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Proposed Chicago casino unattractive to investors because of ‘onerous’ taxes; South and West side sites wouldn’t draw tourists, says a state-hired consultant

Chicago Tribune

Tuesday, August 13, 2019  |  Article  |  Dan Petrella and Ryan Ori

Gambling, Gaming

A proposed Chicago casino could fail to attract investors because the tax structure approved by legislators is “very onerous” and the five South and West side sites floated by the city would not draw enough tourists to bring in maximum revenue, according to a report from a state-hired consultant.

 

Because of the way the heavily negotiated law was written, a Chicago casino operator’s profit margin “would, in a best-case scenario, equate to a few pennies on the dollar,” according to a report from Las Vegas-based Union Gaming Analytics. The Illinois Gaming Board released the study Tuesday morning.

 

The Chicago casino, along with five other casinos statewide, is part of a massive gambling expansion bill Gov. J.B. Pritzker signed this summer. Under the law, the city would receive one-third of the post-payout revenue to help fund pensions.

 

As a result of the high taxes and other upfront costs, the casino’s owner would reap low single-digit profit margins, at best, on any of the five sites suggested as possible locations, according to the study. If the city’s 33.3 percent tax on adjusted gross receipts is eliminated, a Chicago casino could generate annual returns above 20 percent, according to the report.

 

The consultant didn't like any of 5 proposed Chicago casino sites. Here's what we know about them. »

Union Gaming Analytics’ report said none of the city’s proposed sites would attract enough tourists and recommended choosing a downtown location instead. Even with a more centrally located site, though, the study found that excessive taxes and fees likely would ward off potential operators, who would generate “at best a 1% or 2% return annually.”

 

At the state’s 10 existing casinos, 5% of the post-payout revenue goes to the local government where the riverboat docks or where the casino is located. The state keeps 10% to 45%, depending on how much revenue the casino generates. A $1-per-person admission tax also goes to local governments.

 

For the Chicago casino, the city’s one-third take of post-payout revenue would be directed to severely underfunded police and firefighter pension plans. The per-person admission tax would be divided between Chicago, which would get 70 cents, and the villages of Maywood and Summit, which would each get 15 cents.

 

In addition to those taxes, the city casino operator also would have to pay a $250,000 application fee upfront, a $15 million “reconciliation” fee when the license is issued and up to $120 million in gambling position fees — which cost $30,000 each. The casino is authorized to have up to 4,000 gambling positions — with some of those positions possibly being placed at O’Hare International and Midway airports.

 

In a statement, a Pritzker spokeswoman indicated the casino law could be fine-tuned to make it work.

 

“We look forward to working with stakeholders, including the mayor and General Assembly, to refine this approach and ensure that we maximize the opportunities for jobs for residents and revenue to address our financial obligations,” Pritzker spokeswoman Emily Bittner said.

Mayor Lori Lightfoot said Monday she hadn’t yet seen the report, but signaled that she was expecting it would reach this conclusion.

 

"We asked for the feasibility study, as you know, because we were very concerned that the tax structure that the legislature put in place was one that wouldn’t lend itself to funding of a casino,” the mayor told reporters Monday at City Hall.

 

"We talked to a number of different financial experts who are in the business of financing casino enterprises, and person after person that we talked to told us that the tax structure that’s embedded into the statute that passed is not one that would allow for a casino operator to be successful because it takes too much money out of the deal upfront. So we will see what the report tells us, and then we’ll respond,” Lightfoot said.

 

After the Gaming Board hired Union Gaming to conduct the study, the city floated five potential development sites: a parcel near the Harborside golf course at 111th Street and the Bishop Ford Freeway; the former Michael Reese Hospital site at 31st Street and Cottage Grove Avenue; a site near Guaranteed Rate Field at Pershing Road and State Street; the former U.S. Steel parcel known as South Works between 79th and 91st streets along South Lake Shore Drive; and the lone West Side site, at Roosevelt Road and Kostner Avenue.

 

Lightfoot has said she wouldn’t rule out the possibility of a site closer to downtown. Pritzker, however, has said he doesn’t favor a site near downtown or McCormick Place.

 

Among the five options presented by the city for the report, the Michael Reese site would create the largest revenue — including gambling, hotel stays, entertainment, food, drinks and other dollars — of $966.1 million by its fifth year, 2024, according to the study. But the profit margin would be about 3% annually, the highest of the five sites.

 

Estimated 2024 revenues for the other sites were: Pershing and State, $938.7 million; Roosevelt and Kostner, $844.2 million; Harborside, $835.1 million; and U.S. Steel, $793.2 million. The U.S. Steel site, also known as South Works, would operate at a loss for each of the first five years, and all of the sites besides Michael Reese would see profit margins below 3%.

 

Now that the gaming board has received the report, it has 90 days to recommend changes to the tax structure proposed under the law. That puts the deadline just ahead of the second week of the General Assembly’s scheduled two-week fall veto session.

 

Gambling expansion has been a subject of debate in Springfield for decades, and Pritzker was lauded for achieving a deal in his first six months in office. In addition to new casinos in Chicago, Waukegan, the south suburbs, Rockford, Danville and southern Illinois, the law also legalizes sports betting and authorizes horse tracks to add slot machines and table games.

 

The revenue from the gambling expansion is dedicated to funding construction projects at schools, public universities and other facilities under Pritzker’s six-year, $45 billion “Rebuild Illinois" capital plan. The governor’s office said delays in a Chicago casino won’t “significantly impact” the program.