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CONSIDERATION OF AN AMENDMENT TO THE CHULA VISTA GAMING PLAN TO ALLOW CITY COUNCIL WAIVER OF REQUIREMENTS FOR TEMPORARY REVERSION OF CLASS II LICENSES TO CLASS I LICENSES UPON TRANSFER AND RELATED ACTIONS
A. RESOLUTION NO. 2017-056 OF THE CITY COUNCIL OF THE CITY OF CHULA VISTA APPROVING AN AMENDMENT TO THE CHULA VISTA GAMING PLAN TO ALLOW CITY COUNCIL WAIVER OF REQUIREMENTS FOR TEMPORARY REVERSION OF CLASS II LICENSES TO CLASS I LICENSES UPON TRANSFER
RELATED ACTIONS:
B. RESOLUTION NO. 2017-057 OF THE CITY COUNCIL OF THE CITY OF CHULA VISTA (1) RATIFYING CHIEF OF POLICE AND STATE OF CALIFORNIA DIVISION OF GAMBLING CONTROL APPROVALS OF THE TRANSFER OF A CONSOLIDATED CLASS II CARDROOM LICENSE FOR THE SEVEN MILE CASINO FROM V C CARDROOM, INC. TO STONES SOUTH BAY CORPORATION; (2) WAIVING THE REQUIREMENT FOR TEMPORARY REVERSION OF THE CLASS II LICENSE TO A CLASS I LICENSE FOR THIS TRANSFER WITH FINDINGS AND CONDITIONS; (3) RATIFYING CHIEF OF POLICE APPROVAL OF THE NEW OWNERS AND OTHERS POSSESSING A FINANCIAL INTEREST IN THE GAMING OPERATIONS AND/OR CARDROOM LICENSE FOR THE SEVEN MILE CASINO; AND (4) APPROVING RELATED MATTERS
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RECOMMENDED ACTION
Recommended Action
Council conduct the public hearing and adopt the resolutions.
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SUMMARY
This staff report and associate items are jointly submitted by the City Manager, the Police Department and the City Attorney’s Office.
V C Cardroom, Inc. (“VC Inc.”), whose sole shareholder is The Harvey and Bette Souza Living Trust (the “Trust”), has agreed to transfer its interest in the Cardroom License for Seven Mile Casino (“Casino”) to the Stones South Bay Corporation (“Stones Corp.”). The principal owners of the Stones Corp. are Ryan Stone, Rodney F. Stone, Masis Kevorkian, and Kermit Schayltz. Among other things, the transfer is conditioned on receiving approval from the State of California Division of Gambling Control and the City of Chula Vista. The transfer and new ownership have now been approved by the State as of March 23, 2017. After an updated background check (the Stones Corp. principals were previously reviewed and approved by the City as real estate “financial interest holders” in Seven Mile Casino back in March of 2015), and an on-site evaluation of a Stones Corp. affiliate’s operations of a cardroom in Citrus Heights, California. The Chula Vista Police Chief has also approved the transfer to the Stones Corp. and the current and proposed financial interest holders of the license for the Seven Mile Casino.
Pursuant to the terms of the Chula Vista Gaming Plan (“Gaming Plan”), the Police Chief’s approvals are now being presented to the City Council for its consideration and ratification. In connection with this transfer, the Stones Corp. has also requested that the City Council waive requirements in the Gaming Plan that would otherwise require reversion of the “Class II” Card Room License (which allows “back line” betting games like Pai Gow), to a “Class I” license (with no “back line” betting games) for a period of three years. Based on Stones Corp. experience and expertise with managing “back line” betting games, the City Manager and the Chief of Police are recommending that this waiver be granted. This item, in the form of a Gaming Plan Amendment to formally allow the waiver and a resolution implementing the waiver with findings and conditions, is also presented for City Council consideration.
