by Timothy Capps
Timothy Capps is the former executive director of the Maryland Horse Breeders Association and a former executive vice president of the Maryland Jockey Club, which owns Laurel Park and Pimlico Race Track. The Maryland Jockey Club is owned by Magna Entertainment Corporation. During his tenure in Maryland, he lobbied actively for the establishment of slots at the tracks. Now, Tim Capps is the “Executive-in-Resident” in the College of Business, Equine Program at the University of Louisville. Read his editorial after the passage of the slots referendum on equiery.com.
Just when you thought there were lights at the end of the tunnel in the long and tortured path toward bringing slot machines to Maryland, it appears that those lights might really be from the proverbial oncoming train.
The referendum for slots in five jurisdictions, which passed handily in November of 2008, seemed to cast aside the contentious debate and political maneuvers that had characterized slots discussions since the mid- 1990s and set the stage for a reasonably orderly and expeditious licensing process, beginning in early February of 2009.
Regular visitors to Casino Oasis slots and fans of similar casino sites and games were expecting to be able to play their favourite slot games on machines in Maryland for the first time ever. In fact, the only real drama apparently lingering was the question of how many applicants there would be for each of the five locations authorized in the enabling legislation, with the expectation being that there could be competitive bids for at least two or three of the prospective sites.
Of course, no one could have seriously anticipated the waterfall-like collapse of the national economy and the seize-up of the credit markets that occurred in the last half of 2008. Even prosperous Maryland would feel the fallout from the worst economy, by many measures, since the Great Depression, although one could argue that this scenario would increase the urgency to license those would-be slots facilities and their operators, the better to get them up and running quickly as a way of alleviating pressures on the state budget, not to mention the jobs they would create.
There were, to be sure, some potentially nagging problems with the legislative requirements for slots operators, among them the amount provided to the operators (33% for the tracks which could get slots— only Laurel and Ocean Downs would be eligible, 30% for non-track operations, license fees of $3 million for every 500 machines applied for, and an onerous $36 million in “rent” annually for the Baltimore city property, a tax to go to the city).
Maryland has always been a potentially lucrative slots state, both for operators and for other stakeholders, notably state government. However, three of the prospective sites—Allegany County (Rocky Gap), Cecil County, and Ocean Downs (Ocean Pines, near Ocean City)—figure to be only modestly successful, due to their remoteness to the area’s major population centers, and the competition already in existence in West Virginia, Pennsylvania, and Delaware. Accordingly, one could expect, given the tax rate and license fees, bids for 500 to 1,000 machines at each location.
The Baltimore city and Anne Arundel County locations should be far more productive for everyone involved, but that $36 million add-on in Baltimore would certainly make the site much more problematic. Add to that the difficulty in finding financing for anything right now, in particular highrisk ventures such as gambling facilities which are subject to changing political goals and whims, and there was possible trouble on the horizon, which became an ugly reality when the bids were submitted on February 2nd.
The Bids & The Bidders
The bidder for the Cecil County location was Penn National Gaming Inc., owners of race tracks and casinos and one of the shrewdest gaming operators. They asked for only 500 machines at the outset (2,000 less than allotted), and indicated their lack of enthusiasm with their Maryland circumstances because of the high tax rate.
The bidder on the state-owned Rocky Gap conference center property also sought only 500 machines (out of 1,500 allotted), and then failed to provide a check for $3 million for the license fee, which would disqualify their bid.
Oceans Downs’ owner, Bill Rickman, submitted a bid for 800 machines at that location (2,500 allotted), and did pay the $4.8 million license fee. In reality, those first three bids were probably realistic given the nearby competition for the gaming dollar, their locations relative to that competition and to the out-ofstate competitors, and the Maryland gaming tax structure.
The Baltimore site attracted only one bidder, and that one, too, sought only 500 machines (out of 3,750 allocated), undoubtedly a reflection of the $36 million property tax, added on to the state tax and licensing fee.
Anne Arundel County was the only jurisdiction to attract two bids, and therein lies a tale, and not a good one for Maryland racing. The slots legislation provided for a single license in Anne Arundel County, within a two-mile corridor along either side of I-295, the Baltimore-Washington Parkway. This would include Laurel Park, which was widely expected to compete for and receive a license, in addition to areas such as Arundel Mills, the mega-shopping complex, and BWI Airport.
Laurel had to be considered an odds-on favorite for the license, although one could never discount the capacity of Magna Entertainment Corporation, the owners of Laurel and Pimlico race tracks, to snatch defeat from the jaws of victory. Magna’s penchant for stumbling and bumbling has become well known throughout the American racing industry and the company’s survivability is in extreme doubt because of a crushing debt burden and the steady slide in business among its race tracks. The company has appeared to be on the verge of bankruptcy for a couple of years, only to get several last-minute reprieves when creditors, hoping to salvage something from the coming wreckage, would throw another lifeline to the company.
Increasing the drama in Anne Arundel was the buzz that successful Baltimore developer David Cordish, a major influence in the evolution of the entertainment facilities in the Harbor area (the Power Plant, etc.), was preparing a bid for a slots license at a facility adjacent to Arundel Mills. Cordish not only has a track record of making plans and executing them, but could be counted on to have both credible partners and financing, neither of which seemed likely with Magna.
