{"id":5018,"date":"2015-11-22T07:55:54","date_gmt":"2015-11-22T11:55:54","guid":{"rendered":"https:\/\/kerryhannon.com\/?p=5018"},"modified":"2015-11-22T19:15:53","modified_gmt":"2015-11-22T23:15:53","slug":"investing-in-racehorses","status":"publish","type":"post","link":"https:\/\/kerryhannon.com\/?p=5018","title":{"rendered":"Investing in Racehorses"},"content":{"rendered":"
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\u00a0\"the-new-york-times<\/a>One morning this past summer, Ahmed Zayat was in a stall at Del Mar racetrack in California alongside the 2015 Triple Crown winner American Pharoah.<\/div>\n

\u201cI was kind of cuddling with him, lying down on my back, giggling, and he starts licking me \u2026 it was hilarious,\u201d he said.<\/p>\n

For Mr. Zayat, 53, \u201clife is about moments, moments that go beyond,\u201d he said. \u201cThat was one of those.\u201d<\/p>\n

You could forgive Mr. Zayat his giddiness. After all, American Pharoah, a 3-year-old colt nurtured in Kentucky by his Zayat Stables had made the owner the envy of the racing world just weeks before at Belmont Park by becoming the first horse to win the Triple Crown since Affirmed in 1978.<\/p>\n

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American Pharoah photo courtesy of Zayat Racing Stables<\/figcaption><\/figure>\n

And at the end of October, American Pharoah won the $5 million Breeders\u2019 Cup Classic, his final race before retirement.<\/p>\n

He earned a total of $8,650,300 for Mr. Zayat and was a boon for horse racing this year.<\/p>\n

Yet success in racing to Mr. Zayat isn\u2019t all about American Pharoah. He is among a handful of investors, wealthy and less so, who see diversification as the key to profits, or at least as a way to mitigate risk \u2014 hedging bets by owning multiple horses or through shared ownership. These hard-nosed owners are bucking the odds in what is usually seen as a fun and status-enhancing sport for people of means, but not a very good investment.<\/p>\n

It helps that sales of thoroughbreds are strong in a brightening economy, especially since American\u2019s Pharoah\u2019s victory, offering hope to an industry facing mortal competitive threats from lotteries and casino gambling in recent decades.<\/p>\n

Click Here to READ ARTICLE<\/a> On The New York Times<\/strong>.<\/p>\n

Today Zayat Stables<\/a>, based in Hackensack, N.J., owns 165 horses, including stallions, broodmares, young horses in training, and horses currently racing. And although American Pharoah has been sold, Mr. Zayat still retains some breeding-right interest in the horse, as well as breeding rights in 14 stallions that he raced before, including Pioneerof the Nile, the father of American Pharoah. Pioneerof the Nile\u2019s stud fee tripled to $60,000 this year, and again jumped to $125,000 after the Breeders\u2019 Cup. American Pharoah\u2019s fee was recently set at $200,000.<\/p>\n

Like others in the new crop of business-minded owners, Mr. Zayat is financing his passion for horse-racing with business acumen, not an inheritance. In 2002, Mr. Zayat sold the Al Ahram Beverages Company, the formerly Egyptian state-held beer company that he had privatized, to Heineken for $280 million, or four times what he paid for it in 1997. Mr. Zayat is the founder and still a major shareholder in Egypt\u2019s largest glass manufacturing company, MGM (Misr Glass Manufacturing).<\/p>\n

Other owners who believe they can flout the odds through diversification include Mike Repole, 46, a food and beverage entrepreneur and Vitaminwater co-founder, who owns dozens of thoroughbreds; the celebrity chef Bobby Flay, 50, who owns numerous horses; and the Under Armour founder Kevin Plank, 43, whose Sagamore Racing is \u201ca vast breeding operation with a team of 100 thoroughbreds and growing,\u201d said Hunter Rankin, its president.<\/p>\n

There is another way to diversify even if you don\u2019t have deep pockets. You might say the sport of kings has morphed into the sport of partnerships. Winnings and losses are increasingly shared by racing partnerships run by management firms like West Point Thoroughbreds, Team Valor International, Centennial Farms, Donegal Racing and Eclipse Thoroughbred Partners, which typically offer shares of racehorses starting at 5 percent.<\/p>\n

\u201cPartnerships are the core of the thoroughbred racing business,\u201d said Terry Finley, West Point Thoroughbreds<\/a> founder and president. \u201cThe vast majority of our horses are syndicated with people who buy 5 or 10 percent of the horse, with an investment that ranges from $15,000 to $35,000.\u201d<\/p>\n

That type of arrangement was vividly illustrated in the winner\u2019s circle at the 2011 Kentucky Derby when the wreath of brilliant red roses was thrown over the winner Animal Kingdom\u2019s damp neck. His owners making up Team Valor \u2014 all 20 of them \u2014 and family and friends, all stood laughing as the famous trophy was awarded, along with a check for $1,411,800. Animal Kingdom also won the 2013 Dubai World Cup and earned a total of $8.3 million in his racing career.<\/p>\n

At West Point Thoroughbreds, for example, the initial capital contribution covers the partner\u2019s interest in the horse, all acquisition expenses, equine mortality insurance, and training and maintenance costs through the end of the horse\u2019s 2-year-old season. The initial capital contribution does not cover expenses incurred in racing.<\/p>\n

Owners are billed quarterly for their percentage of an estimated $50,000 a year per horse stabled at a major racetrack for feed, stables, training, entry fees, farriers, insurance and transportation. Partners receive quarterly reports and statements detailing the income and expenses for their horses. And individual partnerships are generally set up as limited liability companies. In most cases, a partner wishing to sell his or her interest must be prepared to find a buyer.<\/p>\n

