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According to the Daily News, Aqueduct Entertainment Group – the group chosen by lawmakers to run the racino after an eight-year decision process – has failed to clear all the state's hurdles.

The News says on Tuesday night, the state lottery division told Governor David Paterson's Chief of Staff Larry Schwartz and Chief Counsel Peter Kiernan that AEG is unlicensable.

Schwartz and Kiernan have final say after Paterson recused himself Tuesday from any involvement in the project.

Queens minister Floyd Flake and rapper Jay-Z had minor stakes in AEG, but pulled out of the bid Tuesday as the state demanded sensitive financial information.

"My ongoing participation in Aqueduct Entertainment has become a distraction that has taken me and my attention away from the community projects I created and nurtured,” Flake said in a statement.

A representative for Jay-Z did not return a request for comment.

Critics charge Paterson selected AEG to win Flake's political support in his now-abandoned campaign for a full term. But the governor denies those allegations.

"This was a decision made by all three leaders,” said the governor. “And this was a decision that we were taking a long time to make."

On Tuesday, a representative for AEG said the group wants to break ground as soon as possible.