Documents Highlight Financial Details of Country Crossing

Posted on February 8, 2010. Filed under: Uncategorized |

Documents highlight financial details of Country Crossing

By LANCE GRIFFIN
Published: February 3, 2010

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The developer of Country Crossing will receive between 55 and 65 percent of the daily net bingo revenue from the project, according to documents filed in relation to the validation of bonds for the project’s infrastructure.

According to the limited offering memorandum filed in association with the multi-million dollar bond issue validated last year in Houston County Circuit Court, Resorts Development Group, as developer of the project, will receive the amount “for its services and economic risk in the project.”

Resorts Development Group is one of several limited liability companies affiliated with Country Crossing developer Ronnie Gilley.

Gilley said all of the revenue goes toward expenses associated with the project in compliance with the local bingo rules and regulation.

The process
According to the memorandum (which is made available to all potential bond-buyers), this is how the developer’s compensation was determined:

“The Developer, through a wholly-owned special purpose entity, will construct the gaming facility for the nonprofit (Houston Economic Development Association) and will require the nonprofit to pay the standard market rates that are not tied to the nonprofit’s revenues or profits.

“In addition to building the gaming facilities for the nonprofit in accordance with the development agreements with the nonprofit and the Houston County Commission, the Developer will also enter into a Development and Development Licensing Agreement to supply the nonprofit with electronic bingo gaming equipment and related software as well as meet certain development obligations. In particular, the Developer will contract for the requisite equipment and software from an original manufacturer and then sublease and sublicense it to the nonprofit.

“In return, the Developer will be entitled to consideration to compensate it for its services and economic risk in an amount between 55 and 65 percent of the “hold” or “net daily win” (i.e., amounts wagered less amounts paid out in winnings) from nonprofit bingo operations.

Gilley said Wednesday the average hold during the month of December was around $55 per machine. Based on that number and the 1,703 machines at Country Crossing, 60 percent of the net daily win would equal around $20,500,000 annually.

It is expected that number would be less in Country Crossing’s first year because the bingo pavilion has been closed several days and traffic could have been damaged due to the potential for raids. Also, the bingo pavilion is closed on Sunday mornings.

The memorandum further states financial agreements regarding the developer.

“The Developer will contract with a management company to oversee and manage all of the services to be provided in connection with the Developer’s development and licensing operations for a fee equal to 10 percent of all the development’s earnings before interest, depreciation, taxes and amortization from such development and licensing operations. It is possible that any of these development and licensing services to be subcontracted out by the Developer may be provided by the Developer, an affiliate of the Developer, a consultant hired by the Developer or an affiliate of the Developer, or a joint venture entered into by the Developer or an affiliate of the Developer with one or more third parties.”

In addition, the memorandum states that Gilley stands to receive revenue from licensing of the Country Crossing brand.

“The Country Crossing brand will be licensed for use in the naming of the nonprofit’s bingo operations. The license fee will be equal to .7 percent of gross revenues from the nonprofit’s bingo operations.”

The rationale
The agreements rely on a 2008 Attorney General’s opinion that states a private club’s bona fide employees may operate a bingo entertainment center under Amendment 569, the amendment that authorized bingo in Houston County. The opinion also states the club may compensate the developer or its affiliates under a Development and License Agreement or Trademark License Agreement in the form of a percentage of bingo revenue.

Section 1(a)(4) of Amendment 569 appears to bar the compensation of employees for the operation of bingo.
“(4) No nonprofit organization or club shall enter into any contract with any individual, firm, association, or corporation to have the individual or entity operate bingo games or concessions on behalf of the nonprofit organization of club. No nonprofit organization or club may pay consulting fees, any compensation or salary to any individual or entity for any services performed relating to operating or conducting any bingo game,” the amendment states.

However, the Attorney General opinion states that a literal interpretation of the individual section would defeat the purpose of the entire amendment.

“The purpose of Amendment 569 is generally to allow bingo in Houston County. If a nonprofit organization or private club was not able to pay its own employees, the purpose of Amendment 569 would be defeated. A logical interpretation of section 1(a)(4) of Amendment 569, in the context of the entire statutory scheme, is that it prohibits the payment of compensation to or the salary of any individual who is not a bona fide employee of the nonprofit organization or private club. In other words, under this provision a nonprofit organization or private club operating a bingo game could not pay the salary of, or any compensation to, an employee of a separate entity to operate the bingo games.”

Section 1(a)(3) of Amendment 569 states that bingo can only be played on the premises that are owned or leased by the nonprofit organization or club operating the bingo game. If the premises are leased, then the rate or rental can’t be based on a percentage of bingo revenue.

The Attorney General opinion states that other forms of compensation are legal because they are not specifically banned in the amendment itself.

“There is no corresponding provision in Amendment 569 that restricts any other payments from the club from being based upon a percentage of receipts or profits. As long as the club is not paying any consulting fees, compensation, or salary of any individual for the operation of the bingo games, the percentage payment of revenue under the Development and License Agreement and the Trademark License Agreement, to the developer would be permissible.”

