Claiming

Claiming races constitute the majority of Thoroughbred races. Each horse entered in such a race is subject to sale, or claim, at the value stated in the conditions of the race. However, all purse money earned is the property of the person in whose name the horse started.

The primary advantage to claiming is that it offers immediate racing action. Likened to purchasing a used car, the buyer may be obtaining a horse which, with a change in training routine, may develop and excel or may turn out to be nothing more than a lemon. Unlike purchasing a horse at public auction or privately, the buyer is not entitled to perform a veterinary examination prior to the purchase.

If you elect to pursue this option, you should employ a trainer who excels in this aspect of the business. With your trainer, devise a strategy for selecting potential claims.

Consider the following points prior to claiming a horse:

1. Review the jurisdiction's claiming rules.

Claiming rules differ from state to state. It is important to note: (a) The point at which the horse becomes the property of the new owner - when it steps onto the track before the race, when it leaves the starting gate or at another point; and (b) the conditions under which the horse must make its next start.

2. Complete the paperwork.

Obtain the proper owner's license. To be eligible to claim, you must possess the proper owner's license from the state in which you intend to claim. Licensing is controlled by the particular state's racing commission or board. If you are not licensed in that state, you are required to complete the application process, receiving either a permanent or temporary license.

Most states now have rules authorizing open claiming, thus permitting licensed owners who do not currently have horses stabled at the particular racetrack where the horse is running to claim a horse.

• Establish an account with the racetrack's paymaster or horsemen's bookkeeper. Prior to the claim being made, an owner's account must have sufficient funds to cover the transaction: the claiming price plus state sales tax. Sales laws and bookkeeper's procedures differ from state to state and from track to track. If you intend to have your trainer make a claim on your behalf, there must be an authorized agent form on file. Contact the Horsemen's Bookkeeper and/or Claims Clerk for more precise information on these matters.

• Complete the claims slip. Claims must be made on the day of the race and filed prior to the start of the race in accordance with the rules of the specific jurisdiction. Claiming forms are available in the racing office. The information on the claim form must be absolutely correct; a misspelling can invalidate a claim. A person is not permitted to enter a claim for more than one horse in a race. If more than one person wishes to claim the same horse, a random selection system is used to decide the new owner. The system is commonly referred to as a shake.

3. Take possession of the horse.

Title and risk pass to the new owner immediately upon selection as the successful claim. As the new owner, you will be expected to take possession of the horse at the conclusion of the race or after completion of any post-race tests.
 

Private Transactions

While auctions and claims are the two most popular methods of acquiring horses, they may also be purchased privately. Private transactions offer the buyer value and opportunity as well as the option of a pre-purchase exam. Furthermore, the purchaser is not restricted to only those horses offered for sale, but may make an offer on any horse considered desirable, including those which are not necessarily advertised for sale. Again, consultants play a vital role in finding, selecting and inspecting prospects.

As with other purchase options, proper pre-purchase arrangements must be made and various factors should be considered.

1. Make an inquiry regarding purchase opportunities.

If you are interested in purchasing a particular horse, contact the horse's owner, trainer or owner's agent and inquire if the horse is for sale.

2. Inspect the horse.

After ascertaining that the horse is for sale, a thorough physical examination should be conducted. Follow the same guidelines as those associated with inspecting horses at public auction. If you are serious about the purchase, employ a veterinarian to perform a physical examination evaluating the soundness, general health, wind capacity and reproductive ability of the animal.

3. Negotiate price.

The sale price should reflect the quality of the horse's pedigree, conformation and race record. To determine an offering price, evaluate the following factors in addition to the three previously mentioned:

• The level at which the horse has been competing: If the horse competed in claiming races, what was the claiming price?

• The future earning potential: How much longer will the horse be able to race and at what level?

• The residual value: Will the horse be of value as breeding stock?

When a purchase price has been determined, make a formal offer.

4. Present a Written Agreement of Sale or Purchase and a Bill of Sale.

A written Agreement of Sale or Purchase should be prepared and should include the names of the parties, identification of the horse, terms of sale, warranties of sale, contingencies and deadlines and site of the transaction, as sales tax may be a factor. It may be prudent to also include a procedure for resolving disputes, as well as a provision acknowledging the right for a complete veterinary examination. In most cases a veterinary examination is required by insurance providers before a policy will be issued. Where questions or suspicions exist, good business practice suggests that a title search should be made to ascertain that the seller's title is free of liens.

Upon acceptance of the offer, the purchaser should request a Bill of Sale. A Security Agreement may be imposed by the seller to secure payment if the seller finances any portion of the purchase price. At the closing, the purchaser should receive the horse's Jockey Club Certificate, as well as copies of its health records.

Partnerships

There is little debate that the thrill of owning part of a racehorse matches that of sole ownership. Because of this, and other more practical considerations, many first-time owners elect to become involved in racing through a partnership. The proportional initial capital expenditure, combined with reduced recurring expenses, affords most an economical entry into the business.

There are generally two paths to becoming involved in equine partnerships:

Purchasing shares in an existing partnership, or
Forming a partnership with a group of friends or associates.

Investing With an Established Partnership

Many partnerships are looking for new investors. As a prospective investor, you should investigate the partnership, particularly the individuals involved. Naturally, some are more reputable than others. It is important to select a partnership with goals and philosophies that match your own, and whose financial requirements are within your budget.

The considerations identified below may assist in selecting a partnership.

