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Gaming Guru

Jeff German

Regulator sets scope on club deals

27 March 2008

LAS VEGAS, Nevada -- Amid an Internal Revenue Service investigation and media scrutiny of two of the Strip's most popular nightclubs, state gaming regulators are launching an industrywide review of the lucrative business dealings between casinos and their nightclub partners.

"We're going to look at all aspects of those relationships," said Jerry Markling, chief of enforcement at the Nevada Gaming Control Board. "We want to make sure the relationships are in the best interests of gaming and the tourists."

Some casinos, such as Wynn Las Vegas, own their nightclubs. But many of the major casinos lease space to their nightclub operators and at least some of the resorts share in the revenues, which experts say can run into tens of millions of dollars a year at some clubs.

For the past two years, Markling said, gaming agents have been watching disturbing aspects of the fast-growing nightclub scene, including reports of violence, drug use and serving minors. Agents have put the casinos on notice that even though they may not own the clubs, they can be held accountable for failing to prevent conduct there that brings discredit to the industry.

The focus on the money side of the cash-drenched nightclub operations will include a review of revenue-sharing agreements between the clubs and the casinos, Markling said.

That may give agents a better idea of the lines of responsibility when trouble arises, as in the case of the IRS investigation. The federal agency is said to be investigating reported conspiracies among employees at Pure and LAX nightclubs to hide cash from the federal government.

There is also the question of whether the nightclubs were hiding cash from the resorts, with whom they were supposed to be divvying up the take.

"Underpricing" — publicizing a minimum entry fee but charging customers much more at the door, then funneling the difference to management — is a known practice in the nightclub industry, said one casino source who requested anonymity.

"By underpricing, the club operator can get around the revenue-sharing agreement they supposedly have with their landlords," the source said. Tips are not typically classified as revenue.

On the other hand, "the tip money is considered revenue if there's a requirement to pay a tip to get in," the source said.

The IRS investigation reportedly involves the concealment from the government of unadvertised admission fees and tips obtained from clubgoers looking for favorable treatment in the crowded clubs.

This month, the Sun told the story of a Las Vegas couple, John and Tina Henderson, who had to shell out more than $500 in such fees for their party of 10 at LAX just days before the IRS visited the club in February.

Casino executives are reported to have been stunned at the large amounts of cash that wound up in the pockets of some club employees. There are reports that some doormen were pulling in six figures a year.

Pure, at Harrah's-owned Caesars Palace, and LAX, at MGM Mirage's Luxor, are run by Pure Management Group and its co-owners, Robert Frey and Steve Davidovici, two innovators on the local nightclub scene. Both clubs have revenue-sharing agreements with the casinos.

Copies of the Pure and LAX lease agreements on file with the Clark County Business License Department provide insight into the complex business dealings between nightclubs and casinos on the Strip. Those dealings, the 10-year leases show, are far more complex than in a simple landlord-tenant relationship.

In Pure's December 2003 lease, which is dated a year before the club opened and before Harrah's bought Caesars Palace, the club agreed to pay its landlord $840,000 a year, or $70,000 a month, in rent and give up 8.5 percent of its gross sales.

A clause in the 36-page lease includes "all cover and other charges associated with the nightclub" operations as part of gross sales, which suggests the casino has a responsibility to its shareholders to closely monitor the solicited cash flowing into the club. Pure is bound by the lease to provide Caesars Palace with an accurate accounting of its gross sales each month.

Records show that several celebrities and high-profile locals invested in the $14 million nightclub. Together, those investors contributed a total of $11.5 million, according to a December 2004 list Pure provided the county.

Married former tennis stars Andre Agassi and Steffi Graf are listed as having contributed $1.5 million and $1 million, respectively, giving the couple a combined 11.6 percent interest in the club.

Feeling Productions Inc., owned by Celine Dion and her husband, Rene Angelil, is listed as investing $1.5 million, earning the company a 7 percent interest. Until December, when she ended her engagement, Dion was performing regularly in the Colosseum at Caesars Palace.

Phoenix Suns center Shaquille O'Neal is listed as contributing $500,000 for a 2.3 percent interest.

Attorneys Perry Rogers, David Chesnoff and Michael Bonner are named as minor investors, along with several local developers and businesspeople.

A company called Who's Lunch? LLC, which lists former U.S. Sen. Richard Bryan as a managing member, is identified by Pure as investing $250,000 in the club.

LAX's 88-page January 2006 lease obligates the nightclub to pay rent of $2 million a year, or $166,667 a month, at the Luxor. Beyond that, LAX, which reportedly cost $20 million to build, must give its landlord a percentage of its gross sales.

That figure varies from 10 percent for $20 million in gross sales to 20 percent for gross sales that exceed $40 million, according to an amendment to the lease.

LAX also has to provide the Luxor with a monthly accounting of its gross sales, and those sales include "all cover charges and admission charges."

In the Pure lease, the nightclub agreed to allow Caesars Palace guests inside before midnight without a cover charge, except on several busy holiday weekends. Hotel VIPs who regularly patronize the club also receive a 25 percent discount on bottles of alcohol that cost more than $500.

Caesars Palace, in return, agreed to provide free hotel rooms for "top-level celebrities" Pure invited to club events.

The hotel also promised to spend $420,000 of its marketing budget promoting Pure during its first year in operation. The club opened on New Year's Eve 2004.

In the LAX lease, Luxor officials acknowledged that for the club to be successful, it needs to develop what they called "queue/staging lines" and "charge a cover charge or other admission for access" to the club.

LAX agreed to give the Luxor free access to the club for up to 50 of the casinos's VIP guests each day except for New Year's Eve, Memorial Day and Labor Day.

The Luxor also has a clause that allows it to share revenues of any club the operators of LAX open under the same name elsewhere in Clark County.

Both lease agreements give the casinos the right to approve the clubs' top managers and senior staff, and require the clubs to conduct business in a manner that meets the approval of state gaming regulators. There are provisions in both agreements that allow the casinos to terminate the leases if those conditions aren't met.

The Luxor also has a clause that obligates LAX to conduct business with the "highest standards of honesty, integrity, quality and courtesy" to maintain the casino's reputation.

LAX, according to the agreement, must "continuously monitor" the conduct of its employees to ensure those standards are met.

Bob Emmers of Sitrick and Co., a Los Angeles-based crisis management firm Pure Management hired to field media requests for interviews, said the nightclub company will cooperate with the Control Board inquiry.

All of Pure's original investors listed in county records are still associated with the club, he said.

But Emmers said Pure Management does not want to comment publicly on its lease arrangements with the casinos.

Harrah's Entertainment spokesman Gary Thompson also declined to discuss the Pure lease, saying his company is still "reviewing our nightclub operations."

MGM Mirage spokesman Gordon Absher also declined to comment, but said his company's internal review of its affiliated nightclubs was "ongoing."

Sun reporter Liz Benston contributed to this story.

Regulator sets scope on club deals is republished from