The first Americans were gamblers. Some of the natives gambled their belongings. Others went so far as to gamble themselves into servitude. When the Puritans and other Europeans arrived, they tried hard to put a stop to the natives' practices. America traces the origin of its legal code to Europeans. From early times, society's effort has largely been to suppress gambling's harmful effects by suppressing the activity itself. Recognizing that gambling couldn't be entirely suppressed and lured by the potential for generating income, government has given gambling limited legal outlets. One of these is race track betting.

Pari-mutuel wagering at race tracks is big business. For most of this century, race track betting represented the nation's only legally sanctioned gambling. In pari-mutuel betting, a fixed portion of the "handle" (gross revenue from wagers) is paid to the state and a fixed portion to the track operator. The balance is paid to the winning bettors. In pari-mutuel gambling, bettors wager against one another. Nationwide, race track betting is a $17.6 billion industry. The largest portion of the handle, 83%, is earned by horse tracks. Greyhound tracks account for 15.5%. Jai-alai, which is not a "race track" sport but which is part of the pari-mutuel industry, accounts for the balance. Historically, the pari-mutuel industry experienced steady, stable growth. Race tracks, even more than other commercial facilities, became important to the communities in which they were sited. Tracks are important sources of employment for trainers, animal handlers, administrators, and attendants. For the states, cities, and towns in which they are located, race tracks are an important part of the tax base. For patrons who bet there, the track is a gathering place - a place of cameraderie, competition, and friendship. Horse racing is among the nation's largest spectator sports.

The most important consideration in the valuation of a race track is its ability to produce income. Race tracks are special use facilities with improvements specifically designed to operate a gambling enterprise. A major element in the valuation of a race track or any other special use facility is to define the thing that is valued: the business (a "going concern") or the real estate. Real estate and a business may require different rates of return, the choice of which affects the worth of an income stream. The prospects for continued income production in the face of competition for the gambling dollar are a factor. Another is cost containment and efficiency of operation. For a track that finds its net revenue in decline, the value of the land for any new uses to which it may be put can be an important component of value. An established history as a gambling locale can be another: in a state considering legalization of casino gambling, a history of operation as a gambling venue may represent an advantage over other sites needing approvals.

The stable world in which race tracks operated was changed when state lotteries were established. Through lotteries, states have profited directly from gambling, without track operators as "middle men." Many former track patrons now prefer the ease of lottery and scratch ticket gambling to the race tracks' somewhat complex pari-mutuel system. In addition, casinos (often established in association with native tribes) offer what has proven to be a highly popular alternative. Since 1991, the handle for horse tracks has grown only marginally, while the handle for dog tracks nationwide has declined by 22%. The decline in the more profitable "live" handle of patrons who visit the track (as opposed to off-track bettors) is greater. Nationwide, a number of tracks have closed in recent years. The gambling dollar has increasingly flowed to lotteries and casinos. Massachusetts is a case in point. The Boston Globe in a recent seriesdetailed the rise in lottery spending, with Massachusetts by far the state with the highest per capita lottery spending in the nation. According to Massachusetts statistics, lottery spending is concentrated most heavily in the lowest-income neighborhoods. The bad publicity generated by lottery gambling's negatives, however, falls on gambling generally. Add to that the protests of animal rights activists and you have an industry under duress.

States have attempted to even the field for race tracks by loosening their limitations. Off-track betting has offset losses in the live handle derived from actual track attendance. The track at Lincoln, Rhode Island was allowed to install slot machines and, by becoming more like a casino, has expanded its revenue. Due to competition from the Foxwoods casino in Connecticut, Massachusetts has considered allowing casino-type betting at race tracks as well.

Gambling produces clear winners and losers. Today's winners are casinos and lotteries. Losers are race tracks, jai alai, and the small beano and bingo games that provided revenue for many religious organizations and non-profit groups across the country. Today's losers may be tomorrow's winners. To invest in a gambling venue, once a sure thing, today is itself a gamble. How the climate for the race track industry sorts out depends as it always has on how society decides to come to terms with gambling behavior - whether to attempt to suppress it, to channel it, or to give it free rein.

Stephen M. Post of Stephen M. Post and Associates
and Eric T. Reenstierna, MAI.

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    Cambridge, MA 02141

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Eric Reenstierna Associates LLC is a real estate appraisal firm taking on valuation and consultation assignments in Greater Boston, Massachusetts and New England. Eric Reenstierna, MAI, is the office's principal and is a commercial real estate appraiser.


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