Focus on Technology: Slot Machine Financing Options

It’s no secret that a shift has occurred in Las Vegas over the past few years; Strip casinos now often gain more revenue from rooms, restaurants and entertainment than slots. “People across the nation are coming to Las Vegas for its other amenities,” Matthew Maddox of Wynn Resorts said in a Las Vegas Sun interview last year.

So where does that leave tribal casinos that serve primarily local markets? The 2013 State of the States survey by the American Gaming Association (AGA) shows that casinos located in smaller gaming states (other than Nevada and New Jersey) typically derive 85 to 91 percent of their revenue from slots and table games. This is no surprise as tribal facilities have always depended heavily on gaming devices for the majority of their revenue. Additionally, post-financial recession, the gaming sector has become much more competitive, with each facility having to fight for their customers’ loyal business. This requires more attention than ever to machine selection, which entails keeping track of current popular titles and ensuring new, exciting games are part of the inventory. With gaming machines playing such an integral role in a tribal facility’s business plan, the questions regarding machine selection and financing options remain extremely critical. Following, are some options operators can consider when selecting and financing gaming devices.

Purchasing Slot Machines: If a gaming facility is flush with cash and has a stockpile of capital expenditure funds available, then an outright purchase of new machines to either launch/expand operations or improve an existing floor is always a nice option. However, at price tags that average around $20,000 per machine for new devices, the sales tickets can quickly add up and become a burden on cash reserves. An advantage is that if properly scoped, these machines typically pay for themselves fairly quickly, and then for the remainder of a device’s life the casino owner realizes pure profit without debt or lease payments. A disadvantage is that purchasing slot machines requires a large capital outlay up front, and then the owner will have second-hand inventory that eventually will need to be re-sold.

Revenue Share Model: Probably the most popular option for its ease of execution, the revenue share model is one whereby the casino enters into an agreement with an equipment provider or intermediary to share the gaming revenues in order to acquire the needed machines. For operators low on cash, this is by far the easiest process to obtain slots. An advantage is that there is low capital outlay and no performance risk; also, burden is usually on provider partner to update floor and “swap” out the machines that are underperforming. The disadvantage is that if the machines perform well, even though the operator is receiving the majority of revenue, this can be an expensive way to finance the equipment over time. In many cases in which machines perform exceedingly well during the life of the revenue-share contract, the operator has often paid for the amount of the equipment several times over.

Capital Lease Model: A capital equipment lease is typically structured as a lease to own and is the standard financing method for business equipment. There is no revenue share; the value of the equipment is factored into an equation with a down payment and a buy-out at the end of the lease. Payments are made monthly or quarterly at a set interest rate (based on the casino facility’s credit and other factors), and the term is typically three to five years. The advantage is that casinos pay for only the actual value of the equipment plus financing charges; structured over time, the payments can be more manageable for cash flow than an outright purchase. The disadvantage is that capital leases are typically viewed by lenders the same as debt on the balance sheet; therefore, the overall amount of the lease may trigger defaults or covenant formulas regarding debt ratios. Also, with no revenue share option, if the casino experiences a bad season or drop-off period, the full payment is still owed.

Used and Refurbished Equipment: Although it is nice to own the latest, greatest and newest game titles, there are many slightly used and refurbished slot machines that perform adequately in certain markets. Much like purchasing a slightly used car for a great price, when selecting an entire slot floor inventory an operator can significantly reduce capital costs by utilizing some used machines as well as new. Used machines typically can be financed via any of the methods in the aforementioned paragraphs.

I had an opportunity to speak with Melissa Cox, vice president of marketing for Gaming Capital Group (GCG), a leading financier of gaming equipment, about what their program offers gaming operators:

Valerie Red-Horse: Explain what your company offers with regard to equipment financing and why it makes sense for some tribal operators.

Melissa Cox: In many cases, tribal operators understand that they live in an increasingly competitive environment and keeping the doors open for business is not enough to appease existing customer demands, nor grow the business. However, the decisions at hand for how to tackle these issues can be numerous and costly, especially when navigating the many technological advances occurring in our industry. Are there adequate cash reserves in place to make a substantial change? Do financing agreements exist that prohibit the tribe from carrying out its plan? Should the tribe invest its own capital or save those monies for other projects? These are all valid questions that exist and nobody wants to make a mistake, especially when the stakes are large.

