Caught in the Crossfire

The ‘Dotty’s model’ has the county rewriting the gaming tavern rulebook. Meanwhile, it’s shut down tavern development.

The ongoing debate over the “Dotty’s model” of gaming tavern—an establishment with no kitchen, no kegs with beer on tap, and a decided emphasis on slot machines—has divided the gaming community. Is Dotty’s owner Craig Etsey a clever entrepreneur who has found an underserved market, or a slot arcade operator who should be forced out of business?

Since the first Dotty’s opened in 1995, the locally owned chain has been a modest success story. Today, despite the recession’s chokehold on growth, the company continues to expand; there are more than 40 Dotty’s locations in the Las Vegas valley. With only one employee presiding over the room at a time, the average Dotty’s employs “only” nine people—a number that’s likely not at all trivial to those workers.

Critics charge that Dotty’s has skirted the rules that govern how nonrestricted licenses should operate. By the letter of Nevada law, Dotty’s is a tavern: it has a horizontal surface across which drinks are served. Since it doesn’t have a kitchen, Dotty’s gamblers are free to smoke as much as they want. Without a kitchen, however, it doesn’t look much like the typical “Nevada-style” tavern that offers burgers, video poker and plenty of televisions showing the day’s sports action.

The Clark County Commission voted 5-2 April 5 to dramatically change the laws regarding gaming taverns. All locations, except those that have been in business for more than 20 years, would be forced to be at least 2,500 square feet in size, have a kitchen open 12 hours a day, and offer at least eight bar-top slot machines. All current licensees have two years to comply with the regulation change, which will effectively put a wrecking ball to Dotty’s. It is likely that Dotty’s will take the matter to the courts, so we may be waiting for quite some time for some resolution.

Whatever the ultimate outcome, the struggle between Dotty’s and much of the casino gaming establishment, represented by the Nevada Resort Association, has already resulted in some collateral damage. As the debate over what constitutes a tavern became public in late December, the commission responded by placing a moratorium on all new restricted gaming licenses in December. Until it figured out just what a tavern was, there wouldn’t be any new taverns at all.

The original moratorium was a split-the-baby decision that, on the face of it, seems just, but has halted development; not exactly the results that most voters are asking from their local government in 2011.

Tavern Wasteland

As a public policy issue, temporarily putting a halt to new gaming taverns doesn’t seem like a big deal. The restricted licenses that gaming taverns must receive entitle them to operate 15 slot machines at most. The operations are deliberately low-key. You might drive past a gaming tavern for years without consciously realizing it was there. But just because they’re inconspicuous doesn’t mean there aren’t a lot of them. As of the end of 2010, there were 549 bars or bar/restaurants with restricted slot licenses in Clark County; there were only 90 hotel casinos and resorts.

Even though they don’t have many slots individually, businesses with restricted gaming licenses—which include gas stations, convenience stores, supermarkets and taverns—have a big collective economic impact. With about 14,000 slot machines collectively, they generated some $6.1 million in quarterly slot collections. That pales in comparison to the $15.4 million the average Strip casino generates in gaming taxes each year, but at a time when state budgets are being cut to the bone, it’s nothing to dismiss.

One could argue that most Las Vegans already live within easy walking distance of a slot machine; this isn’t a city whose gambling needs are underserved. Putting the brakes on new development might help existing operations shore up their business.

That might be true, but it raises the question of whether it’s the government’s job to help existing businesses, or to enforce the regulations that are already on the books.

Those questions aside, the moratorium has already stopped development and prevented new jobs from being created in Clark County, no small consideration at a time when it’s only an exodus of the formerly employed that’s driving down the unemployment rate.

Mike Berry, director of operations at Putter’s Gaming Group, is keenly aware of what it feels like to be caught in the crossfire of the battle between Dotty’s and the Nevada Resort Assocation. The company, which operates eight Putter’s Bar & Grill locations around the Valley, is ready to open a ninth location, a shovel-ready project that any politician would be proud to take credit for. But the moratorium means that, even though they’re ready to give 20 Las Vegans steady jobs, Putter’s can’t start the paperwork, much less take applications. And potential employees aren’t the only ones suffering.

“It’s not just the people who’ll work there when it opens,” he says, “We also have to contract with people putting up the signage, landscapers, suppliers—this impacts everyone from the banks who we borrow money on down.”

He’s not the only one who’s seen the moratorium’s chilling effect on local development.

“As someone who assists people getting through that process, it’s been extremely difficult. People are losing deals every day,” says Nevada Licensing Services manager Serina Choi, whose company helps businesses navigate the sometimes-frustrating maze of liquor and gaming license approvals.

Some NLS clients haven’t been able to close pending sales because of the moratorium, while others are hesitant to move ahead in the process because they could see the business they’ve started building declared ineligible for a gaming license, or stuck in limbo.

“A lot of people who would have bought businesses haven’t.” Some bars have actually closed because potential new owners who would have been willing to buy them and keep them open have been prevented from doing so or have gotten skittish, she says. The present owners, losing money, decided that they’d take less of a loss from a closure than staying in business. That means greater economic pressure on commercial-space owners in a market already in trouble.

“Everyone’s losing,” Choi says, shaking her head.

What it means

Opening a gaming tavern in Clark County isn’t simply a matter of signing a lease and opening the doors. Getting in the business is a lengthy—and costly—process that Choi says includes up to $5,000 in application fees before the doors open, plus quarterly liquor and gaming license fees, and gross-business-revenue taxes. With the moratorium, the county and state are cutting themselves off from this revenue stream. But the damage goes beyond that immediate fiscal impact.

Mike Eide, chief operating officer of Dotty’s, shares his perspective on the long and winding road tavern operators face.

“From the day we start talking with a potential landlord or bar owner looking to sell until we open, it takes about a year,” he explains. “ If a landlord or bar owner calls us to ask if we want a space and we say yes, before we can file an application for a tavern license, we negotiate a lease. That usually takes 60 to 120 days.

“Once we have the lease, we fill out a 10-page application that the county investigates. This might take 60 to 90 days. Then, when we have our lease in hand and we’ve gone through the county, we file with gaming. That can be four to six months of getting investigated and approved. So basically, it takes about nine months of preliminaries before you can start building.”

Even if the county decided to lift the moratorium tomorrow, it will still take time before the developmental wheels start turning and the money new tavern owners will invest makes its way back to the community in the form of wages and contracts for suppliers and vendors.

“At the minimum, they’ve delayed construction of anything for at least seven or eight more months.”

That’s certainly not welcome news to the local construction industry, which has been even harder hit by the recession than gaming and hospitality, losing more than 65,000 jobs since 2007.

“Our contractors are looking for work,” Eide says, “and no one can give it to them.”

The five-month moratorium, coupled with the lingering uncertainty that a court battle over the definition of what a tavern is would bring, will likely see a continuation of the wait-and-see approach for some would-be tavern operators. And those who aren’t currently in compliance with the new law will have some tough choices to make.

“It’s heartbreaking,” Choi says, “to see people who’ve invested their entire lives now having to worried that they might be put out of business.”

At the end of the day, some parties have gotten what they wanted—changed rules that will put one style of operation out of business—but the overall costs will be borne by many more people than one or two operators. With Las Vegans currently wondering why more businesses won’t relocate here, a close look at exactly what’s transpired since December might be a good place to start.