In today’s economy, horsemen and women are more likely than ever to pool their resources to purchase horses for resale. Trainers and clients frequently partner on resale horses, with the client providing the purchase money and the trainer providing the labor. Whether the partners intend to resell the horse quickly or they’re planning to take the time to train a young horse and bring it along, the partners’ goals are the same: Minimizing risk and maximizing return.For horse co-owners who don’t have a horse racing partnership agreement or co-ownership agreement that effectively limits their personal liability, each partner has unlimited personal liability for the other partners’ actions. What that means: Partners A and B co-own a horse. Partner A is a trainer and Partner B is trainer’s client. Partner A takes the co-owned horse to a show. Due to Partner A’s negligence, the horse kicks someone in the warm-up area, seriously injuring them. Like many trainers, Partner A has a lot of debt and not much income. The injured party sues both Partner A and Partner B. The injured party could collect the entire judgment from Partner B, even though Partner A was at fault.
There are several ways to limit horse co-owners’ personal liability. Horse partners can limit their personal liability associated with the horse by purchasing horse owners’ liability insurance under the horse racing partnership agreement. This type of insurance policy will protect the co-owners from liability associated directly with the horse, such as in the example above. However, horse owners’ liability insurance won’t cover debts incurred by the horse racing partnership agreement. What this means: Without Partner B’s knowledge or permission, Partner A buys a custom saddle for the co-owned horse and then pays the saddle maker with a bad check. Knowing that Partner B co-owns the horse and is likely to have more money than Partner A, the saddle maker sues Partner B for the cost of the saddle. The saddle maker could collect the debt from Partner B, even though Partner B didn’t know about the saddle, because Partner A incurred the debt on behalf of the horse racing partnership agreement.
Individual horse owner liability and insurance
As an equine attorney, I’m often asked to give presentations on equine liability. It’s a very broad topic, of course, so I try to tailor it to the audience. Many of the audience members are individual horse owners. Here are some common areas of concern, and some recommendations for how to address those concerns:
Injury cases under the horse racing partnership agreement
Injury cases also have to be included in the horse racing partnership agreement in the event of accidents. Just because a horse injures someone doesn’t automatically mean the horse owner will have liability for the injury. The horse owner must be at fault. Common scenarios in which the horse owner might be at fault:
- -The horse has a dangerous habit, such as kicking or biting. The horse owner fails to warn of the danger. The horse’s dangerous behavior then causes injury to someone unaware of the horse’s tendencies.
- -The horse owner rides or handles the horse in a way that is negligent. As a result of the negligent riding or handling, the horse then injures someone. For example, a show rider might run over another horse and rider in a crowded warm-up arena because the show rider is on their cell phone and not looking where they are going.
- -The horse owner fails to provide adequate fencing or stall door latches, and the horse gets loose. The horse runs out onto the road in an area that is not legally designated as “open range.” A passing motorist doesn’t see the horse in time to avoid an accident, and the motorist is injured.
The role of liability releases under the horse racing partnership agreement
Liability releases serve two very valuable functions when included in the horse racing partnership agreement. First and foremost, they discourage people from suing in the first place. They can also provide a viable legal defense and prevent the person suing from winning their case. What they don’t do is pay for the cost of your legal defense, and if you lose, the cost of the legal judgment. That’s where insurance comes in as included in the horse racing partnership agreement.
Homeowners’ Insurance under the horse racing partnership agreement
Many horse owners are under the impression that if their horse injures someone, their homeowners’ insurance will provide coverage. Only when the accident actually happens and they really need coverage do they find out that their insurance may not help them. Most policies have a very small cap on medical expense payouts. Some homeowners’ policies will not provide coverage if the horse is not kept at home. Others have specific exclusions for livestock. In many cases, if you lease your horse, that will be considered a commercial use and therefore excluded from your homeowners’ insurance. Best to check with your homeowners’ insurance agent and read your policy before you actually need the coverage.
Liability insurance for individual horse owners under the horse racing partnership agreement
There are liability policies specifically for horse owners. These policies are very inexpensive, and can provide coverage and peace of mind. Member benefits for United States Equestrian Federation include a basic horse owner’s liability policy, and the cost of a membership is typically less than the cost of buying the policy separately.
Significance of horse racing partnership agreements
Like any well-drafted contract, a horse racing partnership agreement or co-ownership agreement, such as ELS’ Equine Co-Ownership Agreement form, serves some very important purposes. It helps minimize the potential for conflict among the co-owners or partners by putting everyone’s expectations in writing before anything happens (bad OR good!). Who pays for what? Where will the horse be kept? Will the horse be shown, and if so, at what shows, by whom and who will pay for it? What happens if one of the partners needs to exit the horse racing partnership agreement, or the majority of the partners want to eject another partner from the horse racing partnership agreement? Can the horse be sold, and if so, how will the partners decide when to sell the horse, how much to ask for it, and who will have responsibility for showing the horse to prospective buyers? What happens if the horse dies or becomes disabled? A good horse racing partnership agreement or co-ownership contract will cover all of these terms and more.
