indians of Washington state.

A major factor in Harrah’s success in Indian Country was its willingness to loan money at terms below most banks and lending institutions, Satre says.

In addition, tribes applaud Caesars Entertainment’s management training program, which has enabled tribal citizens to assume control of casino and hotel operations.

Virtually all management agreements end at seven years, if not sooner. Self-management not only is more profitable, but an expression of tribal sovereignty.

“Tribes opt for a management agreement when they need money to get started,” says Norm DesRosiers, a consultant and former NIGC commissioner. “Once a casino is up and running and the debt is paid, I don’t think many tribes would maintain a management agreement.”

But Caesars has renewed—with revenue modifications—its Cherokee, Ak-Chin and Rincon deals, largely because of the value of the Caesars/Harrah’s brand. The company’s Total Rewards customer loyalty program has a database of 30 million people, 10 million in California.

Renewed agreements do not include a percentage of profits, but pay an often-lucrative flat management fee similar to what is found in the chain hotel industry.

“Of all the gaming companies, we have the longest history of maintaining these contracts,” Jones says.

“We have a very competitive environment,” says Stallings, noting that San Diego County has 18 tribes, more than any other U.S. county. “We compete more on brand than anything. Total Rewards is just a great base to draw upon. It works for us.”

End Of An Era

Management contracts have diminished with the maturation/saturation of the Indian gambling market. Of the 366 federally recognized tribes in the lower 48 states, 243 operate casinos and another 50 or 60 share in the revenues. Many of the remaining tribes do not have a land base.

The time, expense and political hurdles in achieving federal recognition, acquiring and placing in federal trust ancestral lands and negotiating a tribal-state compact discourage indigenous groups and potential investors with aspirations of getting into the casino business.

“Whether it’s getting recognition or land in trust, things are not happening with the rapidity they were in the late ’80s, ’90s and early 2000s,” Jones says.

“Tribal groups need to be federally recognized. They need land in trust for gaming. And they need a tribal-state regulatory compact,” Berman says. “Virtually every tribe in the country which meets those criteria is already operating a casino.”

Meister’s study lists 26 land/trust applications for gambling on file with Interior, four of them dating back nine years or more and others falling into the politically volatile category of gambling on newly acquired lands.

Berman doesn’t advise entering into a partnership with indigenous groups seeking casinos.

“The deals out there today are—quite frankly—very, very risky,” Berman says. “You have to invest a lot of time and money and there’s no certainty you’ll ever open a casino.

“Let’s put it this way. If some people came to me and said, ‘We want to go into the Indian gaming management business,’ I’ll tell them, ‘Forget it.’ There simply isn’t much there.”

Exceptions To The Rule

Miwok and Pomo Indians of Graton Rancheria were restored for two years when Chairman Greg Sarris met with Station Casinos in 2002 to discuss a casino—a potentially lucrative proposition in that Graton’s trust lands are a 40-minute drive from the Golden Gate Bridge.

“There were a lot of Las Vegas casino companies that contacted me after we were restored,” Sarris says. “But Station gave me what I wanted.”

Station once managed the profitable Thunder Valley Casino Resort near Sacramento, and operates through a 50 percent share of MPM Enterprises the Gun Lake Casino owned by the Pottawatomi Indians of Wayland, Michigan.

Company officials declined to be interviewed.

Sarris, whose connections include Governor Jerry Brown, drove a hard bargain, demanding a non-refundable $200 million to purchase property and control of development decisions.

“There would be no cheap tent,” Sarris says. “We would open with a nice, big facility.”

The biggest concession was Sarris’ demand that the property embrace UNITE HERE, the hotel workers union. Station has been at war with the union in Nevada for a number of years.

“The sticking point was the labor thing. They did not want union. They were adamant about that,” Sarris says. “But I said, ‘OK. Goodbye. We are going to build this and run with this union.’

“I am a firm believer in dignity in the workplace. We made an agreement with UNITE HERE, up front. I was not going to yield. This was the way it was going to be.”

Sarris says labor support was crucial in getting legislative approval of the tribal-state compact.

“They have proven to be excellent managers,” Sarris says of Station Casinos. “They are very good local operators.”

Sarris hopes to buy down the debt in about five years and is not sure the partnership will last beyond seven years.

“Who knows what will happen?” Sarris says. “If we kept them, the terms would definitely be different; that’s all I can say.”

Penn’s Plan

Penn National runs Casino Rama, Ontario’s only First Nations commercial casino, but Jamul is the company’s first U.S. tribal venture.

“I wouldn’t say the company had a strategic objective to enter into the tribal gaming space other than when this opportunity presented itself,” Schippers says. “We explore any and all opportunities—commercial, tribal and even online.”

Lakes partnered with Jamul for several years before selling out to Penn. The project faces a lawsuit from a group of residents.

Baum and Penn COO Jay Snowden, also a Harrah’s alumnus, helped the company navigate the federal, state and local legal, political and bureaucratic landscape of Indian gambling.

“Obviously, there’s a complex map that must be navigated when taking on this kind of development,” Schippers says.

He’s not certain the agreement will last beyond seven years.

“We’re hopeful we can be able to extend it,” Schippers says. “But that, of course, is an issue left to the tribe.”

Author: Dave Palermo

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 dgpalermo1@gmail.com.