Gaming in California operates much differently than in Nevada or other major casino gaming areas. Card clubs and Indian casinos are permitted, but the California Penal Code prohibits 11 specific games, including blackjack, craps, roulette and baccarat, and all “banked” games.

The only type of traditional “casino” gaming permitted under California law is where players play against each other rather than against the house. Several recent court cases have reaffirmed the prohibition against banked games, and have even forced the California lottery to stop the play of California Keno, because it was played as a banking game with the State of California acting as the “bank’. The lottery is now offering a keno-type game called “hot-spots” that is essentially keno with a pari-mutuel payout.

California card clubs can operate only with the approval of local voters. In many of the cites where they operate, these clubs are the major source of the community’s tax revenue. There are currently approximately 200 card clubs in California. The source of gaming revenue for these clubs is a rental charge for the operation of the game, either by a flat time charge (by the 1/2 hours or hour) or by a charge to each player per game. It is estimated that approximately $9 billion is currently wagered at California card clubs, with the clubs generating about $700 million of revenue. The 10 largest clubs had over 50% of this amount. With the larger clubs located in urban areas and most of their customers being local, the clubs have just created a minimal amount of hotel demand. There are some smaller hotel facilities near the major card clubs.

The first card club in California to be developed in conjunction with a hotel is the recently opened Crystal Park Hotel and Casino in Compton. We expect to see only very limited card club development and little or no development of hotels and or resort facilities in conjunction with the card clubs, because of the legal restrictions on the types of permitted casino style gaming, the state mandated restriction on new card club development for the next few years, the small size of most of the card clubs, and the competition from Indian casinos.

California has the largest number of Indian tribes of any state. The Indian Gaming Regulatory Act gave the tribes the right to offer games that were permitted by the state in which they are located. For Class III type gaming, which includes banked casino games, the tribe must first enter into a “compact” with the host state before specific games are allowed.

With the introduction of California Keno by the California Lottery, many Indian tribes brought in video and other electronic machines that operate similar to a slot machine, without entering into a compact. Although recent court decisions have ruled that such machines are not legal in California, many tribes still have these machines. For the larger tribes the cash flow generated by theses casinos approximates that of successful Nevada operations. Ultimately, the tribes will be required to negotiate a compact with the state, which we believe will permit them to keep the machines but require that they operate them in a pari-mutual format similar to the way the lottery is running the keno game.

When this occurs, it will still leave the Indian casinos in a more favorable operating posture that the card clubs, which cannot have these machines. Since many of the Indian casinos are in resort type areas, I believe that some will develop hotel/resort complexes once they enter into a compact, assuming some form of video or electronic machines are permitted. This will be especially true for the casinos located in Southern California. This development will either be solely by the tribes or through joint ventures with hotel operators.