The first step toward a more promising future is acknowledging that some form of action is needed. After that, consulting with industry professionals to ensure you are making the right decisions should give you unbiased input on how to move forward. Gaming Capital Group is just one example of such a group. Our company and its affiliates collectively operate more than 11,000 electronic gaming machines (EGMs) and have provided more than $600 million in capital toward casino expansions, hotel projects and technology enhancements (including the purchasing and ongoing maintenance of EGMs). In addition, we have extensive food and beverage experience, servicing more than 15 locations with 700-plus employees. GCG’s business model is centered on aligning our interests with our customers when an investment is made, via the revenue share model.

Many folks in the gaming industry are quick to judge the revenue share model, saying that it is too costly. However, rarely are the merits of the revenue share model discussed, which include quick access to capital, partnering with a team with extensive gaming and hospitality experience that will provide unbiased opinions on the merits of a project (because our success is linked to the tribe’s success) and, of course, we understand the technological advancements going on in our industry. We will take the technological risk for our customers. If something isn’t working on a project, it is in our best interest to fix it, and we will make the additional investment to do so. GCG’s goal is to be viewed as partners to our customers. The revenue share model is not for everyone, and we understand that. We only want to do business with those who seek our advice and capital, and where we see a good opportunity to create a lasting relationship. Again, GCG is just one example of a third-party professional, and there are many from which to choose. There are also other financial sources that exist in our industry. We are proud to differentiate ourselves in the gaming industry as both a capital provider and a value-add provider of services.

VR: Can you review a case study of how you were able to help in an otherwise challenging scenario?

MC: A customer came to us with the desire to improve their existing floor mix but was handcuffed by existing financing arrangements from reserving cash and/or borrowing additional funds to update their floor. They operated in a competitive environment and were noticing more and more customers driving by their facility to go play the newer games at the other casinos. Every day that went by resulted in further loss of revenue, and those days are gone forever. We offered a solution to get the newest games from various manufacturers on the floor, rather than just from one manufacturer. We also suggested adding some Class II games, with which we have extensive experience, and structured the deal so that it did not violate the existing loan agreement. Further, we enhanced the existing marketing budget and provided significant improvements to the casino floor signage in order to give the customer a “wow” factor to promote in their direct mailing, billboard and online advertising efforts.

VR: What can you tell us about the history of your company?

MC: Founded in 2005 by gaming industry executives, Gaming Capital Group is a direct, flexible source of capital. GCG provides equipment financings, as well as a wide array of financial services to meet any and all gaming industry needs. In doing so, GCG encourages the development of new gaming projects, helps casinos adapt and thrive in an ever-changing financial environment, and supports the varied needs of an economically important and expanding industry.

I also had the opportunity to speak with Eric Ramos, president of Blue Lake Consulting, and David Braunstein, owner of Mr. Gaming; both firms provide slightly used and/or refurbished machines to casinos. Ramos and Braunstein expressed how important refurbished machines can be as an option when casinos are selecting equipment. “I typically find used games that are basically brand new—even with all the costs of compliance, regulatory, accounting interface and configuration, the games will be a fraction of the cost of new game product,” Ramos said.

I asked Braunstein to specifically provide an overview of the advantages that refurbished machines from Mr. Gaming offer. “Our machines look like new, as we literally strip them down with new paint and/or chrome as needed, with complete cleaning and updated game software,” he said. “Mr. Gaming offers a unique solution with our extended warranty programs that not only cover the slot parts but also allow for replacement as part of the warranty with terms up to five years. This model is a lower overall cost for the slot device with an extended warranty that ranges from 5 percent to 3 percent of net win. This model provides a much larger bottom line. In other words, an operator receives all the benefits of a purchase and all the benefits of participation at a fraction of the market cost today.”

Regardless of size and location, a tribal gaming facility will always face serious decisions when adding slot machines. It is always important to compare and contrast financing options. As one of the largest line items in the budget, each method described above should be thoroughly vetted and explored before a decision is made.