While a horse racing partnership agreement can allocate liability among the partners, this allocation is only as good as the partners’ pockets are deep. For example, a horse racing partnership agreement might state that if one of the partners is sued in connection with the co-owned horse (and the other partners are not), that partner can seek pro rata reimbursement from the other partners. However, if the partners who weren’t sued don’t have any money, the partner who was sued is left paying his or her own legal expenses.
Few will argue that the thrill of owning part of a winning thoroughbred is no different than that of sole race horse ownership. And, there is little doubt the lower costs of owning a horse in horse racing partnership agreement allow many first-time owners an economical entry in to the business. In addition, horse racing partnership agreements are a great way to reduce risk by owning smaller shares in multiple horses, similar to a mutual fund. And, horse racing partnership agreements, also called Horse Racing Syndicates, provide the professional management necessary to own and race a thoroughbred.
Limited liability company ownership under a horse racing partnership agreement
Instead of forming a general partnership to purchase an investment horse, Equine Legal Solutions typically recommends that the co-investors who would otherwise be partners form a limited liability company (LLC), have the LLC own the horse, and have the would-be partners own the LLC. The principal advantage of this arrangement is to limit the investors’ personal liability to the amount of their investments in the horse. If the investors happen to be sued personally in connection with the horse, they have a ready legal defense: They don’t own the horse; rather, the LLC does. More about limited liability companies and what they do.
At the same time, the LLC’s governing document, the operating agreement, can set forth all of the same types of terms and conditions typically included in a horse racing partnership agreement, such as those discussed above. Like a well-drafted horse partnership contract, a well-drafted LLC operating agreement can help reduce misunderstandings and set the investors’ expectations appropriately. To cover its exposure to legal claims connected with the horse, the LLC can take out a liability insurance policy and make sure that the policy also covers the investors (as owners of the LLC).
Drawbacks of an LLC under a horse racing partnership agreement
There is, of course, cost associated with forming an LLC. The investors will have to pay the Secretary of State a filing fee to form the LLC, and unless they form the LLC themselves, they will have to pay an attorney to form the LLC for them. Because most horse investors don’t have the experience and legal training necessary to draft a comprehensive LLC horse racing partnership agreement tailored to their specific needs, it’s generally a false economy to try and save money by using a cheap online filing service to form an LLC for a horse racing partnership agreement. The filing services only do the easy part, which is filing the formation document with the Secretary of State, and they leave the hard part, drafting the horse racing partnership agreement, to the investors. ELS offers LLC formation to clients in Washington, Oregon, California and New York for a reasonably priced fixed fee.
The LLC will also have to file a state and federal tax return each year. This means, in most states, that the LLC will have to pay a minimum state franchise tax, whether the LLC makes a profit that year or not. Franchise taxes range from expensive ($800 in California in 2011) to not-so-expensive ($150 in Oregon in 2011). The investors will also have to pay a CPA or licensed tax preparer to prepare the LLC’s tax returns, or take the time to do it themselves (if they have the requisite skills and experience).
When the LLC’s purpose has been completed, the investors will also have to dissolve the LLC. The cost associated with dissolving an LLC is typically quite minimal, however, and it may not be necessary to dissolve the LLC for years or even decades.
Selection of the perfect horse racing partnership agreement
Some important questions need to be answered before deciding on the right horse racing partnership agreement. Hopefully you can speak directly to the Managing Partner to get comfortable after reviewing all of the horse racing partnership agreement’s information commonly found on their website or available my mail. Thus, the need to understand the philosophies of the horse racing partnership agreement and be sure they are consistent with yours. Horse racing partnership agreements can vary greatly with respect to cost and the goals of the Partnership. There are inexpensive claiming horse racing partnership agreements mostly “just for fun” and Partnerships that look to win the higher caliber races and strive to make a profit. Size of the Partnership and geographic location is also a consideration.
One should understand how finances are handled, how decisions are made and by whom and how does management communicate information and discuss strategies. Know what type of entity is used and review the horse racing partnership agreement. And, most importantly, be sure you are dealing with an established horse racing partnership agreement with a proven track record. Assess the expertise of the team and get references. The Managing Partner, trainer, bloodstock advisor and veterinarians are keys to your success!
Thoroughbred horse racing partnership agreements
Thanks to the creation of racing partnerships, Thoroughbred ownership is no longer restricted to elite members of society. A partnership (or “syndicate”) is an easy and affordable way for both new and experienced owners to get involved with the Sport of Kings. These groups provide a great opportunity to experience all the thrills of horse racing at a fraction of the cost when you join a syndicate.
