Las Vegas Business Press : Meet the new kings of the Strip

Meet the new kings of the Strip

BY IAN MYLCHREEST
BUSINESS PRESS

Real estate developers are looking for a few good operators -- casino operators, that is. Just in case you hadn't noticed, the big push for Strip development, and even some of the stuff that's been happening downtown, has created a huge business opportunity.

More and more hotel companies and developers are looking to be landlords and not casino moguls. This is nothing new but regulators will have to rethink the current policy.

Now real estate is king on the Strip. And more and more, it is men with the souls of real estate developers who are taking over. Skeptical? Look at some recent developments ...

Ian Mylchreest

The MGM Mirage buyout of Mandalay Bay was a classic real estate play. In the old days, casinos competed with exotic entertainment, cool atmosphere, loose slots and cheap food. That made sense when every 400 yards a tourist walked on the Strip brought him or her to a new property. If you start at the Four Seasons, you have to walk a few miles now before you even get anywhere that isn't an MGM Mirage resort.

Just like you want to buy the yellow and the green and the blue properties on the Monopoly board, MGM wanted to make it very hard to go anywhere on the south end of the Strip without landing on one of the company's squares.

But MGM is still playing by the old rules; it still thinks that the casino is a revenue center. But lots of the new players do not.

Analysts have long been saying it's not just about the casino anymore. Room rates, entertainment, golf, swimming pools, food and just about everything else were originally used as incentives to get people to play in the casino. The casino was the only profit center.

Then casino companies figured out that they should be making all the other stuff pay as well. With the right branding and marketing, it's worked.

What is different about the new players is that they're happy to cash in on the real estate value of the Strip and cash in on the brand loyalty of hotel customers but leave the casino business to somebody else.

We hardly noticed a few years ago when J.W. Marriott declined to get into slots and cards and left Millennium Gaming to create the Rampart Casino at its Summerlin resort. Well, that was just a company policy.

But then came the Westin Casuarina. Again, a strong hotel brand wanted a piece of the Las Vegas action. So it bought the old Maxim and renovated that sad-looking hotel. Now it can offer its loyalty customers a location near the Strip with the ultra-comfortable beds for which it wants to be famous. And it brought in a casino operator to run its relatively small gaming operation.

Now that model is rapidly expanding. In the past 12 months, we've seen Barrick Gaming disappear from the scene. In its wake emerged Tamares, a Liechtenstein-based corporation whose interest in downtown was apparently a real estate play. It owned the land under the casinos Barrick operated.

When that company left the scene almost as mysteriously as it had arrived, Tamares emerged as the owner of the properties. It decided to get an operator for the casinos rather than go through the licensing process, which might have raised questions about its investments in what it euphemistically describes as "technology development" and "manufacturing." One of its products is a self-propelling howitzer. Its investments are private and it preferred to keep them that way, so it would not expose itself to the licensing process.

Morgans Hotel Group has also decided to bring in a casino operator for the recently acquired Hard Rock. Its business is upscale, boutique hotels and it's sticking to it. Meanwhile, it will outsource the casino.

Last week, we saw the latest development in the stretching of this loophole that allows owners to deploy licensed casino operators. Real estate developer, Concord Wilshire Partners, has teamed with the publisher of "Maxim" to brand a new hotel with the name of the magazine. It's famous for short articles, frat-boy humor and models that look like they've walked off a shoot for Victoria's Secret.

But it's not the brand that's the problem; it's the developer.

Concorde Wilshire Chairman and CEO Steve Sirang was convicted of wire and bank fraud in 1987. That kind of felony would kill any chances of a gaming license. So again the solution is to hire an operating company.

But what about the rest of the deal? Maxim is being paid millions of dollars in fees and operating revenue for the use of its brand. That's the free market. If Concord thinks it's worth it, let it pay it.

Now, however, convicted felons can get a major piece of a Strip casino as a real estate play and it's legal to install a licensed operator. But the outlines of this deal show how easily the Gaming Commission's licensing regime can be circumvented by "branding" and "leasing" agreements.

Operators are necessarily captives of the landlord. What is to stop a collusive agreement between the two that would effectively siphon off gaming money as unusually high rent payments? A branding agreement can easily be used to do the same.

There is not the least suggestion that anyone has done this or is even planning it.

The system was not, however, supposed to work like this. In the old days, a casino license was a license to print money and it still pretty much is. A number of companies have decided, however, that it's not worth the time and trouble to actually go through the licensing process and all they need do is find a willing operator.

Both the Gaming Commission and the next Legislature will have to deal with this unanticipated consequence of rising Strip real estate prices. They should do it soon before operating agreements become the means by which the unlicensable skim money from casinos.

imylchreest@lvbusinesspress.com | 702-871-6780 x319

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