New York State Executive Chamber | Governor Eliot Spitzer

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       Governor Spitzer has recently recommended to the New York State Legislature that a newly constituted New York Racing Association (NYRA) be awarded a 30-year franchise to operate thoroughbred horse racing at the Aqueduct Racetrack, Belmont Park and Saratoga Race Course. The essential points of this recommendation are outlined in a Memorandum of Understanding (MOU) between the State of New York and NYRA, which is attached.

       As indicated by the Memorandum, a gaming operator to manage and operate a facility at the Aqueduct Racetrack in Queens, New York must still be selected. Video Lottery Terminals at Aqueduct are authorized by Part C, Chapter 383 of New York State Laws of 2001, and this facility would contain up to 4,500 Video Lottery Terminals (VLTs).

      We seek an experienced gaming operator to operate the VLT facility at Aqueduct. Funds from the VLT facility will provide sustained funding for elementary and secondary education, while also supporting the operation and improvement of the three thoroughbred racing facilities. The State will receive in excess of 70% of Net Machine Income (NMI) from the facility in the form of statutory payments for education and operation of the Lottery and approximately 14.5% of NMI will be dedicated to supporting thoroughbred horse racing in New York State. Accordingly, the State’s primary concern in selecting an operator will be choosing a firm that -- while operating with the highest level of integrity -- will maximize total revenue to the State and the horse racing industry through maximizing the NMI of the VLT facility. The amount of franchise payments offered by the gaming operator will be a further consideration in assessing the total amount of revenue to be received by the State.

       Any experienced gaming operator is eligible to submit a proposal.

Business Models

• Management Fee with Performance Bonus Model: Under this approach, the State would own the gaming facility and finance its construction. The State would also contract with a gaming operator to manage the facility for an agreed upon fee plus a performance bonus or profit sharing arrangement. The term of the management contract will be negotiated.

• Ownership Model: This alternative calls for the selected firm to develop and operate the VLT facility for a term of 30 years. The private firm would be responsible for the operating, capital and other expenses associated with the development and operation of the gaming facility.

Firms are asked to provide detailed business and operating plans, based on the parameters outlined below.

Business Terms

• VLT-only Facility: Firms are requested to limit their proposals to the construction and operation of a VLT facility. Aside from food and beverage operations that would normally be part of this type of facility, firms should not include in their proposals space for such ancillary facilities as hotels, retail space or other commercial operations. As contemplated in the Memorandum of Understanding, further development at Aqueduct is expected to be pursued in the future following consultation with the local community.


• Racing Revenues: In completing the financial and other analyses related to a proposal, firms must assume the financial support for thoroughbred racing included in the Memorandum of Understanding between the State and NYRA. Specifically, the following percentages of VLT net machine income will be used to support thoroughbred racing:
  
  - 4% for capital expenses related to the three racing facilities.
  
  - 3% for general thoroughbred racing operations.
  
  - 6.5% for purses for the first year, growing thereafter at an annual rate of 6% but not to exceed 6.5%.
  
  - 1% for horse breeders for the first year, growing thereafter at an annual rate of 3.5% but not to exceed 1%.
  
  

• Current Statutory Allocations: Firms should also assume that the current statutory allocations of net machine income for public education, lottery operations and marketing would remain in effect. The specific allocations are included as Attachment A to this letter.

• Operating Principles: Firms are expected to address all pertinent conditions included in the MOU. Firms are directed in particular to the section of the Memorandum labeled “VLT Operations at Aqueduct," which identifies principles that should govern arrangements between the racing and gaming operators.

Submission Requirements

       Any proposals made by the firms should address the specific informational requirements listed below. In preparing the proposals, firms should organize their responses by the specific categories discussed below -- “Background and Experience," “Business Plan," Net Machine Income/Fallback Alternative," and “Facility Design and Construction." Firms may also provide supplemental information as attachments to the submission.

Background and Experience

Firms are requested to include a brief statement describing the background of the firm, including core competencies. In preparing this information, firms should give particular emphasis to describing the extent to which they either currently operate or have operated VLT facilities that are comparable to the proposed Aqueduct facility.

