Journalism
Indian Casinos: Wheel of Misfortune — Who Gets the Money? (Part 1)
Kerzner, 67, was ideally placed to make a killing as a financier in Indian gaming. He has succeeded in gaming systems with loose rules before. His native South Africa once banned gambling but allowed it in tribal areas carved out by the apartheid-era white government for blacks to inhabit. Kerzner, who began his career as an accountant, opened the first hotel-casino in 1977 in Mmabatho, the capital of the homeland of Bophuthatswana, about 150 miles from Johannesburg. That year he began planning what would become the opulent Sun City resort-casino-entertainment-theme-park complex. When it opened in 1979, Sun City—with four hotels, a 6,000-seat arena and a 46-acre manmade lake for water sports—became a favored destination for whites in Johannesburg and Pretoria who wanted to escape their nation's moral restrictions and gamble, view soft-porn movies and watch topless showgirls, white and black. Dubbed the richest man in South Africa, Kerzner got into trouble in 1986 when he won permission for a hotel and casino in another homeland, Transkei. To acquire an exclusive gaming license, he had paid more than $ 900,000 to Transkeian Prime Minister George Matanzima, who was forced to resign and was later jailed for fraud. Kerzner maintained that Matanzima extorted the money, and the South African government declined to prosecute him. Kerzner moved his base of operations to Britain, and from there he expanded his hotel-and-casino empire to France, Morocco and the Bahamas, where he opened the very profitable Atlantis Casino and Resort.
In 1994, as soon as the Bureau of Indian Affairs (BIA) formally recognized the Mohegans as a tribe, Kerzner and several partners reached an agreement to develop and manage the tribe's proposed casino. Their fee: more than the legally allowed 40% of net revenues. The deal with the NIGC was negotiated in private, and then chairman Harold Monteau rubber-stamped it. The other two commissioners and several staff members objected, complaining that Monteau had worked out the generous package in secret. Monteau is now a lobbyist on casino issues for more than a dozen tribes.
The Mohegan Sun replicates the outrageous sensibility of Sun City. Its profitability is equally immoderate. This year it became Connecticut's and Indian country's second billion-dollar casino (after Foxwoods) when annual revenue hit 10 figures. The 32% increase over last year follows the opening of a second complex, which makes the Mohegan Sun's total gaming area larger than the combined area of the Mirage, Stardust and Tropicana casinos on the Las Vegas Strip. Kerzner, the Mohegans and the NIGC will not release details of the full management agreement, but based on financial data drawn from government records, Kerzner will ultimately walk away with an estimated $ 400 million. His partners will split another $ 400 million. And Kerzner is going after more. He and his partners have entered into an agreement with the Wisconsin-based Sockbridge-Munsee Band of Mohican Indians to develop a casino in the Catskills.
THE MALAYSIAN BILLIONAIRE. The biggest winner to date in Indian gaming is surely Lim Goh Tong, the 85-year-old Chinese-Malaysian businessman who bankrolled Foxwoods in northeastern Connecticut. Foxwoods, the country's largest gaming venue, is actually a constellation of five casinos about 10 miles down the road from the Mohegan Sun. On an average day, 40,000 people pass through what was a quiet, mostly rural patch of New England.
Lim knows how to compete for government favors. He earned his fortune as a contractor constructing huge infrastructure projects for the Malaysian government. In the mid-'60s while building a hydroelectric dam in the country's Cameron Highlands, he dreamed of developing a resort and casino in the area, which is easily accessible to Kuala Lumpur, the capital. Even though Malaysia is a predominantly Muslim country and Islam forbids Muslims to gamble, he secured the government's approval in less than a day. In the more than three decades since, his exclusive agreement for what is still Malaysia's only casino has been a license to print money.
His deal in 1991 to underwrite the development of Foxwoods for the Mashantucket Pequots, a tribe of fewer than 200 members at the time, has proved similarly lucrative. While financial details have not been made public, one can estimate the tycoon's windfall. Lim provided two loans, one for $ 60 million, the other for $ 175 million. His company, Kien Huat Realty Ltd., will receive interest on the loans for years to come. But Lim really hit the jackpot with a clause that reportedly gives him 10% of Foxwoods' net income until 2018. Foxwoods' gross revenue is more than $ 1 billion a year. Assuming no downturn in the casino's fortunes, TIME estimates, Lim and his family will walk away with $ 1 billion over the life of the agreement. The U.S. tax bite? As a foreign investor, Lim will pay at a steeply discounted rate—below that levied on an American family earning less than $ 20,000 a year.
