Parlaying Casinos Into Empires

Why Indian expansion beyond gaming is triggering a backlash on Main Street

Twenty-three billion dollars. That's what Indian casinos rake in each year, according to the National Indian Gaming Commission. That's more than the gambling revenues of Nevada and New Jersey combined. And it's the kind of money that buys a lot of commercial and political clout. "We're creating such opportunity," says Ray Halbritter, chief executive of the Oneida Indian Nation of New York, whose Turning Stone Resort & Casino near Syracuse generates some $100 million in gross annual profit.

Tribes with gambling operations are expanding fast, and they're moving into an astounding variety of businesses. To name a few: banks, shopping malls, a women's basketball team, a mutual fund, and big brand-name companies like the Hard Rock International Inc. chain of cafés, hotels, and casinos.

Wall Street is all over this. The likes of Wells Fargo (WFC ), CIBC World Markets (CM ), and Bank of America (BAC ) are all raising debt for the tribes. In February the chiefs and their financiers, lawyers, and political consultants met at the Venetian Resort Hotel Casino in Las Vegas for the semi-annual National Native American Finance Conference. There they talked shop and discussed various controversies bubbling up as the tribes move beyond gaming.

Indian commercial expansion is stirring up some ill will on Main Street. Because tribes are considered sovereign nations, they can operate businesses on their land without adhering to the same legal, tax, and regulatory rules as nontribal businesses next door. What's stirring much of the controversy is the tribes' practice of buying up land and asking the feds to put it "in trust," which effectively means extending tribal sovereignty over it. Not only does that take the land off local tax rolls, critics say, it gives the tribes an unfair advantage over mainstream business. In towns near reservations, there are increasing calls for Indians to operate on the same playing field as everyone else.

So far, the Indians are mostly competing with small businesses—gasoline sellers, B&Bs, convenience stores. But the Hard Rock deal reveals larger ambitions. And it may not be long before Indian sovereignty becomes a bigger issue for the restaurant, hospitality, and even manufacturing industries. Observes John W. Kindt, a professor of business administration at the University of Illinois who has testified against so-called reservation shopping before Congress: "All bets are off when businesses compete with tribes."

The tribes see in their newfound clout and wealth just desserts for historical wrongs. They are using their power to reclaim territory they believe is rightfully theirs. And they aren't shy about lobbying Washington to protect billions in federal aid and the right to operate in accordance with their own laws and regulations. Last year, according to the nonprofit Center for Responsive Politics, the tribes contributed $7.4 million to national election campaigns. The tobacco industry gave half as much. Tribal Representative Max Osceola Jr. summed up the tribal zeitgeist in New York's Times Square in December when he announced the Seminoles' Hard Rock deal: "Our ancestors sold Manhattan for trinkets," he said. "We're going to buy Manhattan back, one burger at a time."

The Indians have been acquiring mainstream companies for a while. But nothing on the scale of Hard Rock. The Seminole Tribe of Florida, destitute as recently as the 1980s, paid $965 million for the company's global operations. In early March, the Seminoles raised $1.2 billion to complete the deal and restructure existing debt. Merrill Lynch & Co. (MER ) raised the money, and Piper Jaffray & Co. (PJC ) provided financial advice.

Over the next few years the tribe aims to open Hard Rock theme parks, casinos, and eateries from Myrtle Beach, S.C., to Macao. One possibility: expanding onto other tribes' land. "It's not only the largest deal an Indian tribe has done, it's one of the largest in the gaming industry," says Jeffrey Carey, a Merrill Lynch investment banker who worked on the deal. "It represents a change in the balance of power in Indian country."

The Hard Rock acquisition is notable not only for its size and ambition. It's also one of the few Indian companies that will operate as a taxpaying corporation. Yes, the Seminoles' seven Florida casinos generate the tax-free money that will help pay the interest on the debt. But the tribe can't very well claim sovereignty for Hard Rock properties when they're located in places like New Orleans' French Quarter, where Indians have no historic claim.

Most tribes, though, are happy to use sovereignty to further their business ambitions. Case in point: the Chickasaw Nation of Oklahoma. Along with foreign partners, it aims to play a role in the resurrection of the MG, the iconic British sports car. The tribe has tied up with China's Nanjing Automobile Group, which owns the MG brand. Last year the Chickasaws bought 25% of a 675-acre industrial park in Ardmore, Okla.—land that was once theirs. By fall, 2008, they hope to start building the MG TF coupé, with parts made in Nanjing and Birmingham, England.

The tribe has applied to the Bureau of Indian Affairs to put its land in trust.That way they won't have to pay property tax or inventory taxes on the parts flown in. Also, because the Internal Revenue Service allows investors operating on Indian land to accelerate the depreciation of investments, the Chickasaws' partners will benefit, too. The state's economic officials are backing the tribe because the project is expected to create 500 jobs—mostly for non-Indians.


But increasingly the tribes are at loggerheads with their home counties and states, which have been going to court to fight Indian attempts to take large tracts of land off local tax rolls. One of the legal epicenters is central New York. There the Oneidas have parlayed the proceeds from their Turning Stone casino into five golf courses, two marinas, over 700 hotel rooms, an RV park, an animation production company, a national weekly newspaper called Indian Country Today, and a string of gas stations.

In some cases, the Oneidas' expansion has helped drive traffic to nontribal businesses. In others, say locals, the tribe's actions have put rivals in jeopardy. Fastrac Markets, a chain of convenience stores, found itself unable to compete with Oneida gas stations selling cigarettes and gasoline tax-free. After sales dropped by half at some locations, it says, Fastrac decided to sell four stations to the tribe. "Nobody likes to raise the white flag," says Fastrac's vice-president for sales, John D. Lytwynec. "We just couldn't compete."

In recent years the Oneidas have bought up 17,000 acres within a 10-mile radius of the original reservation. They are opening hotels and convenience stores, and declining to pay taxes. The local authorities, fearful of losing much-needed revenue, have taken the tribe to court. In 2005 the U.S. Supreme Court ruled that the Oneidas had to pay property tax on land they had acquired in Sherrill, N.Y., a hamlet of some 3,000 people about five miles from the casino.

Now the tribe is asking the Bureau of Indian Affairs to put all the newly acquired land in trust. Oneida and Madison Counties oppose that. But the

BIA's new chief, Carl Artman, an Oneida from Wisconsin who was named to the post on Mar. 6, has vowed to approve quickly some 2,000 land-in-trust applications. (A spokesperson says Artman will recuse himself from decisions involving Oneidas.)

Local businesses complain that Congress isn't doing enough to restrain the tribes' power. Dan Gilligan is president of the Petroleum Marketers Assn., which represents gas stations. He has tried for years to get Congress to pass a law forcing tribes to pay the same state gasoline taxes as other operators. "Congress didn't want to tackle any Native American issues," he says. "There are very few entities that raise more political money than Native Americans."

Oneida Chief Executive Halbritter says it's important to remember how much tribal businesses help local and regional economies. He adds that gripes about unfair competition are sour grapes from businesses that would have failed anyway. Halbritter also notes that local governments often extend tax breaks to lure new businesses that create jobs. "For all the years we lived in poverty, we had no complaints," he says, "until we got successful." Still, the tribes find themselves under increasing pressure to operate just like everyone else.

By Christopher Palmeri

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