By Dave DeWitte

CEDAR RAPIDS – Despite an impressive campaign for a state casino license, Cedar Rapids may still need Lady Luck on its side when the Iowa Racing and Gaming Commission decides the fate of its gaming license application at its meeting Thursday in Council Bluffs.

Three years of effort have gone into the campaign headed by the locally-based Cedar Rapids Development Group to add Cedar Rapids, the state’s second largest city, to the list of 18 Iowa communities that already have casinos. It’s brought together some of the city’s most respected business owners and leaders as investors, a experienced management team formerly associated with Peninsula Gaming and has attracted strong support from Linn County voters and elected officials.

The $164 million project would be a concept unique to Iowa – an “urban casino” with no golf course, hotel or other destination amenities. The design is intended to complement the city’s new DoubleTree by Hilton Cedar Rapids Convention Complex two blocks away, and help attract redevelopment to an area recovering from the massive 2008 Cedar River flood.

It is also designed to help overcome a potential challenge that’s been looming since the idea’s inception.

That stumbling block is the perception, borne out in two market studies commissioned by the Iowa Racing and Gaming Commission, that there’s little room in an increasingly mature and slow-growing Iowa gaming market for another casino without taking business away from other casinos.

The Cedar Rapids project, known as Cedar Crossing, is one of two the commission will consider. The other, proposed by Wild Rose Entertainment for Jefferson, is a smaller, $40 million project further from competing casinos.

Lead investor Steve Gray, the chairman and founder of Gray Venture Partners, has been aware of the issue since day one. He has a litany of concerns about the validity of the market impact studies, but feels the debate over market studies ignores a larger issue.

Since its earliest days, Mr. Gray says, Iowa’s casino industry has only seen growth surge when it added new casinos. And Iowa’s second largest city, Cedar Rapids, is its largest without a casino.

Cedar Crossing would bring 1,100 gaming positions, the industry term for slot machines and seats at gaming tables, to an industry with 21,500 positions already, Mr. Gray said.

“It’s hard for me to believe that adding 5 percent is going to overly saturate, when it’s the second largest city in the state and is a unique, high-end product casino,” he said.

Operators of the Riverside Casino and Golf Resort in Washington County and the Isle of Capri Casino and Hotel in Waterloo, and the community foundations that hold their licenses, disagree heartily.

“In laymen’s terms, the pie is not getting larger,” said Tim Hurley, chairman of the Black Hawk County Gaming Association and former Waterloo mayor. “It’s the same size, or a shrinking, pie. The Cedar Rapids casino would mean everyone would get a smaller slice.”

Mr. Hurley says that total attendance and revenue at Iowa’s existing casinos have been in year-over-year decline for 14 straight months, suggesting a prolonged downtrend likely to continue. He notes that Internet gaming is a growing competitive threat, and Illinois has approved plans to bring slot machines to thousands of taverns and truck stops.

The Isle of Capri Casino and Hotel would lose $11-$12 million of its annual gaming revenue, or more than 12 percent of its total, to Cedar Crossing if the studies are right, Mr. Hurley said.

“You don’t take that kind of impact and not look at hiring, hours, layoffs…you’d take a good look at capital improvements. It’s just a big hit.”

The Black Hawk County Gaming Association awards grants to community organizations in seven counties from the 5.75 percent share of gaming proceeds it receives from the casino under its licensing agreement.

The community contribution that the gaming association receives from the Isle Casino typically allows it to make $4.2-$4.5 million annually in grants that often serve as tax replacement and seed money for community projects. They have made big community projects possible through efforts like an eight-year, $8-million commitment to the new Cedar Valley SportsPlex.

If the projections hold true, that funding stream would shrink by $500,000 to $600,000 annually, Mr. Hurley said, potentially forcing the association to evaluate reducing its maximum grant award, shifting to an annual application cycle from its quarterly cycle and avoiding long multi-year commitments.

Mr. Hurley is quick to acknowledge that the Riverside Casino and Golf Resort would absorb a considerably larger impact. Dan Kehl, chief executive officer of Riverside, is arguably the most outspoken opponent of the Cedar Rapids license. He points to the commission’s market studies estimating that Riverside would lose 29-42 percent of its gaming revenue, and its own market studies suggesting a 31 percent revenue loss in a licensed Cedar Crossing scenario.

“We have developed contingency plans that include budget cuts and staff reductions,” Mr. Kehl wrote in response to an e-mail inquiry. ”We will assess whether it is possible to keep open the spa and the golf course, but it is likely both may close.”

Riverside pays between 4.5 and 5 percent of its revenue, or nearly $4 million last year, to the Washington County Riverboat Foundation for community projects. That would drop by about $1.3 million, or one-third, Mr. Kehl said.

The argument about community impacts has been as hotly debated before the commission as that of job losses or any other. Mr. Gray says the Black Hawk and Washington county foundations supported by Riverside and the Isle have not helped Linn County, even though both casinos have acknowledged Linn County is an important market for them.