The Bid Day
When the application day arrived on February 2, Cordish and a group including Hard Rock, Inc., which not only sells burgers and fries, but is in the casino business in Nevada, Florida and elsewhere, delivered an application for a 4,750 machine facility at Arundel Mills, and included a check for the $28.5 million license fee.
Magna, after what was described by attending media as a theatrical display with lots of guys in overcoats wandering around a fleet of black SUVs talking on cell phones, finally dropped off its application for 3,000 machines at Laurel a few minutes ahead of the 4 p.m. deadline, but forgot the part about the check, which was a requirement of the application process. After considering the matter and getting advice from the state attorney general’s office, the commission that is charged with selecting the slots licensees disqualified both the Magna bid and the one for Rocky Gap for failure to comply with the licensing fee requirement.
Attorneys representing Magna, flailing around for anything to keep their client’s slots hopes alive, filed suit (naturally) in an Anne Arundel court, claiming that the process was constitutionally flawed because it wasn’t clear from the statute that a losing applicant would be able to reclaim their licensing fee (Magna had said that this was the reason they did not submit the fee initially, and said they had placed the money in an escrow account after the deadline had passed).
So, after clearing the debris, what was left? For starters, with the Rocky Gap applicant disqualified along with Magna, the four remaining potential players have applied for 6,550 machines at four locations, far below the 15,000 total authorized by the legislation, meaning the state now has $39.3 million in license fees instead of the $90 million anticipated (hoped for?). State officials, including the Governor and legislative leadership, expressed great disappointment and blamed the state of the economy, which undoubtedly is a factor, but scarcely the only one. In a logical world, the administration and legislature would review the outcome, then take a serious look at modifying the tax and fee structure, although that probably has some legal implications on the bidding process and, besides, it’s too logical in a political world.
If nothing else, the present scenario is indicative of one reality: you can establish a tax structure which sets the investment bar so high that even a potentially strong business model becomes unattractive.
Maryland Racing’s Gloomy Future
The impact on the Maryland racing community, which had its hopes set on Laurel getting a slots license and becoming the strongest slots franchise in the state quickly, is analogous to a pricked balloon. While purses and breeders’ funds still stand to be enriched considerably, if not as much as hoped for or forecast, the unthinkable has happened: no Thoroughbred track in the state will get slots, suggesting a gloomy future for those tracks, especially given Magna’s likely terminal state.
The bottom line for the two tracks is that Pimlico has only the Preakness keeping it alive and Laurel, a superior operating track, doesn’t have a Preakness week and runs too many race days to be profitable. Consolidation is possible, including cutting race days dramatically, something that would have a deleterious effect on owners, trainers and breeders, or closing Pimlico and moving the Preakness to Laurel, or both.
Complicating all this is that Magna’s passage from the scene could be slow and painful, made worse by its inability to sell the tracks for anything other than a fire-sale price (selling was already effectively off the table by their commitment to pay more than half their slots revenues, presuming they got a license, to the tracks’ former owners, a deal that should lay to rest any doubt about Magna’s ineptitude).
There seem two likely possibilities at the moment: (1) a bankruptcy filing by Magna in the near future that would place all their properties into receivership and, eventually, into the hands of a trustee for disposal purposes, or (2) an orderly sale to someone at a price the buyer can live with once they look at MJC’s books and contemplate how to build a workable business model that incorporates the tracks’ debt and their purchase price. There will certainly be interested parties, but their interest is likely to fade once they face the cold financial facts of MJC life. The Preakness is a great franchise, and the tracks have value, but at a very low price, something equivalent to their debt.
In any case, a purchase, either out of bankruptcy or more directly, almost certainly means far fewer racing days in the future, no matter how much purse money becomes available, and, at some point the possibility that the tracks can longer function, with the consequent loss of the Preakness. It is the latter possibility that creates an opportunity which, as undesirable as it might seem in some respects, certainly beats any likely alternatives.
A Last Resort?
Imagine this scenario: the state of Maryland, loathe to risk the loss of its signature sporting event, makes a deal to buy the Maryland Jockey Club assets, including the Preakness trademark, for the tracks’ debt plus some premium for the Preakness. The state then places the entities, which also include the training center at Bowie, into a new agency called the Maryland Racing Authority, or place them under the aegis of the Maryland Stadium Authority.
The state leases the operation to a race track management company that can manage the operations with no debt service, working with operating cash flow. The ownership entity—let’s presume that to be the Stadium Authority, issues debt that is supported by the funds from slots to be designated to the Racetrack Facility Renewal Account, which is scheduled to get 2.5% of slots proceeds for eight years, for facilities enhancements at the state’s tracks. With those funds, Laurel, Pimlico and Rosecroft get major re-do’s, then the statute can be revised to maintain an on-going capital expenditures fund that could also be used to bolster operations if needed.
There is no free lunch, of course, but this is viable way for the state to keep the Preakness in its rightful home, while preserving, at minimal cost, its racing industry infrastructure.
Ultimately, a state-industry partnership of this sort may be the only way to keep Maryland’s most enduring sporting heritage alive and well. Otherwise, Maryland racing is on life support, and that is a numbingly awful thing to contemplate.