After failing twice to attract a developer to transform the debt-ridden Rocky Gap Lodge into a profit-generating slot machine palace, Maryland lawmakers are considering a new package of financial incentives that would erase millions of dollars in fees and temporarily reduce the state's take of gambling revenue.
The 13-year-old complex in Western Maryland includes a hotel with meeting rooms and an 18-hole Jack Nicklaus golf course. But saddled with tens of millions in debt, it has been an annual drag on the state's already challenged balance sheet.
"We want someone to buy the lodge, which is costing us money," said Republican state Sen. George Edwards, who represents Allegany County, where the lodge is located.
Rocky Gap is the only one of the five sites approved for slots that has not drawn a serious bidder. The General Assembly nudged the tax rate down by a few points last year to sweeten the deal, but it wasn't enough to secure a commitment from any among the few companies that had flirted with the idea of bidding.
Lawmakers are now pouring more sugar into the pot: Legislation approved by the Senate would reduce the tax on gambling revenue by another 20 percent, cut at least $3 million from the bidding fee and eliminate a requirement that the developer construct a new building for the casino.
The winning bidder would be required to purchase the Rocky Gap Lodge, taking the money-losing project off the state's books for good. But the winner could count the purchase price toward the $25 million capital investment the state is requiring per 500 slot machines.
"It is very important" that the incentive package passes, Senate President Thomas V. Mike Miller said. "The bondholders have reached the breaking point. They've said this is the last year."
The project was funded with state, county and private dollars. But from the outset, the project has not generated enough income to cover debt payments. The private bondholders — who are first in line to be paid off —want out, according to their lobbyist.
Lawmakers had expected that a Rocky Gap casino would be under construction by now, and ready to generate $38.7 million in revenue for the budget year that begins July 1. Reducing the tax rate to 50 percent would chop about $3 million from the state's expected take from a 500-machine casino.
House leaders are still in discussions about the incentive package, but several said they agree in principle with the Senate provisions. Areas of difference might include the length of time that the state would reduce its take: The Senate is offering 10 years; the House is considering cutting it to five.
The House might also add a provision requiring the owner to pay a higher tax rate if the casino makes more than expected. Machines at Rocky Gap are projected to generate an average of $115 per day; it is expected to be the least lucrative of the five slots sites.
Last year, the General Assembly lowered the state's take from 67 percent to 64.5 percent and said the owner of another casino could also operate Rocky Gap.
The effort failed to attract a single bid.
This year's proposal is drawing at least some interest.
"I look for unique opportunities," said William Correa, CEO of Paragon Project Resources, a commercial real estate firm based in Dallas.
Correa said the hotel and golf course would make a "positive setting" for a casino and resort, but the only way he could make money on the project would be with the lower tax rate. "Organizations like ours aren't going to follow through unless there is a chance of making a profit," he said.
Should the tax rate be lowered to 50 percent, Paragon's lobbyist said, the company would offer to buy the lodge and build a separate structure. The firm would install 500 to 1,000 video lottery terminals, lobbyist Ivan Lanier said. State law allows up to 1,500 at Rocky Gap.
Paragon has done several dozen projects around the country but has no experience with gambling. Lanier said the firm would bring on a strategic partner with a background in the industry, but would not say who that might be.
Miller, the Senate president, said he's met with three potential bidders. He did not name any of them. "They've indicated those numbers could generate interest," he said.
The Senate legislation also eases the current ownership restrictions, allowing the operator of Rocky Gap to run another casino in the state. The state initially insisted that no single entity could hold more than one gambling license, a restriction intended to prevent a monopoly.
Eric Schippers, a spokesman for Penn National, which owns the Hollywood Casino Perryville in Cecil County, said his group "is not in any way" interested in the Rocky Gap license. Neither is William Rickman, who owns the Casino at Ocean Downs on the Eastern Shore, according to a spokesperson.
Those two facilities opened late last year.
Baltimore developer David Cordish, who is building a billion-dollar casino complex at Arundel Mills, said he would bid on Rocky Gap "as a public service" if he were asked to by the state, but he is not otherwise interested.
"Even with these helpful changes, it would not be much of a money-maker for the operator," Cordish predicted. "The big winner would be state taxpayers and Western Maryland."
A planned casino for Baltimore remains in litigation as the city and state attempt to separate themselves from Canadian developer Michael Moldenhauer. Donald C. Fry, the chairman of the state slots commission, said he expects to re-bid the Baltimore license by the end of April.
If the Rocky Gap incentives become law, Fry said, his commission will likely put that license out to bid at the same time.
The Rocky Gap hotel and lodge lost $3.8 million in fiscal year 2010 and do not generate enough revenue to cover debt payments, according to an analysis by the department of legislative services.
"The recession impacted us severely," said Robert C. Brennan, executive director of the Maryland Economic Development Corp., which oversees operations at Rocky Gap. "We can't continue to sustain losses."
The hotel averages 50 percent occupancy, Brennan said.
Built in 1998, the 220-room hotel complex was financed through a complicated web of private and public investment. The private investors are owed about $32.5 million. The state and county have put about $30 million into it, Brennan said.
But lowering the tax rate at one of the five casino locations could lead operators of the others to ask for reductions of their own. Schippers, with Penn National, said his group would "certainly support" any effort to slash the "the tax burden on all the casinos given the competitive advantages of the neighboring states with lower tax rates."
In part to head off that argument, the House is considering creating a gambling permit just for Rocky Gap — a "boutique resort license," for casinos with a limited number of slot machines.
The new category would set Rocky Gap apart from the "more monstrous locations" such as Baltimore, said former House Speaker Casper R. Taylor, who now is lobbying on behalf of the bondholders.
"It is very questionable as to how many more months Rocky Gap is going to be able to operate," Taylor said. His clients are "very eager" to rid themselves of the project.
Rocky Gap proposals
In the hope of drawing bidders for the slots license at Rocky Gap, the Senate has passed legislation that would:
•Reduce the state's take of gambling revenues from 67 percent to 50 percent for the first 10 years of the slots license
Cut at least $3 million from the fee to bid on the project
Allow the operator of another casino in Maryland to also run a casino at Rocky Gap
The House of Delegates has yet to act.