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Gaming Decisions Dating Back to 1999 Doomed Hollywood

This week’s LET IT RIDE.COM HOT TOPIC comes from Matt Hegarty of DRF.com…take a read and VOICE AN OPINION!

Losing bet on gaming doomed historic track

When Hollywood Park closes its doors for good Sunday, it will become the inevitable financial casualty of two bets reaching back to 1999. Those wagers worked out well for the two companies that tied their money to the track – a perverse turn of events considering the gaping hole the track’s closing will leave on the national racing landscape and the track’s deep history.

Hollywood Park was first targeted for a big payoff by Churchill Downs Inc., which bought the track in 1999 as part of a national expansion that had two goals: acquiring simulcast signals and planting stakes in potential casino-gambling markets. Six years later, however, frustrated by the state’s opposition to expanding casino gambling beyond Native American reservations, Churchill unloaded the track – at a $120 million markup from the price it paid.

The buyer in 2005 was a real-estate company, Bay Meadows Land Company, controlled by a California Democratic businessman with deep ties to the state’s legislature, Terry Fancher. His company, too, was betting on getting slot machines or casino games at the track, but unsuccessful efforts supported by Fancher and the rest of the California racing industry to improve Hollywood’s chances at reaping the rewards of expanded gambling failed miserably in the next three years.

Then the real-estate market collapsed.

That collapse was the only reason Hollywood Park held on until 2013. With the track located on valuable real estate, with quick access to nearby LAX and the city’s ports, Hollywood Park’s owners kept it operating solely because razing the facility and redeveloping the land wasn’t prudent until the real-estate market recovered. What’s more, it’s become apparent since a referendum failed in 2007 that the state has no interest in giving racetracks slot machines, and so Hollywood’s owners are finally cashing in their chips for the lucrative world of retail and housing development.

That reality might be off-putting to many local racing fans and historians, but the simple fact is that real-estate developers look at one crucial statistic in gauging the worth of a property: profit per square foot. Hollywood Park sits on a lot of square feet, 238 acres worth of sprawling property that includes a backside generating far more expenses than revenues and a spacious infield unused but by birds, a pretty park no one can picnic in, with value only as a backdrop for photographs that rarely make the papers these days.

Meanwhile, handle nationally on racing went into a free fall at the start of the 2008 economic meltdown after years of stagnation or small declines, although it has stabilized over the past two years. Handle at Hollywood’s summer meeting in 2008 averaged $11.8 million a day, a number that declined to $9.1 million in 2012, while average handle at its 2008 fall meeting was $8.3 million, below its 2012 fall meet average of $8.9 million. At the same time, real-estate values have been steadily creeping up.

“From an economic point of view, the land now simply has a higher and better use, so, unfortunately, racing will not continue here once the 2013 autumn meet is completed,” said the track’s president, Jack Liebau, when finally announcing the closing earlier this year.

Both Churchill Downs and Bay Meadows Land Company made no secret of their goals for Hollywood – slot machines. Churchill decided to bow out as the result of a breathtaking miscalculation by the state’s racing constituents in 2004 to support an industry-drafted referendum that would have forced Native American casinos to contribute 25 percent of their gambling revenues to the state and to local governments. Under the language of the referendum, if a single Native American casino refused to make the payments within 90 days of the referendum passing, the state’s racetracks and card rooms would get a backdoor right to operate as many as 30,000 slot machines.

The referendum was shot down by 84 percent of the voters. In defeat, the racing industry came off as petty and vindictive, eroding support for their efforts for expanded gambling while simultaneously serving up a stark reminder of the unbreakable political clout of the Native American casino lobby.

Frustrated by the vote and bowing to reality, Churchill reached its agreement to sell the track to Fancher’s company in 2005 for $260 million. Tom Meeker, Churchill’s chief executive when the company purchased the track for $140 million in cash from a company controlled by R.D. Hubbard, said after reaching the deal that the state “seems to have forsaken racing,” a reference to the company’s inability to get any authorization for casino gambling. That comment probably didn’t endear the state racing industry to lawmakers, either.

The sale allowed Churchill to retire nearly all of its long-term debt and post a $72 million profit for the quarter. Hollywood’s average handle when Churchill acquired the track in 1999 was $10.38 million for the summer meet and $9.66 million for the fall meet. When the company sold the track in 2005, those numbers were $10.42 million (little change) and $8.94 million (a 7.4 percent decline), respectively.

