Experience keys pub financing

September 30, 2002 - The slot pub craze in Nevada is shows little signs of slowing.

While lenders still view these businesses as solid investments, most financiers will said it comes down to experience when entrepreneurs set out to finance their restricted gaming operations.

"We've been very selective. There are some very good operators in town, and we stay confined to them. We don't (finance) them all," said Tom Mangione, president of Nevada Community Bancorp Ltd.

Mangione, like other local lenders, looks for owners with other, established facilities. That way if his bank's loan is for a "soft" location, there is cash flow from an existing location to help with repayment of the loan.

"If someone's just coming into town, unless they can secure the deal with cash, we probably wouldn't do it," he added.

That sentiment is shared by other lenders in the valley.

Jerry Martin, chief lending officer for Nevada State Bank, said his bank sticks with companies that have historically strong earnings, and stays away from start-up operations.

"(Financing a start-up) would depend on the strength of the backers. Most of the ones we've done have already been established," he said.

The numbers say it all when it comes to the proliferation of slot pubs in the valley. In 1990, there were only 90 restricted gaming licenses in Las Vegas and Henderson, today there are over 400. The growth has spurred a web of facilities, where many operators own several different pubs in town.

"The difficult thing now is to find a good corner (to put them on)," added Mangione.

Brian Gordon, a CPA and principal of Applied Analysis, a local economic research firm, is bullish on the future of these facilities and points to the "themed" approach of many establishments that make them cleaner, more attractive neighborhood facilities.

"These places are trying to create a great dining establishment with good food, while also having a gaming portion."

But the polished image could bring with it some consequences, he added.

"The problem is that the food isn't a huge money maker and the slots drive the profitability," Gordon said.

But while a track record is important, some lenders will say that the more "dangerous" operations to lend to are the ones where owners have found success with their first bar/restaurant and are ready to go full throttle with major expansion plans, perhaps adding two or three more in a relatively short time frame.

"A lot of times it's the local (staff) that makes that (success) happen. Too often, a quick expansion means more debt, and that cook at the old shop has to leave to focus on the new one, then the old one has problems and the new one's not established," said Rod Dunnett, president of Irwin Union Bank.

But overall, Dunnett said that a slot pub tends to hold up a lot better than traditional restaurants, and in most cases will stay in business while standard fast-food establishments go out of business around it.

Dunnett also is of the opinion that a restaurant property needs to be on its third owner, in most cases, to finally become profitable.

In his experience, he typically sees a new (non-gaming) restaurant open up, then close it's doors and sell the operation for about 75 cents on the dollar. The second owner then may do a little better, but ultimately has to close his doors too. It isn't until the third owner of an establishment comes along, who is probably only paying 25 cents on the dollar of the original development costs, that a successful establishment is seen, he said.

"The third guy comes in and makes it because maybe he gets the place at 25-30 cents on a dollar, doesn't have as much debt, and can withstand the competition around him," he said.

But by adding slots to the business equation, owners are clearly at an advantage over general restaurant operators, added Dunnett.

"That gaming component really makes the big difference," he said, while adding that in most cases the slots make up about 25 percent of revenues.

Dunnett also agreed that many lenders would rather see a track record behind a prospective bar owner, but said in the case of new operators, financiers would consider a new client if he was someone who worked for a major chain and had experience running the facilities, and had several financial backers willing to help him out.

"They key is to keep the debt as low as possible in this business. There are some places where people just own one location and they do fine. But they do it smart. They keep their debt low," he said.

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