Gambling on Revel Casino

The failure of Revel Casino is in many ways the failure of Atlantic City. Simply, there were too many casinos, not enough customers. Prior to competition from Delaware, New York, and most notably Pennsylvania, the Atlantic City market reached a high point in 2006 with gaming revenue of $5.2 billion. By 2014, that number had decreased to $2.7 billion. Without competition, Atlantic City could get by without building any infrastructure or other destination attractions because gamblers had no alternative. Atlantic City became a day tripper grind market comprised of middle market gamblers – those who bet relatively small amounts of money on a regular basis. These gamblers are creatures of convenience. Any obstacle placed between them and a gambling opportunity will make it less likely that they will go to a particular casino. Other than Las Vegas (which is unique), gamblers will visit the nearest available option. So, casinos in neighboring states simply cut off the flow of customers to Atlantic City since there was nothing in Atlantic City outside of the four walls of the casinos to justify the trip.

When New Jersey officials belatedly realized what had happened and that something needed to be done their response was Revel – the wrong casino in the wrong place at the wrong time. Building Revel was an act of hubris on the part of New Jersey state officials who wrongly believed that by building an extravagant and plush property with nothing else to support it that they could somehow lure new customers and save Atlantic City. My former business partner wisely and consistently admonished that to build a tall building you need a strong foundation. Revel was a building with no foundation or infrastructure to support it.

I am guardedly optimistic that Revel can be rebranded and turn a profit given the relatively low purchase price and debt service it will incur.

And it was the wrong property. Revel failed to realize that Atlantic City is a grind market and that any money spent on luxury amenities would be wasted. By building a luxury resort in a grind market, Revel’s owners made a fundamental mistake.Revel became a hotel trying to support a casino when you need a casino to support a hotel. There were other mistakes – initially Revel was a no smoking facility with no food buffet (an essential in a grind market) and with a casino located on the third floor making access one more obstacle for a gambler to overcome, Atlantic City gamblers did not feel comfortable at Revel – as they perceived it to be too upscale without providing the basic amenities to which they were accustomed.In consumer-driven businesses you don’t get a second chance to make a first impression and Revel had a difficult time (despite belatedly making some changes) recovering from its own mistakes as the market contracted around it.

Revel also collapsed under the weight of its debt. By spending $2.4 billion to construct, its owners doomed Revel to failure. Borgata – by far Atlantic City’s most successful casino – might have been able to survive burdened by that amount of debt. But no other Atlantic City casino could have even come close. And so Revel declared bankruptcy.

Enter Glen Straub. There is a reason that no serious and experienced casino operators were interested in Revel even at the giveaway price of $82.4 million (that’s 4 cents on the dollar) that was paid for it in the bankruptcy auction. The property is now owned by Glen Straub, a Florida real estate developer with no casino experience. While the purchase price is a steal in real estate terms, I am skeptical that this is a good investment for Straub and may not be for Atlantic City.

Straub and his team have difficult challenges ahead, some operational and some legal, all in the face of increased competition. Operationally, the property needs a major re-branding both physically and perceptually. It needs to offer more of what the Atlantic City gambler actually wants – fabulous buffets; smoking opportunities; the right mix of slot machines for the market; and outstanding customer service (coupled with building an effective marketing database). The property also needs to feel accessible to the Atlantic City customer with décor, signage, and ambiance appropriate for the market. All of this will not guarantee success, but it will give them a shot. Straub has stated that he will spend an additional $150 million on the property. I hope he spends it wisely.

A revitalized and successful “Revel” will not by itself rescue Atlantic City.

However, before any of this can happen, Straub needs a gaming license. When he bought Revel in the bankruptcy proceeding he only bought the real estate. The license granted to the previous owners was not transferable (which seemed a surprise to Straub who initially announced a summer re-opening). Straub and his legal team must file applications with the New Jersey Casino Control Commission who will then conduct a lengthy and extensive investigation before deciding whether to grant the license. The process will take months, not weeks. And in any business, time is money.

Straub and his legal team must also come to an agreement with the entity that owns the power plant that supplies electricity to the casino property. In the bankruptcy proceeding the judge ruled that Straub could reject the existing contract (which contains terms not favorable to Straub) but if he wanted electricity he would have to either honor the existing contract or come to a new agreement with the power plant. This issue is still not resolved and poses a real impediment to the re-opening.

It is doubtful that Straub and his legal team could have solved either of these situations prior to the purchase. However, it is important for any deal lawyer to conduct due diligence and discover potential obstacles so they can advise clients both as the likelihood of successfully resolving such problems and the potential time and expense involved. To a client, the latter can often be as or more important than the former.

Will Straub succeed? How do you define success? I am guardedly optimistic that Revel can be rebranded and turn a profit given the relatively low purchase price and debt service it will incur. However, any success at Revel will probably come at the expense of other marginal Atlantic City casinos so it may become a zero sum game. I don’t see the Atlantic City market as a whole growing significantly in the short term – especially if plans for North Jersey casinos (including at the Meadowlands) are approved.

A revitalized and successful “Revel” will not by itself rescue Atlantic City. But, despite the effect it might have on other marginal casinos, it could generate momentum, which will spur other non-casino infrastructure and attractions which are vital to the city’s future. I’m pulling for them.

Professor Edward Ellers has taught courses in Corporations, Corporate Finance, Corporate Transactions, Unincorporated Business Associations, Securities Regulation and Gaming Law. Before joining Temple Law School in 1996, Ellers served in the Enforcement Division of the United States Securities and Exchange Commission. He left that position to become a founding partner at Klehr, Harrison, Harvey, Branzburg and Ellers, where he was Chairman of the Corporate Department and specialized in banking, corporate, and securities law. Ellers left the firm in 1991 to become the CEO of a publicly traded gaming company which opened the first legalized riverboat casinos on the Mississippi River.

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