ENVIRONMENTAL REVIEW
Environmental Notice
Environmental Notice
The City Attorney’s office has reviewed the proposed activity for compliance with the California Environmental Quality Act (CEQA) and has determined that the activity is not a "Project" as defined under Section 15378 of the State CEQA Guidelines because the activity consists of a governmental administrative/fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. Therefore, pursuant to Section 15060(c)(3) of the State CEQA Guidelines the activity is not subject to CEQA. Thus, no environmental review is required.
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Environmental Determination
The City Attorney’s office has reviewed the proposed activity for compliance with the California Environmental Quality Act (CEQA) and has determined that the activity is not a "Project" as defined under Section 15378 of the State CEQA Guidelines because the activity consists of a governmental administrative/fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. Therefore, pursuant to Section 15060(c)(3) of the State CEQA Guidelines the activity is not subject to CEQA. Thus, no environmental review is required.
BOARD/COMMISSION RECOMMENDATION
Not applicable
DISCUSSION
A. Background
1. History of Card Rooms In California
Cardrooms are one of California’s oldest forms of legal gambling with operations ranging from “mom and pop” storefronts, to larger, more sophisticated establishments. Historically, card clubs were regulated by local governments. Beginning in the mid-1980s the State gradually increased its regulatory oversight. The stated primary purpose of this increased oversight by the State was to attempt to prevent criminal activity from being associated with these businesses.
In 1998, then Attorney General Daniel Lungren and Senate Pro Tem Bill Lockyer introduced and passed the California Gambling Control Act. (SB 8 was enacted; the language is in Business and Professions Code: 19800 - 19887.) The Act developed the California Gambling Control Commission (“State Gambling Commission”) and the Bureau of Gambling Control (“Bureau”) in the California Department of Justice. The State Gambling Commission and the Bureau are responsible for the development of policy, regulatory oversight and enforcement of the States gaming laws at California cardrooms.
With these changes, California cardrooms are now regulated at both the local and state levels. Of the 80 or so cardrooms in California, the largest is the Commerce Club, located in the City of Commerce, with approximately 240 tables. The largest cardroom in San Diego County is Oceans 11 in Oceanside which is currently operating fifty (50) tables.
2. History of Chula Vista Gaming Plan
Prior to enactment of the City’s Gaming Plan in 1995, cardroom operations were regulated by way of City ordinance. The ordinance was amended by the City Council on six different occasions between 1977 and 1995 for various reasons.
The Gaming Plan concept was introduced to the City Council on November 28, 1995, because the City Attorney’s Office determined that then pending state laws would have the effect of pre-empting local control by City code. By creating a structure under the City code where future changes would be adopted by resolution, the Gaming Plan preserved local Chula Vista authority over its cardroom operations. This made it so that the City Council is authorized to adopt or make amendments to the Chula Vista Gaming Plan by resolution after a public hearing. Under this revised structure, the initial Gaming Plan was adopted in February 1996.
In 1998, the Gaming Plan was amended at the request of the City Council to eliminate the issuance of additional licenses without a vote of the people. At the time, there were 4 total licenses issued in the City. Two were held by the Chula Vista Bay Club, Inc., and two were held by Harvey Souza. In 2000, the Gaming Plan was amended again, this time to eliminate 2 of the outstanding 4 licenses and consolidate the remaining 2 licenses under Mr. Souza’s ownership. This was accomplished by Mr. Souza acquiring 2 licenses from Chula Vista Bay Club, Inc., and immediately turning them over to the City. Other updates at this time included: 1) expanding the allowed hours of operation; 2) allowing more types of games to be played; 3) increasing bet limits; 4) allowing the service of alcohol; 5) increasing license tax fees; and 6) enhancing employee screening and security requirements.
In 2009, consistent with state law changes, the maximum number of card tables allowed to operate was increased in the Gaming Plan from 12 to 16.
In 2012, again consistent with state law changes, the maximum number of card tables was increased in the Gaming Plan from 16 to 18.
