It's an exciting time for the gaming industry in south Florida. Last year, voters in Broward County approved the installation of up to 1,500 Class III* slot machines at each of the four pari-mutuel gaming facilities in the county. And within the next several weeks, the Mardi Gras Gaming and Racing Center and Magna Entertainment's (NASDAQ:MECA) Gulfstream Park will be the first two pari-mutuel gaming facilities in Broward County to begin Class III slot operations. Isle of Capri's (NASDAQ:ISLE) Pompano Park will follow suit in early 2007, with the Dania Jai-Alai -- which Boyd Gaming (NYSE:BYD) has agreed to purchase for $152.5 million -- to follow some time after that.

Earlier this week, industry leaders, legislators, vendors, and others gathered at the second annual Florida Gaming Summit at the Seminole Hard Rock Hotel & Casino in Hollywood, Fla., to discuss key issues as the Florida gaming industry enters a new era. Today, we'll take a look at the potential for the slot operators, the casinos themselves, and the obstacles they face, and then we'll close out with some of the other key issues.

The potential
There's obviously a tremendous opportunity here. The demographics in south Florida are highly favorable for gaming, with a relatively mature population with lots of free time and money to spend. According to Andrew Zarnett, Managing Director at Deutsche Bank Securities, the two Seminole Hard Rock casinos in Tampa and Hollywood -- which operate over 4,300 Class II machines -- combine to do $1.2 billion in annual business. Zarnett expects the four new slot operations to eventually do $600 million to $700 million.

In fact, you don't even really need to see the numbers to see the demand. While the smallest-denomination machine at the Seminole Hard Rock in Hollywood is a nickel machine, you can't bet less than a quarter on it (the minimum bet is five units). What this means is that not only are there a lot of people betting big on slots (or at least Class II machines that look like slots), but there's also a significant opportunity for the four locals-oriented slot operations to bring in penny-denomination slots and capture substantial lower-end business.

The obstacles
However blessed with opportunity, the pari-mutuels also face considerable obstacles.

  • A "punitive" tax rate. The pari-mutuels will pay taxes at a monstrous 50% of gaming revenues, a rate that Isle of Capri General Counsel Allan Solomon deems "punitive." The high tax rate means lower returns on investment and thus lower levels of investment, making it difficult to compete with the Native American-owned casinos. By comparison, the Seminole Hard Rock and Coconut Creek (also in Broward County) casinos don't pay taxes. Although Jason Giles, General Counsel of the National Indian Gaming Association, argues that the casinos pay taxes to the Seminole tribe, I find it hard to believe that's comparable.
  • Low projected returns attributable to a similarly high tax rate in Pennsylvania kept value-conscious operators Station Casinos (NASDAQ:STN) and Ameristar Casinos (NASDAQ:ASCA) from pursuing potential opportunities in Pennsylvania, and likely south Florida as well.
  • The slot limit. An example of one of those rules that don't actually do anything except serve as an annoyance is the one mandating that the pari-mutuels are limited to 1,500 slots each. Restricting the size of the operation won't stop casino patrons from spending their money -- it only makes it more difficult to compete.
  • Limited hours of operation. The pari-mutuels are only permitted to operate 16 hours per day. The Native American casinos, on the other hand, are permitted to operate 24 hours per day.
  • No ATMs on site. The pari-mutuels are prohibited from having ATMs anywhere on site. That's ridiculous. It's also a bit like prohibiting banks and credit card companies from transferring money to online gaming sites (see "Did Congress Kill Online Poker?"). In the end, it solves nothing but annoys everybody.
  • Other restrictions. Unlike the Hard Rock, the pari-mutuels are restricted from having jackpots for their poker offerings. This is another competitive disadvantage, particularly where the bet limit on poker games in Florida is $2. Jackpots are commonly used to attract low-limit poker players. Also, wide-area progressives -- such as International Game Technology's (NYSE:IGT) Wheel of Fortune games and WMS Industries' (NYSE:WMS) Monopoly and Powerball games -- are also not allowed in the pari-mutuels.

The casinos
Of the four pari-mutuel slot operators, there's no question in my mind that Isle of Capri is getting the best of it, and it has everything to do with the property's location.

Isle of Capri's Pompano Park is located at the north end of Broward County, and is roughly a 30-minute drive from the rest of the pari-mutuels and the Hard Rock. By comparison, the other three competitors -- Boyd's Dania Jai-Alai, Magna's Gulfstream, and the Mardi Gras -- are all located near the south end of Broward County, and none is more than a 15-minute drive from the Seminole Hard Rock.

Isle's location offers a couple of advantages. The first is that a locals casino business is primarily one of convenience. With that in mind, Pompano Park has first dibs on all potential casino patrons in Palm Beach County directly north, which includes exceptionally wealthy residents in Boca Raton, West Palm Beach, and Jupiter. The second advantage is one of durability; Dade County -- directly to the south of Broward -- is only one vote away from legalizing Class III slots at its own pari-mutuel facilities. This means that the three pari-mutuels in south Broward are only one vote away from a heavy dose of additional competition.

To give you a better picture, the Seminole Hard Rock is located a few miles west of I-95. The Dania Jai-Alai, Mardi Gras, and Gulfstream are all located just off U.S.-1, a few miles east of I-95. The Dania Jai-Alai and Hard Rock share the same I-95 exit; the Mardi Gras is a few miles south of the Jai-Alai, and Gulfstream is maybe a mile or two south of the Mardi Gras, marking the southern tip of the market.

No easy task
The south Florida gaming market is a no-brainer. Unfortunately for the casino operators, it seems as if for every new state to legalize gambling, the rules keep getting worse and worse, and so do the returns on investment.

The bright side is that most of the restrictions will likely be relaxed eventually, and it helps that Gov. Jeb Bush -- who is dead opposed to gambling and a big reason why the restrictions are in place -- is on the way out. The slot limit probably won't last forever, and the ATM ban surely won't. The market may also eventually see table games, though that's at least several years away.

The downside for the new operators is that Dade County won't be far behind, and anything the pari-mutuels can do, the Seminoles can do without the same restrictions. In other words, the Seminole casinos will soon be allowed to operate Class III slots, and a lot more of them. Also, it's a lot harder to justify lowering the gaming tax rate than it is to justify raising it, even if lowering it would encourage investment and higher taxes. And the "punitive" tax rate is easily the biggest obstacle the pari-mutuels must overcome to get the money.

*Class II machines pit players against other players in bingo. Class III machines are your typical Vegas-style slots where players compete against the machine. Class III machines are generally more profitable for the casino than Class II.

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Fool contributor Jeff Hwang owns shares of Ameristar Casinos, International Game Technology, and WMS Industries. The Fool has a disclosure policy.