Hotel Casino Management Agreement
(outline of conditions to consider from
owner and management company standpoint)
Names
and date of the Owner and Management Company
Witnesseth:
Statement
that Owner owns the property and has the authority and wishes to engage Management Company
to manage and operate the hotel casino. Statement
of consideration.
Article I
1. The property which is subject to this agreement
shall consist of (name and description of property).
3. Description of future expansion planned by Owner
and perhaps triggers that will require that the Manager
can force Owner to add casino space, rooms,
parking, etc.
Article II
Effective date, term and options
1. Effective date of management to begin. Agreement to run for five years.
2. Manager shall have the right to extend agreement
for an additional five successive periods of five years each, if/and
a. Manager is not in default in
performance.
b. Renewal upon same basis as set
forth in this agreement.
3. Manager and Owner agree to incorporate terms of
this agreement to include any expanded facilities.
Note-
A situation did arise where the Owners
added shops to a hotel casino and claimed that they should be considered separate from the
hotel casino operation when computing incentive fees.
4. Manager shall exercise the right to discontinue
management agreement by serving written notice to Owner 60 days prior to termination of
option period.
Note-You
may want to get out fast.
Article III
Pre-management expenses
Owner
shall pay all costs and expenses of preparing the property for business operations by the
Manager. Manager will present a budget to
Owner.
Note-This
is extremely important if the casino, restaurant or rooms need to be refurbished. It might also be a consideration if equipment such
as phone systems or computer systems are needed.
Article IV
Manager's duties, obligations and
rights
1. Reference to rights reserved by Owner.
2. Manager shall establish bank accounts and deposit
all proceeds therein.
Note-The
actual bank account may not be changed, but new signature cards should be required.
3. Manager can draw on line of credit established by
Owner.
Note-
The Owners never consider anything other
than a successful operation. A reasonable
line of credit should be established so that the Manager is protected during the start-up
period.
4. Manager shall have the right to purchase all
inventories, supplies and services customarily used or needed by hotel casino.
Note-The
Owner may have made commitments to his friends to supply disposable. The Manager should make sure he is not
responsible for any prior commitments of the Owner.
5. Manager shall have full responsibility for all
employees. Owner may veto hiring of
executives. Manager may fire anyone without
Owner's consent. Manager will set all
salaries.
6. The in-house General Manger assigned to the
Establishment shall be an employee of Manager, and Owner shall reimburse Manager monthly
in advance for the total aggregate compensation, including salary and fringe benefits
payable with respect to such General Manager. With
the approval of the Owner, Manager may assign other employees of the Manager or any of its
subsidiaries. The Owner shall reimburse
Manager for the total aggregate compensation paid to such employee by Manager.
Note-
This provides the flexibility to move management people from one contract to another
without them losing their employee benefits with the management company. It also provides
the management company with more control over its employees. This can be particularly important in short term
contracts such as those with the Indians. I
have seen instances where the Indians offered the manager a management contract and kicked
out the management company. You must be
careful not to create an "us and
them" situation among the operation’s staff.
The management company employees should not flaunt their benefits if higher than
the regular casino staff. This type of an
organizational structure also helps in recruiting and training management people.
7.
Manager will set up and maintain a separate tax identification number. Manager will be advanced funds to cover payroll,
and the advance will be charged against gross revenue and working capital.
Note- A new tax number is a good idea. The old management company or the Owner may be in
arrears, or questions may arise as to the payment of employees' withholding or payroll
taxes from prior periods. It is also a good
idea to have the payroll and tax money transferred by the owner or money under the owners
control.
8. Manager shall
cause complete books of account to be maintained, which shall comply with requirements of
any governmental agency. Manager will provide
monthly financial statements and annual year end audits.
Note- It is a good idea to let the owners
pick the outside auditor. In the house profit
computation, the audit and legal costs are added back and not recognized as an expense for
the computation of the management fee.
9. Manager shall
provide annual budget. Each budget shall
contain a reserve for repairs, refurbishment's, and replacements to maintain premises in
good condition. Manager shall not acquire interest in any such property. Manager shall make no expenditure other than those
budgeted for capital improvements without
Owner's written approval. Books shall be open
to Owner's representative.
Note- These reserves can be set up as percentage of
revenue or based upon a formula related to replacement.
Slot machines have an economic life of five years, same with refurbishing the
casino and rooms.
10. Manager shall comply with all laws and
regulations.
11. Manager shall maintain all licenses and permits
required.
12.
Manager shall determine all matters concerning decor, design and layout. Owner can veto request for partitions of other
structural matters.
13.
Manager shall cause to be acquired all necessary and proper insurance against all
reasonably foreseeable risks to both parties and the business.
14.
Manager shall take out and maintain at Owner's expense for the full insurable value on a
replacement cost basis--fire and extended coverage, boiler and machinery coverage.
15.
Manager may institute suits in his or Owner's name.
16. Manager shall have absolute control
and discretion with respect to the operation of the premises including credit policies,
room rates, entertainment, quality of service, promotions and any other matters affecting
the operation.
Note- This
statement is very important. You need
something in the contract to point to in the event the owner, or owners children, start to
meddle in the operation.
