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Musical Racetracks 

Could too much gaming create problems for Ohio's casinos?


According to law, everyone is sitting pretty.

After successfully tag-teaming the push for statewide gambling through a voter referendum in 2009, Dan Gilbert's Rock Gaming and industry giant Penn National Gaming Inc. split the spoils: the rights to develop casino projects in four Ohio metro areas.

The market divide was clean: Penn stuck flags into Columbus and Toledo; Rock marked turf in Cincinnati and Cleveland. For the partners, who spent an estimated $47 million on the campaign, their effort was rewarded with the kind of in-state market dominance rarely seen outside of an Economics 101 textbook.

But that balance could easily be offset by an old factor now rearing up again. Newly installed Governor John Kasich is considering whether to expand gaming through digital slot machines — known as video lottery terminals (VLTs) — at Ohio's racetracks.

Since the campaign trail, Kasich has been ambivalent about Ohio gaming. In particular, he's voiced concern that the state didn't get the best deal from developers, who wrote the legislation without the state government's input. Under the law, each casino will pay a $50 million licensing fee to essentially print cash.

"It rankles me that they spent approximately $200 million for a $1 billion asset, and it happened because they spent enough money to get it on the ballot to pass this thing, which means we didn't control our own destiny," Kasich told The Toledo Blade earlier this year. "I'd like for us to be able to better control our own destiny on some of these issues."

VLTs could not only offer such control but radically alter the game.

The change would amount to an overnight Cinderella switch, turning cash-bleeding racetracks into slot parlors, or "racinos," in industry-speak. Instead of four mother-ship casinos holding down the industry, 11 gaming sites would dot the map. In Northeast Ohio, struggling Thistledown and Northfield Park would join Rock's downtown project as potential draws for the slot-hungry.

And although it's unclear where Kasich will eventually fall on the issue, the players have already begun to make their moves; a high-stakes Monopoly game is under way to see who will be best positioned to capture potential VLT business — and, just as important, who will be best positioned to eat away at the other guy's share.

Opposing Strategies

Ohio's seven racetracks have struggled for years. Over the last decade, bets have fallen almost 60 percent. For almost as long, many tracks have touted VLTs as the silver-bullet solution for reviving the industry. In 2009, when then-Governor Ted Strickland faced a ballooning budget deficit, he green-lit 17,500 VLTs at the state's racetracks, an arrangement that would have directed 50 percent of the gaming revenue back to the state.

The move was attacked in court by gambling opponents and eventually shelved. But it never became clear whether the governor even had the authority to authorize VLTs or if voters and the legislature would have to sign off as well. This is one of several areas Kasich's administration plans to investigate before issuing a decision.

But legislative mechanics aside, the real question regarding VLTs is whether or not Ohio's itch for the slots is great enough to support both Vegas-style gaming and racinos.

The answer, according to most industry insiders, is a cautious yes. A number of studies say Ohioans currently spend around $1.2 billion annually at gaming sites across state lines. The more options there are within the state, the higher the likelihood of snagging a greater share of that business. But with VLTs, more players in the mix means more players palming the winnings, according to David G. Schwartz, director of the Center for Gaming Research at the University of Nevada, Las Vegas.

"Obviously, if you've got 11 locations instead of 4 locations, that revenue is going to be more spread out," he explains. "If you go from having no competition to competition, that's going to change your business plans, if you're a responsible business person."

Both Penn National and Rock are arranging their chess pieces for the change — albeit in radically different ways. Neither group opposes VLTs, and both have recently purchased tracks. Last May, Caesar's Entertainment Corp., Rock's partner on its casino projects, paid $43 million for Thistledown, which is about seven miles from Northfield Park and 10 miles from downtown Cleveland. Rock has an option on the track; if VLTs are approved in Ohio, the company plans to pull the trigger on the sale. According to Rock spokesperson Jennifer Kulczycki, the track will complement the two-phase downtown Cleveland project.

"It's a close proximity, it's a bit of a different clientele, a different gaming customer. But that doesn't change our focus on Cleveland," she says. "We actually think the gaming revenue could go up."

Last March, Penn National spent $37 million on Beulah Park, a suburban track located seven miles from Columbus, eight miles from another track (Scioto Downs), and about six miles from the site of the company's future casino. But instead of integrating the two holdings, Penn National wants to relocate. Under a proposal presented to the Ohio State Racing Commission earlier this year, Penn would pack up Beulah Park and move it to Dayton; similarly, the company's track in Toledo — Raceway Park — would be transferred to a site in Austintown, near Youngstown.

