Last of three parts

If he is right about the gambling - and that is at least as big an "if" as the election - gaming experts said he could collect hundreds of thousands of dollars a year from the Casino San Pablo.

Casino San Pablo is an ersatz Moorish palace plunked down in the midst of dollar stores and fried-chicken joints in one of the most hardscrabble parts of the San Francisco Bay area.

The casino, owned by non-Indians, is now limited to poker and a few other card games. Katz and 19 Philadelphia-area partners have, in his words, put a "a lot of money and time" behind the Indian tribe's efforts to buy the place and turn it into a full-scale casino, the only one in the San Francisco area.

They want to install as many as 1,000 highly lucrative electronic slot machines, which would be the only ones for miles around.

"Nothing makes more money than a casino," said I. Nelson Rose, a professor at Whittier Law School in Costa Mesa, Calif., and an expert on gambling economics. Like many with an interest in California gambling issues, Rose has followed the seemingly endless twists in the Casino San Pablo story, and he rated Katz's prospects this way:

"He could have a significant share of one of the only casinos in the world in a major city, or he could lose everything."

Given the hugely complicated state of Indian gaming in California, and the uncertainty of getting approval from the state and the federal Bureau of Indian Affairs, Rose leans toward the "lose everything" scenario.

Katz said he was optimistic, and that "very little" of the money invested in the project was his own. His main contribution, he said, has been time and expertise.

Katz has been the tribe's financier and more, advising it in its quest to enter the casino business, searching for sites, and setting up the Casino San Pablo deal. In return, he and his partners will have a share of whatever profits it generates.

Katz made a national reputation in the Eighties as an expert in financing sports arenas, and later invested in golf courses and entertainment centers. He has never been involved in anything like the Casino San Pablo.

He refused to identify his 19 limited partners or say how much money they have invested. Nor would he discuss his potential earnings from the casino.

Katz said his role in the project would pose no conflict with his duties as mayor, even if the Indian tribe were to get the necessary approvals.

"I'm not going to be a manager," Katz said. During the approval process, which is expected to last at least several more months, "I don't have to engage in any further time-intensive activities."

Proposals to bring riverboat gambling to Philadelphia have stirred controversy in recent years. Katz said his involvement in the California casino did not mean he would support gaming here. Indeed, Katz said he opposed gambling in Philadelphia - not out of moral scruples, but because he thinks it would not benefit the city economically.

Strait-laced and prudent, Katz is no one's stereotype of a gambler. But in placing a bet on the success of the Indian gambling venture, he has followed a pattern he established early in his career of being willing to take a chance on something untried.

His clients are the Lytton Band of Pomo Indians. The Pomo were a loosely knit tribe living in Sonoma and Mendocino Counties in north-central California during the 19th century, with most members drawing their cultural identity from their own independent villages. The Lytton Band - now numbering 218 - gets its name from the Lytton Springs area.

Until the 1950s, the Lyttons had a small reservation. Then the federal government, in the name of encouraging "assimilation" of smaller tribal units, stripped the Lyttons of official recognition and their reservation. The tribe scattered.

"We were wrongfully terminated," the tribal chairwoman, Margie Mejia, said.

In 1991, a federal court restored official recognition to the tribe, but not the reservation. The Lyttons were left with no territory and no source of revenue to run the tribal government, let alone address health and educational needs.

Gambling was an obvious way to try to raise funds. American Indian tribes have a unique, semi-sovereign legal status that many have used to open casinos where others could not. California alone has more than three dozen Indian gaming operations.

As the tribal council struggled to organize the scattered Lyttons, they issued a "request for proposals" in 1995, looking nationwide for a financial adviser to develop and manage a gaming place.

"It was really important for the tribe to get sound investment advice," Mejia said. "We didn't want some fly-by-night adviser."

A year earlier, Katz had left his job at Public Financial Management, the government-consulting firm he had helped lead for 18 years. He wanted to look for entrepreneurial opportunities, situations where he could use his talents to try to score big.

He was spending a lot of time in Florida working on a deal to build an arena for the National Hockey League's Florida Panthers, and was frequently in the news. That brought him to the attention of a Seminole Indian businessman named Joe Frank, who suggested that he and Katz jointly respond to the Lyttons.

By October 1996, Katz had put together a group of 20 Philadelphia-area partners, called Sonoma Amusements, to go after the Lyttons job.