Article V
Owner's duties, obligations and rights
1. Acquire and maintain gaming license at Owner's
expense.
2. Replace facilities and equipment if obsolete or
destroyed.
3. Provide sufficient working capital by direct
investment through credit provisions
with a commercial lending institution.
4.
Comply with local ordinances, federal and state laws.
Article VI
Manager's compensation
1. Gross gaming revenues for base rent purposes,
shall be the amount recorded in the books as "gaming win" and adjusted to a cash basis as reported to the Nevada Gaming Control Board for
tax purposes.
2. House profit will be computed by deduction from
gross revenues every expense arising from the existence of the premises and operations,
except the following:
a. Payments of principal and interest on any sums borrowed.
b. Depreciation expense incurred with respect to improvements and personal property.
c. Amortization of any kind relating to deferred costs or capitalized assets.
d. Lease payments with respect to real or personal property.
e. Insurance costs for fire or extended coverage, boiler and machinery coverage.
f. Property taxes.
g. Outside accounting and attorney fees.
Note-
All of the above items are expenses that can cause problems for the Manager. Also, by excluding the above, the Managers
incentive participation can be low which makes the negotiations easier. Exceptions may be made for accounting and legal
that relate directly to the operation day for compliance with gaming regulations. I have seen situations where the owners became
involved with gaming licensing problems and wanted to charge the attorney fees to the
operation. It is best if all of these cost
are excluded.
Note- With Indian contracts you may want to provide
that the operation will make the principal
and interest payments on debt as part of the contract. These payment can then be deducted
from the Indians participation at each settlement. This
provides the operator with control over the payments.
It may also be a good idea to exclude the Indian salaries as an expense for house
profit. Most Indian contracts require that a
percentage of the employees be Indians. The
experience to date by operators has been that the Indians tribe’s demands can create
excessive salary costs. This exclusion can
also cause the Managers participation percent to be less and therefore easier to
negotiate.
3. There shall be paid to Manager a fee for services
rendered in managing the business, a sum equal to 2% of the gross gaming revenues, as
defined, as base management fee; and a sum equal to 15% of the house profit as management
incentive fee.
Note-
The percentage fee on revenues and participation need to be determined based on the size
of the operations. In some instances, rather
than a percent a flat annual fee is used. Percent
of all gross revenues that includes gaming, can run as high as 6% and participation in house profit as high as 25%. As a guide, most management contracts fees run 30
to 35% of the net income of the operation.
4. Manager may draw from the agency account monthly
an amount equal to 1/12 of the estimated base management fee based on 5% of the prior
year's gross gaming revenues. Manager may
draw an amount monthly equal to 80% of the incentive fee established by using the monthly
financial statements at the time the statements are delivered to the Owner. Adjustments for the year's base management fee and
incentive management fee will be computed by the outside auditors at the time the year end
audited financial statement is delivered.
Article VII
Termination of Rights
1. If Manager shall apply for bankruptcy.
2. If Manager fails to perform material covenants.
3. If Manager fails to perform at some standard.
Note-This
could be done by perhaps agreeing to use the gaming abstract for like hotel casinos. Some standard such as at least 80% of the medium
gaming win per unit. This is best left unsaid
unless the Owner insists.
4. Manager may terminate agreement by giving 30 days
notice, but will continue managing for up to 12 months if Owner requests extension.
Article VIII
Condemnation
Manager
will be fairly compensated from award.
Note-Most
going concerns are valued based on capitalizing earnings.
The earnings are a reflection of management's ability. Some formula should be in the agreement.
Article IX
1. Operation shall be known and such name as mutually
agreed upon.
2. Managed by "Ajax Management"
may be used.
Article X
Successors and Assigns
1. Manager may assign agreement to parent, subsidiary
or partnership as long as the new group is at least 51% controlled by the original
management group.
Note-This
could become important, and there is always the chance the Owner may be unhappy with a merger or additional investors. Most Owners want some control over assignments but
Manager needs some flexibility.
2. Manager may assign this agreement with written
consent of the Owner, and Owner may not be unreasonable in giving consent.
Note-Assignments
are always a problem if one takes place. The
right to assign has considerable value to the Manager.
I have seen contracts where the Owner had the right to decrease the Managers
participation in fees if the contract was assigned. Such
a condition reduces the assignment value to the Manager but gives the Owner a bargaining
position with the new Manager.
Article XI
Legal
addresses of Owner and Manager for notices.
Article XII
Right
of first refusal to purchase.
Note-A
good idea, even if it is not contemplated. This
condition can have the effect of reducing the value of the property. I have seen situations where prospective buyers
backed away because they thought their proposal would be matched by the Manager.
Article XIII
Manager's conflict of interest
Manager
will use its best efforts to manage independently for the benefit of the Owner. However, Owner recognizes and acknowledges that
Manager's affiliated companies and other management companies are engaged in the same
businesses that at times may compete with the Owner's business.
Note-This is very important. Donald Trump has a suit filed against him claiming he transferred customers from the Trump Castle to the Taj Mahal.
Return to Nevada Gaming Statistics
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