A Racino Model

(This post also appears on the Blood Horse website)

With the passage of legislation in Maryland to allow either slots at the race tracks or, at the very least, slot parlors contributing revenue to the racetracks, it got me thinking about what I would do if I could build a racino. And not only build a racino, but design the structure around the racino including slot machines, table games and even state tax rates.

Before I get started, I’m no economist and admittedly these are rough calculations. While there is need for polishing this up by an expert, I hope that doesn’t detract from my point: that slots, horses and government can coexist if everyone would stop being so greedy and work together so that everyone makes money

To start, you look at the Maryland legislation and you see that the state will get about 67% of the take. In contrast, Nevada casinos are taxed at a rate around 8%. Both are ridiculous. You need to be able to build a business on the high end and, as the sorry state of Nevada schools (especially southern Nevada) attests, you need a bit more on the low end to make it worth it to government. You need to be able to reinvest in the infrastructure of the physical plant; turn over your slot floor to keep offerings fresh; continuous track maintenance. Forcing a racino operator to try and operate on only 33% of revenue does only two things: discourage operators from maximizing the property and prevents the property from being the best it can be.

So first off, let’s tackle this issue first. I would propose a state take of 20 – 25%. It’s a pretty hearty tax, sure, but to compensate a bit for gaming, it should be a decent bite. This would also help stuff the state’s coffers, but not make the tax so onerous that it stifles business creativity. Another 3% or so should go to the local government where the property is located. This would be perk of hosting the property, if you will. Now instead of forcing a racino operator to try and operate on 33% of the revenue, they have about 70% to work with.

A friend of mine who builds and operates casinos once said that if slot vendors would lease slot machines on an 85/15 revenue split, he probably wouldn’t buy another slot machine again. This should be interpreted to mean that his operating cost for a slot floor runs about 15% of revenue. He has many years of experience doing this so I have no reason to doubt him. That being said, I would push that to 20% to account for inflation and perhaps some additional expenses that escape me right now. This is just to run a slot floor and not the racetrack, but those numbers would be part of an enterprise wide calculation and this is just on the slot end.

So now our slot floor is taken care of, our expenses are set and the state and municipality are taken care of. What about table games? I say the heck with them. They are labor intensive and don’t generate the same type of ‘win’ numbers as slots. If you want to add an automated roulette machine and some digital tables, go right ahead, but don’t burden yourself with a table games department. It’s no sin to be ambitious, but know who you are and what you are about. A racino shouldn’t be a slot parlor with a racetrack attached; it should be an added amenity to the racetrack. I don’t see it as a 3,000 slot behemoth. I see it more as a 1,000 – 1500 slot addenda to the race track. Don’t add the headcount, chips and stacks of cards and stay with a lean operation.

Let’s run some numbers before we get to the horsemen and purses. Let’s assume that we’re in an urban/suburban area like Prince George’s County, Maryland. With that demographic, I think we’re safe in assuming a $300 win per unit per day (actually, I think it may be considerably more, but let’s go with that number).

1,000 Slot machines x $300 per day x 365 days = $109,500,000 a year

State tax (25%) = $27,375,000

Local tax (3%) = $3,285,000

Expenses (20%) = $21,900,000

What’s left? = $56,940,000

Let’s compare for a second the current model. I will not show the 3,000 machines that the law allows for – no one in their right mind would commit that kind of capital investment with a 67% rake.

Revenue = $109,500,000

State Tax = $73,365,000

Local Tax = $0

Expenses (20%) = $21,900,000

What’s left? = $14,235,000

How do you reinvest, make a profit and increase purses on that? The government folks will complain that it’s not enough dough for them, but where else can they get $27 million per location while still PROMOTING business development? (That goes to show you that liberal Democrat and devout capitalist are NOT mutually exclusive!)

If you dedicate 30% of ‘what’s left’ under the first example to augment current purses, horse rescue and disabled jockey funds that leaves the operator $39,858,000 a year. Keep in mind, I am not taking into account any revenue from food and beverage, gift shop or even horse wagering into these totals. If there is an infrastructure investment of $100,000,000 the ROI is less than three years! What business would not love that kind of return? And you’re not going crazy building gaming palaces but building entertainment value for your patrons.

I truly think in my scenario you could dedicate even more money to purses and still not faze an operator. You could take that money and use it to promote the racing product and do things like free programs and parking that should be standard anyhow. Sure you’ll need a smaller operator who would be happy with that kind of steady return as well as one that values the sport of horse racing. But you could do it.

Truth be told, the tracks could run it without an outside operator. Seriously. A General Manager would need to understand that he needs to do two things: hire someone with good, solid, slot experience to be Director of Slots; and take some time himself and take some casino management courses at the University of Nevada at Las Vegas or University of Nevada at Reno. They even offer intensive two week courses from time to time. Know what you don’t know, admit it and then learn it. This way you have the racing folks running the entire entertainment product. Kind of like civilian control of the military, if you will.

This is my ideal; a scenario that for various reasons will probably never happen – the greed of all parties involved springs immediately to mind. But hell, I’m a horseman and I care about our product and what’s in it for us. We’re always on the short end and I’m tired of being the afterthought.