A Sample Case Study of Math for a Casino Business Proposal

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Toronto Skyline from Billy Bishop Airport : image by beachdigital (George Socka)

Toronto Skyline from Billy Bishop Airport : Image by beachdigital (George Socka)

What do we really need math for anyway, right? Well, just about everything. For example, basic mathematics can help analyze business project proposals, such as the correct hosting fee when building a casino. For a real-life case study, let’s examine the current proposal for a casino in the city of Toronto, Ontario, Canada.

Casino in Toronto: Setting the Stage

The Ontario Lottery and Gaming Corporation (OLG) proposes and licenses all casinos and gambling in Canada’s province of Ontario. The province also requires a public consultation before a new gaming facility or casino can be licensed in any municipality.

The OLG‘s 2012 proposal for a new gambling facility in Toronto would be the first casino in that city. Although the Woodbine Racetrack already has slot machines, the OLG would prefer to locate downtown, quite near Lake Ontario. The existing Woodbine site is several kilometres north from the lake. Other cities just outside Toronto, but OLG would consider part of the GTA (“Greater Toronto Area”), if Toronto rejects the proposal.

Here, we’re mainly dealing with estimates for the downtown Toronto ‘C1′ area near Lake Ontario, rather than the other potential locations. Specifically, the focus is on “hosting fees” which the OLG pays to every municipality that hosts slot machines. We present all dollar amounts in millions, unless otherwise indicated.

Toronto Casino Proposal: Two Estimates

Slot Machines Primed for Action : image by Lisa Brewster

Slot Machines Primed for Action : Image by Lisa Brewster

The City of Toronto engaged Ernst & Young, a consulting firm, to review and summarize the OLG proposal for the Toronto casino. The official City of Toronto web page about the proposed casino includes a Toronto City Wide Analysis. (See reference #1). The full presentation covers several pages of this website, with a link to the full Ernst & Young report. (See reference #2).

The OLG prefers an Integrated Entertainment Complex (IEC), including hotel and live theatre facilities, to a Stand-Alone Casino (SAC) featuring gaming tables and slot machines. The background material discusses both options.

The Toronto City Wide Analysis states the following in the “Financial/Revenues” section, for Toronto’s lakeside C1 area. One presumes that the variance depends on whether the SAC or IEC project goes forward.

  • Hosting fees have two estimates: $68-168 (million, by Ernst & Young) or $50-100 (by the OLG).
  • Property taxes also have two values: $10-27 by Ernst & Young; or “Not Applicable” by the OLG.

This page also states that “The City and OLG are concentrating their discussions on an appropriate funding model” for the hosting fee.

We will pursue the reason for the significantly different estimates for the hosting fee by Ernst & Young versus the OLG. (Although the discrepancy in estimating property taxes is important to Toronto, it seems to be a local political issue rather than mathematical. A complete business case for the city obviously should pursue this matter further).

Hosting Fee: Guidance from the Ernst and Young Report

Let’s turn to the full Ernst & Young report, but start with Appendix J. This table presents several alternatives.

  • A “50-50 partnership” would lead to the $168 million hosting fee for an ICE. A full business case study would investigate whether this is indeed a viable option that all parties might support. (This article, however, discounts this option as unlikely).
  • The “4%” rate leads to the $50-56 hosting fee, which represents the average historic rate. Now we have accounted for the discrepancy in the Toronto city’s summary.

The “new OLG formula” drops the hosting fee to $17-18 million. Strangely, this was not reported on the City of Toronto page, was it?

Keen readers should refer to several other sections of this report.

  • Section 4.2.6 implies each slot machine at Woodbine generated $177-220,000/year (under a quarter-million). This is lower than expected for a downtown casino but above the provincial average.
  • Section 4.2.7 projects the current hosting fee at 4% since the new hosting fee structure is not approved.
  • Section 5.1 discloses the new but not-yet-adopted “hosting fee structure” included in the spreadsheet below. Ernst & Young presents a table showing the effect of the new formula, which would pay Toronto about $18 million in annual hosting fees.
  • Appendix F estimates each slot machine in an IEC would generate $230,000, or almost one-quarter of a million dollars, of revenue per year. That’s slightly lower than the article’s estimate of $278,000 required to meet the hosting fee target at the old 4% rate.
  • The report often estimates gaming revenue as $1.4 billion/year, which probably includes gaming table revenue. Greater clarity would be helpful to analyze the business proposal.

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