Faulty bid on slots blurs Md. horse racing's future

The Baltimore Sun

Minutes before a deadline for Maryland slots bids, agents for the Laurel Park racetrack waited on a sidewalk outside the State House for word from corporate headquarters in Canada. Two versions of applications sat in a nearby Ford Expedition, and they didn't know which one to turn in.

When the call finally came Monday, the high-priced lobbyists who had worked for years to legalize slot machine gambling appeared crestfallen. Magna Entertainment Corp. executives instructed them to turn in a bid that lacked $28.5 million in required fees - a decision that imperils its chances of winning.

The stunning turn of events left many Magna supporters in Annapolis confused and angered. But to some longtime observers of the company, which owns Laurel Park, Pimlico Race Course and tracks around the country, it appeared to be another in a history of missteps.

"They've had difficulties in Florida, Pittsburgh ..." said House of Delegates Speaker Michael E. Busch. "You have to ask the question: How can a company that has invested so much time and investment here ... then make the determination they're not going to participate?"

The stumble raises fresh concerns about the future of Maryland horse racing - the very industry the slots initiative was conceived in large part to save - as well as prospects for keeping the Preakness Stakes in Baltimore. Some have speculated that without slots Magna would be forced to sell Laurel Park, a prime piece of real estate between Baltimore and Washington, or that the company would move the Preakness, the second jewel of horse racing's Triple Crown.

A week after the company's last-minute decision to forgo paying the fees by the deadline, the answer to Busch's question is starting to take shape.

Magna officials declined to answer questions about its bid, but lawyers for the company have begun laying the groundwork for a court battle that could stall the state's largest casino project, citing a "lack of clarity" over fee refunds. A number of factors likely complicated Magna's bid, according to documents obtained by The Baltimore Sun and people familiar with the company's deliberations.

Zoning not assured

Executives were concerned about whether they would get the application fee back if their slots plans were derailed by a local zoning fight. The financially strapped company also appeared to have trouble finding a reputable gambling operator to partner with in Maryland, and had committed to a problematic profit-sharing deal with Joseph A. DeFrancis, a former owner of Laurel Park.

Magna was one of six applicants submitting proposals for slots licenses last week. But the company's submission and another for slots at the state-owned Rocky Gap resort in Allegany County did not include required fees, and may not be valid. Officials say that fewer than half of the 15,000 slot machines authorized by voters last year could be claimed, and the state initially could collect far less than the $600 million yearly in slots proceeds it has been counting on.

When Magna bought a controlling interest in Laurel Park and Baltimore's Pimlico in 2002, it entered a long-running debate in Maryland over whether to allow slot machines in the state. The company quickly jockeyed to be one of the biggest beneficiaries of slots proposals that were being debated in the General Assembly.

Magna and its affiliates spent more than $4 million on lobbying expenses, and the Maryland Jockey Club, a subsidiary, has one of the top lobbying firms in Annapolis on retainer.

When the legislature decided to put the question of legalization to voters last fall, Magna spent another $2 million to back the campaign for passage. The referendum was approved by a wide margin.

The company appeared to be well-positioned to win a slots license in Anne Arundel County, one of five potential slots locations in the state.

But just two weeks ago, Magna officials told representatives of the horse industry in a private briefing that they did not yet have an operating partner, though they were confident they would get one, said Alan Foreman, a lawyer for the Maryland Thoroughbred Horsemen's Association who attended the presentation.

That wasn't the only detail left to the last moment.

According to people familiar with the situation, Magna continued to negotiate to the 11th hour with DeFrancis, a contentious figure in Annapolis who secured a hefty cut of any eventual proceeds when he sold his stake in the Maryland Jockey Club, owner of Pimlico and Laurel.

DeFrancis hails from a storied family in the horse racing industry and has been a major player in Annapolis on the slots issue. As the debate was heating up in 2002 and 2003, he contributed $225,000 to a national group, the Democratic Legislative Campaign Committee, controlled by Senate President Thomas V. Mike Miller, an aggressive slots proponent.

Maryland's slots legislation imposes one of the highest tax rates in the country. So if Magna could not renegotiate DeFrancis' share of slots proceeds, the company would be left with a slim profit margin - if any. "It's common knowledge that that agreement needed to be reworked; it was a significant impediment," Foreman said, adding that Magna Chairman Frank "Stronach wasn't going to do a deal that made DeFrancis a rich man and left nothing for him."

DeFrancis did not return phone calls last week.

Meanwhile, Magna officials - like other prospective bidders - were worried that the upfront application fees wouldn't be refunded under various circumstances. Magna, in particular, was worried about a potential zoning battle in Anne Arundel.

The state's lottery commission, which is overseeing the slots program, answered the refundability question in mid-January, saying it "may consider such requests under extraordinary circumstances."

That response was small comfort, said Miller, the Senate president, to a company that has lost money every year since 2002 and has been kept afloat through more than $200 million loans from a parent corporation.

'Game of chicken'

Miller said he understood that the company consulted with "three different sets of lawyers" about the matter. Miller has reacted angrily to Magna's failure to pay the fee, likening the company's decisions to a "game of chicken" that "appears to have backfired."

On Tuesday, a day after the application deadline, Magna asked a procurement official to change requirements regarding the fee after the deadline. Donald C. Fry, chairman of a slots commission that will award the licenses, said Magna was told that the deadline had passed. The next day, Magna released a statement saying the money had been placed in an escrow account.

In its incomplete application delivered Monday, Magna explained that it was not including the $28.5 million fee because the company "protested, objected" and took exception to "improprieties" in the state's procurement process. The protest, which lays the groundwork for a potential court fight, was detailed in a letter sent Friday night by Magna attorneys to the Maryland Lottery.

A state commission charged with awarding slots licenses isn't expected to rule on the viability of the Laurel bid until later this week at the earliest.

Even with a complete application, Magna's bid for a slots license would have likely faced especially strong scrutiny. The company's ability to operate a gambling business has long been questioned by some state and industry officials. Laurel Park's loss widened to $4.3 million in 2007, up from $3.6 million the year before, according to audited financial reports submitted to the Maryland Racing Commission.

The company also has had trouble with its slots operations. Its largest slots casino, at South Florida's Gulfstream Park, lost $15.8 million in 2007, financial documents with the Florida Department of Business and Professional Regulation show. To operate, Magna is surviving on cash infusions from its parent, MI Developments, a real estate company. It provided a loan of up to $50 million late last year to Magna.

The day after the Maryland bid deadline, Magna's chief appeared in Laurel before the Maryland Racing Commission. Stronach was "extremely concerned" about his company's incomplete application, said John B. Franzone, chairman of the racing commission, but also "absolutely, unequivocally" determined to maintain Magna's support of Maryland horse racing and the Preakness.

The loss of the Preakness had been so dreaded that Maryland's gambling law was written so that Magna would share in some slots proceeds only if it kept running the race in the state. The tracks would still be eligible for purse subsidies if Magna maintained a certain number of racing days in Maryland.

Still, Franzone said Magna's major stumble down the stretch this week - and its formidable competition from the well-heeled Cordish Cos., which also offered a bid in Anne Arundel - is "devastating" to the state's horsemen who badly wanted a casino at a major track to bolster the fading industry's fortunes.

"Nobody has more of an investment in North American racing than Frank Stronach," said Franzone. "And when it's finally time to hit pay dirt ... it's just very unfortunate."

Baltimore Sun reporter Hanah Cho contributed to this article.

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