*Co-authored by Etan Mark, partner in Berger Singerman’s Miami office and co-manager of the Dispute Resolution Team* The scope of gaming’s impact on the hotel industry depends upon whom you ask. If you’re a mom and pop independent, a small franchisee, or you operate Disney (or another company where gaming can have a negative impact on your bottom line), you would most likely conclude that casinos are threats and/or competitors. That potentially includes competition for clientele, direct revenue, and indirect revenue. As you’ll read in our expert panelists’ comments, for example, lost convention revenue is a significant piece of this equation. In stark contrast, many big hotel chains hope to see gaming come their way, and even join forces with the casino companies. From a revenue standpoint, there is no greater partner than a casino occupying your first floor, with your hotel rooms directly above the action. In hospitality, there are very few things which, at least superficially, seem to make more sense. When you compare traditional hotels and casino properties, you can understand that the customer bases can be vastly different. This has the double effect of increasing a given customer segment (locals, residents of neighboring states, and, potentially, national and international clients), while possibly diminishing other segments at the same time (e.g. those with moral objections to gambling). The critical factor our panelists address is geography. All the positives in the world can be ineffectual, if your property is in an area where there is casino saturation and rapidly declining revenues. Nowhere is that more applicable than in Atlantic City, where casino revenue has plunged from a high of $5.2 billion, in 2006, to $2.86 billion last year. With severe competition from Pennsylvania (now the nation’s number two casino market after Nevada) and additional casinos opening in New York and Maryland, the writing is on the wall in New Jersey. As of the authoring of this piece, it’s being reported that 25% of Atlantic City’s casinos could be shut down by the fall of 2014. Even a market giant like Caesars Entertainment is reportedly closing the doors on the iconic Showboat Atlantic City Hotel and Casino. Here at Berger Singerman, we have a unique perspective, having handled casino bankruptcies and restructurings in some of those saturated states, and various casino matters in our home state, Florida, which is, arguably, the most under-penetrated gaming state in the U.S. We thought it would be a great idea to bring together a couple of our colleagues, along with three renowned casino operators/consultants, and explore the paradox that is the future of gaming in Florida, and the future of gaming in America. The moderator of the panel, and the individual responsible for assembling this stellar group of panelists, is my colleague, Etan Mark. Etan’s recent discussion of the future of Florida gaming, in his Miami Herald article, “The Gaming Drizzle on the Horizon,” attracted a lot of attention, and was a significant precursor to the creation of this panel, in conjunction with the host of this event, HistoryMiami, the premier cultural institution committed to gathering, organizing, preserving, and celebrating Miami’s history as the unique crossroads of the Americas. Etan’s bio is featured at the end of this article, and his introduction of our esteemed panelists leads off this inside look at the captivating intersection of hospitality, entertainment, politics, and powerful local and national constituencies: Moderator:
Etan Mark, Esq., Partner, Berger Singerman LLP Panelists:
Randall A. Fine, Managing Director of the Fine Point Group
Isadore "Izzy" Havenick, Vice President of Magic City Casino
Christopher A. Jarvinen, Esq., Partner, Berger Singerman LLP
Dave Jonas, President/COO at Casino Miami Jai Alai **Etan Mark:** In recent months, gaming in South Florida has been described both as the savior of the economy, through jobs creation and tax revenue, and its scourge, the final straw in South Florida's descent into modern day Sodom, leading to massive increases in unemployment and crime. We're not here today to decide who is right and who is wrong in that discussion. Instead we have, I hope, some more modest ambitions in trying to better understand where we're going, and whether there's a likely future for gaming, or an increased level of gaming, in Florida. We're going to be discussing the various special interests involved in that debate, the legislative landscape, and the state of affairs of gaming in Florida, and across the country. Let me introduce our distinguished panelists: **Izzy Havenick** is a native Miamian. He's the Vice President of Magic City Casino, formerly known as the Flagler Greyhound Track. The casino has been a family-owned business since Izzy's grandfather purchased the property in 1952. Izzy is a significant investor in the local community. He's an active corporate partner of local community organizations, including the Miami Beach Chamber of Commerce, the Miami Beach Cultural Arts Council, the Miami Beach Cinematheque, Beacon Council, Miami Museum of Science, UM School of Communications, and the Young Philanthropists of UM Sylvester Cancer Center. **Randy Fine** is the founder and Managing Director of the Fine Point Group - the casino industry's