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An artist rendering of a proposed casino for Block E in downtown Minneapolis.

Courtesy, Courtesy of Gensler, Los Angeles

Block E casino developers face tough odds

  • Article by: JENNIFER BJORHUS
  • Star Tribune
  • May 15, 2011 - 8:51 AM

Walking the packed halls at the State Capitol, the developers pushing the Block E casino plan scan their iPhone and BlackBerry for e-mails and tweets, then survey the crowd for the next chance to sell a little Las Vegas in downtown Minneapolis.

The regular session ends in eight days; Bob Lux and Philip Jaffe don't have a second to lose.

Their $200 million-plus Bellagio-style casino could generate more than $100 million a year for state coffers, they argue, but it's a tough sell for a state where Indian casinos rule. And it won't be at the top of any lawmaker's list, already filled with a $5 billion deficit and a stadium proposal for the Vikings.

The bill lacks support from some local players, including Sen. Linda Higgins and Rep. Frank Hornstein -- Democrats from Minneapolis -- who just don't want more gambling, partly because they believe the social costs are just too high. Mayor R.T. Rybak also opposes expanding gambling, while the City Council is mixed. There are significant blocs of Republicans and Democrats at the Capitol who say they don't want to expand gambling, either.

Rep. Joe Hoppe, chairman of the House Commerce Committee, where the bill is sitting with no hearing planned, called the push for the casino project "an uphill battle."

Given the odds, many players would have folded.

But Jaffe and Lux, principals of Minneapolis-based Alatus LLC, are determined. Unafraid to hustle a big idea, their team is passing out brochures and dipping into side rooms for quick meetings with lawmakers. It's the benefit of jobs, Lux said, "that's probably resonating the most."

They're working hard to portray the casino as a jobs machine that will deliver the kind of large-scale economic medicine downtown Minneapolis needs, with up to 2,800 direct jobs and $125 million a year for the state in gaming taxes, according to their projections.

They're motivated. The men have a moribund mall on their hands. Block E on Hennepin Avenue might need a wholesale transformation to make their investment pay off big, even with the bargain basement price of $14 million they paid last summer, plus nearly $30 million in tax increment finance repayments. If the bill passes but another company scores the contract with the state to develop and operate the casino, they'll probably charge rent.

More than that, they're convinced of their business proposition: Minneapolis is overripe for its own casino.

Even though the state has 18 casinos, all owned by Indian tribes, the demand is here, they insist.

The casino market researchers Alatus hired, the Innovation Group, won't release its feasibility study. But in an interview, Innovation executive Michael Soll said they studied 18 cities around the country and Minneapolis was second to last in terms of casino supply.

It calculated the number of adults in a 50-mile radius per available gaming position -- a slot machine or chair at a card table. Saturated markets have about 100 adults per position. Albuquerque, with 56 adults per position, was over-saturated. Minneapolis has 431 adults per spot, second only to Louisville, Ky., with 457. Detroit, with three downtown casinos: 307.

"It's a constrained market and a very big city," Soll said of Minneapolis.

Ka-ching

Richard Schuetz, a former gaming industry executive and consultant in Las Vegas, agreed: "There's room in Minneapolis, it's just a no-brainer."

Not everyone agrees. Bill Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at University of Nevada, Reno questioned the traffic estimates of 5.6 million visitors a year, saying much of that would simply be pulling from existing casinos.

"One of the big questions in a place like Minneapolis is are you really going to grow the market?" Eadington asked.

Soll wouldn't discuss the specific age and income level of their target audience, only that they're relatively well-off and younger -- although not much -- than the 50-plus crowd that dominates the suburban casino scene. They're aiming for 55 percent of those gambling downtown to be less than 50 years old. "People who actually get a date night once in a while," Soll said.

And yes, some of that traffic will clearly come at the expense of nearby tribal casinos, he said, but "they should not cause tremendous job loss at the casinos."

