Details of AC “overhaul”

Here are more details about the proposed regulatory changes in Atlantic City, which seem to make the tax process even more byzantine. Ah, I just wanted an excuse to use “byzantine” in a sentence. It’s one of those words that I don’t get to use enough. From Business Week:

The new casinos would have to pay a tax rate of more than 14 percent to compensate for the lesser amount they would have to spend, compared to existing, larger casinos, which pay just over 9 percent.

The bill has incentives to entice casino owners to add hotel rooms. Those who build 200-room hotels would be permitted 20,000 square-feet of casino space. If they expand to 500 rooms within five years, they would get 30,000 square feet of gambling, and would get back the extra 5 percent in taxes they paid to enter the market.

Conversely, if the owners of a 200-room hotel kept it that size after five years, the money they paid would be used for other casinos' expansion or infrastructure projects in Atlantic City.

Owners could opt for slot machines alone — which account for two-thirds of Atlantic City's casino revenue — or offer table games as well, which cost more to staff.

via Atlantic City eyes adding 4 small casinos – BusinessWeek.

This isn’t easing the regulatory burden: it’s adding another layer to it. Capping the number of “mini-casinos” at 4 seems like an unnecessary intrusion into the market. There’s no statutory cap on casinos now, and the market’s done a good job of limiting itself.

I don’t know exactly how you can justify using taxes paid by these new casinos to fund “other casinos’ expansion.” That seems like it’s subsidizing poor operators. Why should the Chelsea (for example), have to pay taxes that the Hilton uses to expand? Is that where this is going, or did I read it wrong?

As far as the cap on casino size at 20,000 square feet, that’s tiny. The average casino size in 2008 was 121,388 square feet, with seven casinos well over 100,000 square feet. The statistical average number of hotel rooms is 1,325. But it works out almost perfectly, at least mathematically: a 20,000 square foot casinos is 16.5% the size of the industry average, and 200 rooms is 15% of the industry average. So at least it’s scaled correctly.

Just how much money would a 20,000 square-foot casino make in Atlantic City? I’m going to do some really rough calculations. First, I’ll assume that with 15% of the floor space, the casino will have 16.5% of the gaming equipment. It would have about 24 table games and 512 slot machines.

Using 2008 revenue numbers as a guide* gives us a total approximate table win of $21.1 million, and a total slot win of about $46.9 million. That’s about $68 million in win a year, if the win is truly scalable.

With four total, that’s $272 million in total revenue; taxed at at 14%, that’s an extra $38 million in tax revenue for the state.

Keep in mind that if I’d have had 2009 numbers to work with, the win totals would be about 14% lower, so the total win per mini-casino drops to about $59 million. Considering the amount of money and effort that will be invested in starting up the casino and regulatory compliance, as well as staffing and promotional costs, there doesn’t seem to be much room for a good return on investment. If you’ve got 16.5% of the floor space, you’ll have a far smaller selection of games, which means that you’re going to have to work harder to attract customers.

Talk about “Monte Carlo-type” casinos is about 30 years out of date. Sure, some of the big Nevada casinos are doing well at baccarat, but is a $25,000/hand player really going pass up Wynn or Aria (or, for that matter, Borgata) to play at the Chelsea? If you can’t get that level of player, you’ve got to make your profit on volume, and that’s going to be very hard to do in this case.

It’s great that people are thinking about ways to attract investment, but I don’t think this is going to lead to the rebirth of the city. Bottom line, you need to look at what works for other destinations, and see how it can be adapted or improved. Lowering regulatory costs would be another great incentive, and this doesn’t seem to do that.

*I did these calculations by using the historic win statistics to find average win per casino, then multiplied it by 16.5%. A crude method, but an effective one with the info that’s available.
Average numbers of table games (2008): 148
Average number of slots (2008): 3,102
Average table win:$128.4 million
Average slot win:$284.7 million

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