Is the proposed $600 million Sonoma County casino a financially viable bet? A look at supply and demand

A relatively obscure tribe is trying to enter the Indian casino business in the North Bay, which begs the question: How many are too many gaming facilities in one region?

The Koi Nation earlier this month announced its intention to build a $600 million resort on 68 acres in Windsor that the tribe recently acquired for $12.3 million. This would be about 15 miles from its nearest competitor in Rohnert Park.

“I don’t think (oversaturation) will be an issue in the least. You have so much population up there,” said Anthony Lucas, a professor of casino management at the University of Nevada Las Vegas who has developed award-winning research on the business aspects of the global gaming industry.

Casinos in the North Bay can easily draw from the entire Bay Area, which is home to 7.75 million people in the nine county region.

With the American Gaming Association reporting revenues reaching $34.6 billion in 2019, and annual growth for the nine years prior to the pandemic, the Koi Nation wants to tap into that pot of cash, joining two established tribal casinos in Sonoma County and several in neighboring Lake and Mendocino counties.

Koi Nation is also not worried about cannibalizing the market.

“The Shiloh Resort & Casino is going to offer a different experience to customers, from the design of the facility to its integration with the natural environment, from an entirely non-smoking campus to the combination of dining, entertainment, gaming, and proximity to the Sonoma County wine country,” Darin Beltran, chair of Koi Nation, told the Business Journal. “That’s a combination we believe would be appealing to a very wide range of customers, including first-time casino customers looking for a unique experience in a unique location as well as people who enjoy gaming and are looking for a different experience.”

However, Graton Resort and Casino in Rohnert Park, which opened in 2013, is not welcoming a competitor just up the road on Highway 101. The Federated Indians of Graton Rancheria’s contention is the Koi have no ancestral connections to the land they want to develop.

Proving they have a right to the land is one of the federal hurdles the Koi will have to overcome before the first shovel of dirt is overturned.

“The Koi Nation’s attempt to push through a proposal to jump into other tribes’ territory is wrong. Moreover, this is not the Koi Nation’s first attempt at reservation shopping,” Greg Sarris, chairman of the Federated Indians of Graton Rancheria, said in a statement. “The consensus among ethnohistorians is that the Koi Nation’s ancestral roots are in the Lower Lake area of Lake County. This attempt by the Koi Nation to manufacture a connection to Sonoma County is an affront to Sonoma County tribes such as our own, who have an extensively documented presence here.”

Taxes, fees and compensation agreements

Tribal casinos are a mixed blessing for any jurisdiction in the United States. They bring more jobs, but employees don’t pay state income tax.

They offer more things to do, but it’s not necessarily the type of business local officials would have tried to lure or something tourism bureaus want to promote.

Tourism officials in Sonoma County know all about Indian gaming. In addition to Graton, there is River Rock Casino in Geyserville, which will be celebrating its 20th anniversary next year.

“Of all the motivations for people to come to the North Bay and Wine Country, or Sonoma County, casinos are not a major motivating factor for that visit,” Tim Zahner, executive director of the Sonoma Valley Visitors Bureau, told the Business Journal. “Casinos kind of rank up there with golf and other activities that people can do while they're here. That's not to say that casinos aren't a driver for some visitors, and especially day-trippers who come up just for the day, go to the casino and go back. There are a fair amount of people that do that from the Bay Area and Sacramento area. But for overnight visitors looking for a casino experience, it’s just too easy to get to Las Vegas or Reno. So we're not the draw for that kind of experience at all. Our visitors ask us about cannabis more than they ask about casinos.”

Koi Nation plans to build a 200-room hotel; the same number of rooms Graton has. Transient occupancy tax, or the hotel tax assessed on all room nights, is not collected at Indian properties. That can be a lot of money not coming into local coffers.

Sonoma County’s TOT rate is 12%, with an additional 2% accessed in the seven cities that have approved the Business Improvement Area. These two taxes pay for tourism promotion in the county.