The Great Land Rush
When gambling was first proposed as a tool for Indian economic development, it was expected that casinos would be confined largely to rural reservations where impoverished tribes had lived for generations. But as with any transaction involving real estate, it's all about location, location, location. Casinos on reservations near urban areas, with a ready supply of would-be gamblers, have tended to do well. The more remote ones, not surprisingly, have foundered. The result: a mad scramble by tribes and their non-Indian financial partners to find prime real estate that they can claim as "reservation" land—and then build on it a gleaming new casino. The choicest spots are near big cities and along major highways. It doesn't matter if the tribes have ever lived there.
With the blessing of the BIA, these instant reservations are cropping up all over the country. The United Auburn Indian community's new reservation is in an industrial park in Roseville, Calif., just minutes from I-80, one of California's busiest highways. The heretofore landless Match-e-be-nash-she-wish Band—otherwise known as the Gun Lake Band of Potawatomi Indians—now has a reservation of 50 acres along busy U.S. 131 south of Grand Rapids, Mich. Further west, in Washington State, the BIA has set aside 56 acres along I-90 east of Seattle for the Snoqaulmie tribe to develop a casino.
IN TRUST WE TRUST. To appreciate how frenetic investor activity has become, take a look at the action swirling around an otherwise unremarkable tract of land across the Sacramento River from the California state capital. The Upper Lake Band of Pomo Indians, a 150-member tribe, says in court papers that its ancestral homeland, two hours' drive from Sacramento, has "little economic value." So it wants to develop a casino on the river site, even though it neither owns the land nor has the money to buy it.
But the tribe does have friends with clout and deep pockets. A group of wealthy investors headed by Roy Palmer, a feisty onetime Chicago lawyer, has optioned the 67-acre tract in West Sacramento on behalf of the tribe and is footing the bill for trying to secure government approval for a reservation and casino. Palmer and two fellow Floridians, Robert Roskamp and Philip Kaltenbacher, onetime chairman of the New Jersey State Republican Party, formed a company called SRQ Inc. to develop and manage the casino. They envision it as a glitzy Las Vegas—style resort complex designed to replicate the state capitol building. If the BIA approves the plan and takes the land into trust, Palmer's group would convey the property to the Upper Lake Band. In return, SRQ would manage the casino for seven years and take 30% of its annual net profits.
For Palmer, who favors bow ties and loud sport coats, it could mean a replay of one of the most profitable chapters in his career. In the early 1990s, when Indian gaming was in its infancy, Palmer and a partner formed Buffalo Brothers Management Inc. to develop and manage two casinos for the St. Croix Chippewa Indians in Wisconsin. The company negotiated an agreement to collect 40% of the casinos' total net revenue for running the operations. Then it recommended that the tribe lease slot machines from Interstate Gaming Services Inc., a company that Palmer and his associate happened to own. The fee: 30% of the gross take from each machine. Since slots account for most of the gaming revenue in Indian casinos, Buffalo Brothers was poised to take 70% of the profits—far in excess of the 40% maximum permitted by law. In one year alone, 1992, the two companies collected $ 14 million.
Although the BIA had approved the St. Croix arrangements, some tribe members felt they were being gouged. Following an investigation, Michael Liethen, the director of the Office of Indian Gaming for the Wisconsin Gaming Commission, recommended in 1993 that the state revoke Buffalo Brothers' license. Instead, the state fired the director. (Some years later, the state paid him $ 290,000 to settle a lawsuit over the dismissal.) The disgruntled tribe members sued Buffalo Brothers, and by 1994, amid the rancor, the St. Croix Band bought out its contract, reportedly for more than $ 30 million. Palmer and his partner exited the state very wealthy men. "I was in the right place at the right time," he later told Sarasota magazine.
Palmer disputes the notion that he took advantage of the tribe and says he was the victim of tribal politics: "We did not do one thing wrong. They lost the case at every level, in every jurisdiction. It was just a smear job." As for the 30% his company received for supplying the slots, he says, "We used all that to pay for the slot machines."
Even in California, where tribes don't hesitate to make claims to land that was never theirs, the West Sacramento casino proposal is in a class by itself. Not only is a citizens' group in West Sacramento fighting it, but eight other tribes in Northern California are also opposed. In a joint letter written in April of this year, the tribes said that if Upper Lake were allowed to "move its land base to any area it wanted, [it] would make a mockery of our own California Indian history and demographics and damage the credibility and legitimacy of tribes across the state."