After sinking millions of dollars into the dream of a world-class tourist destination in the mountains of Western Maryland, the state is poised to cut its losses and turn the Rocky Gap hotel and conference center over to a private company that plans to open a casino at the lakeside resort.
The Board of Public Works is scheduled to vote Wednesday on the final series of agreements needed to complete the transfer of the $54 million complex in Allegany County from the quasi-public Maryland Economic Development Corp. to Evitts Resort LLC, which plans to eventually install 1,000 slot machines at the site.
Bob Brennan, executive director of MEDCO, will be happy to say goodbye to the troubled investment. He said the corporation will write off about $11 million on the deal. Two state agencies will have to write off another $30 million in loans and unpaid ground rent.
"If all my projects were like Rocky Gap, I'd be very thin," said Brennan, whose organization's mission is to promote economic activity in the state while helping to reduce unemployment.
Christopher Summers, president of the conservative Maryland Public Policy Institute, said the Rocky Gap experience is a "costly lesson" for Maryland taxpayers.
"It's a big warning sign that states shouldn't be in the hotel business, nor cities. It's not a core function of government," he said.
The project's bondholders, who have approved the deal before the board today, will share in the hit. As part of the agreement with Evitts, Brennan said, bondholders will share about $7.8 million and absorb about $26 million in losses.
"The investors are not being made whole," Brennan said. "They are settling for cents on the dollar."
The essential elements of the deal have been in place since April, when the state's Video Lottery Facility Location Commission awarded a casino license to Evitts. It will take over as owner and operator of the resort on 260 acres in Rocky Gap State Park.
Because the deal includes a lease on state land, it requires the approval of the public works board — made up Gov. Martin O'Malley, Comptroller Peter Franchot and Treasurer Nancy K. Kopp. The panel, which approved the state's original investment in Rocky Gap 16 years ago under Gov. Parris N. Glendening, is also being asked to approve the terms of the agreement between MEDCO and Evitts.
Under that deal, Evitts, a subsidiary of Minnetonka, Minn.-based Lakes Entertainment, will invest $54.6 million to buy the resort and to build a 50,000-square-foot slots casino next to the existing 220-room lodge and conference center. Of that, Evitts will have to pay only about $6.8 million up front to acquire the resort.
The hope, Brennan said, is that slots will provide the lure Rocky Gap has lacked since its opening in 1998.
"It needs another attraction to help bring customers, and gaming is certainly an additional attraction," he said.
Tim Cope, president of Lakes Entertainment, said the company has succeeded with projects similar to Rocky Gap before and is optimistic about its future. "I think we can provide a little more year-round entertainment," he said.
Cope said a slots parlor adjoining the lodge will be built with enough room to add table games such as blackjack and roulette should the General Assembly approve them. But he predicted that the project will make money even if it remains a slots-only facility.
"We'll be fine either way," he said.
When Rocky Gap was first proposed as a resort site in the 1990s, its backers couldn't imagine that slots would someday be seen as its salvation. It wasn't just that they were bullish on its prospects; Maryland was firmly closed to casinos and didn't seem poised to change.
For many years, dating back to the administration of Gov. William Donald Schaefer, it was the pet project of then-House Speaker Casper R. Taylor Jr., a relentless advocate for Western Maryland and his hometown of Cumberland. Critics warned that the project would be a boondoggle, but Taylor's tireless advocacy, and considerable clout, helped wear down skeptics in Annapolis.
The hope was that the 18-hole, Jack Nicklaus-designed golf course and lakeside lodge would draw a stream of tourists from Washington and Baltimore and that the resort itself would become a magnet for other attractions.
"Rocky Gap will redefine what Western Maryland is all about," Taylor, a Democrat, said at the time it opened. He could not be reached Tuesday to comment.
It didn't work out the way Taylor hoped. Even though the resort won praise for its design and setting, it wasn't in the class of such luxury resorts as West Virginia's Greenbrier or Pennsylvania's Nemacolin Woodlands. The golf course's opening was delayed. Occupancy never reached the levels its backers envisioned, and by 2007 slots were seen as the resort's only path to prosperity.
Even then it appeared Rocky Gap was snakebit.
When the legislature passed a bill allowing slot machine gambling in 2007, Rocky Gap was one of the sites to which lawmakers gave the green light. It wasn't because they viewed it as an optimal site for producing revenue. It simply appeared to be the only way to get the property off economic life support.
But when they wrote the bill, legislators imposed a 67 percent tax on slot machine revenues, one of the highest rates in the country. The terms were still attractive enough to draw bids to operate the state's other four designated sites — in Cecil County, in Anne Arundel County, in Baltimore and at Ocean Downs outside Ocean City — but there were no takers at that rate for relatively remote Rocky Gap.
It wasn't until the Assembly cut the slot tax rate to 50 percent for Rocky Gap in 2011 that the site received bids from prospective operators. After ruling one of the two bidders ineligible, the slots commission awarded the license to Evitts.
Evitts has said it expects to open its casino in mid-2014 with 850 slots at first and another 150 to be added in its second year. The commission has estimated that the Evitts site will produce $40 million in gross revenue in its first year, $17 million of which will go to the state for education. Brennan estimated that the casino will add 400-500 employees to the resort, which now has a full-time staff of about 100. Spokesmen for Evitts were traveling and could not be reached for comment.
While the state will have no ownership stake in the resort or casino, the Department of Natural Resources will collect rent for the use of its land under a 40-year lease, at least $150,000 a year. Eventually, the department will get a small share of the gambling revenue as well.
That stream of money might eventually offset some of the money the state has lost at Rocky Gap. In recent years, with annual losses as high as $3.8 million in 2010, MEDCO has had to lend it money to keep its doors open.
While the bondholders lost even more, Brennan said they were not the proverbial widows and orphans but sophisticated investment companies that took a calculated risk in return for what would have been a high yield if the project had paid off.
"They were nonrated bonds, so they knew what they were getting into," he said. "It was not investment-grade."
Despite MEDCO's struggles with Rocky Gap, Brennan is optimistic about its future under Evitts.
"The new, reborn Rocky Gap will be tremendously successful," he said. "With gaming there, you're no longer a one-trick pony."
Sen. George Edwards, a Republican who represents Allegany and Garrett counties, said Rocky Gap never developed the type of economic spinoff effect Western Marylanders were hoping to see. He said the Evitts deal appears to be the "best marriage" the state could get.
"It gets it off the state's books. The county will generate more revenue than they've generated in the past," he said.
Edwards said the Rocky Gap experience will make the state more reluctant to get involved in such deals. "Because of this, I don't think they're going to go this route in the future," he said.
While the board's action and subsequent settlement will mark an end to MEDCO's role in running Rocky Gap, it will not get the state out of the volatile hotel business entirely. MEDCO, which more typically invests in such lower-risk projects as college housing, also owns the waterfront Hyatt Regency resort, golf course and marina in Cambridge.
Brennan acknowledged that the opulent AAA 4-star resort isn't turning impressive profits, having taken a beating in the economic downturn. The property had an operating loss of more than $3.5 million for each of the past two years, but Brennan said the property is holding its own and paying its bills without being subsidized by MEDCO's other projects. In recent months, he said, the resort been "knocking the cover off the ball."
"All things considered, we're doing a lot better than Rocky Gap," he said. "I'm very bullish on our future."
Brennan said MEDCO has no interest in bringing a casino to the Cambridge project.