Casino economics

Anything I write on the $585 million bond issue, by which Sullivan County, NY intends to prop up the Monticello casino (which has been losing on the order of $100 million a year for the past seven years, since it opened in the winter of 2018), is by definition hampered by the following:

I write only on the basis of media articles and the incomplete response I received to my FOIL requests. 

Matt McPhillips, District 1 legislator and chairman of the Sullivan County Economic Development Committee, is quoted by the media as saying, "I really want  to assure the people and the taxpayers in Sullivan County that they have no stake in this deal. There’s no collateral that the county or its taxpayers are responsible for."

Jennifer Flad, the executive director of the Sullivan County IDA, stated that the bond payments would be funded by the general sales tax on the land the Sullivan County Resort Facilities Local Development Corporation (SCRFLDC) would purchase from the casino, together with the hotel, the golf course and all non-gaming property. 

The property of the Kartrite Resort is not part of this project.

The SCRFLDC would also sign with the casino a 39-year sublease agreement for the remaining useful life of the gaming facilities.

The county expects that this transaction would spur significant economic growth in Sullivan County by developing the land the SCRFLDC would purchase from  the casino, put the casino in the black, and facilitate new investment by the casino into the county. This is how the $585 million bond issue is being sold by the county  and these are the expectations and hopes.

The purpose of this project is to preserve the 1,400 local jobs the casino has been providing.

I have obtained two important documents: a copy of the bond agreement itself and the certificate of incorporation for the SCRFLDC, which has been set up by the county to handle this transaction (called "Project" in these documents).

The bond agreement says in Section 5(C): “The series 2025 Bonds and the interest thereon are not and shall never be a debt of the State of New York or Sullivan County, New York nor Sullivan County, New York shall be liable thereon.”

The certificate of incorporation states in its second paragraph that "The Corporation shall serve as a public instrumentality of, but operate separate and apart from, the County of Sullivan, New York (the ‘County’).”

Let us analyze the facts stated above:

There is absolutely no reason to think that helping the casino stay in the black would increase the casino’s revenue—namely, the number of customers. The casino has been losing on the order of $100 million a year since its opening in 2018 and the revenue from paying customers has been declining.

In fact, there is no guarantee that the casino can be in the black with more than $500 million in secured debt maturing between 2024 and 2037.

In addition, the sister company of the Casino Resort World Catskill—Resort World NYC—is bidding on the $5.5 billion development of a casino at the Aqueduct Racetrack. MGM is close to obtaining the license to open a casino at the Yonkers Racetrack after the three applications for casinos in Manhattan were turned down. And the State of New York announced its intention to issue a third casino license in NYC.

All these developments have been for a long time of concern to those hoping that the casino in Monticello can sustain its operation and the 1,400 local jobs.

All in all, it does not seem prudent from the economic point of view to lend the casino $585 million on a poorly justified hope that the casino can stay open and above all,  that lending the casino this huge sum of money would spur tremendous economic growth in the county. 

How did the casino get into this unenviable position? By building lavishly at the cost of $956 million with more than $500 million in secured financing (loans). This resulted in projected expenses of $280 million a year. And as paper can survive anything, it was assumed that the revenue would be $300 million a year.

That has never happened. The revenue stayed around $200 million a year and it is declining. Thus, the Malaysian gaming conglomerate Genting, with successful casinos  in Asia and Las Vegas owned by a Malaysian Chinese, was recruited. Genting has been chipping in $100 million a year for the past seven years presumably because he was getting his foothold in New York.

For instance, no lesson could be taken from the long-term operation of the Foxwood Resort Casino in nearby Connecticut. In 2024, it had net revenue of $156  million and operating expenses of $133 million, and employs 2,200 people. 

Shortly after Genting became an 80 percent owner of the share of stock (unsecured debt) in the Monticello casino, media reported that Genting was contemplating taking the  Monticello Casino private. That would have wiped out in a bankruptcy the secured debt of more than $500 million and, presumably, the casino could have continued  operating as before, thus protecting the 1,400 local jobs.

