Station offered best deal for San Francisco-area casino

By Liz Benston

Friday, May 9, 2003 | 11:16 a.m.

When an Indian tribe near San Francisco decided this year to build a casino, it bypassed suitors at some of the nation's largest casino companies to select Station Casinos Inc. for the job.

Gaming giants are pursuing contracts with tribes to expand their nationwide reach at a time when few states are likely to legalize non-tribal gambling. While Station Casinos has eyed other states for development, the company -- estimated to control roughly 40 percent of the Las Vegas locals' gambling market -- has had the most success sticking close to home.

That's precisely what appealed to the tribes, Station executives told investors last week.

"Station Casinos is the one that pioneered the regional entertainment destination for the frequent repeat visitors, who are typically the locals that live within that general area," Station Casinos Chief Executive Frank Fertitta III said during the company's first quarter conference call. "We have the product to show them here in Las Vegas. We have the track record, we have the operating margins."

One-on-one relationships with tribal members also sparked the deal, executives said.

"I myself was involved in meeting with people from the tribe and walking them through what our philosophies are, what are our core values, how do we design and develop a property," Fertitta said. "They're going to be working directly with me on designing and developing and operating the project. They're not getting someone else further down within the organization. They're meeting with myself and (Station Casinos President) Lorenzo (Fertitta) in a personal, hands-on relationship."

The casino business is an insular world where personal relationships can make or break an agreement. Tribes often require a level of trust and communication that can be lacking in traditional business deals, executives say.

Graton's tribal Chairman Greg Sarris confirmed that the tribe had access to top executives during the negotiations.

"We were very impressed with the respect they showed the tribe and willingness to work with the tribe," he said. "Station was particularly sensitive to the tribe's stated priority of working with the community."

Financial factors also gave Station a leg up over competitors, Sarris said.

Station casinos will receive a management fee equal to 22 percent of pre-tax earnings -- a smaller percentage than some stated contracts between corporate managers and Indian tribes, tribal representatives say. Station's deal with the United Auburn Indian Community to manage the Thunder Valley Casino near Sacramento calls for a 24 percent fee. Both deals call for an additional development fee of 2 percent of project costs.

"At the end of the day, the tribe selected Station because of Station's hard work, commitment to working with the tribe and the fact that the tribe was able to negotiate a fair deal," Sarris said. Other companies approached the tribe, he said, declining to reveal their names.

The fee arrangement will leave more money for the tribe to contribute to county services including education, public safety and health care, he said.

Station Casinos had no pre-existing relationship with the tribe or tribal advisers when it approached the group about developing the casino, according to company and tribal officials.

Station Casinos is the third major Las Vegas company to launch a casino for a California tribe. Station expects to open the Thunder Valley Casino by June 26. The property will initially feature about 1,900 slot machines and, before the end of the year, a private gaming area, restaurants and a buffet.

Harrah's Entertainment opened the Harrah's Rincon Casino and Resort for the Rincon San Luiseno Band of Mission Indians in San Diego last year. Anchor Gaming Inc., since acquired by slot maker International Game Technology, opened the Pala Casino for the Pala Band of Mission Indians in 2001.

Station executives said last week the Auburn and Graton proposals represent "probably the best locations in the entire state of California" and will help the company seek future agreements with tribes nationwide.

"We're not out there just trying to go after any Native American deal no matter where it's located," Fertitta said. "We want great locations where we can build regional entertainment destinations with big populations, good ingress and egrees off major interstates and roadways."

Some analysts have questioned Station Casinos' ability to overcome several hurdles that could trip up development.

The tribe doesn't yet have a gaming compact with the state and would also require the federal government to place land into trust for the casino. The casino also faces local opposition from Sonoma County's Board of Supervisors.

"As with any proposed large casino property near a major metro area where reservation land does not already exist, we would expect significant push back from local residents and possibly lawsuits," Merrill Lynch analyst David Anders said in a research note to investors last week. "In addition, the process of having land taken into trust is generally a long one, making near-term cash flow from the project unlikely."

Station executives dismissed some of those concerns last week.

"We wouldn't pursue this opportunity if we didn't think it was as good or better ... or easier to get accomplished than the Auburn deal was," Fertitta said. "With us, it's not a matter of if this opportunity is going to happen. it's a matter of when it's going to happen."

Meanwhile, the timing for a compact is opportune because Gov. Gray Davis is now in the process of renegotiating some of the aspects of original agreements struck with tribes three years ago, Station Casinos Chief Legal Officer Scott Nielson said.

"I think that the mindset and the people are in place to be able to negotiate a compact," he said.

The federal government created the rancheria on about 15 acres of land in Sonoma County in the early part of the century but it was dismantled in the 1950s when the government sold the land.

In 2000, the government restored the tribe's sovereign status and pledged to put land into trust for development -- land the tribe says it has traced to its ancestors. The tribe then opposed gaming but changed its mind after a study last year showed that casinos offered the best economic engines available.

The Graton casino faces opposition from local leaders and environmentalists who say the project threatens a sensitive ecosystem that touches the San Francisco Bay. A casino at the county's southern gateway to the county, they say, also would create an unfavorable image in a region known for its largely rural landscape and picturesque wineries.

"If they put this land into trust and move forward to get this compact with the Governor, they would be doing something that nobody else would be allowed to do," County Supervisor Mike Kerns said. "The people of Sonoma County should have a say as to what this county should look like. They should have the right to preserve their agricultural and open space."

Kerns said he is not morally opposed to casinos.

"I'm not against tribes doing economic development that will benefit their members," he said. "I'm concerned about developers using tribes to come in and circumvent local laws and environmental laws ... that are more stringent than the federal government's."

Sarris has sent letters to Gov. Gray Davis and local politicians expressing a desire to cooperate with government. The tribe says it will organize an inter-governmental task force and contribute funds to help the surrounding community pay for the infrastructure the casino will need to function.

Station Casinos is betting that the project's proximity to San Francisco and the region's upscale demographics will eventually reap bigger profits than Thunder Valley. Station is expected to generate $50 million per year from the $215 million casino near Sacramento. Both Auburn and Graton are seven year contracts, the maximum allowed by federal law.

Twice the number of adults live within a 50 mile radius of the site than in the vicinity of Thunder Valley, which is about 30 miles northeast of Sacramento on Interstate 80.

The Graton casino would be the closest casino to San Francisco. It is proposed about 50 miles northeast of the city near Infineon Raceway, formerly known as Sears Point Raceway. Station has a $24 million option to buy the land for the casino. Once a purchase is complete, the casino would be transferred to the tribe and Station would develop and manage the property.

After Thunder Valley, Station Casinos expects to break ground on its next project, Red Rock Station in Summerlin, by mid-2004.

Station predicts Red Rock Station will surpass the performance of Green Valley Ranch Station Casino in Henderson, the company's newest, most expensive and luxurious casino.

The success of Green Valley Ranch "gives us a significant amount of confidence" in Red Rock Station because Summerlin "is a significantly better location in terms of the overall population demographics," Fertitta said.

Green Valley Ranch Station Casino is half owned by the Greenspun family, which owns the Las Vegas Sun.