In Atlantic City, size does matter

Expert says small casinos don't make sense in N.J., but boutiques still have backers

October 08. 2012 3:00AM


Hard Rock International's not-so-unexpected decision to cancel plans for a 208-room boutique casino hotel in Atlantic City marks the end — at least, for now — of an experiment at lowering the investment threshold to enter the city's struggling gaming market.

The boutique casino licenses will eventually attract developers, says Jim Whelan, standing at the future site of Bass Pro Shops, in Atlantic City.

But local officials hope Hard Rock's cashing out won't stop nongaming developers from betting on Atlantic City.

The idea behind the 21-month-old "boutique casino" law was that investors too risk-averse to build a 500-room hotel and casino — the smallest allowed by law — might be willing to build a 200-room resort. The law created two "boutique casino" licenses, though Hard Rock was the only party to actively pursue one.

The bill's sponsor, state Sen. Jim Whelan (D-Northfield) said he still believes in his premise and thinks the licenses will eventually attract developers.

When the market returns, Whelan said, "you're far more likely to see a boutique casino, a 200-room casino, than a 500-room casino."

Israel Posner, executive director of the Lloyd D. Levenson Institute of Gaming, Hospitality and Tourism at Stockton College, said the boutique casino strategy has been superseded.

"The business environment, including the regulatory environment, is completely different than the time of two years ago, when the decision was made to pursue that" legislation, he said.

Posner noted the boutique casino legislation was introduced in May 2010, two months before Jon F. Hanson's commission released its report on gaming, sports and entertainment. That report laid out the vision for the re-tooling of the Casino Reinvestment Development Authority, and the creation of the state-run Atlantic City tourism district. Legislation based on the Hanson report was introduced that November and signed into law in February 2011, one month after the boutique casino bill became law.

Hard Rock blamed its decision on "current market decisions," saying it wasn't possible to get financing right now. The company left open the possibility of resuming the plans in the future.

Daniel Heneghan, a spokesman for the Casino Control Commission, said the two small casino licenses remain available for interested parties. Whelan said he thinks it will be at least 18 months before any developer would want to apply for a casino license.

But David G. Schwartz, director of the Center for Gaming Research at the University of Nevada, Las Vegas, said the small casino idea never made fiscal sense.

"It's not viable. Period," he said. "I just don't see how you can make those numbers add up."

He noted that the Trump Marina Hotel Casino — with its 740 hotel rooms — sold for a mere $38 million last year. Hard Rock estimated its construction costs at $465 million.

Asked if those numbers might work in a market that was growing instead of contracting, Schwartz said it likely depends on the state, but it still wouldn't be easy.

"Ohio has a couple of casinos, I believe, in the $300 million to $400 million range — but even there, it was difficult," he said. "For Caesars Entertainment to get backing for that, they had to partner with a company called Rock Gaming. It wasn't like earlier when they could just write a check and say, 'Hey, we want to do this.' "

Schwartz said casino floors are getting smaller, but for technological reasons. New machines can handle multiple denominations, negating the need for denomination-specific gaming terminals.

Schwartz said he doesn't know if Atlantic City needs more casinos, and he agrees with the general direction CRDA has taken as it aims to create a more robust entertainment resort.

"I don't think they need more slot machines," he said. "I think they need to do a better job of creating other attractions."

CRDA Executive Director John F. Palmieri said he's comfortable with the city's current base of casinos.

"It's not as though we've got a couple of casinos," he said. "We've got 12. And the newest edition (Revel) obviously is a big new player. It's fair to say that they're still establishing themselves as a place to visit, and their numbers have not been compelling yet."

Still, Palmieri was adamant that the pullout of Hard Rock, and struggles of Revel, aren't discouraging nongaming developers.

"The nongaming developers who come to talk to us about projects like Bass Pro Shops and Margaritaville don't look at the decision on the part of Hard Rock to pull out as a sobering condition," he said. "They fully understand we've been historically a gaming-oriented city, but that there are tremendous opportunities to reinforce the nongaming environment."

Revel's slow start perhaps underscores the long road ahead for Atlantic City. If Hard Rock hadn't pulled out, its original plan called for construction to begin this past July.

Jack Kocsis Jr., CEO of the Building Contractors Association of New Jersey, said the completion of Revel and cancellation of Hard Rock have raised unemployment among contractors in the region. Work on Bass Pro Shops and Margaritaville hasn't started yet.

He said contractors will take any work — large or small. They just hope it comes soon.

"We hope the interest in revitalization quickly turns into real, sustained work that will employ dozens of area contractors and hundreds of craftworkers who live and raise families in this state," he said.

E-mail to: jaredk@njbiz.com
On Twitter: @jaredkaltwasser


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