Mr. Hurley counters those arguments by pointing to the history of the Isle’s licensing. He said the foundation committed to supporting projects in all the surrounding counties that supported it when it originally applied for licensing, but Linn County, which had its own proposal for a casino at the time, did not support Black Hawk County.

The studies performed for the state gaming commission by Marquette Advisors of Minneapolis and Union Gaming Analytics of Las Vegas provided powerful ammunition for Cedar Crossing opponents, partly because they were hired as independent analysts by the state, and because they reached very similar conclusions. They found significantly higher revenue losses to existing casinos than a study commissioned by Cedar Rapids Development Group.

Mr. Gray’s primary argument with the findings is that they were based on how the new market entry would further divide up an existing base of customers who gamble, and did not project that the availability of Cedar Crossing would add gamblers to the market. He said the past market studies have tended to overestimate market impact.

“We’ve heard from so many people, who say, “I don’t want to drive to Riverside, or Waterloo or Tama, but I would drive to a casino in Cedar Rapids,” Mr. Gray said.

That market saturation is the primary objection of Cedar Crossing’s opponents could be viewed as a tribute to the organizing abilities of Mr. Gray and Drew Skogman, the promoters.

After being asked by Cedar Rapids City Council members to organize the project, Mr. Gray said the promoters contacted operators of the surrounding casinos to see if they were interested in partnering.

With no interest, the promoters brought together some 200 local investors, enough to commit $47.4 million in equity. They include many successful and respected business owners and professionals, lending credibility to the project.

As Mr. Gray analyzes Cedar Crossing’s licensing prospects, he points out that economics is only one of five major licensing criteria the commission must consider by statute, and that market impact resides among 13 separate sub-criteria of the economics category. State statute sets no standards for how much is too much when it comes to taking share from another casino, Mr. Gray said, leaving it up to commission members to decide what level of impact on other casinos is acceptable.

The other criteria include regulatory compliance, integrity, efficient and safe operations, and community support, all of which Mr. Gray feels Cedar Crossing comfortably satisfies.

About 37,000 Linn County residents, nearly 62 percent of those who voted in the March 2013 casino gaming referendum in Linn County, supported it, Mr. Gray notes, and approximately 1,000 local residents turned out during a weekday to show support for the casino before a hearing of the Cedar Rapids Racing and Gaming Commission in Cedar Rapids on April 3.

Cedar Crossing supporters have tried to get a stronger message for their project heard through the voices crying out about market saturation. That message is the synergy Cedar Crossing would create for development in the Kingston Village area on the west side of downtown Cedar Rapids, where buildings damaged in the 2008 flood were still being torn down last week.

With demolitions and vacancies, about 2.5 million square feet of space is available for development within a mile radius of the casino site, Mr. Gray said. The casino would help draw conventions and tourists to the new DoubleTree. With the visitors, workers and energy of the new casino, that could bring hundreds of millions of dollars of new development to the area in the next 20-30 years, he said.

That additional investment would help the city overcome the U.S. Army Corps of Engineers’ chief objection to federal funding for flood control on the west side of the Cedar River, Mr. Gray added. That objection hinges on studies showing an insufficient valuation of property to protect relative to the cost of flood protection.

Mr. Gray sees that adding to annual community contributions from the local foundation that would hold its license, an initial $20 million licensing fee to the state, 486 new jobs and $26 million or more in new tax revenues.

Supporters of existing casinos are not as swayed by the Cedar Rapids flood recovery story, and they hope the Iowa Racing and Gaming Commission is not either.

Mr. Hurley feels that Cedar Rapids has told the commission a compelling story, summarizing it as, “It’s our time. We deserve it, and flood-flood-flood.” He said flood recovery makes Cedar Rapids’ story stronger, but is not a factor the commission is bound by statute to consider.

“I’m pretty satisfied that the Governor and the Legislature have stayed out of it,” Mr. Hurley said. “It’s terribly hard to read anything into what the Racing and Gaming Commission members have said. They’re very stoic.”

Mr. Hurley estimates the odds Cedar Crossing will be licensed at 50-50. He feels reasonably confident that a rational objective analysis that incorporates the input of the commission’s two market studies would lead to rejection.

“If they make a decision of the heart, a political decision, then I’m worried,” he added.

Mr. Gray expressed confidence that Cedar Crossing has made its case. He declined to predict the vote outcome, but said he hopes that common sense will guide it.

Cedar Crossing’s business case for the state and for the community is compelling, Mr. Gray said, because Cedar Crossing would provide a healthy net boost to state gaming revenues, leverage investment in Cedar Rapids and improve the availability of gaming in a market with much faster growth than the state average.

“If we’re going to optimize long-term the benefits of gaming to the state, it should include a casino in Cedar Rapids,” he said.

With licensing approval, Mr. Gray said work on the project would begin almost immediately, with a targeted opening in July 2015.