largest full-service gaming consulting and management company. Randy was named one of Global Gaming Magazine's People to Watch in 2010 and In Business Las Vegas's 2009 "40 under 40." He has an equal mix of casino operations and marketing experience. Randy has served as the CEO of two nine-figure gaming companies in Detroit and New Mexico and was the corporate Vice President for Harrah's Entertainment, a 40,000 machine slot operations group. He served as the Chief Marketing Officer for Carl Icahn's gaming company and as Corporate Vice President of Total Rewards for Harrah's. As part of the Fine Point Group's growing litigation support practice, Randy has served as an expert witness for financial institutions, policy advocacy seeking groups, Indian tribes, and local governments in Michigan, Nevada and California. Before entering the gaming industry, Randy worked at McKinsey and Co., Lehman Brothers, the U.S. House of Representatives, and he taught economics at Harvard. He holds both his undergraduate degree and his graduate degree, his MBA, from Harvard. **Dave Jonas** has 30+ years of gaming experience in numerous states. He started his career at an accounting firm and worked his way up until he became president of four properties in Atlantic City for Harrah's, overseeing $2 billion in gaming revenues. Dave subsequently built a casino in Philadelphia from scratch and he is currently running Casino Miami Jai-Alai. **Christopher Jarvinen** is a partner in the Business Reorganization Team at Berger Singerman. Christopher's practice focuses on corporate structuring, cross-border cases and bankruptcy-related litigation. Christopher has represented official committees, receivers or significant parties in interest in numerous gaming and hospitality industry cases, most recently including the chapter 11 bankruptcy of Florida Gaming filed in Miami and the Extended Stay Hotel chain bankruptcy case filed in New York. In addition to serving as a partner at Berger Singerman, Christopher teaches courses to senior executives attending the highest ranked Executive MBA program in Brazil focused on unlocking enterprise and organizational value. Christopher has obtained degrees from Brown, Harvard, Yale, Boston College, FGV-EAESP and Oxford universities and will soon attend Cambridge University. **A recent headline read, "Gambling bills are off the table.” The House speaker stated: “I would say at this point the lights are out.” This headline followed many months of discussions and prognostications that gaming was a virtual certainty and that further legalization was just a matter of time. Most people concluded that it was certainly going to happen and many people felt that it was going to happen in 2014. Of course, as of today’s discussion, the 2014 legislative session is not yet over. Izzy, I know that you've been pretty intimately involved in the legislative process for a number of years. Is there a prospect of an expansion of gaming from the legislature in 2014, or do you think that ship has sailed?** **Izzy Havenick:** I believe gaming will go the way the Seminole Indian Tribe wants it to go in the State of Florida. I think it is dead this Session until a new compact is negotiated with the tribe and inevitably the tribe will then dictate to the State of Florida what's going to happen in the future. **As a backdrop, what are the current discussions and negotiations between the Governor and the Seminoles and how will the framework likely play out? Dave, as somebody who's been running Casino Miami Jai-Alai for the past couple of years, you have been engaged in the legislative process. Do you think there's any reason in 2014 for there to be some legislative change?** **Dave Jonas:** I agree with Izzy and right now, unfortunately, all roads lead through the Seminoles. It is unfortunate because, for a state as big and as great as Florida, for one group to decide the outcome of the gaming conversation is very short-sighted. In other states, where it's been a more open process, like Pennsylvania, Maryland, and Chicago, you have thriving gaming operations that really rival Las Vegas and Atlantic City. Florida, unfortunately, is not ever going to be on the national stage as far as gaming is concerned until that deadlock is lifted. I hold out hope that a deal can be cut with the Seminoles this Legislative Session and, as we all know, a lot of deals are done in politics at the 11th hour. I think a deal still could be struck in the future. In my humble opinion, until the pari-mutuels here in Florida get a level playing field where they can get table games and other amenities, you're not going to see the job growth and the capital investment that should be happening with gaming in this State. There is no reason to have gaming anywhere unless you create jobs, tax revenue, and capital investment. Gaming really creates a thriving industry and, unfortunately, we don't have that right now in South Florida. **With the partial expiration of the Seminole compact in 2015, is there some leverage for the pari-mutuels to gain concessions from the Seminoles? Randy, do you see the pari-mutuels having leverage in negotiations with the Seminoles over the next 18 months?