Mejia said that Katz and his backers were not the only applicants. The tribe asked its attorney, James E. Townsend, to fly to Philadelphia to look him over.

"The gaming business requires quite a bit of scrutiny as to who is at the table with you," Townsend said. Townsend then recommended that Katz meet the tribal leaders in California.

"The tribe was real impressed by his integrity and what he brought to the table," Mejia said of Katz. "He was honest and straightforward, and didn't try to wine and dine the tribe."

So the Lyttons hired Katz to advise them at every step of the way: to look for a suitable casino site, arrange the financing, find an operating partner to manage the casino, and win the necessary government approvals.

Katz was not working for a fee. If the casino (or some other business) got off the ground, he and his partners would get a share of the profits. If not, they would get nothing.

In fact, the Katz partnership had to front the tribe money so the Lyttons would have some income while they waited for a casino to start generating revenue. Katz would not disclose how much had been sunk into the project.

"Part of the deal was that a line of credit had to be created to support tribal operations while this project was being implemented," he said. Among other expenses, the tribe had to pay rent on its headquarters in a strip shopping center in Santa Rosa, Calif., the only location anywhere that the Lyttons could call their own.

There were other expenses. In the search for a casino site, Katz commissioned polls to determine whether local communities would support Indian gaming. Mejia said the tribe was determined not to go "anywhere we're not wanted."

All other California Indian casinos are on tribal reservations, and none of those reservations is very close to the major population centers of San Francisco or Los Angeles. With no reservation of their own, the Lyttons could shop around.

Katz and the tribe looked all over the wine country north of San Francisco. Among the most promising leads seemed to be in a small municipality called American Canyon, just north of the industrial city of Vallejo, on San Francisco Bay's northern reaches. Using the Katz group's money, they bought an option on a piece of property.

Initial discussions with American Canyon officials had seemed encouraging. But when the tribe's proposal to build a casino there got its first airing at a public meeting in February 1998, the Lyttons and their advisers were surprised by what their attorney, Townsend, described as "intense opposition."

That killed the American Canyon site.

"When we left American Canyon, we felt pretty well defeated," Mejia said. "That was really a hard time."

Apparently out two years' work, Katz and the others left American Canyon on Interstate 80 for the short drive to Oakland and the Bay Bridge.

Katz said it was becoming clear that "there isn't any place in Sonoma, Napa, Marin or Contra Costa Counties where we could have found a property, built on it, and received public approval."

But as he drove on I-80 through San Pablo, Katz quite literally saw a sign - an extremely tall and garish one for a poker club called the Casino San Pablo.

"A lightbulb went off," Katz recalled. He wondered if the Casino San Pablo might somehow fit into the tribe's future, and he decided to call the casino's owners to see what the possibilities were.

California has always permitted card games based on skill - a definition that includes poker and an Asian game called pai gow. Ladbroke USA, a Pennsylvania-based subsidiary of the British company Hilton Group Plc, built the large - 71,000-square-foot - San Pablo casino as a card house in 1995, but it was designed with an eye toward possible changes in California gambling laws.

Ladbroke built in San Pablo, a town of about 25,000 in an area that has served as the Bay Area's industrial backyard. The defining image is not a cable car, but the oil refineries on the nearby hills. San Pablo, with some of the lowest household income in Contra Costa County, welcomed the card house - and the tax revenues - that neighboring communities might have spurned.

Ladbroke's plans for the casino were hampered by a ruling from the California attorney general that effectively barred the company from being both owner and operator. Ladbroke had to turn over the potentially lucrative operational part to another company.

The card house was initially a success, with first-year revenues estimated at $35 million, but business appeared to have fallen off sharply since.

Katz's call led to the first of several meetings with Ladbroke executives in San Francisco in the spring of 1998. Gradually, the outlines of a deal took shape: Ladbroke had a casino it could not operate. The tribe needed a casino, and had no desire to operate it itself.

But it took persistence and salesmanship to interest Ladbroke in getting involved with the Lyttons.

"Since we had no intention or plans to sell to anyone, let alone have it be used as an Indian casino, it was something that wasn't on the radar," John Ford, executive vice president and general counsel for Ladbroke, said.

