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Strip mall becomes pseudo-casino

Twelve stores, with 72 lottery terminals, cluster in one spot
by: CHRISTOPHER ONSTOTT, Business is brisk at this Jantzen Beach strip retail center, but shoppers, many from Vancouver, Wash., come for the gambling and cheap cigarettes, not holiday shopping.

For years, Jantzen Beach's recipe for success has been attracting throngs of Vancouver shoppers eager to evade sales taxes.

But the folks jamming the strip retail center across the street from Jantzen Beach SuperCenter aren't here today to do their Christmas shopping. They're here to gamble - and buy cheap cigarettes.

There are 12 stores at Hayden Island Harbor Shops, and all appear to earn the bulk of their money hosting video slot machines for the Oregon State Lottery. Collectively, the 12 outlets generated $8.8 million in net lottery revenue in the 2009-10 fiscal year, collecting $1.9 million of that as sales commissions.

When a Tribune reporter and photographer sit down at Cafe del Toro and ask for a menu, a staff person kindly advises that it's not the place to go for fresh Mexican food, as the food is frozen and then heated in a microwave. Food is just a requirement to sell booze and offer video lottery, she says, adding that there's only one place in the strip center she would recommend for dining.

Despite store names such as Dotty's Deli, Paddy's Old Irish Cafe and Rachel's Kitchen, food is mostly an afterthought at Hayden Island Harbor Shops.

Retailers here found that profits from hosting the six video lottery terminals allowed per establishment are so great that they opened clones next door with different names. The Dotty's owner, Oregon Restaurant Services Inc., owns or manages six of the 12 shops, three of them side-by-side. The Dotty's here generated $1.3 million in net lottery revenue in the fiscal year ending in June, keeping $254,515 of it in commissions. Two doors down, the same company's Cafe del Toro earned nearly $1.1 million in lottery revenue, keeping $212,000 in commissions.

Dotty's pioneered the lucrative 'lottery deli' format in Oregon - bare-bones or faux cafes that make their money from what gamblers pour into state lottery terminals. The chain also inspired several competitors. One of them, Eugene-based CJ's, operates three of the 12 side-by-side shops here.

Some of the dozen establishments have bars, pool tables and freshly cooked food. Half of them are Dotty's look-alikes.

'Every retailer of that nature would love to have more than six machines,' says a former Dotty's employee, who asked to remain anonymous. They found a way to do that in Jantzen Beach, he says.

Dan Fischer, president of Oregon Restaurant Services, did not return phone calls requesting an interview on the issue.

Private casinos illegal

Oregon's constitution bars casinos, though Native American tribes are exempt. Voters overwhelmingly defeated last month a ballot measure that might have allowed one private casino in the state, at the former greyhound racetrack in Wood Village.

This tiny strip center in North Portland offers a cluster of 72 video lottery terminals - similar to those in casinos - and a dozen different places to gamble legally.

At 3:45 p.m. this weekday, the 46-space parking lot is full. More than two-thirds of the cars have license plates from Washington, which has no video lottery games.

One customer, who identifies herself as 'Thelma' and her friend as 'Louise,' says they come over from Vancouver because it has a boring night life, and also so they can buy the cheap cigarettes. She scores some Marlboro Skylines for $3.99 a pack, half what she pays just across the Columbia River in Vancouver, Wash. For a full carton, that's a savings of $40.

One former Dotty's employee says he spotted people lining up before the stores open, to get cheap cigarettes.

The Oregon State Lottery, under pressure from critics who argue that lottery delis are mini-casinos, tightened up its rules in 2007, specifying that at least half of each establishment's total revenues must come from non-lottery sales. But the rules are silent on where the retailer's profits come from. That helps explain why some of the lottery delis offer such good deals on cigarettes and sandwiches.

Much like large casinos, Oregon lottery delis make serious profits from gambling, and use cheap food and cigarettes to lure customers, and not run afoul of the lottery's rules.

On this late weekday afternoon, several people are observed double-parking in the strip center lot, remaining at the wheel with their engines running. Some are spotted getting deliveries in small packets from people hanging around the center or emerging from one of the stores.

One patron suggests they're getting packs of cheap cigarettes. But others, including a former Dotty's employee, say rampant and open drug dealing occurs at the strip center.

'I'm quite scared walking to my car,' says Marci McClanahan, a waitress at BJ's Restaurant and Brewhouse, a nearby business that uses a separate parking area adjacent to the strip center. She says car break-ins are common in the area and her friend's car was stolen.

Perfectly legal

Usually it makes sense for a lottery retailer contemplating a second site to open it elsewhere, to command more business, says Bob Whelan, a senior economist at ECONorthwest in Portland who specializes in the gambling business. But with so many Vancouver shoppers flocking to Jantzen Beach, there's more of a market there to open multiple outlets and attract more gamblers, he says.

'It makes business sense,' he says, and it appears to be perfectly legal.

Also, some landlords shun video lottery retailers, fearing they'll attract the wrong crowd, Whelan says. So it's not always easy to find good sites.

Former Oregon Secretary of State Bill Bradbury, who declared after a 2000 state audit that lottery delis were 'acting as casinos,' says he's not sure Oregon voters would have approved the Oregon State Lottery if they knew it would turn out this way.

'This kind of direction for the lottery, I think, is just very unfortunate,' Bradbury says. 'Oregonians have said they don't want private casinos.'

Bradbury recalls that the Oregon State Lottery Commission was more discriminating about allowing new video lottery retailers in the past, if there already were several in one small community.

'Lottery commissioners would say, 'No, we don't need any more in this little town,' ' Bradbury says.

'Having 12 lottery retailers right next to each other? How do you justify that?'

One complicating factor is that the Oregon Constitution doesn't clearly define what a casino is.

David Leslie, executive director of Ecumenical Ministries of Oregon, has long contended that lottery delis are 'mini casinos' and thus unconstitutional. 'If it looks and acts like a casino, then I think it is one,' Leslie says. However, it may be difficult for the state to regulate with a heavy hand, he observes, when the lottery delis are so lucrative for the state.

Lottery officials unaware

Larry Niswender, interim director of the state lottery, was unaware that 12 lottery retailers dominate the Jantzen Beach strip center, or that retailers were opening up separate shops next door to sidestep the six-terminal limit per store. So was Oregon State Lottery Commission chairman Steven Ungar, who helps oversee the state agency and sets policies.

But after making inquiries about the Jantzen Beach enclave, Niswender saw nothing wrong with it.

'They are 12 different individual businesses and we have 12 individual contracts in place for them to do business with the lottery,' Niswender says. There's no rules that would bar retailers from opening separate stores, he says, and they've been complying with their contracts.

Niswender was unaware of any public safety issues at the strip center, and says he hopes people would report problems to the police.

Since the lottery tightened up its 'casino prohibition' rules in 2007, the lottery has taken nine enforcement actions against retailers accused of violating the rules, Niswender says. In addition, the lottery has conducted 1,760 audits of retailers' books to assure compliance.

'We have seen significant changes to how they operate the food service and the menus since we changed the rules on casino prohibition,' he says.

If a retailer is collecting more than half its gross revenue from the lottery, it is allowed to promote other products to boost those sales. There are no provisions in lottery rules against selling food or cigarettes at cost or as 'loss leaders' to gain compliance.