** **Randy Fine:** No, I think the Seminoles really do have most of the leverage. The way the law works, if gaming is legal in a state, in any form or fashion, an Indian tribe cannot be prevented from having that same form of gaming on their tribal lands. That is, the State has to do a compact with the Seminoles but the Seminoles don’t really have to have a compact with the State. It's not the kind of situation where the State can say: "If you don't give us what we want, you're going to have to close.” The Seminoles are very proud of their heritage of doing things their way, and as we saw when the first compact was struck down, after they had already implemented it, the Seminoles told the State "Too bad, we're not changing it." Indian tribes are legally “sovereign nations,” and act as such. Some consider the head of their tribe as a peer to President Obama. There isn’t much leverage to prevail upon those deeply held beliefs. That being said, the State could decide that it is willing to demand less money from the Seminoles because it can make it up elsewhere. The fact of the matter is, in a state as large as Florida, the State could easily make up the lost revenues if it chose to reduce the Seminoles’ level of exclusivity. **The Seminoles have a huge stake in the Hard Rock in Tampa. That casino generates a large amount of revenue for the tribe. It is likely that the Seminoles would, however, like some expansion of gaming within their own casinos, i.e. craps. Is offering new games to the Seminoles a potential avenue for leverage?** **Randy Fine:** Yes, but, craps would probably be a rounding error compared to the actual size of their operations. The granting of table games or card games is where the overwhelming percentage of the value is. So, unfortunately, the State doesn't have a lot of new things to offer, unless the State tells the Seminoles it can build casinos outside of their reservations. But, as it relates to the conduct they can engage in on their sovereign land, most of the train has left the station. **Dave Jonas:** The Seminoles deserve and received a huge head start within the gaming discussion and the gaming industry in Florida, but at some point that has to end. There is no Constitutional requirement that Indian gaming comes ahead of any other gaming, and if you look at most other states in the country, they co-exist in harmony -- and there's plenty of pie to go around here. The pari-mutuels are an industry all to themselves. They employ real people who go home and try to feed their families, buy homes, and do all the other things that we all do. They deserve to make a living as well. If the pari-mutuels obtained table games in South Florida, it would not hurt the Seminoles at all. In fact, it probably would enhance the Seminoles. Slots in South Florida hasn't hurt the Seminoles’ business at all. In fact, it has grown the overall business in Florida, because it’s grown new customers that ultimately go, for a different experience, to the Seminole Casino in Fort Lauderdale. So, the notion that they have the tribe fighting for exclusivity in most of the State, doesn't hold water anymore. It is puzzling to me why that discussion hasn't broadened itself past where we are today. **A recent article from BusinessWeek is titled: "[Local Casinos are a Losing Bet.][1]" The general tenor of the article is that casinos are not economically feasible enterprises. The article makes the argument that there has been a fairly significant decline in gaming revenue in Nevada, New Jersey, and Mississippi, among others. In fact, over the past few years, there has been a significant amount of restructuring and consolidation of various gaming interests throughout the United States. Is there something about Florida that makes it unique or somehow immune to those risks? Randy, can you please address this first, since you've been involved on the national level with a number of casinos, and can offer some inside clarity?** **Randy Fine:** The article is partially right and partially wrong. The problem that the industry has is that most of the value in the casino business was created through the delivery of a government-sanctioned monopoly. Las Vegas was the only place in America for a very long time where you could gamble legally. And then Las Vegas and Atlantic City were the only places in America where you could gamble legally. And then, Nevada, New Jersey, and Mississippi were the only places where you could gamble legally. If you could only have one grocery store in Miami, it wouldn't matter if the food was rotten; people would go there to buy it because they have to eat. **What has happened in the industry as additional states legalized gaming?