Management fees eat up First Nation casino profits

A native-owned casino that is mandated to provide economic benefits for Manitoba First Nations is filling the coffers of an U.S.-based management company.

A CBC News investigation has found that since the South Beach Casino opened in 2005on the Brokenhead Ojibway Nation, it has paid more than $43 million to Hemisphere Gaming MB Co. and related companies, based in Minneapolis.

By comparison, the total net earnings were just over $39 million.

"It was absolutely shocking to see," said Yale Belanger, an associate professor of Native American studies at the University of Lethbridge, noting the amount of the management fees.

In its six years of operation, South Beach has been a financial winner: it has doubled in size, added a hotel and raked in a lot of moneymore than $200 million in revenues.

CBC News has examined thecasino's annual financial statementssince startup, which show the Minneapolis-based operators have been paid:

• Management fees of $32,914,775.
• Interest payments of $5,115,080.
• Two per cent of gross revenue, worth $4,162,123.
• Other set-up costs of $1,001,250.

The management fees were initially calculated as 47 per cent of earnings before taxes, and then dropped to 37 per cent in 2008.

The financial statements are filed with the Manitoba Gaming Control Commission.

The Minneapolis-based president of Hemisphere Gaming, Ali Alizadeh, was unavailable for an interview with CBC News.

In an email, a spokesperson said, "Hemisphere was responsible for financing, designing, developing, constructing, staffing and opening the casino and operating the casino for the last six years."

The management fee does notcover the wages of all the employees working in the casino and hotel, who are instead paid out of operating expenses.

Owned by First Nations partnership

The casino is owned by a partnership of seven First Nations: Brokenhead, Hollow Water, Little Black River, Poplar River, Little Grand Rapids, Pauingassi, and Bloodvein.

The ownership group has been paid $17 million in profits since the casino opened, which works out to $2.4 million for each of the seven First Nations.

The chair of the First Nations partnership said the fees paid to the management company are worthwhile.

"We wouldn't be getting any of that money if we didn't have this management company with us because our hands were tied. We didn't have [anyone] to turn to," Furlon Barker, board chair of South Beach Casino and Resort, told CBC News.

"To me, it's worth the price," he added.

Hemisphere Gaming put up a loan of $7.75 million to get the casino built. Barker said Hemisphere came forward with a loan when no one else would.

The company and its partners have been involved in casinos in Minnesota, California, Oregon, Washington state and Wisconsin, as well as in Europe and the Caribbean.

When the Manitoba government approved a plan to create First Nations casinos, the profits were meant to benefit all First Nations in the province.

Outside of the South Beach management group, other First Nations are critical of the management fees paid to Hemisphere.

"It all goes to the management company. It doesn't come to us", Chief Ken Chalmers of the Birdtail Sioux First Nation in western Manitoba told CBC News.

'One hell of a deal'

"It's one hell of a deal for a management company," Chalmers said, adding thathe wants to see more financial accountability from the casino.

Belanger said the initial struggle to find an investor is not a good reason to continue turning over such large sums to Hemisphere Gaming, whose management agreement runs until 2028.

"Very problematic, very disturbing and something that has to be reflected on," said Belanger, who isthe author of the book First Nations Gaming in Canada.

The annual management fee will drop in 2017 to 32 per cent of earnings before taxes, and again in 2022 to 27 per cent.

Barkersaid he remains confidentwith thecasino's arrangement with Hemisphere.

"Financially, I'm very satisfied [with] how we are able to meet our needs," he said.