Before there were subprime mortgages, collateralized debt obligations, vacant Nevada McMansions and foreclosed Florida condos, there was Rocky Gap Lodge & Golf Resort, Maryland's original toxic asset.
Built in the 1990s, the state-owned hotel was supposed to draw tourists and conferences to Western Maryland. It did, to a modest degree. But every investor in the Allegany County hideaway, whether the capital was financial or political, has come away a loser.
Rocky Gap basically hasn't paid its mortgage, held by private investors, for at least eight years. It owes Maryland's Department of Natural Resources $14 million in overdue ground rent. It owes $12 million to the state Department of Business and Economic Development for construction, upgrade and bailout loans. It owes the state about $3 million more in management fees.
Over the years, Rocky Gap has also blotted up $18 million in state and county grants that do not have to be paid back.
In truth, however, nothing of the tens of millions of dollars that taxpayers have sunk into Rocky Gap is likely to be recouped. Only the Wall Street guys who hold about $30 million in Rocky Gap junk bonds will get anything, and they'll be lucky to receive half what they're due.
For every dollar that Rocky Gap booked in room, golf and restaurant sales last fiscal year, it lost 59 cents. They frown on that sort of thing at the fully accredited business schools.
A new plan to end the pain makes more sense than its predecessors. But that is faint praise. Previous ideas included turning remote Rocky Gap into a theme park, a music venue, a film production studio, a slots casino and a slots casino.
Now, state officials want to turn it into a slots casino.
Fine print is supposed to make the latest slots proposal more promising than the previous two, neither of which drew a single qualified bidder. This time, to interest developers, the state agreed to let the operator keep more of the gambling profits than at other casinos. But to get the sweetened license, slots investors have to buy the whole damned resort.
The bid package comes out this week. If it works, the state will unload an embarrassing cash siphon. Gamblers will turn Rocky Gap into a sustainable economic resource. Maryland will start collecting slots revenue. Slots moguls will make money.
"If the state is interested in moving the property and they price it aggressively, then there are some real opportunities," says Scott H. Marder, a Baltimore lawyer with gambling clients.
But even if qualified offers arrive, the state isn't fully in control of the outcome.
To make the deal work, developers will want to pay as little as possible. The Rocky Gap bondholders, who have first claim on any proceeds from a sale, might have something to say about that. If the deal is too puny, they could stonewall or move to seize the resort through foreclosure — which would set the stage for Rocky Gap Slots Proposal No. 4.
New York hedge fund Davidson Kempner holds most of the debt, having bought it from the suckers who financed the resort in the 1990s. One presumes that the firm will decide that accepting a lowball offer for Rocky Gap with a slots license is better than foreclosing on Rocky Gap without a slots license. As Maryland has vividly shown, the only thing worse than being Rocky Gap's lender is being Rocky Gap's landlord.
"They realize they're probably going to end up taking some kind of loss," says Davidson Kempner lobbyist Casper R. Taylor Jr. "But how substantial nobody knows."
Rocky Gap was Taylor's pet project when he was speaker of the House of Delegates. Davidson Kempner did not return my call. Maybe the firm will team up with a developer, make an offer for Rocky Gap and try to recoup its losses with slots profits.
But whether it has gambling or not, Rocky Gap will always be two hours from anywhere. A slots operation there is no more of a sure thing than playing the "video lottery terminals" themselves. Slots parlors in Pennsylvania and West Virginia will compete for potential Rocky Gap gamblers, especially if they also offer blackjack and roulette.
Slots players want slots and may not care about Rocky Gap's gorgeous vistas and barbered fairways. The profit-sharing deal Maryland is offering at Rocky Gap, while better than elsewhere in the state, is only average for the slots industry.
"I do believe the economics of having slots there in a rural region with the resort component provides a very compelling business case," says Robert C. Brennan, executive director of the Maryland Economic Development Corp., the state-affiliated agency that owns the resort. "And it's one that I think we're going to get some pretty decent bids on at this point."
That would be nice. Rocky Gap's new investors may turn out to be chumps like everybody else. But from the taxpayer's point of view, any deal that gets the place off Maryland's books will be a screaming success.