** **Randy Fine:** As gaming comes to more and more states, people choose a more convenient option. At the same time, as gaming has become more convenient, people have chosen to do more of it. The equivalent example is when one McDonald's in town does $1 million of revenue and a second McDonald's opens on the other side of town. The second McDonald’s does $750,000 in revenue, while the revenue of the first McDonald's declines to an equivalent $750,000. While the town supports both McDonald’s businesses, and they generate $1.5 million in revenue, you are not very happy if you are the owner of the first McDonald's and your business has gone down by $250,000. That is basically what happens in the gaming industry. The market grows almost every year and even if you opened casinos in Jacksonville and in Tallahassee, the effect on the gaming market overall would be slight. So, while the Seminoles could conceivably lose some business if there were five (5) other casinos in Tampa, generally speaking the State’s gaming market is so under-penetrated that there could be a massive expansion and it really would not affect anybody. **Izzy Havenick:** The real effect is not a threat to competition in the gaming industry. The actual, perceived threat is to the State's revenue from Disney and the tourism it brings. That is why Disney is the number one lobbying group against gambling in the State of Florida. **Randy Fine:** I don't agree. People are not going to avoid Disney because there is a casino in Orlando. I think the fact of the matter is that the people who oftentimes oppose gaming in certain states are the people that actually currently own casinos. So, I think Disney opposes gaming, not because they're against gaming; I think it's because they're against building convention hotels outside of Orlando. Disney does not really care all that much about gambling. Disney’s worry is that if there is a Las Vegas-style strip in Miami Beach, with 30,000 or 40,000 hotel rooms, people who attend conventions in Orlando might want to attend them in Miami instead. **Dave Jonas:** The customers at our casino are not the same customers at Disney. Disney’s visitors are mostly families. They offer a totally different environment for recreation. While some people that go to Disney also gamble, Disney’s opposition to gambling has very little to do with competition, and a lot more to do with the perceived conflicts with their family brand. There are additional reasons why markets start to saturate and stop growing over time, as is evidenced in other states. Florida, however, is years away from that occurring. First, Florida is a growing state with people from the Northeast flooding in every day. While the gaming industry may ultimately become saturated and, over time, the market may become fully penetrated, that is a long way away from today. For example, if 25% of the market enjoys gaming and the industry only grows 1% or 2% per year, you will see much slower growth once the market is saturated. Slower growth, however, does not mean a stagnant market. Growth from new entrants into the market, as Florida grows, will remain steady. Unfortunately, however, forecasters and state budget officers get greedy and project 10%-15% growth in their budgets every year for the next twenty years. Once the market matures and fewer new people do it, the growth rates level off. When growth rates level off, the states are the ones left with holes in their budgets that they can't fill. Those who expect year after year growth argue that gaming itself is to blame. **Christopher, you have been involved recently in the restructuring of gaming interests in South Florida through your work with Miami Jai-Alai. What do you see on the national level with respect to gaming trends from a restructuring perspective?** **Christopher Jarvinen:** If anyone had said six years ago that we would see such an uptick in the amount of bankruptcy filings in casinos, I would have had a hard time believing it. They were few and far between. Now, however, two trends have changed the landscape completely. The first trend is that in the early 1990s, there were basically three places you could go to in the United States in order to go to a casino -- Las Vegas, Atlantic City, and certain areas of Mississippi. By this past Great Recession, essentially an entire population of the lower 48 was within a few hours’ drive of a casino, and so you had such an increase in the amount of states that were willing to have or to license casinos, that you've had a real saturation. So, what we've seen, particularly over the last three years, is a dramatic increase in the number of casinos that are choosing the option to restructure under the United States Bankruptcy Code. **Given what we’ve seen over the past three years, do you envision more casino restructurings in the coming years?** **Christopher Jarvinen:** We will see a lot more of these restructurings within the Bankruptcy Code because there are many benefits. You can essentially clean your balance sheet through the process. A bankruptcy filer can sell its assets and the purchaser can buy the assets without inheriting the filer’s debt obligations. That protection offers a huge advantage to filers under the Bankruptcy Code. That being said, Native American casinos are different things altogether. For example, the Foxwoods Casino, in Massachusetts, just restructured out of court. It took four years to restructure and it took $550 million off of its balance sheet. But why did it restructure out of court? The Native American tribe that runs Foxwoods is a sovereign nation. Just like the Seminoles, the tribe lives in their own independent nation. In order to file under the United States Bankruptcy Code, you have to be a corporation. Hence, the argument is that casinos run by Native American tribes aren't corporations; they're not distinguishable from the tribe, and therefore they can't file under the Bankruptcy Code. That’s why they did an out of court restructuring. There are decisions in the bankruptcy courts where they have denied or dismissed Chapter 11 cases filed by Native American tribes on the legal reasoning that there is no "corporation" in order to be able to file, which is a requirement under Chapter 11. **A concern that a number of Florida constituents probably have is that the people who build these $2.4B casinos in Atlantic City aren’t stupid. They're brilliant businessmen and they have yet to restructure. What is the lesson we can learn from their experiences? We assume that the market is under-saturated, but people are reasonably concerned about instilling a false sense of confidence – “If you build it, they will come.” Then, lo and behold, you build it and they don't come. How do we avoid that result?