“A place like Graton where they don't pay into the BIA — I don't think they even pay TOT because it's on sovereign Indian land — we're not going to promote them as an overnight destination,” said Claudia Vecchio, president and CEO of Sonoma County Tourism. “And it's true that casinos are not really our brand, but it is certainly a draw. And so inasmuch as we can help create a longer, broader stay from those people who are coming up to a nearby casino, we would actively do that.”

Graton does pay the county $700,000 annually in lieu of TOT. If the number of hotel rooms increases beyond 200, this fee would increase. Vecchio said no funds from Graton go to her organization.

“While the county uses a portion of transient occupancy tax to help fund Sonoma County Tourism, this is not the primary use of the tax, and the county is under no obligation to do so,” said Marissa Montenegro, the county’s intergovernmental and legislative affairs coordinator. “TOT is a general tax and is available for general government purposes. Under the agreement (with Graton), there is no specified use in lieu TOT, allowing the county discretion to utilize the funding.”

She added, “Tribes are sovereign and as such generally do not pay state or local taxes, including transient occupancy tax, property tax or sales tax.”

Graton and Sonoma County have a 64-page memorandum of understanding. Here are some of the provisions:

• $1 million annually for fire districts.
• $3.1 million annual payment for public safety.
• $600,000 annually for gambling addiction programs.
• $1.79 million minimum annual development and mitigation fees.
• $500,000 per year for local roads.
• $25 million annually to the extent available for county parks and open space.
• $5 million annually to the extent available for other community benefit programs.

The county put a caveat in the agreement saying it could shift how it spends the money if it so desires. The county is supposed to be paid this money as long as the casino keeps operating.

Sonoma County also has an agreement with the Dry Creek band of Pomo Indians, which operates the casino in Geyserville.

The city of Rohnert Park has its own 33-page MOU with Graton; so it would be expected Windsor would enter an agreement with Koi Nation in the future.

“The $8.3 million a year is what we call the guaranteed contribution by the tribe for certain activities in the MOU. Generally, it’s for public safety, stormwater, problem gaming mitigation,” explained Leo Tacata, senior analyst for Rohnert Park. “It was set as a base rate back in 2013 when the MOU started, and that is increased by the Consumer Price Index, so it’s about $10 million now.”

That agreement expires in 2033 but could be renegotiated, Tacata said.

Time will tell what kind of agreement Koi Nation and the county will come up with.

“We are and will be meeting with elected officials, community leaders, and other Native American tribes and others to create a community benefits program as we develop the project,” said Beltran, leader of Koi Nation.

Beyond money paid to government entities, the Federated Indians of Graton Rancheria is helping non-gaming tribes of Sonoma County.

The tribe on Sept. 21, six days after the Koi announced its plans, put out a statement saying, “Starting on Nov. 1, we will disburse $3 million each to the Cloverdale Rancheria of Pomo Indians and the Kashia Band of Pomo Indians. Under our 2012 agreement with Sonoma County, the county was to make these payments when our revenues reached a certain level, but that level has not yet been reached. We will continue these payments annually, revenues permitting, until such time as the county is able to make the payments. Our sister tribes are sovereign nations and they must ultimately decide on the spending of this assistance, but we ask that at least 70% of this funding be distributed to their adult tribal citizens as per capita payments, with the rest to go to health or environmental programs or the like.”

Revenue stats for California Indian casinos are not public information, according to the California Gambling Control Commission. This state agency sets policy, establishes regulations, conducts audits, issues licenses, controls various gaming funds, and administers the Gambling Control Act and the Tribal-State Gaming Compacts.

Even so, the American Gaming Association in November 2018 estimated the economic impact of tribal casinos.

“California is the largest tribal gaming state by economic activity, jobs and tax payments. Tribal casinos add $20 billion to the Golden State’s economy, support jobs for nearly 125,000 Californians and generate $3.4 billion in taxes and revenue share payments to all levels of government,” the report said.

