HD11 - Fair Market Rental Value Study: Commercial Bingo Facilities - Leases

Executive Summary:
The Executive Secretary has been directed by the Commission to report to the Governor and General Assembly on or before November 10, 2001 on its findings and recommendations relating to House Bill 2375 (See. Appendix 1).

The contents of this report may not reflect the views of the Commissioner's in whole or in part, but is believed to present an accurate view of a very complex and controversial subject matter. Based upon the results of this report, it is highly recommended that consideration be given in adopting one of the two set formulations provided in the "Fair Market Rental Value Mode/or Bingo Halls Regulated by the Virginia Charitable Gaming Commission" (the "Report") prepared by James H. Boykin, Ph.D., MAl, CRE, an independent real estate analyst and consultant, to ensure consistent application of rental amounts for real estate and equipment/services paid to commercial landlords by organizations that are permitted to conduct charitable gaming activities, and to allow commercial bingo hall operators an opportunity to make a reasonable profit on the uniqueness of the real estate utilized for the conduct of charitable gaming activities.

The Commission has been asked to evaluate four issues associated with charitable gaming activities relating to licensed charitable gaming organizations who utilize commercial real estate for the conduct of their charitable gaming activities. First, the Commission was asked whether leases between operators of commercial bingo facilities and qualified organizations conform to the standards set forth in § 18.2-340.33(3) (rent shall not be in excess of fair market rental value). Secondly, to evaluate fair market rental value for real and personal property utilized by licensed charitable gaming organization. Third, the Commission was asked to evaluate methods licensed charitable gaming organizations should utilize in reporting information relating to rents associated with real and personal property. Fourth, to evaluate the relationship between rents paid by licensed charitable gaming organizations and their ability to meet the use of proceeds requirement defined under § 18.2-340.16.

Evaluation of Fair Market Rental Value

In reviewing the statutes and regulations (See. Appendix 2 and 3, respectively) of the Charitable Gaming Commission, it is evident that the principle goal of the Commission is to ensure that licensed charitable organizations meet their charitable obligations which they accept as a precondition to licensing, that games be conducted reasonably, and that the playing field for all organizations is equal and all organizations have an opportunity to use charitable gaming defined under the statutes and regulations as a means of raising revenue funds.

Statutory and regulatory law relating to the Charitable Gaming Commission does not specifically define "fair market rental value", and the Commission, per se, does not have the authority to devise standards to protect against abuses in appraising fair market rental value. Currently, there is no way of insuring that the methods used by the landlords in appraising the fair market rental value is a fair price and not an excessive price on the property, based upon the property's original or constructed purpose.

The enclosed Report defines a formula that will ensure licensed organizations obtain a fair market rental value for real estate and equipment/services while at the same time allowing the commercial bingo hall operator a reasonable profit.

I. Whether leases between operators of commercial bingo facilities and qualified organizations conform to the standards set forth in § 18.2-340.33(3).

The enclosed Report is based on a study of prevailing retail rental rates, capitalization rates and operating expense ratios for retail properties, and rental practices for retail and bingo halls. The Report includes an equitable rental formula for both tenants leasing facilities for the operation of bingo halls and their landlords, and the Report formulas provide landlords with a profit consistent with the nature, location, and risk associated with their properties.

Additionally, the term "Fair Market Rental Value" has been defined in the Report as follows:

Fair Market Rental Value - Defined as rental for a bingo hall that allows a qualified organization to achieve its minimum percentage of use of proceeds [amount required by law that an organization is required to donate to charity] requirement while allowing a landlord a fair return on its leased premises, including services and equipment provided on behalf o f the tenant.

II. The ways in which fair market rental value for both real property and the personal property used therewith for bingo games may be appropriately computed.

As used in the context of charitable gaming, "fair market value" of real property and services/equipment in actuality means "fair market rental value". The methods used to determine fair market value of real property are achieved through generally accepted appraisal standards. Likewise, fair market rental value is determined through generally accepted standards. Furthermore, personal property provided to the renters, i.e., blowers, monitors, and electronic number boards, would be subjected to generally accepted appraisal standards.

II. The ways rents for real property and any personal property used in connection with such real property for bingo games are reported or should be reported to the Commission.

