12/09/2010 2:24PM

Pegram partnership's deal at Del Mar under debate

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A trio of horse owners, led by Kentucky Derby winner Mike Pegram, plans to turn Del Mar Thoroughbred Club into a for-profit enterprise if the group's bid to purchase a 55-year lease on the racetrack is approved by the state legislature.

If sanctioned by a legislature that remains wary of some of the central aspects, the complex deal would leave California with one not-for-profit racing operator, the Oak Tree Racing Association, at a time when the state's for-profit racetracks are facing significant financial difficulties on a rapidly changing racing circuit. Already, one for-profit California racetrack, Bay Meadows in San Mateo, has closed, and the owners of Hollywood Park in Inglewood say they remain committed to a plan to develop the track's property into commercial and residential units once the California real-estate market rebounds.

A change in the racetrack's tax status is not all that Pegram and his partners envision. Also as part of the plan, Pegram said Del Mar would seek an unspecified number of additional racing dates to ensure the operation could turn a profit for its leaseholders. In addition, the partnership would convert the track into a year-round training facility and widen the track's turf course, Pegram said, a project that is considered essential to the track making a serious bid for the Breeders' Cup two-day event.

But despite those changes, Pegram said the partnership was committed to retaining the character that has made Del Mar a summer destination for the circuit's top horses and horsemen -- as well as the throngs of summer vacationers and casual racegoers who pack the mission-style grandstand every weekend.

"The one thing we know about Del Mar, the reason it has become such a jewel on the racing calendar, the reason it has been such a success, is because it's a pristine place, because it's a fun place, because people want to go there, and we want to keep it that way," Pegram said.

The 350-acre property on which Del Mar and a sprawling fairgrounds sits is owned by the state's 22nd District Agricultural Association. Strapped for cash, the state put the property up for sale last year as part of a wide-ranging plan to offer up state-owned assets to the private market, at least to test the waters for some of its more attractive properties.

Improbably, Del Mar, which has a population of about 4,000, made an offer that is now being seriously considered by the legislature. Seeking local control over its most famous landmark, Del Mar said it would pay $120 million for the property, but the deal would be financed almost entirely with debt. Under the plan, Del Mar would issue $45 million in bonds, at a cost of $50 million, and would seek approval for another $45 million in a loan from the state. Pegram and his two partners, the horse owners Karl Watson and Paul Weitman, would pony up the rest, $30 million. All three men are Arizona residents and horse owners who have second homes near Del Mar.

Not surprisingly, critics of the offer have two big bones to pick. The first is the price: $120 million for 350 acres of sun-splashed seaside California property -- or $350,000 an acre -- is well below market value, even in the doldrums of the current market. The second criticism focuses on the amount of debt the city of Del Mar would take on at a time when the state and its local municipalities are struggling to meet current and future obligations. The deal is outlined in legislation that was introduced this week to the California legislature, but the bill probably won't be acted on until next year, when a new governor takes office.

Pegram, who made his fortune in McDonald's franchises, discounted the criticism of the price the city of Del Mar would pay for the property. Instead, he contended the $120 million offer "is too high" because of restrictions that would prohibit any large-scale development of the acreage and restrict business operations to the racetrack and a low-margin county fair.

"That property, with no restrictions on it, would it be worth more than $120 million?" Pegram said. "Probably. But it has to maintain a race meet and be available for a county fair, and I don't care where the real estate is − if you can't develop it, it's not worth anything."

The $30 million that Pegram and his partners have offered for the track would enable the partnership to operate the racetrack for 55 years, along with a yet-to-be-determined annual lease fee that would be high enough to cover the city's debt service. The partners have also offered to spend $15 million in the first year of the lease to upgrade the stable area and racetrack so that horses could train at the facility year-round, a capability that could be critical if and when Hollywood shuts down. A portion of that initial $15 million would also be used to widen the track's turf course to address the Breeders' Cup's desire to accommodate 14 horses in each of its six turf races.

Pegram said the partners have also pledged to spend at least $5 million each year in capital improvements to maintain the facility and its amenities. He said the amount would exceed the amount Del Mar currently spends on capital improvements, in part because the current not-for-profit leaseholder -- the Del Mar Thoroughbred Club -- has to petition the agricultural association each year for the money after turning over its operating profits. The partnership also intends to keep in place the current management team, which is headed by Joe Harper and Craig Fravel, Pegram said.

Within the California racing industry, wariness about the deal stems from unease over the conversion of the track to a for-profit enterprise. Currently, most racetracks that do not have subsidies from slot machines are hard-pressed to generate any profits, and California tracks have little to no chance of getting help from casino-style gambling, considering the power of the state's tribal gaming industry. To critics of the conversion, for-profit companies are far more susceptible to pressures to close and sell racetracks than non-profits, especially when the going gets tough, and they are less likely to weather long-term downturns without seeking to eke every last ounce of juice out of the lemon and putting a financial squeeze on other racing constituents.

To Pegram, Del Mar needs to host more than seven weeks of racing each year to generate the revenue that would allow the partnership to recover its investment. How many dates is still undetermined, Pegram said, but any effort to expand the meet could run up against opposition from other racetracks in the state and local officials who already complain about traffic generated by the race meet and other events at the property. An expansion of the meet could also dilute the novelty that the track currently enjoys as a boutique-type meet that provides a West Coast complement to the prestigious Saratoga stand in upstate New York.

Despite the concerns among some in the racing industry about the potential loss of Del Mar's non-profit status, Pegram is unapologetic about his partnership's effort, citing his belief that a profit motive among horsemen like himself and his partners will better serve the struggling California racing industry.

"You don't invest $45 million in a not-for-profit," Pegram said. "Profit is not a dirty word in this business. This is a risky venture, and if we can make a go at it, then good for us, because that will be good for everyone."