I am conjecturing that in the COVID-19 epidemic that hit shortly thereafter, the casino received hundreds of millions of dollars in the federal stimulus to keep the employment  going. That only prolonged this agony.

In my considered opinion, taking the casino private on the strength of the promise it would continue operating may still be one of the best options for Genting, even though the negative effect on its credit rating would impair its ability to obtain whatever financing it contemplates for the $5.5 billion casino at Aquedact Raceway—for which the license is not certain by any means.

Let us see what would happen if the Monticello Casino would default, stop making payments and the SCRFLDC would default on the $585 million bond issue:

The bond holders would attempt to seize the assets of the SCRFLDC, securing the mortgage financing the bonds. Matt McPhillips stated that Sullivan County taxpayers would be protected as they and the County of Sullivan take no part in this bond agreement.

We will see that this protection is by definition imperfect. In fact, the media reports that only now the county and the prospective investors hired consultants to study what liability, if any, would the county and its taxpayers have in case of the casino's default on the bond payments.

I would observe that the bond agreement says that this $585 million debt can never be a debt of the Sullivan County, NY and by extension of its taxpayers.

BUT, the certificate of incorporation for the SCRFLDC also states in its second paragraph that "The Corporation shall serve as a public instrumentality of, but operate separate and apart from, the County of Sullivan, New York (the ‘County’)."

This single sentence in the certificate of incorporation could cause the taxpayers to be liable or, at a minimum, it could cause a multiyear litigation, whereby the only winners in this case would be the lawyers who would "laugh all the way to the bank" with the county paying them.

Thus, the clause in the Certificate of Incorporation, which is there for a different purpose,  namely to assure the tax exempt status of the SCRFLDC under the New York State law,  may cause the taxpayers to be liable.

In other words, "operating separately and apart from the County" for the tax purposes  runs afoul with "being a public instrumentality of the County." Along those lines, the legislators of the County and the executives of the Sullivan County Industrial  Development Agency (IDA) would be best advised not to make any statements on  behalf of the SCRFLDC or in defense of the $585 million bond issue as if it is a project primarily carried out by the County of Sullivan, NY.

In such a litigation, the county would claim the clause in the Bond Agreement and the  bondholders' attorneys would claim that the SCRFLDC is a sham set up in an attempt  to shield the county from a liability.

What is more, it is likely that the bondholders' consortium could claim fraud, as the collateral—the land, the hotel and the golf course—does not provide sufficient equity to secure the mortgage loan to finance the bond issue. If a charge of fraud could be sustained in court, the corporate veil of the SCRFLDC can be pierced. 

Not only that, the corporate officers of the SCRLDC can be held personally liable for repaying the debt, but this liability could also extend to the taxpayers of Sullivan County.

Here is an example of insufficient collateral: Any mortgage loan lender knows that the “low downpayment” mortgage loans, say with 10 percent down, represent a straight loss to the lender, because it would cost the lender more than 10 percent of the appraised value of the property if the lender has to take the property back in a foreclosure. This is because all of this would take time with unpaid taxes, unpaid interest, property upkeep and the decline in value in case of a "fire sale" and the 6 percent real estate broker commission on the sale of the property.

We may have a similar case here:

The casino’s hotel has 332 rooms. The going price for a midrange hotel is $150,000 to $300,000 per room. Luxury hotels are priced at $400,000 to $1 million per room. Location and revenue are important.

Thus the value of the casino hotel at $300,000 per room may be only $100 million total.

The purchase price of a golf course ranges from $1 million to $15 million for golf courses with "development potential." It should be clear that the golf course does not add to the collateral value in any meaningful way.

Then there is the undeveloped land. The media reports that we are talking about approximately 1,500 acres divided into 1,161 tax lots. The value of a building lot in Sullivan County is typically $10,000, though some sellers list their land for sale for up to $30,000.