Operation of thoroughbred horse racing partnership agreements
The management team is responsible for purchasing top-quality horses privately and at sales as yearlings or 2-year-olds. Potential owners are then invited to invest or “buy-in” on horses. They can get involved on their own or with a group of friends, and have the option to determine their level of participation. The minimum investment cost (decided by the management team) usually varies with each horse. Obviously, the more horses you’re involved in, the better your chances will be to hoist a victory trophy. You also limit risk by diversifying your investment over multiple horses so if a horse can no longer compete, there are others who are capable and maintain your participation.
Merits of owning with a racing syndicate under a horse racing partnership agreement
Just because you aren’t the sole owner of a horse doesn’t mean you can’t enjoy the advantages and perks of full ownership. Racing syndicates take away the financial stress of participating in the game because costs such as training, veterinary expenses, insurance, racing fees, etc. are managed by the partnership. It is the management team’s responsibility to deal with trainers, horses, and racing on a day-to-day basis. However, partners in a syndicate under a horse racing partnership agreement are still given a voice on certain key decisions. For example, West Point Partners vote on issues specified in the horse racing partnership agreement, such as whether a horse should be dropped into the claiming ranks for the first time or offered for sale. Partners also vote on the expenditure of large sums of capital.
In most partnerships, partners get full access to the stable area and paddock, the chance to meet the trainer(s), and an opportunity to meet jockeys. Another perk of premier partnerships is race day dining or seating for you and your family and friends at the track. Another major perk of a partnership is a chance to meet fellow owners and form a camaraderie. Owners not only spend time together at the races cheering on their horses, but also at sales and events throughout the year, such as the Kentucky Derby and the Breeders’ Cup World Championships.
Risks of a horse racing partnership agreement
Like all investments, there is a degree of risk involved with Thoroughbred ownership. There is no guarantee your horse will cover your initial purchase price or cover expenses. Because Thoroughbreds are professional athletes, there is a risk of injury, illness and retirement. Yes, horses are able to “pay their way,” but there is no such thing as a sure thing.
The pros and cons of horse racing partnership agreements
Becoming a horse owner is extremely exciting. The thrill of watching a horse you own race is one of the best feelings you can have (legally). The main problem with horse ownership is that racing is extremely expensive. The average price of a 2-year-old is right around $75,000 – (Jockey Club resource). So, unless you are an accredited investor with more than $1,000,000 net worth, it will be hard to responsibly purchase a horse on your own.
There is some good news, don’t worry. The rest of us can use syndicates and horse racing partnership agreements to get the same upside with a far less risky downside. A syndicate is where you go in with a group of people and purchase a horse. With all this upside, you do have a great downside. Which is you having less control. In a nutshell, a syndicate and a horse racing partnership agreement might be for you if you are willing to compromise some of the control to maximize on a wide variety of benefits.
- Pros of a horse racing partnership agreement
There are plenty of pros to why someone should get involved in a syndicate and draft a horse racing partnership agreement. The pros vastly outweigh the cons, in my opinion. That doesn’t mean one is better than the other, it means one is better for a certain type of person than the other. With that said, here is a list of benefits of a syndicate and horse racing partnership agreement.
Working with the pros
Horse racing is a sport where you can spend your entire career trying to become an expert, and end your career knowing there is still more to learn. It’s a very complicated sport with very complicated rules and regulations which may vary depending on your state or country you’re racing in. The main benefit of working with a syndicate is that you’ll be working with a horse professional who will be much more equipped to handle the administrative and day to day stress that comes with horses more so than you would be able to on your own. So, what does this mean for you?
It means you won’t have to worry about how often the farrier needs to come. It means you don’t need to know what a farrier is. It means you don’t have to worry about what type of food to feed your horse. It means you don’t need to worry about what supplements to give your horse. It means a lot more too. It also means you don’t need to be an expert horseman to be part of the beautiful sport of horseracing. It ultimately means you can be an amateur horse owner and a full-time horse lover and not have to worry about the stuff that gives the regular horseman a headache.
Affording a better horse
Let’s assume you have $80,000 to spend on a horse. That’s a little more than the average price of a 2-year-old at auction in North America. If you buy that horse by yourself, you are stuck with one horse. If that horse doesn’t turn out good, you can end up losing some money.
Now let’s say you decide to put that $80,000 into a syndicate. You not only get to diversify your investment, which I’ll mention later, but you also get to put that money towards a higher quality thoroughbred. That money could be put into a few horses that are worth much more. You could get a sizeable share of a few $500,000 horses when you use a syndicate. You could get several 5% shares in some $500,000 horses. Which typically the better the horse, the better the ROI.
