Industry split over Lanni tax, room-building proposals

Analysts and industry officials are split over two controversial proposals made at Preview '99 Thursday by MGM Grand Chairman J. Terrence Lanni.

Lanni called for a moratorium of sorts on new Las Vegas hotel construction, suggesting that developers be required to retire rooms from existing inventory before building new rooms. For example, if Mirage Resorts wanted to build a 3,000-room resort, it would first have to find 3,000 existing rooms to "retire" from the existing room inventory.

Lanni also called for the extension of the gaming privilege tax to gaming machine manufacturers, distributors and slot route operators.

The room moratorium proposal seemed to elicit the most excitement from Wall Street analysts, who are more familiar with the room inventory issue than with the privilege gaming tax.

"That's the smartest thing I've heard somebody say in Las Vegas in the last 10 years," said Bear, Stearns analyst Jason Ader.

"I think that it's reasonable," said Andrew Zarnett, analyst at Ladenberg Thalmann. "Effectively, it would take some of the older supply out of the market, and replace it with new supply."

Many observers are concerned that increases in Las Vegas visitor volume are not keeping pace with increases in the supply of hotel rooms. Including last October's opening of the Bellagio hotel-casino, more than 20,000 new rooms will be added to the Las Vegas market by the end of 2000. But not all analysts favor the room moratorium proposal.

"While it's an interesting proposal, it's not workable," said Bruce Turner, analyst with Salomon Smith Barney.

Gaming industry officials also expressed reservations about the plan.

"It's un-American," said David Atwell, a real estate broker with Resort Properties of America who has represented Grand Casinos' attempt to sell a Strip parcel and represented the Debbie Reynolds hotel-casino in its search for a buyer. "You're going to tell somebody they can't build a hotel? ... They're trying to limit the competition, and they're trying to ensure their survival."

"This state, and this community, has been served extremely well by letting the market forces take care of themselves," said Mirage Resorts spokesman Alan Feldman.

When government tries to tinker with growth, it sometimes forces unintended consequences, said Feldman. Mirage owns several Strip parcels it hopes to someday develop into resort casinos.

Concerns about government involvement in a free market weighed heavily in the comments of room moratorium opponents.

"Those are not issues the government should have a darned thing to do with," said Turner. "The state never guaranteed profitability for everyone."

Atwell said the plan was simply unfair.

"In other words, 'We can play but nobody else can play,"' said Atwell.

But supporters said a moratorium could help all players -- big and small; here or not.

"Ultimately, what he's (proposing) is bringing closure to the cycle of an obsolete product," said David Wolfe, analyst at CIBC Oppenheimer. "What his proposal would do, to me, is create a much more efficient market."

"A moratorium at least controls the process," said Ader. "Right now, there's just too much supply."

Such a moratorium would lead to a sudden increase in the value of obsolete properties, said Ader and Wolfe. And it would create a mechanism to more quickly remove older properties from the market, an argument Zarnett endorsed.

"You can buy a crummy hotel out of bankruptcy for a very small amount of money and level it and build your rooms somewhere else," said Zarnett. "Eventually, their properties end up like the Landmark, rubble on the Strip."

But Turner questioned the logistics of a moratorium plan, noting that owners of undeveloped, unapproved property would fight it tooth and nail.

"You would have to grandfather everybody in," said Turner.

One consequence of such a proposal is clear, said Ader. If approved, it would certainly boost gaming stocks.

Analysts were also supportive of Lanni's call to extend the gaming privilege tax to gaming machine makers, distributors and slot route operators. Clark County casinos now pay a privilege tax of 6.8 percent on gaming win. Slot route operators, on the other hand, pay flat fees of about $550 a year per machine.

While many slot route operators are privately held, and do not disclose their machine win, some indication of the way a privilege tax would affect route operators can be gleaned from the financial statements of a publicly-held slot route operator, Alliance Gaming.

In the year that ended June 30, 1998, Alliance generated an average daily win of $53.70 from each of its 6,460 route machines in Nevada. That translates to $19,600.50 per machine per year. A 6.8 percent tax would cost Alliance $1,333 per machine on its Clark County route operations each year, compared to $550 now.

Lanni said extending the tax to slot route operators makes more sense than raising the tax for casinos, a proposal under consideration given the state's budget problems. Several industry observers agreed.

"There is some logic to that argument," said Wolfe.

"They're certainly benefiting from their participation in gaming, and not paying for their share (of community services)," said Feldman.

But the route operators themselves, not surprisingly, see such an extension as unnecessary.

"We're benefitting, however we pay a fee," said Sean Higgins, president of the Nevada Retail Gaming Association, the slot route trade association. "Fees can be paid in lieu of taxes."

The slot route flat fee has been increased twice in the last 10 years, said Higgins.

Whatever the merits of the proposal, the Legislature will most likely look at it, said Higgins.

A spokesman for International Game Technology, the Reno company that makes most of the state's gaming machines, declined to comment until IGT has studied Lanni's proposal more closely.

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