There is a constant struggle in gaming sector debt financing between the borrower’s expectations of reasonable cost of capital and the lender’s return requirements as a factor of perceived risk assessment. This disparity in expectation versus perception, and ultimately reality, is perhaps most greatly evident in greenfield (new construction) finance. Many investors and lenders have internal criteria set by their boards and senior management that do not allow for the consideration of new construction projects, but only second-stage financing and refinancing once a project is cash flowing. So the universe of capital sources willing to bear the construction risk of a new build casino project is fairly small. After the market crises, resulting recession, dislocation and subsequent recovery, those few with an appetite for new construction risk are more cautious and diligent than ever when assessing a potential investment.
As a banker and advisor responsible for bringing these two parties together, I often feel like a marriage counselor trying to assist both sides in reaching an amicable agreement. Truly I understand and sympathize with each respective viewpoint. On one hand, most funds willing to take the construction risk have strict internal criteria that require certain return minimums to compensate for that risk if they are putting their capital to work in the project. Alternatively, the owner/issuer has cash flow constraints with launching a new business and cannot bear exorbitant rates or will be doomed even before opening. If the project is feasible, there usually is a middle ground that can allow for proper returns in exchange for risk and also provide manageable cash flow. However, new construction finance is never inexpensive.
Therefore, if a program is available that can provide extremely low-cost financing into any portion of the new construction capital stack, it is very good news and should be explored. Over the years there have been numerous government programs aimed at spurring economic development and increasing jobs. Some have been more effective than others, and most are susceptible to administrative change and political cycles. In most cases no government program will fund proceeds for the purpose of gaming, but when planning a resort gaming master plan, there are often ancillary integrated projects within the capital needs that are potentially eligible for this type of funding (such as hotels, travel centers, infrastructure services, road improvements, police and fire buildings, welcome centers, tourist attractions, restaurants, etc.)
One of the more robust programs currently available is the U.S. Department of Agriculture (USDA) Rural Development guaranteed loan program. American Indian tribes and rural commercial enterprises are normally eligible for this funding. Although the USDA guaranteed loan programs do not typically provide direct lending to borrowers, by providing eligible projects with a USDA guarantee (up to 90 percent for infrastructure and a range of 70 percent to 80 percent for business and industry), the projects are able to attract commercial banks that would otherwise shy away from new construction. Not only does the USDA guarantee, which technically is perceived as the same as a full faith credit backing from the U.S. government, attract banks that would not otherwise lend, but it also provides for low-risk lending such that the rates and terms are below those otherwise available in the market.
American Indian tribes also have the benefit of being able to access Bureau of Indian Affairs (BIA) guarantees that historically have provided similar benefits. However, in the current state of government affairs, the BIA program is limited, near capacity and not nearly as robust and attractive to lenders as the USDA program. In addition, the BIA guarantees are not currently marketable within the secondary market, which dissuades banks from originating the BIA-guaranteed loans.
Greg O’Donnell is a leading expert with regards to the USDA guaranteed loan programs who has been working with both banks and borrowers for nearly 20 years. He authored a book aimed at educating banks about the USDA guaranteed loan programs titled, “The Best Kept Secret.” O’Donnell finds it hard to believe that more entities do not take advantage of this great opportunity. “Every year allocations go unused, and it appears potential borrowers and banks simply are unaware of the availability of the program and its tremendous benefits,” he said.
The advantage to tribal gaming projects is in marrying the expensive cost of capital on the greenfield casino financing with extremely low-cost, USDA-backed funding for the other amenities that are eligible, so that the ultimate blended rate of capital is manageable.
Some of the types of projects eligible for financing under the business and industry category are:
- Manufacturing Plants
- Investment Properties
- Strip Centers
- Child-Care Facilities
- Franchises
- Travel Centers/Truck Stops
- Juvenile Correction Facilities
- Jails
- Airplanes and Helicopters
- Vending Companies
- Rodeo/Horse Training Facilities
- Rock Quarries
- Lumber Mills
- Mulch Manufacturing
- Coal Mines
- Fruit and Nut Processing
- Convention Centers
- Senior Living Facilities
- Assisted Living Centers
- Multi-Family Housing
- Dental Offices
- Hospitals/Nursing Homes
- Hunting Lodges
- Processing Plants
- Distribution Facilities
- Wholesale Operations
- Hotels and Motels
- Restaurants
- Warehouses
- Tourist and Recreation
- Marina Operations
- Convenience Stores
- Oil Refineries
- Bottled Water Companies
Some of the types of projects eligible for financing under the community facilities category are listed here:
• Community health services, including hospitals, health clinics, assisted living, nursing homes and dialysis centers
• Fire, rescue and public-safety facilities, such as police cars, fire trucks and police stations
• Educational and cultural facilities, such as schools, libraries and student housing
• Transportation facilities, such as airports, street improvements or bus services
• Community support services, such as child or adult day care
• Public buildings and improvements, including community and multipurpose centers
• Infrastructure needs, such as water and power facilities
There are, of course, rules, regulations, limitations and financial requirements typical of government programs, and the application process can be daunting, but well worth the effort.
Many tribal governments do not realize they are eligible for this program as they, like many citizens, have the perception that the USDA serves only ranchers and farmers. However, the USDA’s mission is to increase opportunity and improve the quality of life for all rural Americans.
It is essential to understand that these programs are funded through the banks and not directly with the USDA. While the USDA does in fact provide the guarantee, a bank must be identified to actually fund the loan. O’Donnell points out that sometimes potential borrowers call their local USDA offices directly and determine if they are eligible for the program, but that does not identify the actual funding. The key is finding a bank that is familiar with the programs and then successfully completing the application on behalf of the borrower.
Determining eligibility and structure, completing the application process and finalizing the ensuing negotiations with the banks, as well as identifying the other capital in a project’s overall financial footprint, typically require a team of professionals to complete successfully and seamlessly.
O’Donnell believes that bringing the right people together is all part of the process. In fact to illustrate this, he opens his book with a quote from Richard Branson, the successful entrepreneur and founder of the Virgin Group: “For me, building a business is all about doing something to be proud of, bringing talented people together and doing something that’s going to make a difference to other people’s lives.”
The USDA loan guarantee program can definitely make a difference and should be explored by any tribe seeking financing.
To reach any vendor mentioned in this article, please contact author Valerie Red-Horse.
Valerie Red-Horse is an investment banker and financial advisor to tribal governments in her role as President/Owner of Red-Horse Financial Group Inc., offering securities through Western International Securities Inc., a FINRA and SIPC member firm. Red-Horse Financial Group and Western International Securities Inc. are separate and unrelated companies. Red-Horse can be reached at valerie[at]wisdirect.com.