Landlords have no statutory or regulatory obligation to report to the Commission the basis for the rental of real or personal property used in conjunction with charitable gaming, nor are they regulated by the Commission. The Commission has determined the many landlords/nonprofit organizations enter into rental agreements wherein the rent is established at the "high end" or maximum profit potential for both parties. When attendance is low, some landlords will adjust the rent downward, but not all. These adjustments are often based on personal property used during the gaming session. This method/philosophy is undertaken to circumvent § 18.2-J40-33.

18.2-340-33(3). Prohibited practices. No personal shall pay or receive for use of any premises devoted, in whole or in part, to the conduct of any charitable games, any consideration in excess of the current fair market rental value of such property. Fair market rental value consideration shall not be based upon or determined by reference to a percentage of the proceeds derived from the operation of any charitable games or the number of people in attendance [emphasis added] at such charitable games..."

Currently, gaming organizations must submit a copy of their lease, and any applicable primary or subleases, with their Bingo/Raffle Application. They are also required to disclose any and all payments made to the landlord for activities dependent upon an organizations charitable gaming license. In addition, they are required to document rent paid on the annual financial report form. At this time, there is no uniform requirement to segregate rental costs between real and personal property. Landlords are statutorily barred from taking part in any aspect of the game with the exception of providing real property to host and personal property to accommodate the play of bingo.

11 VAC 15-22-30. Permit application and exempt notification process.

G.(5) A copy of the written lease or proposed written lease agreement and all other agreements if the organization rents or intends to rent a facility where bingo is or will be conducted.

Information on the lease shall include name, address, phone number of the landlord, square footage and maximum occupancy of the building, and the rent amount by each category of equipment and property rented.

11 VAC 15-22-70. Recordkeeping.

A. In addition to the records required by § 18.2-340.30 (D) of the Code of Virginia, qualified organizations conducting bingo shall maintain a system of records that documents and identifies:

7. All operating expenses including rent, advertising and security. Copies of invoices for all such expenses shall be maintained.

11 VAC 15-22-100. Requirements regarding renting premises, agreements and landlord participation.

(A) No organization shall rent or use any leased premises to conduct charitable gaming unless all terms for rental or use [emphasis added] are set forth in a written agreement and signed by the parties thereto prior to the issuance of a permit to conduct charitable gaming.

The regulations of the Commission specifically provides that a charitable gaming license is contingent upon an organization providing, upon the initial application and upon renewal, a true copy of the lease agreement, in addition to providing any and all addenda thereto.

In light of the above referenced provisions under the Charitable Gaming Regulations, the Commission reserves the right to impose a penalty on any organization which fails to comply with the provisions of the law or these regulations (11 VAC 15-2280 (H.), up to and including terminating the license of any organization that fails to provide the required information regarding the terms and conditions of the lease upon which they operate charitable gaming. The burden is clearly on the charitable gaming organization to provide the initial lease upon application, upon renewal, and to provide any and all changes or addenda during the term of the contractual obligation to stay in compliance. (See. 11 VAC 15-22-30)

III. The nexus between such rents paid, the reporting of such rents, and the ability of qualified organizations, as defined in § 18.2-340.16, to meet the minimum percentages of the gross receipts required to be used for those lawful religious, charitable, community, or educational purposes for which the organizations are specifically chartered or organized.

The Commission has reviewed the performance of the charitable gaming community in the Commonwealth as related to organizations that currently rent gaming facilities and their ability to meet the "Use of Proceeds" ("UOP") as required by current statute.

The Charitable Gaming Commission has accumulated the following data relative to those organizations who rent versus non-renters and their ability to meet their use of proceeds requirement: (see page 8 of the report).

A significant number of organizations failed to meet UOP requirements due to market saturation, military base gaming (no limits on amount of prizes), poor game management, inexperience, inadequate training, higher-than-profitable-prize payouts, managing expenses (including rent and other landlord charges), volunteer turnover, and failing to establish UOP requirements on a per "gaming session" basis.

From the Commission's review of the 2000 annual reports filed by licensed charitable organizations, there appears to be a correlation between the amount of rent paid and the ability of an organization to meet the UOP requirement.