The Borgata gives new meaning to the saying that “the house always wins.”
Every day thousands of disappointed gamblers leave Atlantic City with their wallets a little lighter. For most, this makes for a long ride out of town. After a Tax Court ruling earlier this month in favor of the Borgata, Atlantic City officials may wish to take a long ride out of town.
Photo courtesy of Wikipedia
As far as we are aware, this appears to be the largest ever reduction in assessments ordered by the Tax Court and the largest single year refund as a result of a tax appeal.
In a comprehensive 64 page opinion, the Tax Court in Marina District Development Co. LLC v. Atlantic City adopted the income approach to determine the true market value of a casino-hotel. The court accepted the “uncontradicted credible evidence from three of plaintiff’s experts that buyers, sellers and lenders in the marketplace determine the value of casino-hotels based on the income generating potential of the property.”
While the appraisers on both sides utilized the income approach, the court rejected the methodology of the City’s appraiser which utilized a net operating income by averaging the subject property’s annual net operating income from 2006 through 2009. The court found this approach lacked credibility because the averaging did not reflect the expert’s weighing of various factors that had an impact on the subject property’s future earning potential. The court noted in particular the increased competition in the hotel and casino business as well as the national and regional economic downturn in 2008 and 2009.
The court found that the determination of net operating income by the Borgata’s second appraisal witness was more credible. This appraiser’s conclusion took into account what the court characterized as the “reset of the gaming industry as a result of growth of casino-gaming in [surrounding states].” The court found also that this appraiser “credibly captured” the impact of the national economic downturn in her estimate of net operating income.
The court also accepted the proposition of plaintiff’s experts that each transaction starts with a determination of the property’s EBITDA or “earnings, before interest, taxes, depreciation and amortization.” The EBIDTA multiple reflects the educated prediction of future earning potential during a reasonable holding period and may be converted to a capitalization rate for use in the income approach. In this regard, the court accepted the capitalization rate of one of plaintiff’s appraisal experts which was derived from the EBITDA multiples of casino-hotel sales and the analysis of financial firms that monitor the casino-hotel industry.
The court rejected the capitalization rate proffered by the City’s appraiser which relied on data from the sales of hotels not associated with casinos. The court noted that stand alone hotels are operated very differently from casino-hotels, most specifically that room rentals, occupancy and other factors associated with casino-hotels are intertwined with the gaming operations. Revenue from room rentals represents only a small percentage of income generated by a casino-hotel.
Given what is at stake in this case it is likely there is more to come. We will, of course, keep you posted.
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