Red Hawk Casino's fortunes have disappointed so far

From the Sacramento Bee - December 11, 2011

Red Hawk, where glass feathers dangle from the chandeliers, opened in the teeth of the recession and does about half as much business as Thunder Valley. The casino is stuck in rural El Dorado County, although it benefits from the direct link to Highway 50, via an offramp built at the tribe's expense.

It's also the only Indian casino in the region without a hotel, a significant handicap.

"People who stay in a hotel gamble more," said Doug Elmets, a spokesman for Thunder Valley.

 

 The Shingle Springs Band of Miwok Indians battled for more than a decade to build a casino along Highway 50, a gambling palace that would lift the tribe out of poverty.

It hasn't worked out that way.

Three years after it opened, Red Hawk Casino is performing well below expectations, can't pay all its debts and has failed to enrich its owners.

Despite a sea of slot machines and elegant trimmings worthy of Las Vegas, the $535 million casino continues to be dwarfed by its wildly successful rival, Thunder Valley Casino near Lincoln, in the battle for Sacramento-area gamblers.

Some of Red Hawk's woes have been made public before, including the debt problems. Now, testimony in an El Dorado Superior Court lawsuit provides the most vivid picture yet of how badly the Shingle Springs casino is lagging.

Red Hawk took in $214 million in gambling revenue last year, testimony shows. That was 10 percent below 2009, its first full year of operation.

More importantly, that was about $100 million less than what was expected in a forecast the tribe made in 2007, according to court records. Gambling revenue is the amount the house wins, not the amount wagered.

"I think it's strictly the economy," said Nick Fonseca, chairman of the Shingle Springs tribe. "This is a new reality, and tribes are going to have to adjust to it."

Normally kept secret, details of Red Hawk's performance have spilled out in a lawsuit against the tribe by a company that once supplied it with slot machines and contends it is entitled to a cut of the profits.

Executives with the casino and the company that manages it for the tribe, Lakes Entertainment Inc. of Minneapolis, declined to comment further on Red Hawk, citing the ongoing court case.

But in an interview outside the courthouse during a break in the trial, Fonseca said the tribe is getting just $6 million a year in profits – the bare minimum guaranteed by Lakes.

Individual tribal members are receiving $800 a month in profit distributions, he said. Half of his 500 members continue to live below the poverty line.

By comparison, the 300 members of Thunder Valley's owner, the United Auburn Indian Community, reportedly get $30,000 a month apiece in casino profits.

Red Hawk and Thunder Valley are just 40 miles from each other but might as well inhabit different planets.

Thunder Valley opened in a time of relative prosperity, 2003, and quickly became one of the nation's most successful casinos. It has an ideal location, near two upscale Sun City retirement communities. It opened a luxury hotel last year and occasionally brings in high rollers from the Bay Area by helicopter.

Bill Eadington, a gambling expert at the University of Nevada, Reno, recently estimated that Thunder Valley's annual revenue is $400 million to $500 million.

Like all Indian casinos, Thunder Valley pays millions to the state under a gambling compact. But it no longer pays a firm to run the casino, enabling the Auburn tribe to keep more of the profit.

Red Hawk, where glass feathers dangle from the chandeliers, opened in the teeth of the recession and does about half as much business as Thunder Valley. The casino is stuck in rural El Dorado County, although it benefits from the direct link to Highway 50, via an offramp built at the tribe's expense.

It's also the only Indian casino in the region without a hotel, a significant handicap.

"People who stay in a hotel gamble more," said Doug Elmets, a spokesman for Thunder Valley.

Slots for locals

Red Hawk is also hemmed in by an array of financial obligations. It pays up to 30 percent of its profits to Lakes Entertainment, according to a Securities and Exchange Commission filing. That's the maximum allowed by federal Indian gambling law under most circumstances.

Under a deal signed with former Gov. Arnold Schwarzenegger, the tribe also pays the state up to 25 percent of its slot-machine winnings. That's believed to be the most onerous tribal gambling compact in California.

It pays millions to El Dorado County for various services – and is laboring to repay a $450 million construction bond.

"All the profits that we're making are going to the bondholders," Fonseca said.

As for those big-money gamblers, Red Hawk has scaled back on marketing to the Bay Area. Instead, it's opted to become "a more value-oriented locals casino," said Lyle Berman, chief executive of Lakes Entertainment, in a message to his shareholders in May.

Translation: better deals at the casino's restaurants, lots of free slot tournaments and other goodies.

The approach may be helping. Keith Wong, 84, of Stockton used to gamble at Jackson Rancheria but now visits Red Hawk twice a week.

"They give away a lot of prizes, gifts, they have a lot of promotions," said Wong, who came to Red Hawk on a recent weekday afternoon.

Red Hawk's profits and revenue improved during the third quarter, Lakes recently reported. The company declined to disclose details.

Still, the casino has lots of room for improvement.

As previously disclosed by Lakes, at times the casino doesn't make enough to generate the $500,000-a-month minimum distribution to the tribe. In those cases, Lakes loans the tribe money.

Lakes reported in March that the tribe has stopped making principal payments on a separate, $66 million loan from the Minneapolis company, although the tribe is still paying interest on the note.

Red Hawk is caught up in an industry-wide slump. The world's largest casino, Foxwoods in Connecticut, defaulted on a $2 billion debt in 2009. The family that owns the Sacramento Kings lost controlling interest in its Las Vegas casino to creditors in June.

"Everybody has had to renegotiate these loans, nobody can make these payments," said Reno gambling consultant Ken Adams. "Half of Atlantic City has been restructured."

No instant riches

The Shingle Springs tribe got into the business in 1996, in the early days of California Indian gambling, by opening a tent-like structure called Crystal Mountain Casino. It operated sporadically before closing in 1997, amid disagreements with neighbors and uncertainty about the casino's legality.

The tribe's partner in that venture, a slot-machine manufacturer named Sharp Image Gaming, is suing the tribe for breach of contract in El Dorado Superior Court.

Sharp Image says it had the right to supply slot machines to Red Hawk – and is entitled to tens of millions of dollars in profits. The tribe is fighting the suit, which has gone to a jury trial.

The opening of Red Hawk, on Dec. 17, 2008, followed years of negotiations with state and county officials. "We've been well-received by Sacramento," casino general manager Peter Fordham said on opening night.

But Red Hawk quickly turned disappointing. The workforce was trimmed within months. Fordham and much of his management team were replaced.

Gambling revenue came to $237 million the first full year and fell to $214 million in 2010, according to testimony by Gary Howard, an accountant who reviewed Red Hawk's books for Sharp Gaming.

Red Hawk is actually performing well by gambling industry standards. Its slot machines rake in about $235 a day per machine. The average slot in hyper-competitive Las Vegas takes in $149 a day.

Still, it's a far cry from what the tribe anticipated – an expectation formed by watching other tribes around the state get rich with casino profits.

Former Shingle Springs tribal financial officer Steven Garwood, in a written declaration to the court, said a financial forecast submitted to federal officials in 2007 assumed the casino would do at least $300 million a year in gambling revenue.

Back then, that wasn't a pie-in-the-sky prediction.

"Extremely realistic," said Nelson Rose, an expert on Indian gambling law at Whittier College. "That's what they would have been making if the economy hadn't crashed."


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