In the most direct line of fire: Grand Casino Hinckley, about 80 miles north; Treasure Island Casino, 45 miles away in Prairie Island near Red Wing; and Mystic Lake Casino in Prior Lake, about 30 miles south and one of the state's most popular gambling spots.

"This proposal is aimed at Mystic Lake," said William Thompson, gaming expert at the University of Nevada, Las Vegas.

Indian gaming has turned the Shakopee Mdewakanton Dakota Community, Mystic Lake's owners, from a destitute tribe where people lined up for commodity cheese into a regional powerhouse -- rich enough to become a source of financing for other tribes. Last year alone, according to the tribe's annual report, it made $61 million in economic development loans to six other tribes and gave away another $29 million for projects as varied as grocery stores on reservations and the new polar bear exhibit at St. Paul's Como Park Zoo.

The tribe wouldn't discuss Mystic's operations, and would only say they view the proposed Block E casino as a threat like the other gambling expansion proposals at the Capitol, such as allowing slot machines at Canterbury Park.

"They're all threats in different ways," said Willie Hardacker, the tribe's staff legal counsel.

Hardacker said he couldn't predict the tribe's legal response should the casino bill pass. John McCarthy, however, executive director of the Minnesota Indian Gaming Association, was clear the state's tribes would take legal action on grounds that the casino violates the state's constitution. The constitution says that the Legislature shall not authorize any lottery except for one operated by the state.

The issue is whether lottery means casino, said Dale McDonnell, general counsel for the State Lottery. McDonnell noted that Kansas has a similar constitution and its Supreme Court blessed its casinos as lotteries lawfully operated by the state.

The compacts the tribes negotiated with the state more than two decades ago, back when the goal was fostering economic development for the tribes, allow them to run casinos, tax-free, with no expiration. Expanded competition would cut to the heart of tribal governments across the state, Hardacker and McCarthy said. If they lose money, tribes will have to cut back on essential services.

"We do not view tribal casinos as businesses," Hardacker said. "They are government-run enterprises that supply the revenue for government run programs."

Making the pitch

For now, Lux and Jaffe are focused on the game at hand: getting a bill passed.

They face some tough opposition from lawmakers who don't like gambling. Up to half the total revenue at casinos comes from problem and pathological gamblers, according to gambling expert and economist Earl Grinols at Baylor University in Texas. Grinols figures that for every $46 of economic benefit from casino gambling, there's up to $289 in social costs.

"I just can't see it as economic development," Sen. Linda Higgins said. "With gambling comes a lot of problems. I don't want my downtown to be filled with pawn shops."

Republican lawmakers from outside Minneapolis -- Rep. John Kriesel, a freshman legislator from Cottage Grove, and Sen. Doug Magnus, assistant majority leader from southwest Minnesota -- are carrying the bills in the Legislature. As of Saturday, only the House bill has been introduced. It's sitting in the House Commerce committee, where it hasn't been scheduled for a hearing.

Rep. Tom Anzelc, an Iron Range Democrat and member of the House Commerce Committee, said the hospitality union UNITE HERE lobbied him. They made a good pitch, but he's undecided.

"Everybody here at the Capitol realizes that the ultimate solution to our budget dilemma is more jobs, more taxpayers, more economic activity," he said. But the omnibus tax bill would take $60 million out of the Taconite Economic Protection Fund to help close the deficit, Anzelc said, adding that his constituents are getting robbed.

"Now I'm being asked to create jobs in Minneapolis. That troubles me," he said.

So, what happens to Block E if the bill doesn't pass?

Lux is circumspect. They'll roll the dice on Plan B, he said. He wouldn't say what Plan B is and whether it involves Wal-Mart, which has been sniffing out spots for an urban-format store in downtown Minneapolis. Clearly something is in the works as Alatus has been clearing tenants out of Block E.

"We've got some ideas on it," Lux said by phone from the Capitol. "It doesn't do for the block or the neighborhood what putting a gaming operation in there would, driving all these people."

Jennifer Bjorhus • 612-673-4683

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