Business Plan

Firms, as indicated, are requested to present proposals based on one or both of the business models outlined above. Generally, firms should provide detailed financial and operating plans, including pro-forma financial statements and marketing and management plans. The management plans should include anticipated staffing levels and an organization plan. It is especially important that firms identify the specific financial, attendance, NMI and other key assumptions underlying the pro-forma financial statements.

In addition, firms should, at a minimum, address the following points in the business plans:

Management Fee Model

• Proposed minimum term of the management agreement


• Proposed management fee and payment schedule


• Considerations factoring into the calculation of the fee


• Performance benchmarks and the recourse of the State for failure to meet expectations


• Access to financial records, periodic review of operations and termination rights

Ownership Model

• Proposed franchise or ground lease payments, including any upfront payments to the State and/or annual payments


• Potential minimum guaranteed franchise or ground lease payments to the State


• Proposed equity investment, sources/structure of permanent financing and any related contingencies


• Disposition of the facility at the end of the agreement


• Process for verification of operations/performance


• Profit sharing and associated risks

Net Machine Income/Fallback Alternatives

Firms are also requested to identify the net machine revenue at VLT facilities operated by the firm and/or other comparable VLT facilities. In the event there are material differences in the NMIs for these facilities and those anticipated for Aqueduct, firms are asked to explain, to the extent possible, the differences. In this connection, firms are also asked to identify the alternatives they would consider should VLT revenue fall materially short of projected amounts (e.g., refocus market efforts, scale back operations, etc.).

Legislation is also pending that would increase the allocation of NMI allocated to marketing for VLT facilities – the marketing allowance would increase from its current 4 percent to 8 percent. Firms are requested to indicate how this change would affect projected NMI and amounts available for education and lottery operations. (Please see Attachment A for additional details).

Facility Design and Construction

Architectural plans have previously been developed for a VLT gaming facility at the Aqueduct Racetrack and such plans have received certain local and State approvals. If you are interested in responding to this letter, the plans will be made available by contacting David English of the Division of the Budget at the address listed below. We are specifically interested in whether your firm would anticipate using plans substantially similar to these for the development of the Aqueduct VLT facility.

If you decide, however, to utilize your own design, please describe how you intend to blend the VLT operation with NYRA’s live racing and simulcast operations, and discuss what other impact your facility will have on NYRA’s racing operations. In particular, you are asked to estimate the time you expect would be needed to obtain the necessary environmental and other reviews and approvals.

In addition, please provide:

• A detailed construction schedule, including all phases of construction, budgets, incentives, the type of work to be performed during each phase, and the time required for completion of the construction phase.

• A description of how the construction will be managed to minimize disruption to the racing operations, and how the design will complement racing.

• A detailed operational plan to demonstrate how quickly the facility will become fully operational. This should include a timeline, description of phased-in operations, if applicable, revenue assumptions for each phase, and the anticipated effect of each phase on the racing operations.

Integrity Review

       Firms are advised that the preliminary selection for either the management fee or ownership models will be contingent dependent on the subsequent completion of an integrity review. It is the intent of the State that the selected firm will meet the highest standards of integrity.

Administrative and Other Provisions

       Firms are advised that any information received by the State in response to this letter may be used as the State deems appropriate and will be the property of the State. The State will not reimburse the firms and does not assume any liability for costs and expenses that may be incurred in responding to this letter. Finally, we also reserve the right to request additional information from any respondent, to conduct meetings or interviews with one or more firm(s) or other persons and to recommend a gaming operator on a basis other than as described in this letter or not to recommend a gaming operator. As noted in the MOU, implementation of the actions described in this letter would require legislative action, which cannot be assured.

* * *

       Proposals are to be submitted to David I. English, Chief Budget Examiner, NYS Division of the Budget, State Capitol, Albany, NY 12224 on or before October 15, 2007. Proposals should state that they have been approved by the Board of the submitting entity and its parent. The State, in consultation with NYRA, will review submissions and expects to make a selection within approximately 60 days.

       Thank you for your interest in this important effort, and we look forward to hearing from you in the near future.

Attachments

Allocation of Video Lottery Terminal Receipts
Under Current Law and Proposed Amendments