One of West Point Thoroughbred\u2019s stars, Liam\u2019s Map, owned in partnership with Teresa and Vincent Viola, for example, ended his career with a win in the $1,000,000 Breeders\u2019 Cup Dirt Mile.<\/p>\n

The partners were in Kentucky on race day to cheer on the 4-year-old. They received free admission to the owners\u2019 boxes and paddock privileges. \u201cWe encourage clients to visit the horses, meet the trainers and jockeys, and enjoy the behind-the-scenes happenings of the thoroughbred racing world. Many of our partners especially cherish time spent with their horses during morning training,\u201d Mr. Finley said.<\/p>\n

The size of syndicates and partnerships varies significantly among companies, but most partnerships usually have eight to 15 members, and the length of the investment typically runs two to five years.<\/p>\n

\u201cThere is no doubt we have had a surge of people coming to us since American Pharoah won the Triple Crown and getting involved,\u201d said Mr. Finley, who operates around 70 partnerships with 500 clients. \u201cIn the last eight years, our business has almost doubled in terms of clients and partnerships, and we will see residual effect for years to come of this year\u2019s Triple Crown victory.\u201d<\/p>\n

People who have sold a company or had a big score in the stock market will come into the business because they will think back to the electricity that was exhibited in the crowd on Belmont Stakes day, and they will say let me investigate that,\u201d he said.
\nPartnerships can make money the same way anyone in the business does, through the sale of the horse, purse earnings, or by selling shares in the syndication of a stallion.<\/p>\n

And, of course, there are tax incentives. A provision of the law allows taxpayers to depreciate on a three-year schedule, as opposed to a seven-year schedule, racehorses 2 years old and younger when purchased and placed into service.<\/p>\n

In addition, there\u2019s \u201cbonus depreciation\u201d at 50 percent, which permits taxpayers to depreciate in the first year 50 percent of qualified property (in this case, thoroughbred racehorses) purchased and placed into service.<\/p>\n

\u201cThe owner\/buyer of the horse must be actively involved in racing with the intention to make a profit and should have a business plan for doing so,\u201d said Joel B. Turner, a specialist in equine law at Frost Brown Todd in Louisville, Ky.<\/p>\n

\u201cThere are many hoops, though, to be jumped through in order to take advantage of those deductions. People who are high-net-worth individuals who are generating significant ordinary income can deduct a variety of expenses incurred in operating in a trade or business pursuant to the I.R.S. code, but they must be running it like a business, trying to make a profit, which is very challenging in the horse business.\u201d<\/p>\n

But turning a profit is tricky. \u201cIt is so challenging to train and race a horse that is as delicate as a piece of fine crystal,\u201d Mr. Turner said.<\/p>\n

\u201cWe don\u2019t represent it as a tax investment,\u201d said Mr. Finley of West Point Thoroughbreds. \u201cThat should not be the reason you get in. People come to me and say \u2018I want to make money,\u2019 or \u2018I want to use this as a tax write-off,\u2019 and I say, \u2018No, I wouldn\u2019t advise this investment for either one.\u2019 \u201d<\/p>\n

\u201cYou have to be an optimist, and you\u2019ve got to be a dreamer in order to own horses,\u201d Mr. Finley added. \u201cWe are finding when we look at the demographics of people who are coming to us and inquiring about partnerships, we\u2019re seeing people who are getting a little bit older and have the wherewithal and have always loved the horse business. They watched the Derby and might have gone to the races when they were a kid with their mother, father, uncle or aunt and had an introduction, now they are looking for a whole new world to get into.\u201d<\/p>\n

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Commanding Curve, photo courtesy of West Point Throughbreds<\/figcaption><\/figure>\n

Consider George Waldron, 72, of Hamden, Conn. Two years ago, Mr. Waldron, a retired lawyer and workers\u2019 compensation commissioner, paid about $13,000 for a 5 percent share in Commanding Curve, a 2-year-old colt, along with 14 other investors via a West Point Thoroughbred partnership.<\/p>\n

In the 1950s, he started watching horse races with his father. His father had emigrated from Ireland and had a passion for horses. He passed that feeling along to his son. \u201cI never thought I would be involved in horse racing. My friends and I would talk about getting a horse, but we never did.\u201d<\/p>\n

After Mr. Waldron retired in 2008, though, he spent considerable time researching various partnerships until he finally decided to give it a try in 2013.<\/p>\n

About a year later, Mr. Waldron stood in disbelief on the first Saturday in May at Churchill Downs, watching Commanding Curve finish second to California Chrome in the Kentucky Derby.<\/p>\n

In many ways, the 2014 Kentucky Derby shone a spotlight on partnerships. Aside from Commanding Curve\u2019s runner-up finish for West Point Thoroughbreds, the third-place finisher, Danza, was owned by Eclipse Thoroughbred Partners, and Wicked Strong was fourth for Centennial Farms, a partnership formed in 1982.<\/p>\n

The check for running second: $400,000. The partners ended up with about $300,000 after trainer, jockey and entry fees.<\/p>\n

Mr. Waldron now owns a small percentage of four horses and has spent roughly $40,000 upfront. And his racing luck has continued. This year, for the first time he stood in the winner\u2019s circle at Saratoga, with the 2-year-old Heated Verdict and a bunch of his friends who came to watch the race.<\/p>\n

\u201cIt\u2019s like a dream to be involved with a modest investment at the highest level of the sport,\u201d he said. \u201cIt\u2019s so thrilling, but for me, it is a hobby. I wouldn\u2019t think you would go into it for the money.\u201d<\/p>\n