** **Christopher Jarvinen:** What you are going to see and what you are seeing already is consolidation in the industry. For those who can take advantage of its protections, Chapter 11 of the Bankruptcy Code will be used as the structural tool to sell assets without the purchaser inheriting the debt. Consolidation is a natural market response to over-saturation, and it is already happening in this industry nationwide. Like the airline industry, the gaming industry nationwide is consolidating. **Please look into your crystal ball and predict what the gaming landscape will look like in 2020?** **Izzy Havenick:** Sadly, the gaming industry will look exactly like it looks today. Maybe without dog racing at the dog tracks, but I feel like the more time I spend in Tallahassee, the more I realize that the State will go the way of the Seminoles, and the way of the new tribe that is coming in from Alabama and just requested a compact. The legislature isn’t worried about municipal elections that affect gambling and thus, gaming will never get expanded anywhere without the tribes’ say so. **The Genting Group bought a large chunk of land on the Miami River at the old Miami Herald site. Would you suggest that that was a poor investment, assuming that they bought it not for the uptick in real estate values but for the prospect of future gaming?** **Izzy Havenick:** I think everybody who looks at Florida from outside of Florida thinks Florida is ripe for gaming and that it will happen here. But, anyone who lives in Florida, and deals with gaming on a daily basis knows, unfortunately, it won't. I'm sure there will be a great apartment building or a nice hotel there, but I don’t ever see it being a casino. **Randy Fine:** I have to agree 100% with Izzy. Whether it should be expanded or not, I think that, given the power of the Seminoles, the budget that they have to give campaign contributions, and the franchise that they want to protect, they will fight the existential threat, which they perceive, of lots of other casinos in Florida. Between the Seminoles and contributions from Disney, I don't think I see any expansion coming out of it. **There are significant Las Vegas-style gaming interests that have tried to throw their hat in the ring here, not limited to Genting, and they have the resources to contribute in a very material way to these campaigns. Why is it that the sway of the Seminoles so far outweighs the sway of these Las Vegas-style gaming interests?** **Randy Fine:** It always helps to have the hometown advantage. Being part of the community helps, irrespective of where the monies are coming from. No matter how much Sheldon Adelson or Genting is willing to spend, the Seminoles and Disney will always be willing to spend more because the downside to them is so great. One of the primary reasons that gaming may get legalized in any state is that the state goes broke. Legislators do not want to raise taxes so they vote to permit casinos. The second reason to legalize gambling is that legislators do not like to see money from their state going across the border to their neighbors. The general thinking is, “I hate gambling but I like tax revenue, so I'm going to legalize casinos.” Neither pressure currently exists in Florida. We’re a growing state. People are coming here and Florida is actually in pretty good shape economically. We don't have a multi-million dollar hole we need to fill where gambling could be the answer. Second, where are you going to go if you live in South Florida? It's not as though there are casinos right across the border. There aren't any in Georgia; there aren't any in Alabama. If you live way out on the Panhandle, you can theoretically go over to Mississippi, but generally speaking, Florida doesn’t have lost revenue to get back from another state. The lack of these two traditional reasons to legalize gaming, coupled with the entrenched opposition, means change is unlikely anytime soon. **Dave Jonas:** Florida will be broke sometime between now and 2020, from some form of recessionary pressures in the normal economic cycle. Pennsylvania, for example, has a thriving casino industry. It has the second largest casino industry in the country and is a very conservative state. It used to be that everyone said Pennsylvania would never have table games and that it would be a slots-only state. About two years after Pennsylvania received slots, the state turned up a $1B deficit. It was no fault of the state; it was just some bad stuff that happened with some pension liability and the recession. Within six months, a bill was proposed and, lo and behold, Pennsylvania, a state that