In 2015, again consistent with state law changes, the maximum number of card tables was increased in the Gaming Plan from 18 to 20. Other changes included an increase to 15 the number of tables that could be operate as ”Class II” or “Class IA” tables (allowing “back line” betting and other “higher stakes” games). In consideration of this, the Village Cardroom agreed to an increase in the quarterly license tax per table from the previous maximum of $5,000 up to $7,100. These changes, and some others, were requested and granted in anticipation of the Village Card Room moving its operations from 429 Broadway to a new establishment at 271 and 285 Bay Boulevard now known as the Seven Mile Casino. An Operating Agreement was also entered into to implement the license tax increase in consideration of a 5-year “vesting” of operations under then-applicable Gaming Plan regulations.
3. History of Village Club Card Room (now Seven Mile Casino) Ownership and Operations
Currently, VC Inc. owns the only card room gaming license issued by the City of Chula Vista (technically, two licenses that have been consolidated) and is the only gaming operation within the Chula Vista jurisdiction. VC Inc. also possesses and maintains the required state gambling licenses.
As a police-regulated business, the Village Club Card Room operated by the Souza family had a solid track record of compliance with City regulations and positive interaction with the Police Department. The business was opened by Mr. Souza’s father, and operated at the Broadway location from 1946 until 2015. Harvey Souza has managed the business from 1963 to 2015.
In 2015, the Village Club Card Room moved its operations to a 20-table cardroom located at 271 and 285 Bay Boulevard, Chula Vista, California. The relocated business was renamed “Seven Mile Casino”.
The property located 271 and 285 Bay Boulevard was originally owned by VC Bay Properties LLC. This entity was formed by Mr. Souza. Prior to moving its operations to its current location, Mr. Souza sold a 50% interest in VC Bay Properties LLC to a new ownership group, Stone Chula Vista Holdings, LLC. The members of the Stone Chula Vista Holdings, LLC are: 1) Ryan Stone; 2) Rodney F. Stone; and 3) Masis Kevorkian. This gave Stone Chula Vista Holdings, LLC a 50% interest in the Seven Mile Casino real estate and an indirect “financial interest” in the Cardroom License under the Gaming Plan. The principals of this entity also acquired an option to acquire a fifty percent (50%) interest in the Seven Mile Casino business.
On March 3, 2015, the City Council approved Resolution 2015-057, ratifying Chief Bejarano’s approval of Stone Chula Vista Holdings, LLC members “financial interests” in Village Club Card Room’s license after reviewing their applications and conducting background checks. The Stone Chula Vista Holdings, LLC members were told they would need to re-apply for approval with the Chief of Police if and when they proposed to exercise their option and obtain a direct interest in the cardroom license.
On September 23, 2015, the Bureau brought allegations against Seven Mile Casino operators Mr. Souza, Mrs. Souza, and VC Inc. relative to cardroom operations that were alleged to be in violation of state and federal laws. In connection with these proceedings, the Bureau issued an emergency order on December 9, 2015 that, among other things, temporarily suspended gambling activities and put in place an independent manager to oversee the day-to-day operations at Seven Mile Casino. The cardroom was allowed to re-open two weeks later, but the independent manager continues to oversee such operations. On February 12, 2017, Mr. Souza, Mrs. Souza, and VC Inc. entered into a Stipulated Settlement with the Bureau to resolve the allegations brought against them, including an agreement for payment of penalties. It is staff’s understanding that the federal charges against Mr. Souza have also been resolved.
B. Proposed Transfer to Stones Corp.
In 2016, Stones Corp. exercised its option and entered into agreements to purchase 100 percent of Seven Mile Casino from VC Inc., conditioned upon approval of the State Gambling Commission and the City.
On December 12, 2016, Stones Corp. submitted its application to the Chula Vista Police Department for the transfer of the consolidated “Class II” license from VC Inc. to Stones Corp. At the time of the submittal and since, the Stones Corp.’s principals have repeatedly communicated to the City their commitment to: (i) providing Chula Vista with a “premier entertainment facility” including live entertainment, an “elevated dining experience” welcoming to both families and businesses that could serve as gathering place for the local community; (ii) providing visitors and locals with first-class gaming and state-of-the-art card rooms; and (iii) enhancing current operations, helping further Seven Mile Casino’s appeal and promoting Chula Vista as a world-class destination. Further, Stones Corp. representatives have stated their commitment to ensuring that operations at Seven Mile Casino are consistent with “their history of commitment to sound business practices and City of Chula Vista’s sterling reputation”.