Fancher picked up right where Churchill left off, even if his language was coded in the type of business-speak that is familiar to anyone who has watched a racetrack set the stage for lobbying efforts to get slot machines. During a conference call to discuss the purchase of the track, Fancher said: “[We] will seek alternative uses for the current racetrack site, in collaboration with the city of Inglewood, in the event that our best efforts are unable to improve the underlying economics of the horse racing industry and stem the tide of horses leaving the state.”

Then he issued a warning to Gov. Arnold Schwarzenegger: “It would be tragic to see racing fall off the landscape in California. Governor, you can do something about it.”

Fancher and supporters of expanded gambling wasted no time in pursuing their goals, working behind the scenes to try to strike a deal to bring slots to the state’s tracks. Those efforts failed to bear any fruit. In 2007, a referendum that would have nullified the state’s agreements with Native American tribes – and opened the door to slots at tracks – failed nearly as spectacularly as the 2004 vote. Efforts to revive the issue have fallen flat ever since.

Fancher had vowed to keep Hollywood up and running as a racetrack only until 2008, but any plans for redeveloping the property then faded in the wake of the dramatic pullback in real-estate investment when credit and land values collapsed as part of the recession. Just in case anyone had any lingering confidence in Hollywood’s future as a racetrack as a result of the delay, however, the owner quickly put those hopes to rest when Bay Meadows Race Course, the company’s other racetrack holding, located in an industrial area south of San Francisco, was torn down late in 2008 and promptly redeveloped.

The larger concern for the racing industry is whether Hollywood’s fate will be shared by other similar racetracks. While crosstown circuit member Santa Anita is probably safe from redevelopment over the short run due to a combination of its billionaire owner’s ability to absorb losses and the property’s few viable redevelopment options in a tony location already crowded with retail and housing, other tracks without expanded gambling will face the same pressures over the long term unless they receive the right to operate slot machines.

With casino-type gambling reaching into nearly every nook and cranny of the continental United States, tracks without gaming have now become few and far between. Tracks in Illinois, Arizona, and Washington fit the bill. Kentucky, surrounded by casino states, obviously stands out, but only one Kentucky track, Turfway Park, is in dire financial straits. Churchill has the cash-cow Kentucky Derby; Keeneland is a not-for-profit that has consistently posted record attendance and handle figures despite the recession (and has sales revenue to fall back on); and both Kentucky Downs and, to a lesser extent, Ellis Park are reaping revenues from Instant Racing machines, devices that so nearly resemble slot machines that they are hardly distinguishable from the real things.

But in Texas and Virginia, two states where casino gambling seems a longshot at best, the future is grim. Tracks in those states, each with its own long equine pedigree, opened in places where racing seemed a sure thing, and at a time when the national gambling expansion was beginning to carry racetracks with it to the land of riches. But that has changed, seemingly irreversibly. Unless racing finds a way to resurrect its fortunes – and wean itself from the slot-machine subsidies that have so distorted the economic and political incentives shaping its present and future – more tracks will go the way of Hollywood Park, white elephants whose once best uses expired long ago.

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Are Kentucky Slots Facing “Do or Die”?

This week’s LET IT RIDE.COM HOT TOPIC comes from Gregory Hall of The Courier-Journal…take a read and VOICE AN OPINION!

Is this the last chance for casino gambling in Kentucky?

FRANKFORT, KY. — Supporters of expanded gambling have said this year’s legislative session — fresh off Gov. Steve Beshear’s landslide re-election win over Senate President David Williams — may offer their best chance yet for success.

But is it also their last chance?

“I don’t think so. Not at all,” said Beshear, who has proposed a constitutional amendment that is expected to get its first airing on Wednesday before the Senate State & Local Government Committee.

Whether the measure passes this session or not — and he thinks it can — Beshear said, “I am excited that the issue is finally getting the attention that I think it deserves, and I think it will only go on from here.”

Others, on both sides of the debate, aren’t so sure.

While the issue likely wouldn’t go away, they say, a defeat could seriously derail political momentum, at least for the push to allow expanded gaming through a constitutional amendment — an approach that circumscribes the chance of a court challenge.

