A few weeks ago, an animal rights group, NYCLASS, announced that two New York legislators, Linda Rosenthal in the Assembly and Zelinor Myrie in the Senate, had introduced a bill that would end payments made to NYRA’s racing and breeding programs from the proceeds of the Resorts World casino that operates 5,000+ VLTs (Video Lottery Terminals) at Aqueduct.
You may be familiar with the name NYCLASS (New Yorkers for Clean, Livable and Safe Streets) because in the last decade this organization advocated the elimination of Manhattan’s iconic horse-drawn carriages. However, here is what Danny Lewis, of NYC News, reported regarding NYCLASS in July, 2017.
“The group rose to political prominence during the 2013 mayoral election, when NYCLASS raised hundreds of thousands of dollars to challenge then city council speaker Christine Quinn’s mayoral bid. Since then, though, the group has met opposition from both politicians and the public.
“A proposal by NYCLASS to replace the horse-drawn carriages with electric cars fell flat, and the group was later fined by the city Campaign Finance Board for violating spending limits in contributions to several city council campaigns and to Mayor Bill de Blasio's own mayoral campaign. Even after years of haggling with the union that represents the carriage drivers, a 2016 deal to keep the horses off city streets in exchange for new city-built stables collapsed at the last minute.”
However, the efforts by NYCLASS and the NY legislators have raised concerns by many about NYRA and New York racing and breeding participants and their potential exposure to any loss of revenue from the Resort’s World VLT machines at Aqueduct.
How NYRA was founded
To get a complete picture of the situation, we need to take a look back at the founding of the New York Racing Association in 1955, its history up until today and any potential risk for Aqueduct VLT revenues. Here is a link to a document detailing NYRA’s history and I will quote extensively from it.
“On a crisp autumn afternoon in 1954, John Hanes began formulating an idea that would trigger a renaissance in New York Thoroughbred racing … So he took the train to Belmont Park. Roaming the grandstand, he looked for a decent lunch and a good seat. He found neither. Nor could he even get near the paddock for an up-close view of the horses. ‘It was useless,’ Hanes told Sports Illustrated of his experience. ‘I never once got to a hot-dog stand, or to a $2 window, or close to a horse – or within range of a comfortable seat.’
“What Hanes learned that day in 1954 was revealing. Despite New York’s status as the nation’s leading racing circuit, the facilities at the four major Thoroughbred tracks, Belmont as well as Saratoga Race Course, Aqueduct Race Track, and Jamaica Race Course, were deteriorating.
“Meantime, increasing lean purses were compromising the proud tradition of the tracks in New York.
“The Jockey Club took note. Moving decisively, Vice Chairman Ogden Phipps named a 3-person committee of people with demonstrated business expertise and a passion for Thoroughbred racing to develop a comprehensive, long-range plan to restore the luster of New York Racing. They were John Hanes, former U.S. Undersecretary of the Treasury, Christopher Chenery, Chairman of the Board of Southern Natural Gas Co., and Harry Guggenheim, a director of Kennecott Copper Co.
“By January, the tracks had developed a comprehensive reorganization plan based on a deceptively simple idea. New York racing would be best served if the four flat racing New York Tracks joined hands under the guidance of a single organization to provide convenience and a good experience for guests. The committee called their new non-profit organization, the Greater New York Association, later renamed the New York Racing Association.
“NYRA then bought the stock at New York’s existing metropolitan tracks - Belmont Park, Jamaica Race Course, Aqueduct Racetrack, Empire City and Saratoga Race Course - upstate. In the New York metro area, NYRA closed both Empire City and Jamaica and sold the Jamaica property for a housing development. Creating a corporation to be run by the racing officials who received no salaries, NYRA raised some $45 million, which it earmarked for capital improvements at its tracks.
“To secure bank financing, NYRA was granted a long-term franchise to operate the tracks.”
Sweeping new gambling law
It is important to note that each of these racing properties had always been held privately. Going forward, NYRA would be certain that real estate taxes were paid to the local municipality where the track resided. Every NYRA track paid local real estate taxes to the governing municipality until 2008, when NYRA agreed to sign over the deeds for consideration that will be discussed below.
On October 29, 2001, Governor George Pataki signed a sweeping new gambling law that allowed VLTs at nine New York tracks, including Aqueduct. On April 17, 2003, NYRA and MGM signed a contract where MGM agreed to build and operate a casino at Aqueduct.
A number of the harness tracks and Finger Lakes had built and were operating VLTs by the end of 2004. However, the Pataki administration continued not to approve NYRA’s agreement for MGM to build and operate its Aqueduct VLT operation and, as a result, NYRA was forced to file for bankruptcy protection on November 2, 2006, contending that it continued to own and operate Aqueduct, Belmont and Saratoga.
