May 06, 2008 12:05 am
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By Roger McKinney
rmckinney@joplinglobe.com
The Kansas Lottery Commission on Monday approved Penn National Gaming’s contract to build and operate a state-owned casino in Cherokee County.
The contract now goes to the Kansas Lottery Gaming Facility Review Board for its consideration. It is expected to vote on the contract during a meeting Aug. 21 and 22.
The company plans to open its casino by May 5, 2010, about a mile north of the Interstate 44 exit leading to Baxter Springs and Galena.
Penn National’s contract with the state allows it to invest $125 million in the casino project initially, plus a $25 million privilege fee to the state that is due in 29 days. By year three, the company would invest an additional $35 million, to be followed by $15 million in year five, $25 million in year 10 and $25 million in year 12.
The company’s original application called for a $295 million casino and hotel, to be built at the same time. Company officials recently announced that they wanted to scale back and use a phased approach, because of competition from a casino and hotel the Quapaw Tribe is building nearby. The tribe’s $301 million Downstream Casino Resort is scheduled to open July 5.
Penn National’s president had told The Kansas City Star that the company might abandon the project if the Lottery Commission didn’t allow it to phase in its investment.
‘We don’t like it’
Lottery Commissioner Bob Wunsch’s vote was: “Reluctantly, I say yes.”
Keith Kocher, director of gambling facilities for the state lottery, said lottery officials were not pleased with Penn National’s scaled-back plan.
“Plain and simple, we don’t like it,” Kocher said, but he added that the state law requiring a minimum $225 million investment doesn’t specifically state that it must be made all at once.
“It’s not prohibited,” Kocher said. He warned companies making proposals in other zones under the state law not to attempt it.
“For those thinking about the other zones, this isn’t going to fly, because there’s competition there (in Cherokee County),” Kocher said, noting that Penn National was the only applicant in the southeast zone, which takes in Cherokee and Crawford counties.
“I think it’s a good contract, though maybe not the best we had hoped for,” said Ed Van Petten, Kansas Lottery director.
Kocher said representatives for Penn National negotiated in good faith and were good to work with.
The project
An overview of Penn National’s Hollywood Casino-Cherokee County calls for 900 slot machines at opening and 30 gambling tables with 180 positions. It also initially would have a 225-seat buffet; a 30-seat coffee and pastry shop; an entertainment lounge and bar; and a gift shop.
Future projects to be phased in might include a 200-room hotel; a pool, fitness room and spa; a car museum; an event center; additional food and beverage offerings; a parking garage; casino expansions; and retail offerings.
Tom Auriemma, Penn National’s vice president and chief compliance officer, addressed the commission about the project.
“We are clearly committed to invest a minimum of $225 million,” Auriemma said. “That’s crystal clear.”
He defended the plan to complete the project in stages.
“It’s a prudent business decision, one that will benefit the state of Kansas, Cherokee County and Penn National,” Auriemma said.
Under the state law, Penn National would be required to provide 22 percent of gambling revenues to the state; 2 percent to a problem-gambling fund; 2 percent to Cherokee County; and 1 percent to Crawford County.
Criticism
Economist Richard Schuetz criticized Penn National’s strategy in a report submitted for Monday’s meeting in Topeka.
“Penn’s recently disclosed desire to limp into Cherokee County is a bit curious,” Schuetz wrote. He wrote that if fear of the competition was a driving factor, Las Vegas would cease to exist, rather than growing ever bigger.
“There the challenge of competition has been to build a better mousetrap, with better staffing and service, better amenities,” Schuetz wrote of the situation in Las Vegas. “Why Penn has not chosen this route is a bit surprising. They seem to be admitting defeat before the first punch was ever thrown.”
Richard Klemp, Penn National’s vice president for government relations, said after the meeting that he disagreed with the tone of Schuetz’s statement.
“Our investment in Cherokee County is very significant, and the phase-in reflects the stark economic realities of a competitor that’s immediately adjacent to our site and will have a two-year, first-mover advantage, plus a major advantage in tax rates,” Klemp said, repeating that Penn National is committing to the required $225 million investment. “It’s only prudent to do it in a way that makes economic sense to ensure the long-term viability of the project.”
Schuetz’s report overall was positive for Penn National.
“Penn is well equipped to meet all of the management challenges of operating a $230 million casino resort facility in Cherokee County, Kansas,” Schuetz wrote, listing eight reasons. “The fact of the matter is that Penn offers an excellent level of management competence that well surpasses any level of desire mandated or implied by KELA (Kansas Expanded Lottery Act). Kansas would be well served by a company of this high level of competence.”
Synergies
State Rep. Doug Gatewood, D-Columbus, said the Lottery Commission took an objective and pragmatic action that considered market forces and economic realities. He said he thinks the competing casinos will benefit each other.
“I still feel there are synergies to be had, to have two facilities that close to each other,” Gatewood said. “There’s a reason you build a Wendy’s next to a McDonald’s.”
Cherokee County Commissioner Rodney Edmondson said he agreed with Gatewood.
“If you’re going on vacation and there’s more to do when you get there, you’re more likely to stay and go other places,” Edmondson said.
Gatewood said Monday’s action should put to rest concerns that Penn National may have been considering abandoning its plans in Cherokee County.
Edmondson said he agreed on that point, too.
“It ought to be an indication to Penn that everyone’s trying to work with them,” he said.
Final OK still out
Sally Lunsford, spokeswoman for the Kansas Lottery, said approval of the contract by the Lottery Gaming Facility Review Board is not a foregone conclusion. She said one option it has is to send the contract back to the Kansas Lottery Commission to renegotiate.
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