The State of Florida Gaming, Part 1

The young and impressionable often assume there is a reason for everything. Then they start to realize that legislators, on average, have no idea what they are doing.

Case in point: The Broward County racino market isn't yet a year old -- Magna Entertainment's (Nasdaq: MECA  ) Gulfstream Park in Hallandale became the first racetrack in South Florida to have a casino when it added Class III slots last November, followed by the Mardi Gras (formerly Hollywood Greyhound) last December, and the new Isle of Capri (Nasdaq: ISLE  ) casino at Pompano Park in April -- but the early returns in what is expected to become a $600 million to $700 million industry have come up short. (Class III machines are the typical Vegas-style slots where players compete against the machine. They are generally more profitable for the casino than Class II machines, which pit players against other players in bingo.)

Granted, the South Florida gaming market is highly seasonal, as snowbirds skew results toward the winter months. But according to data in the Gaming Industry Observer periodical, the three Broward County racinos generated combined slot revenue of a mere $53.4 million from the beginning of June through the end of August.

One by one, panelists at last week's Florida Gaming Summit at the Seminole Hard Rock Hotel and Casino in Hollywood expressed disappointment at the weak performance. Deutsche Bank's (NYSE: DB  ) Bill Lerner went as far as to call it a "disaster." And to be honest, I can't think of an instance when someone said, "Well, on the bright side ... "

Now, I would be remiss to tell you the three racino operators aren't responsible for their own problems, because I don't think they really know what they are doing (more on that in Part II of this article). But because of the absurd operating conditions in South Florida -- primarily the prohibitive 53.5% gaming tax rate, which discourages capital investment -- the racino operators don't even have a chance to compete with the high-flying, large-scale Seminole Hard Rock resort in Hollywood and a smaller Seminole casino undergoing an expansion in Coconut Creek.

Meanwhile, the Seminoles are negotiating a compact with Florida Gov. Charlie Crist (the most recently extended deadline was Oct. 15, which has passed without a deal) that would give the Seminoles Class III slots to replace their Class II bingo machines and the added advantage of table games in exchange for paying taxes to the state. At the same time, three more pari-mutuel facilities in Dade County could get slot machines as well, pending the results of a vote in January.

This past summer, the racinos were granted extended operating hours, the ability to place ATMs on site (but not on the casino floor), the ability to offer bad beat jackpots, and an increase in the slot limit to 2,000 from 1,500. Yet despite such relaxed restrictions, the main obstacle -- the tax rate -- remains. As a result, Boyd Gaming (NYSE: BYD  ) , the fourth and last racino operator in Broward County, hasn't even broken ground on a new slot facility at the Dania Jai Alai.

Level the playing field
As per the Indian Gaming Regulatory Act of 1988, the rule is that whatever commercial operators are allowed to have in Florida, American Indians are allowed to have as well. But I have the impression it ought to be the other way around. Under these conditions, the only winners are the slot operators -- including International Game Technology (NYSE: IGT  ) , WMS Industries (NYSE: WMS  ) , Bally Technologies (NYSE: BYI  ) -- and the Seminoles.

And here's a thought: If you're going to gamble, then you are going to gamble. The state should encourage gamblers to play at commercial racinos rather than Seminole casinos so that the state could collect the higher return on the gambler's dollar, regardless of what the Seminoles' ultimate tax rate will be. And the easiest way to do so is to lower the gaming tax rate to encourage investment on the part of the racinos.

The tax rate doesn't have to be 12%. It doesn't even need to be as low as the rate the Seminoles will pay; it just needs to be a rate the racino operators can work with, perhaps in the 30% range. Moreover, if the Seminoles have table games, then the racinos should be allowed to have table games as well.

It's not exactly as if the racino operators are putting out the best product; they just don't stand a chance under these conditions.

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