A few days later, November 7, 2006, Attorney General Eliot Spitzer won a landslide election as Governor, replacing Pataki, a Republican. On December 15, 2006, NYRA sued Pataki and several state agencies, accusing the state of blocking its attempts to build and open the Aqueduct casino and alleging a pattern of state conduct that drove NYRA into bankruptcy. Not surprisingly, on May 1, 2007, NYRA officials confirmed that MGM had backed out of the casino agreement.
Role of the Bankruptcy Court
The complete final and franchise agreement was signed by the New York State Franchise Oversight Board Chairman, the NYRA Chairman, the New York State Governor and the Attorney General of the State of New York on April 28, 2008. The relevant document to review all elements of the Franchise Agreement is Exhibit G, the Franchise Agreement.
While the Bankruptcy Court is not a signatory to the document, it does sign off on representations that are made by all the signatory parties. Here is an example under Recitals, Paragraph F:
On April 28, 2008, the Bankruptcy Court conducted a hearing (the ‘Confirmation Hearing’) to consider the Modified Third Amended Plan of Debtor Pursuant to Chapter 11 of the United States Bankruptcy, dated April 28, 2008, (the ‘Modified Plan’) in accordance with section 1129 of the Bankruptcy Code and (2) connection therewith, Old NYRA presented testimony and other evidence regarding among other things, (a) the compromise and settlement between Old NYRA and the State, including, without limitation, the granting of the Franchise to New NYRA, the levels of the Support Fee and the CAPEX Amount, each as set forth in the Legislation that certain State Settlement Agreement, dated as of the date hereof, by New NYRA, the State, the Oversight Board and New York State Division of the Lottery …
While the Bankruptcy Court is not a signatory to the Franchise Agreement, it is very clear on the specific terms of the bankruptcy agreement. Here is another example:
By order, dated April 28, 2008, (the ‘Approval Order’), and based upon the evidence presented at the Confirmation Hearing, the Bankruptcy Court (1) confirmed the Modified Plan and (2) authorized the consummation of the transactions contemplated by the Modified Plan, including, without limitation, the execution and delivery of (1) this Agreement and (ii) the Settlement Agreement.
We will now move away from the strict legal language and summarize the VLT payments that are due to the NYRA-related entities.
Section 2.8 Operational Support Payments. Upon the commencement of VLT operations and for the term of the license to operate VLTs NYRA will receive 3% of VLT revenues for Operating Expenses
Section 2.9 Capital Expenditures. NYRA will receive 4% of VLT revenues for Capital Expenses
Section 2.10 Purse Support. For the first year, the Purse Account will receive 6.5%
For the second year, the Purse will receive 7%
For the third year and thereafter it will receive 7.5%Section 2.11 Breeder Support. For the first year, the Breeder Account will receive 1%
For the second year, the Breeder Account will receive 1.25%
For the third year, the Breeder Account will receive 1.5%
There are further considerations given both NYRA and New York State as a result of the Bankruptcy discussions and negotiations. The State waived approximately $200 million in debts and liens against NYRA as part of this deal. In addition, NYRA was given $105 million by the State to pay off creditors and cover operating expenses, including $24 million to fund pension liabilities.
In addition, NYRA transferred ownership of the three tracks to the State, and NYRA now saves approximately $15 million in local real estate taxes annually.
On the other side of the ledger, New York State received 150 percent more seats on NYRA’s Board, and now has clear title to 900 acres of prime land under the tracks, which has been valued at over $1 billion.
As a practical matter, the State is in a much better position than NYRA to monetize any excess land at the three tracks, and there is not a lot of excess land available for development at NYRA’s three tracks. However, the new hockey building, UBS Arena, was built with private funds from New York Arena Partners for over $1 million, and reportedly UBS paid $350 million for a 20-year naming rights deal.
A very good deal
NYRA’s deal with the state on the franchise renewal in 2008 turns out to have been a very good deal for both NYRA and NY State. One cannot say that very often.
In closing, let’s get back to the original issue. I invite all readers to find the first 25 pages of Exhibit G of the Franchise Agreement document generated by the Bankruptcy court filing by NYRA and carefully review it.
First, there is no question that a legislative initiative such as the one proposed on behalf of NYCLASS is a non-starter. NYRA has the best year-round racing circuit, with a strong management team and an effective group of owners, breeders, trainers and racing customers. I do not foresee any business initiative that would jeopardize NYRA’s VLT revenue stream where the contribution from VLTs to NYRA’s purses is around 35 percent.
Many of the other New York racetracks’ purse accounts rely on a minimum of 70-80 percent of their purses from VLTs.
There are a number of other racing jurisdictions where the majority of purses comes from gaming and not wagering on the races. The threat to these tracks and their purse accounts is real.
Last spring for instance, for the second time, Governor Tom Wolf, of Pennsylvania, tried to legislate a $199 million purse reduction to move the money from racing to education.