The property located at 215 Bay Blvd (formerly Anthony’s Fish Grotto) has also been acquired by Stone 215 Bay Blvd., LLC, whose members are entities owned and controlled by Rodney Stone, Ryan Stone, and Masis Kevorkian. This property is currently being leased for overflow parking and storage/office space for Seven Mile Casino and Stones Corp. representatives have indicated a desire to utilize this property consistent with its commitments noted above.
The City Attorney’s Office has reviewed the transfer and ownership documents in connection with this transaction and found them to be consistent with the summary of the transaction provided by the attorneys for Stones Corp. See Letter from Stones Corp. Attorney, dated February 15, 2017, attached hereto as Attachment 2. The City Attorney found no issues of concern in its review.
1. Police Department Review of Gaming Operations
The Police Department has always been the primary staff involved with cardroom regulations due to the amount of cash involved in business operations and the related possibility of criminal activities. Over the years, the Police Department has actively monitored Village Club Card Room/Seven Mile Casino in terms of security requirements and public safety. It has also worked closely with the California Department of Justice Division of Gambling Control.
Seven Mile Casino has not had excessive calls for service. In the last 18 months there have been 42 calls for service associated with the Casino. Most are unrelated to crime such as lost property, private impounds, proactive patrol, or investigative follow-ups related the DOJ investigation. A review of the details of each call found about 14 total calls over 18 months related to crimes or quality of life issues such as fights, drunk in public, petty theft, domestic violence, or driving while intoxicated. Some were service calls made by staff at the Casino about problems outside or near the Casino and not related to the business itself.
The Police Department has reviewed and approved the Seven Mile Casino security plan as required by the Gaming Plan. As required by the Gaming Plan, the Police Department has and will continue to conduct background checks on all new Seven Mile Casino employees.
2. Ratification of Proposed Transferees and Financial Interest Holders
The Gaming Plan requires Chief of Police approval, by way of background check, of any persons having a financial interest in the cardroom including property owners. This approval must be ratified by the City Council pursuant to the Gaming Plan.
The Police Department conducted a thorough investigation and background checks of each of the interest holders identified on the Financial Interest Summary attached hereto as Attachment 3. The Police Department’s investigation included a site inspection and a meeting with management at Stones Gambling Hall in Citrus Heights, California, which is licensed to and operated by the principals of Stones Corp. During the visit to the Stones Gambling Hall, the Police Department noted the Gambling Hall’s positive relationships with local law enforcement and an overall positive atmosphere and professional operation.
Based on the Police Department’s investigation, the Chief of Police has determined that the proposed transferee possesses adequate experience and expertise to operate a “Class II” cardroom in accordance with state gaming laws, the terms and conditions of the City’s Gaming Plan, and existing best practices for such operations. The Chief of Police has also approved the financial interest holders identified on Attachment 3.
3. California Gambling Control Commission Approval
Concurrent with its request for City approval, Stones Corp. submitted an application to the State Gambling Commission to approve the sale and license transfers for the Seven Mile Casino from VC Inc. to Stones Corp. On March 23, 2017, the State Gambling Commission issued a Temporary State Gambling License to Stones Corp. and approved the transfer of the interests in Seven Mile Casino from VC Inc. to Stones Corp. The State Gambling Commission’s approval was preceded by a substantial due diligence review of the Stones Corp. principals including review of the various financial and ownership interests of the principals and entities involved in the transfer, and confirmation of compliance with the Business and Professions Code. See Attachments 2 and 4.