Martin Cothran, a senior policy analyst for the Family Foundation of Kentucky, which opposes expanded gambling, said a defeat on the Senate floor could kill the issue practically and politically speaking.

“I think … unless there’s a change in the party dynamics of the Senate, that this is the last hurrah,” Cothran said.

House Speaker Greg Stumbo, D-Prestonsburg, who has pushed for expanded gambling in the past but prefers doing it through statute, agreed that defeat of Senate Bill 151 might end the push for an amendment.

But he said, “I don’t think you can say something that’s been around for 20 years is going to die overnight.

“… This issue’s not going to go away until we address it or solve it or put an end to it. The manner in which the issue is addressed may change, but I don’t think the issue would go away.”

When asked the same question, Williams, a Burkesville Republican who opposes expanded gambling, said he doesn’t respond to hypotheticals. During last year’s campaign, he said the votes could be in the Senate to pass an amendment, but he has been critical of the way the current bill is drafted.

A constitutional amendment requires a three-fifths vote in both chambers of the legislature — 23 senators and 60 representatives — and ratification by the voters in the November general election.

SB 151, which contains Beshear’s proposed constitutional amendment, was introduced last week and assigned to the State & Local Government Committee, whose chairman, Georgetown Republican Damon Thayer, is the measure’s sponsor.

The amendment would allow up to five casinos at racetracks and two at other locations, though the latter could not be within 60 miles of one of the state’s eight tracks.

But that wording could change significantly by the time the committee is expected to take it up on Wednesday, with Beshear and Agriculture Commissioner James Comer, a Republican, planning to testify for it and Cothran against it.

Thayer previously compared the bill’s drafting to “threading the needle” — finding a compromise that works for those who want casinos only at tracks and those who want no guarantees for tracks.

But responding to criticism of the bill’s language, both he and Stumbo said a simpler amendment would have a better shot at passing.

Specifically, some legislators in both parties and chambers have been critical of the amendment’s preferential treatment of the horse industry and in how the 60-mile radius in essence gives racetracks like Churchill Downs in Louisville and Turfway Park in Florence monopolies in their markets.

If those tracks didn’t get one of the five racetrack casinos, then there wouldn’t be any casino in the Kentucky portion of their markets.

“There are some legitimate constitutional concerns that are being brought up and I think we’re going to have to be mindful of those,” Thayer said on Thursday.

He said that he thinks a simpler amendment — leaving the racetrack issues to enabling legislation that would be considered later if the amendment passes — is “the way we’re headed.”

In an interview with The Courier-Journal, Beshear said he may make changes to the bill in response to complaints from legislators.
“We’re getting a lot of useful suggestions, and I’m going to be talking with a number of folks in the legislature,” he said.

As it stands now, the bill has at least five votes in committee — six are needed for passage — and Thayer has said it likely will get to the Senate floor, where Republicans command a 23-15 majority, including one independent who caucuses with them.

While the Family Foundation has declared the bill dead, and opponents plan to rally against it Tuesday at the Capitol, Thayer said he doesn’t believe anyone really knows where the votes will be when and if the roll is called on the floor.

“I think that’s difficult to say definitively, at this time, whether it’s going to pass or fail,” he said. “I think it’s very close. I do think it could go either way.”

Cothran said he believes the bill might die in Thayer’s committee. But if it does get to a floor vote, he believes a decisive defeat “is a very real possibility” — and effectively would spell the end to the push for expanded gaming, assuming the makeup of the Senate remains similar.

“I think that any kind of conservative leadership would have plenty of justification to say the next time they bring a bill like this, ‘been there, done that,’ ” he said.

Cothran acknowledged that “as long as there’s big money in it for casino advocates,” the incentive to continue the push remains. “But I think that they’re going to find fewer politicians willing to risk their credibility on it,” he said.

Thayer said he agrees with Cothran on every issue but this one.

“To me it’s about letting the people decide,” Thayer said, declining to say whether he thinks the issue is dead forever if his bill fails.

“I never want to say anything is alive or dead forever,” he said. “But this is the last time I will sponsor it.”

Patrick Neely, executive director of the pro-gambling Kentucky Equine Education Project, said they don’t see an end to the issue if the bill fails.

“As long as our signature industry remains at a competitive disadvantage and as long as hundreds of millions of Kentucky dollars continue flowing to out-of-state casinos, the issue will continue to be debated and discussed,” he said.

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