1. Compare Partnership Prospectus

To find the names of existing partnerships, contact local horsemen's associations, trainers and other industry professionals. Additionally, the TOBA Membership Directory and The Source published by The Blood-Horse, Inc. offer comprehensive lists of individuals who operate partnerships, including their addresses, telephone numbers and e-mail addresses.

Compile a list of partnerships to contact and request a copy of their written plan or prospectus. In reviewing this material, determine if the partnership is (a) oriented in the area of the industry in which you wish to participate: racing, breeding, racing and breeding or pinhooking*; (b) involved at the level at which you desire to be involved: claiming, allowance or stakes horses; and (c) a limited or general partnership, as this distinction will affect your expense liability and your right to participate in the making of certain decisions.

* "Pinhooking" is the term utilized to describe the practice of purchasing a young horse, either a weanling or yearling, for the purpose of selling that horse during the next sale season. Pinhooking is a very speculative venture and may not be the best introduction to Thoroughbred ownership, as it requires in-depth knowledge and skill.

2. Meet with the Managing Partner

After identifying the partnerships most appealing to you, arrange to meet with the managing partners. Don't be afraid to ask them the same questions you would ask of any other potential partner. Determine up front the answers to questions that could develop over the course of the partnership.

3. What are the goals of the partnership and what is the plan to achieve those goals?

The managing partner should be able to clarify the objectives and the manner in which he intends them to be achieved. Is there a developed plan? Does the plan appear realistic? What about the partnership's goals? Are they consistent with yours? Will the success of the partnership be determined by profit alone, caliber of races won, by social activity, etc.?

4. Who are the players?

• Managing partner: depending on the type of partnership, one individual or a group of individuals will have primary decision-making authority. The success and overall profitability of the partnership are dependent on the skill of the managing partner. Consequently, determine to your satisfaction what the managing partner's credentials and experience are in the industry. Ask whether he intends to have and maintain a financial interest in the partnership.

• Team players: in addition to the managing partner, identify who the other professionals involved are - the trainer, bloodstock agent, pedigree advisor, veterinarian and farm manager. You may want to meet them and verify their references.

• Other partners: how many partners are there in the partnership? What will their role and /or percentage of interest be? Will each partner own the same percentage? Are any of the partners related to the managing partner? Remember, these are your business partners. It is important that you are confident that you are compatible and that you find them trustworthy.

• The athletes: if the partnership does not yet own any horses, determine the procedure and criteria for their acquisition. If the horses have already been purchased, examine how closely the price of partnership share reflects the purchase price.

5. What type of entity is used?

Equine partnerships can be formed in a variety of ways. Your personal expectations and comfort level should be considered along with the tax and liability implications associated with the form of partnership utilized.

6. How are the finances handled?

• Managing partner's compensation: frequently, the managing partner seeks to be, and is, compensated for his experience, time and related expenses. Compensation may either be a management fee, an equity percentage in the horse or a commission for finding or selling the horse. As an investor, it is essential that you are informed and aware of the arrangement.

• Your initial investment: ascertain what is included in the offering price and the number of horses in which you are purchasing an interest. Some partnerships offer "packages" while others are for individual horses.

• Expense allocation and income distribution: in addition to the cost of a share in the horse, there are other expenses such as training or board, veterinary charges, farrier fees, accounting bills, vanning fees, stud fees (if applicable) and licenses for which you will be responsible. Be certain who authorizes these expenditures and how investors will be notified and billed.

When income is recognized from purse money or sales, does this income flow directly to investors or is it maintained in an account to cover future expenses? At what point does the partnership settle up? Is it monthly, quarterly or annually? Is each partner provided a statement reflecting cash receipts and disbursements? If so, how often?

7. How are decisions made and by whom?

As indicated above, depending upon the degree of knowledge and expertise of the partners, it may be desirable for the managing partner to have the final say. However, it is imperative that you know going in whether decisions will be made in a democratic manner or whether the managing partner has full authority.

8. What are the services provided to investors?

• Communication/correspondence: at what intervals will reports on the condition, progress and location of your horse(s) be sent? Who will be responsible and via what mode (written or oral communication) will this information be disseminated?

• Perks: as you may be paying a premium, will you be provided with special racetrack accommodations on race days? Will you be given access to the stable area? Are you welcome to visit your horse? Will you be supplied with some sort of income or other financial statement for your tax purposes?

• Licenses: according to the Association of Racing Commissioners International Model Rules, each person who has a five percent (5%) or more ownership or beneficial interest in a horse is required to be licensed. Names of owners of less than five percent (5%) must be disclosed in an affidavit filed by the partnership which also states that these persons are not presently ineligible for licensing or suspended in any racing jurisdiction.

9. What are the conditions for transfer of shares and dissolution of the partnership?

Many partnerships require investors first offer their shares to the existing partners; however, determining a transfer or sale value can be difficult. On occasion, the partnership will employ an expert to determine this issue, but it is far more common to disburse partnership interests at public auction.

As an investor, you may know how long you are committed to participate in the investment. If you are involved in a racing partnership, what happens when the horse retires from racing? Is the horse to be maintained for breeding purposes? Will it be sold publicly or privately?

Other Options

You may also wish to explore forming your own partnership or seek a consultant, trainer, or bloodstock agent to match you with other interested investors. Be certain to discuss these issues with your partners.

Clearly, this option is more time-consuming; however, the advantages may outweigh the disadvantages. For example, common goals and criteria can be established and a plan developed from the outset with which each partner feels most comfortable.