C. Amendment To the Gaming Plan and Waiver of “Class II” License Reversion Requirements Upon Transfer
The City’s Gaming Plan currently requires a temporary three year reversion of “Class II” licenses to “Class I” licenses upon transfer of a “Class II” cardroom license. Stones Corp. has asked for a waiver of the reversion requirements upon transfer of the Cardroom License in order to allow “Class II” operations to continue without interruption, subject to findings and conditions acceptable to the City.
Staff has considered the Stones Corp. request and recommends that the Gaming Plan be formally amended to allow for such a waiver upon a finding by the Chief of Police, subject to approval by the City Council, that the transferee demonstrate adequate experience and expertise to operate a “Class II” cardroom in accordance with all state gaming laws, the terms and conditions of the City’s Gaming Plan, and then existing best practices for such cardroom operations.
In this instance, the Police Department recommends that the waiver request be granted. Stones Corp. affiliates are already operating a “Class II” cardroom in Citrus Heights California. Chula Vista Police Department’s on-site inspection and evaluation of this operation was highly favorable and supports the required findings in the Gaming Plan waiver amendment.
D. Staff Recommendations
In light of the above report, City staff recommends as follows:
1. City Council approve a resolution amending the Chula Vista Gaming Plan to allow the City Council to waive the “Class II” License reversion requirements upon transfer of a cardroom license, subject to City findings that the transferee of the cardroom license has demonstrated the necessary experience and expertise to operate a “Class II” operation, and subject to such further terms and conditions as the City Council deems appropriate.
2. City Council ratify the Chief of Police’s approval of the transfer Class II Cardroom License from VC Inc. to Stones Corp.
3. City Council ratify the State Gambling Commission’s approval of the sale of the interests in Seven Mile Casino to Stones Corp. and its issuance of the state gambling license to Stones Corp.
4. City Council waive the “Class II” License reversion requirements upon transfer of the Cardroom License based on: (i) the Chief of Police’s findings that Stones Corp. has demonstrated that it possesses adequate experience and expertise to operate a “Class II” cardroom in accordance with all state gaming laws, the terms and conditions of the City’s Gaming Plan, and existing best practices for cardroom operations; and (ii) as further condition of such waiver, Stones Corp.’s agree to amend the Card Room Operating Agreement to reduce the Vesting Operating Term thereunder from five (5) years to four (4) years.
5. City Council ratify the Chief of Police’s approval of the proposed transferees and financial interest holders of the Cardroom License.
DECISION-MAKER CONFLICT
Staff has reviewed the Councilmember’s real estate holdings within Chula Vista and has determined that no property is within 500-foot of the project location. Staff is not independently aware, and has not been informed by any City Council member, of any other fact that may constitute a basis for a decision maker conflict of interest in this matter.
LINK TO STRATEGIC GOALS
The City’s Strategic Plan has five major goals: Operational Excellence, Economic Vitality, Healthy Community, Strong and Secure Neighborhoods and a Connected Community. This action supports the Economic Vitality goal as facilitates the continued operation and success of the Seven Mile Casino under new ownership. The Seven Mile Casino employs approximately 305 people generating significant business activity and City revenues.
CURRENT YEAR FISCAL IMPACT
The estimated license tax revenue generated by Seven Mile Casino in fiscal year 2016-17 is $585,000. These funds are considered discretionary revenues and support overall general fund services such as police, fire, libraries and recreation.
ONGOING FISCAL IMPACT
The estimated license tax revenue which is expected to be generated by Seven Mile Casino in fiscal year 2017-18 is $603,000. These funds will be included in the City Manager proposed budget and are considered discretionary revenues and support overall general fund services such as police, fire, libraries and recreation. City Council action to approve the transfer and waiver of the reversion requirement will help sustain these revenues. The reversion to a Class I license would materially reduce these amounts.
ATTACHMENTS
1 - Conflict of Interest Map
2 - Letter from Stones Corp.’s Attorney
3 - Financial Interest Summary
4 - State Gambling Control Commission Approval
Staff Contact: Gary Halbert, City Manager, Roxanna Kennedy, Chief of Police, Glen Googins, City Attorney