- Social benefits of a horse racing partnership agreement
Sure, horseracing is a business for some people, but for others it’s a huge social event. Seeing pictures at the track make it seem like such a fun time, which it is. You meet all sorts of people from all sorts of backgrounds that you’d never meet otherwise. You can travel the world because of horses. When you do that, you will meet all sorts of people. It’s obviously more fun when you don’t have to worry about how your horse is doing. A syndicate and a horse racing partnership agreement provides you with piece of mind so you can enjoy your time at the races and hopefully in the winner’s circle.
- Less worry on the legal aspects of a horse racing partnership agreement
No one likes messing around with administrative parts of the business and the horse racing partnership agreement. When you must deal with that, it really takes the joy out of the sport. Which if you haven’t learned yet, there are a lot of administrative tasks that need to be done if you own a racehorse. Some of these tasks include starting your horse racing partnership agreement, reading through the conditions book at your home track to make sure you aren’t breaking any rules, obtaining your racing license, registering your silks, finding and entering your horse into races. A lot of that stress and admin work is taken off your plate when you are part of a syndicate. Most syndicate managers have an administrative assistant, if they don’t have one, they have years of experience dealing with it and know what to expect.
Syndicates and drafters of horse racing partnership agreements know how complicated and stressful this process can be. They want to make this process as simple as possible to help keep you as a partner.
- Limiting of risk by a horse racing partnership agreement
It’s common knowledge that you need to diversify your investments to limit your risk. This is as true in horse racing as it is in other investment. If you have enough money to invest in horses, you will be much more successful if you spread out your investments over a few high-quality horses rather than 1 great horse. Sure, you might think that your horse is the next California Chrome, but for every California Chrome, there are hundreds of gelded horses that end up breaking even and retire as a pleasure horse. This is even more important if you aren’t a professional horseman. This is a complicated sport that people spend their entire career learning how to pick out the best horses. No matter how much money you have, if you don’t have an expert helping spread your money intelligently, you will burn out quick.
How does a syndicate and a horse racing partnership agreement alleviate that? I talked about this above during the “You can afford a better horse” a little bit. To further the point about risk. If you have your hands on 5 different horses, and 1 of them ends up losing money, you have 4 other horses to offset that cost. Imagine if you just bought that one horse that ended up losing money. That’s a quick way to burn through some cash. If you have your hands on several horses, the great one’s help outweigh the cost of the bad ones.
Think of what venture capitalists do. They have the money in several companies and one of them will take off and absorb the losses of the other ones. Horse racing is very similar. You’ll have horses that you think are worth a lot and end up not being worth a lot, and you’ll also have horses you think aren’t worth that much and end up being worth a lot. The longer you’re in the sport, the more often you’ll end up on both sides of the coin. That’s what makes this sport so exciting! The only way to last long enough to enjoy the excitement is to spread your investments out to many horses through a horse racing partnership agreement. You don’t want all your eggs in one basket.
Cons of a horse racing partnership agreement
- No control over where the horses race
When you own your horse flat out, you have complete control over where your horse races. If you want to have your horse race at Santa Anita, you can. If you want a vacation and want your horse to race at Gulfstream Park, you can. There is a lot of freedom of that comes with being a horse owner, but when you’re in a syndicate then you might lose out on some of that freedom. Any reputable syndicate and a horse racing partnership agreement manager will take your thoughts into consideration, but typically they have complete control.
- No control on the trainer
Typically, a syndicate manager has a relationship with a group of trainers, depending on the talent of the horse, they’ll probably hire a certain trainer. If you’ve owned a horse before and used a specific trainer, you might not be able to use him with that horse. The manager might take your recommendation for the trainer into consideration, but since the manager would already have a relationship with a few other trainers it probably wouldn’t happen.
- Not having an ultimate say
A lot of syndicates have one manager. When you join the syndicate, there will be a contract you sign with the expectations from you and the manager. Typically, the contract will say something about the manager having final say in what happens. They will take your thoughts and concerns into consideration, but they will have ultimate say. For instance– There is one syndicate and horse racing partnership agreement that will be nameless, had a horse win a few races and they had several people call and make offers on the horse. The horse was bought for under $100,000 and someone offered $600,000 and the syndicate manager turned the offers down.
I don’t know the full story on the horse and what the plans are for that horse, but a 6X ROI on your initial investment would be nice. The manager talked to other syndicate and horse racing partnership agreement members to get their input, but it was ultimately the manager’s decision. I should mention that those decisions typically made lightly and there are several reasons why a manager would do that. The manager is dealing with 10-20 different member’s opinions. That was a delicate decision to make either way, and I’m assuming that manager did what the majority of the people wanted.
References
https://ww.equinelegalsolutions.com
https://www.equineninfoexchange.com
https://www.equininelegalsolutions.com
https://www.kilcradinsolicitors.com
https://www.sharingcontracts.com
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