A deal in Jersey

            Many in New Jersey’s thoroughbred industry are celebrating the news that a deal was struck between the N. J. Thoroughbred Horsemens Association, which represents owners and trainers, and the New Jersey Sports & Exposition Authority, the quasi-governmental entity, for the lease and operation of Monmouth Park.
            But as the corks are popped and the champagne begins to flow, let’s take a close look at the nuts and bolts of the deal:

MONMOUTH PARK RACETRACK

GROUND LEASE SUMMARY

The New Jersey Sports & Exposition Authority (the “NJSEA”) and New Jersey Thoroughbred Horsemen’s Association (“NJTHA”) will enter into a ground lease (the “Ground Lease”) and related documents with respect to: (i) the leasing to NJTHA of the Monmouth Park Racetrack; (ii) the assignment to NJTHA of the right to operate five (5) off-track wagering facility licenses, including the existing Woodbridge OTW; and (iii) NJTHA’s assuming responsibility (together with the Meadowlands Racetrack operator) for the operation of the account wagering system and receiving a fifty percent (50%) share of the related net income.  These terms were signed March 1, 2012.  A closing is expected by the first week in May 2012.

 LEASE OF THE RACETRACK

The lease contains customary events of default permitting the NJSEA to retake the Monmouth Park Racetrack, including if NJTHA (a) ceases to operate the track as a thoroughbred racetrack, or (b) breaches any covenant in the other related documents.  If the NJSEA retakes the Racetrack, then it is also entitled to retake possession of the OTWs and account wagering interest.  At the conclusion of the lease, NJTHA agrees to allow the NJSEA, or its operator, to run a 71 one-day meet at purse levels that the NJTHA had run in the years that it leased the track.

The initial lease term shall terminate on December 31, 2016.  NJTHA has the right to extend the lease for up to three (3) 10-year terms. NJTHA and the Authority may jointly agree to extend the lease for a fourth 10-year term.

During the initial lease term, rental payment will be $1 per year.  During the first renewal term, annual rent will be either $250,000 or five percent (5%) of NJTHA’s net operating profits, whichever is greater.  During any subsequent renewal terms, annual rent will be either $500,000 or five percent (5%) of NJTHA’s net operating profits, whichever is greater.

 RACETRACK OPERATIONS AND EXPENSES

NJTHA is responsible for all operations at the Monmouth Park.

NJTHA is responsible for all costs of operating and managing Monmouth Park through the end of the lease.  NJSEA will advance $5.0 million of that amount on NJTHA’s behalf.  This $5.0 million is repaid as additional rent over five (5) years commencing in June 2015.  Repayment of the $5.0 million is secured by several forms of collateral including an escrow of $4 million.  As an incentive for the NJTHA to take over for the 2012 season, with expected operating losses in excess of $8 million, the NJSEA also agreed to provide a $4 million grant for the 2012 racing season.

NJSEA has also agreed to advance up to $2.0 million of operating losses for 2013 and up to $2.0 million of operating losses for 2014.  These amounts will also be repaid over five (5) years commencing in June 2016 and June 2017, respectively.  Repayment of these amounts is secured by various forms of collateral, including the OTW investments.

OTW AND ACCOUNT WAGERING

NJTHA will be granted the right to operate the off-track wagering facility in Woodbridge.  NJTHA will pay NJSEA ten percent (10%) of its net operating profits from the Woodbridge OTW commencing on the second anniversary of the Ground Lease.

NJTHA also has the right to construct and operate up to four (4) additional off-track wagering facilities.  NJTHA is required to commence construction of one new OTW facility within 12 months and a second new OTW facility within 24 months of commencement of the Ground Lease.  NJTHA will pay NJSEA ten percent (10%) of its off-track wagering net operating profits from any new OTWs.

NJTHA will receive 50% of NJSEA’s net operating profits from the account wagering operation.  Prior to NJTHA and the operator of the Meadowlands Racetrack assuming the account wagering operation (which is expected to occur after the closing of the Ground Lease), the Authority will retain 5% of the net operating profits.

Starting in 2013, the NJSEA will get 5% of the NJTHA’s share of account wagering revenue.

 ENVIRONMENTAL

Environmental remediation in areas of new construction is the NJSEA’s responsibility up to the first $2.0 million. NJTHA will be responsible for all costs associated with the removal of historic fill.  If the cost of remediation is over $2.0 million, then NJTHA will have the option of paying the excess costs.  If NJTHA fails to pay the excess remediation costs, the NJSEA has the option of paying the excess or terminating the Ground Lease.  The NJSEA agreed to increase this amount depending on the amount the NJTHA contributes to capital improvements.

 GAMING

If the laws relating to gaming change, then NJTHA has the right to conduct such gaming from the Racetrack.  If NJTHA elects not to exercise the available gaming rights, then the NJSEA has the right to conduct such gaming from the Racetrack.

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            We’ll have a fuller examination and opinion on this deal in a subsequent blog post, but suffice it to say it seems that the NJTHA, with no experience at running a racetrack, may be biting off more than they can chew unless they have a team of professionals ready to assist.