One big reason for Ladbroke's skepticism was the highly uncertain state of Indian gambling in California. It was far from certain that the state would approve the operation in San Pablo, especially because a key part of the tribe's plans called for installing hundreds of electronic video slot games, a first for the Bay Area.

There was a thicket of other issues. Tribal purchase of any land is complex. All such land is held in trust for the tribe by the federal government through the Bureau of Indian Affairs. Adding to the difficulty in this case was that it was apparently the first time that a tribe had proposed buying an existing casino.

But Katz persevered, and eventually Ladbroke, the tribe, the city of San Pablo, and Katz's investment group judged the deal feasible and potentially profitable. An agreement of sale was signed in September 1998.

If the tribe gets the required government approvals, Ladbroke will become the operator of the newly revived casino. The tribe will get the revenues it needs to build housing or fund education for its members. The city will receive a negotiated $5.2 million a year in lieu of taxes; the entire municipal budget is presently about $6 million.

"It would be the only casino in the state of California anywhere near a major downtown area," said Nathan Barankin, a spokesman for the State Attorney General's Office. "If the Lytton Band were to take over that casino," it would have "an enormous advantage" over any other tribe.

To close on the purchase, the tribe must reach agreement with the state on a "compact" spelling out such details as whether slot machines would be allowed and, if so, how many. Then the Bureau of Indian Affairs would have to approve the purchase.

The National Indian Gaming Commission, meantime, must approve the management contract among the tribe, the Katz group and Ladbroke. As part of that process, the commission is conducting background checks on all involved, including Katz.

Katz's major remaining task is to arrange financing to pay the purchase price. Katz would not disclose the price, but said he had made arrangements to raise at least $65 million from banks or investment markets.

Katz said the casino's net proceeds would first go toward debt service, repaying the lenders.

Of the remainder, 70 percent would go to the tribe, he said. From the 30 percent left, "a significant percentage" would go to Ladbroke as its management fee, Katz said. Then Katz and his 19 partners would divide the remainder.

"We're very low on the food chain," he said.

If the deal is successfully completed, Katz's role will be entirely passive - and potentially lucrative, the payback for the years of effort. As Townsend described it, "he'll be receiving a check" for as long as the management contract remains in effect.

The size of the check is difficult to gauge with so many pieces of the puzzle missing: how many slot machines the state ultimately allows, for instance, and the size of Ladbroke's management fee.

The tribe has talked about putting in 1,000 electronic slots. If the actual number was near that, the payoff could be huge, gambling experts said.

William R. Eadington, a professor of economics at the University of Nevada at Reno and director of an institute there that studies gaming, said that slots in even the most saturated areas, such as the Las Vegas strip, clear $100 a day each.

In a monopoly like the Casino San Pablo would have in the Bay Area, slots can have a daily "win" of $600, Eadington said. Nelson Rose, of the Whittier Law School, said some can have a win nearing $1,000 a day.

Eadington said that a casino with 1,000 slots having a win of about $400 per day each would gross roughly $150 million a year, not including any revenue from other games such as poker. After expenses, casinos are generally left with a profit of about 50 percent, or $75 million in this case, he said.

Debt service - payment of interest and principal on the loans that would enable the tribe to buy the casino - would have first call on profits. If the Katz group borrowed all of the $65 million that Katz suggested was the purchase price, Eadington said debt service might take $6.5 million a year, leaving a gross of $68.5 million.

Katz called attempts to guess at his potential payoff "wholly speculative and totally irrelevant." But while declining to provide any numbers, he did hint that Eadington's debt-service estimate was too low.

Doubling debt service to $13 million would leave $62 million to be divided.

Seventy percent of the remaining revenue would go to the tribe - more than $43 million a year under this scenario.

That would leave about $19 million. Katz said Ladbroke would take "a significant percentage" of any such amount. Eadington said typical management fees in such an arrangement could be expected to be $10 million or $11 million.

If $8 million remained to be split among Katz and the 19 limited partners - and if he agreed to split it equally with them - the result would be $400,000 each yearly. If Ladbroke took a far bigger chunk - $15 million - that would still leave the partners with an average of $200,000 a year.

The mayor of Philadelphia will be paid $135,000 next year.

The casino project is typical of many of the ventures that Katz the entrepreneur has tried: the hope of a good payday coupled with the risk of little or nothing.

"It's not a real certainty that it will go forward," Katz said. "There's a lot of risk."