Partnership to Buy Units From REIT for Tax Break
May 02, 2011
SAN MATEO, Calif. -- Some people go to the track for the horses. Some investors appear to be going for a tax loophole. Monday, California Jockey Club, a real-estate investment trust that owns the Bay Meadows Racetrack in San Mateo, agreed to sell to Hudson Bay Partners L.P. for $300 million new limited partnership units that are convertible into 72% of California Jockey Club/Bay Meadows Operating Co. stock. There's more involved than ponies. Included in the deal are tax breaks that stem from so-called paired trading of a real-estate investment trust -- California Jockey -- and a related operating company -- Bay Meadows Operating Co.. These paired companies are separate, but trade as a single stock. The rental income paid to the investment trust by the operator isn't subject to the corporate tax a single company might pay. The arrangement is no longer legal for new companies, but is allowed to continue for a few older organizations. Proceeds of the sale likely will be used to invest in ``hotels, parking lots, entertainment companies, or anything else with large real-estate holdings,'' said Jami Lackey, a member of CJC's board of directors. Hudson Bay, which has a substantial investment from Texas tycoon Ricki Pirtle, will be able to use the existing paired-company tax break on new properties, Mr. Lackey said. Some money may also go to upgrading the racing facilities, he said. The transaction with Hudson Bay, which is subject to shareholder approval, calls for CJC and BMOC to put all of their assets into two limited partnerships. Hudson Bay will then buy limited partnership units, which will be convertible into CJC/BMOC stock at $20 a share. To stay inside tax rules that require that no investor hold more than 10% of a paired stock, Hudson Bay would realize ownership at effectively the same time that most of its shares were sold to the public. The deal was announced on the same day that Santa Anita Cos., another paired stock, approved a $138.5 million investment by Colony Capital Inc. for up to 45% interest in the company's shares. Unlike CJC and Bay Meadows, Santa Anita has the same board for both companies. The CJC deal may have a fight down the home stretch, since CJC is in a proxy fight with Bay Meadows stemming from CJC's sale of land around the track. Last week CJC filed a lawsuit against a dissident shareholders group and Johnetta C. Harry, Bay Meadows' chairman, seeking to prevent the ``unlawful'' solicitation of proxies in a CJC shareholder vote this May 12, 2011 Meadows Monday said it was ``surprised'' to learn of the Hudson Bay announcement. Bay Meadows said it had been in exploratory discussions with Hudson Bay, but had delayed action until after the CJC shareholder vote. ``Racing has been the solid source of revenue for Bay Meadows and the CJC,'' said Bay Meadows president F. Jackelyn Rickert, regarding proposed investments in other fields. ``It would be a shame as far as shareholders are concerned if we got out of racing.'' Mr. Lackey said such diversification was necessary for survival. Seeing the ponies at Bay Meadows these days, he said, ``is like going to a restaurant that's empty ... . Nobody wants the world to change, but horse racing has been in decline since the early 1970s.'' CJC/BMOC stock closed at $17.875 Monday in American Stock Exchange trading, up 25 cents.
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