Other compensation
According to the memorandum, the former landowner where Country Crossing is now located executed the land deal with a seller-financed transaction.

Landowner Keith Givens received a promissory note for $19.4 million plus a five percent equity interest in the development. The details of the agreement require the promissory note to be repaid within five years.

Some country music artists also have financial stakes in the development.

“It is anticipated that venue-specific endorsers will receive a royalty from the operations of that specific venue while those celebrities and/or artists selected to endorse the entire development may receive an equity interest in the development, which … would only dilute the Developer’s interest in the development.”

The memorandum also states Gilley plans to use his record label, Ronnie Gilley Entertainment, to enter into record deals with current and rising country stars.

Part of the record deal would require concerts and/or appearances at Country Crossing as well as endorsements of the development. As such, Country Crossing would in turn pay Ronnie Gilley Entertainment an unspecified cooperative marketing fee.

“Through this arrangement the development will secure multiple artists to make appearances in some fashion at the development,” the memorandum states.

The developer
Gilley said the agreements provide a greater benefit than communities receive at other bingo establishments in the state because of the overall scope of the development.

“What we have is a developmental licensing agreement for all the circuitry of entertainment that comes through here on a regular basis and will come through here,” Gilley said. “We also have encompassed the leasing agreement for the machines themselves. Instead of the charity purchasing a $15,000 or $25,000 machine, it is encompassed in our leasing agreement, so more money stays here.”

Gilley said the revenue is used to maintain the current development and fund future development of the project, which he said could employ as many as 6,000 in just a few years.

“This is all based on a synergized cost structure,” Gilley said. “It is an accumulation of a multitude of things that serves a greater good than just one thing. This is why this is about more than bingo. The synergized cost structure is we create jobs, we create tax revenue, we create an expansion of trade and commerce.

“I could have accepted an invitation from some of these counties that authorize bingo, thrown up a bingo barn, put 500 or 600 machines in there and put 30 people to work. But here, we have a mechanism in place that is for the greater good.”

Gilley said the development turns out to be a “win-win-win” for the county, the workers and the charities.

“Let’s dispel any innuendo and propaganda that we are exploiting the charitable organization. Our thought process is that this charitable organization will have the greatest impact of any in the state.

“We are taking 100 percent of the risk. The charity takes no risk. They get 100 percent of the net revenue and we are taking ours to allocate it and expand development. Hopefully, if it turns out like I hope it will, we will make a nice profit down the road. We feel like in 3-7 years, our entertainment revenue will far exceed our bingo revenue. But we have to get there first,” Gilley said.

Gilley said the recent Supreme Court decision that defined bingo put Country Crossing’s machines at a competitive disadvantage to the machines currently
used at Indian gaming facilities in Atmore and Wetumpka. He said since bingo sites at Country Crossing, VictoryLand and White Hall have shut down recently, Indian gaming sites were adding makeshift pavilions to accommodate more machines due to increased traffic.

“This task force will not eliminate bingo in Alabama. It will eliminate competition for the Indians. It will not eliminate one single machine. Those machines will be absorbed by the Indian facilities.”

The reaction
Houston County Commission Chairman Mark Culver said he was not aware of the percentage of bingo revenue the developer is set to receive. He said the county was not a party to the agreement that arrived at the developer’s compensation, and added the county’s bingo rules and regulations call for all net revenue to go to charity after expenses.

Rev. Tom Anderson, spokesperson for Concerned Wiregrass Citizens, who oppose electronic bingo in Houston County, said the agreement appears to violate the specifications of Amendment 569.

“As I look at this, my first question to my county commissioners, Ronnie Gilley, and the operators of Country Crossing is, ‘Is this not a great conflict of interest that our elected officials are entering into?’  This does not appear to meet the specifications for charitable bingo as clearly defined in Amendment 569.

“When the Alabama Attorney General came with a new opinion, that changed the whole landscape of charitable bingo into gambling with paid workers and a complete corporation,” Anderson said.

Huntsville attorney Julian Butler, who successfully defended a case brought against Madison County Sheriff Blake Dorning after he shut down a bingo hall in Triana, said provisions in Madison County’s bingo amendment and Houston County’s bingo amendment are similar.

“In Madison County, subcontractor created several LLCs (limited liability companies) that were guaranteed a percentage of the take. When you added all of it up, 90 percent went to the developer. A federal judge directly wrote to that and held that you just can’t do that,” Butler said.

The federal court decision did not, however, render a decision on the legality of the machines themselves. The court did, however, side with the sheriff because the operation of the facility was not done in compliance with the provisions of the Madison County amendment that authorized bingo.

“The Madison County amendment was a 1980 amendment,”  Butler said. “What was intended at that time was to legalize the kind of bingo games you and I had traditionally been familiar with; the fall carnival, the churches on Wednesday night, the Elks clubs and other fraternal organizations, where the members of the organization ran the bingo game for part of one night and the prize was probably a ham, cake or maybe even $100. The idea you would have a casino today with a staff of 400, I do not think was in the contemplation of the Legislature or of the voters when they approved the amendment.”

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