Through compacts with each casino, the state has ensured it gets a chunk of change every quarter.

“Tribal gaming operations pay into two funds, and what they contribute is based on the terms agreed upon in their compact. These two funds are the Revenue Sharing Trust Fund and the Special Distribution Fund,” explained Fred Castano, spokesman for the California Gambling Control Commission. “Tribes with gaming operations pay into the Revenue Sharing Trust Fund, which distributes payments to federally-recognized tribes in the state that are operating fewer than 350 gaming devices. Each quarter, they receive $275,000.”

Koi Nation does not yet have a compact with the state, which would come after federal approvals are granted. So it receives those quarterly payments from the fund. Through June 30, the tribe has been given $21.39 million. Payments started in 2001.

Kathryn Rand, co-director of the Institute for the Study of Tribal Gaming Law and Policy at the University of North Dakota, said California is unusual with the level of revenue sharing the tribes have agreed to. Shared revenues are on gaming income, not from other amenities at the casinos like food and beverage or room nights.

Rolling the dice on growth

There are 108 tribes in the state and more than 80 tribal casinos. Revenues are estimated to be $8 billion a year. This compares with Nevada’s $8.76 billion in revenues in 2019, after hitting a high of $11.6 billion in 2018.

It took a pandemic to derail nine years of growth in the industry. The American Gaming Association reported in 2020 the revenues throughout the United States were down 19.5 percent for tribal gaming, to $27.8 billion.

When the Indian Gaming Regulatory Act passed in 1988, tribal gaming was worth about $121 million in the United States. Now 29 states have tribal gaming. There are more than 240 federally recognized tribes.

“Theoretically there is a limit to everything. The question is where is the limit?” said David G. Schwartz, gaming historian and longtime former director of the Center for Gaming Research at the University of Nevada Las Vegas. “Indian gaming tends to draw from a more local, regional clientele.”

Schwartz said it is incumbent upon the operator to study the market to know if there is room for another casino.

A significant constraint for Indian casino growth is they must operate on land the tribe owns, whereas commercial enterprises can build seemingly anywhere. That is why some Indian casinos are in more rural, remote locations.

As Rand put it, “Tribal casinos don’t determine their market as much as federal law has determined it for them.”

Plus, the federal regulations can be onerous.

“For tribal gaming in California it is very difficult to reach that supply-side constraint because you have to do so much at the federal level to be recognized,” Lucas said.

Land recognition is something the Koi Nation must address. James Siva, chairman of the California Nations Indian Gaming Association (CNIGA), believes the success of tribal casinos has a lot to do with why they are in business — that it’s personal and not about satisfying stockholders.

He said their focus is to “improve the lives of tribal members, the community and employees.”

“Most have seen an improvement in the quality of life for members that without gaming would not be possible,” Siva said.

CNIGA is a nonprofit organization comprised of federally recognized tribal governments whose purpose is to protect the sovereign right of tribal governments to operate gaming on federally recognized Indian lands. Compared with commercial gaming, Siva said tribal gaming revenues are still predominately from the games of chance. Slot machines at every type of casino are the biggest money maker.

“This idea that nongaming revenue is more important than gaming revenue is not true in Vegas or any market,” Lucas at UNLV said. “Nobody is surviving on food and beverage revenues. That is one of the biggest misconceptions.”

Most everyone associated with the casino industry agrees, though, that amenities beyond gaming are necessary. That is why many are called resorts. Most have multiple dining options, event space that can be for meetings or music, and spas that can be an all-day outing.

It would seem to be a sure bet that gaming — commercial or tribal — is going to be here for the foreseeable future.

“I will say market saturation has been predicted in legalized gambling over and over, but Americans demonstrate an insatiable appetite to gamble,” Rand told the Business Journal.

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Cheryl Sarfaty contributed to this story.