was never, ever, supposed to have table games, had them. So, if everything stays the way it is in Florida, you probably won't see gaming expansion. But everything isn’t going to stay the way it is. The gaming train has already left the station here in Florida. Gaming has already passed here. So to add table games, or another form of gaming, or more casinos, is very simple. It will take about a month in Tallahassee and a bunch of legislative initiatives that say “Hey, we have a big deficit, how are we going to plug it?” The answer will be, “Let's expand gaming.” The naysayers will say we can't expand gaming and the pro-gamers are going to say “Why not? We already have gaming.” At the end of the day, there's always a deal to be cut with the Seminoles. They may want something that they don't have today. In short, it is very probable that you'll see more gaming in Florida by 2020. **It seems that unless there is decoupling, i.e. if Miami Jai-Alai drops the Jai-Alai part and just operates the gaming part, or at Magic City, if you drop the greyhounds and just keep the slots, it's going to be tough to compete over the next 6-7 years without table games for the pari-mutuels. Is there a significant risk to the continued operations of your businesses, over the next 6-7 years, in the event that either (1) the pari-mutuels aren’t able to get table games, or (2) there isn’t decoupling?** **Izzy Havenick:** It will make doing business tougher, but we're doing okay now with what we have and we'll continue to do okay. One of the things we pride ourselves on is that we're Miami guys and we know what's going on. We have the best slot guy in the country right now running our Casino Florida. While we're the smallest casino in the State of Florida, we're the highest grossing per machine in Florida. We're the group that everybody laughed at when gaming passed here in 2004. “What’s this family doing? They don't know their arm from their elbow (in terms of gaming), and they should sell.” When it comes to gaming, Florida is not going to pass up real money that it’s getting from the Seminole Tribe for money that could come in from the pari-mutuels. Right now, there are eight of us operating, seven that passed the constitutional referendum, and the eighth in Hialeah, as granted by the legislature. Together, the eight of us aren't producing half as much in tax revenues as the State is getting from the Seminoles. We will continue to motor along and do what we can do, but I just think the Seminoles are too big of an adversary for us to ever beat out. **Christopher Jarvinen:** Gaming in 2020 will be online gaming. In this industry, the complexity of managing a casino requires strong leadership. I’ve heard someone remark that Bill Gates once said a single “great” programmer is worth 10,000 “good” programmers, and so, if you have a “great” manager at the casino, she or he is worth 10,000 good managers, and can do things that bring stability, that bring “value-added” to the process. On the other hand, a mediocre or bad manager can lose value for a casino very quickly, much faster than in other industries. One of the challenges for the gaming industry here in Florida and elsewhere, is finding the right managers, the “great” managers, the men and women who can preserve and bring value to the process. In my opinion, the best manager is a professional, one with common sense -- a very experienced individual. That person and the team that he or she leads, could create significant value and literally save casinos. ![alt text][2] *Etan Mark is a partner in Berger Singerman’s Miami office and is Co-Manager of the firm’s Dispute Resolution Team. Mr. Mark focuses his practice on helping clients navigate business disputes both before the commencement of litigation, and through the entire litigation process. In recent months, Mr. Mark has represented one of the principals of Casino Miami Jai Alai through its restructuring, and was involved in (among other things) the negotiation of vendor contracts and leases, union issues, and employment issues. He also has recently worked with an international gaming conglomerate representing its interests in South Florida, and counseled a number of hotels, real estate developers, and retailers through the most recent boom-bust-boom cycle in Miami. Mr. Mark is ranked by Chambers USA as a leading lawyer in commercial litigation, is a former federal law clerk and Certified Fraud Examiner, and splits his practice between state and federal court.* *This article was assembled with the direction of Gavin Gaukroger, a senior associate at Berger Singerman. Mr. Gaukroger comes to the world of Gaming from a technology, Internet, and IP background, having previously worked with product management groups at start-up and mature technology companies. In private practice, he protects patent, copyright, and trademark holders against infringers, and in licensing disputes. Mr. Gaukroger drafts marketing, licensing, and joint-development agreements for technology companies, and counsels and advises businesses on data and privacy compliance and protection, and electronic records management.* [1]: http://www.businessweek.com/articles/2014-04-03/casinos-close-as-revenue-falls-in-gambling-saturated-u-dot-s [2]: http://www.hotelexecutive.com/images/business_review/Etan_Mark,_Co-author.jpg