"For [Penn] to have what would amount to having casinos and racinos within miles of each other in the same market doesn't make sense for the company and doesn't make sense for the state, because you end up cannibalizing your own market," says Bob Tenenbaum, a spokesman for Penn National.

But Penn National's own plan has butted against opposition from those who believe the company is using VLTs to unilaterally blitz every market across the state. If allowed to move forward with its site relocation, Penn National will not only hold down the Toledo and Columbus gaming markets with its casinos, but would also have shops set up in Youngstown and Dayton. Considering the company already has a significant grip on the Cincinnati market, thanks to its high-grossing Hollywood casino located just over the river in Indiana, Penn National would have an all-points presence in Ohio.

"The bad thing about this is Penn is going to control five spots in Ohio, and that's monopolistic in every way," says Rick Lertzman, a longtime advocate for Ohio gaming. "The state really needs to take a look at this."

Lertzman has a considerable horse in this race. He fronts a group of undisclosed investors proposing Mahoning Valley Downs, a 200-acre resort in the Youngstown area slated to include a 400-room hotel and spa, a golf course, restaurants and shops — as well as a racetrack. The $300 million project will move forward with or without VLTs, he says. The group is currently filing applications for a racing license.

Penn National's Tenenbaum dismisses the charges of monopoly. "I think it's a silly objection. Penn would be in Toledo, Columbus, Dayton, and the Mahoning Valley. There are other racetracks in Cincinnati, Cleveland, and Columbus," he says. The relocation would increase the state's gaming tax revenue by around $200 million annually, according to the company's math.

Plotting a Monopoly?

The game of musical racetracks spotlights how increased competition in a VLT'd Ohio could be problematic for the state's infant industry. Yes, most agree there's enough gaming business out there for multiple Ohio projects. But that success also depends heavily on what part of the state you're talking about.

Should VLTs get approved, the pieces resettle as proposed, and Mahoning Valley Downs happen, the northern part of the state would have six gaming options — five of them clustered around the northeast corner. Those chips might be in the wrong place, according to UNLV's Schwartz. A number of gaming options make sense in southern Ohio, he explains, because they would be positioned to pull from Kentucky, an underserved market. "But northern Ohio, you've got Michigan, Pennsylvania, and Indiana, and they all have pretty robust industries."

And while the original setup outlined in the legislation obviously isn't an example of the free market at work, it gives developers a leg up for a crucial reason. According to Schwartz, the casino business isn't exactly growing nationally, and bankers are skittish about lending money for gaming projects. That is, unless they see market dominance.

"If you can guarantee that by statute we're the only casino in how many miles, then [banks] may be more interested," he says. "But are you going to be able to borrow the same amount of money if the bankers know you have competitors down the street? That could be a limiting factor."

Rock is working out financing for the first phase of its Cleveland project, which calls for a $350 million Horseshoe Casino in the Higbee Building that is expected to open by 2012. Phase II, a $600 million chunk of Vegas glitz airlifted onto the banks of the Cuyahoga, is planned for down the line.

Kulczycki admits that if Northeast Ohioans went from having one gaming option to three or more, there's a chance the downtown project's revenue projections could slip. But studies of the Cleveland-area gaming market justify the project regardless of competition, she says.


Kulczycki also says that the uptick in competition is all speculative at this point, and that the company will not "speculatively worry" about future events, including the possibility that Rock's former partner, Penn National, sets up shop on Rock's doorstep.

"We'll certainly keep an eye on it," she says. "But it's not a decision we have control on."

In the end, it will come down to how Kasich chooses to roll on the issue. Deputy Press Secretary Connie Wehrkamp tells Scene the governor's office is in the midst of hiring an expert to review VLTs and other forms of gaming in order to "best harmonize" the state's new industry. There's no cemented timeline for when that hire will happen or when the review will be completed.

"Until we see the full report, no policy decisions on gaming will be made," says Wehrkamp.

But with a cocked-and-loaded budget deficit firmly placed against Ohio's head, there seems to be little option about what the administration can do. Regardless of how the tax on gaming revenue for racinos breaks down, they'll give the state an opportunity to squeeze more money out of gamers. The ongoing land scramble shows that developers know they could earn more as well. That is, if they're holding down the right real estate.

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