If we go with the building lot value of $30,000, the 1,161 building lots have a value of $35 million.

There would be a lease of a certain value owned by the SCRFLDC, but its value would go to zero if the casino defaults on it.

So it looks to me like the present value of the collateral to secure the $585 million bond is only some $150 million at this time. If Cushman and Wakefield appraised the assets 

at a much higher value and possibly in excess of $585 million, the potential for charges of fraud is high if the casino defaults.

I will be the first one to admit that the value of a RE property is in the eye of the beholder. We all remember the nonsensical charge against President Trump that he overvalued his properties on which the judge refused to sentence him. Nearly 40 years ago, I had difficulties in obtaining a mortgage loan on a house I was buying for $320,000. The appraisal came at $420,000 and the bank thought this was some kind of a fraud.

But I used the high dollar values in my estimate of the value of the collateral. It may be clear that too much is simply too much.

That was the asset side of this project. Let us take a look at the income side:

Jennifer Flad said that the bond payments would be funded from the general tax receipts on the tax lots the SCRFLDC would purchase from the casino.

The general tax set by the state of New York is $1.61 per each $100 of the assessed value of the property. The equalization rate in the Town of Thompson is 40.5 percent. Thus, to bring the general tax to a value comparable with other towns, the general tax would be $4 per $100 of the property value.

If we use the high figure of $30,000 per each of the 1,161 building lots, we can estimate the annual tax revenue as merely $1.4 million. But assuming a bond interest rate of 5 percent, the annual interest payment on the amount of $585 million is $29.25 million.

This is in addition to the legal difficulties of separating the operation of the SCDFLDC from the county operation, in which the tax revenue goes to the county but the interest on the $585 million bond must be paid by the SCDFLDC "operating separately and apart of the County."

So where would the $29 million a year in the bond’s interest payments come from? 

From the lease of the casino floor? We do not know.

I suspect that I know where the problem is because I have seen that before—twice:

In the Town of Forestburgh we had an "investor" who was buying land and promising his investors fabulous returns on their money. Not only were the investors not  receiving the promised profits, but when they asked for the principal they received nothing.

This "investor" is now serving a 20-year term in the federal penitentiary. I had the opportunity to see an affidavit a realtor who sold him the land submitted to court in his defense. It said, "the value is in the land." What the realtor was talking about was the full value of the fully developed land that might be realized decades from now, and not the present value of the undeveloped land. I believe that the SCDFLDC is suffering from the same delusion, and is making the same mistake in the case of this project.

Also in our town, we had a developer who wanted to divide some 2,000 acres into 2,742 smaller building lots. Our supervisor and the town board became infatuated  by a similar thing, having no previous experience with such projects. It would have been the largest such development in the State of New York ever.

The developer in his presentations was painting a picture of millions of dollars in new tax revenue flowing into the town's coffers in short order. But there was a problem. The developers' own documentation said that on the basis of their experience from their similar developments in Texas and Pennsylvania, in 10 years there would be houses on only 10 percent of the lots. 

This means that in 10 years, 90 percent of the building lots would still have been taxed as undeveloped land. It could have taken 100 years to realize the full tax revenue the developer was promising to the town in short order.

Our inexperienced town board could not grasp this subtlety. In the end, the developer could not sell the less than one-acre building lot at the price of $80,000 

after marketing these lots as far afield as China and Angola of all places. In the end, the developer bowed out and our revenue from the land in question remains  the same as 20 years ago.

I believe that this project suffers from the same problem, namely the difference between the value of raw land and the value and the tax revenue of fully developed land that may or may not happen, or it may happen decades from now.

Von Mises is an occasional opinion column on economics, written by Ivan Orisek of Forestburgh, NY. It’ll look at money and the way money works in America, and show you the numbers behind the headlines.