ATLANTIC CITY — The city’s financial future may hinge on negotiations with creditors like Borgata Hotel Casino & Spa, which is owed $170 million in property-tax refunds.
But a firm hired by the state in 2015 in part to “analyze strategies for negotiations” with the city’s creditors hasn’t been asked to do so yet in relation to Borgata, a state spokesman said last week.
And that firm, Ernst & Young, once valued Borgata’s real property at $1.2 billion as of March 2010, nearly $345 million more than a judge ruled it was worth, according to a valuation report obtained by The Press of Atlantic City.
The 2011 report, prepared for Boyd Gaming, raises new questions about Ernst & Young’s work, Borgata’s $850 million property assessment and the negotiations with the casino, the city’s market leader, largest employer and biggest taxpayer.
Ernst & Young, which declined comment, agreed to “analyze strategies for negotiations with creditors” and “advise on, and analyze, cash impacts pertaining to negotiations with key stakeholders,” according to a March 2015 state retention letter.
Despite that language, a state spokesman said Ernst & Young is not performing that work in relation to either Borgata or the other creditors.
“They haven’t been asked to do so,” Leland Moore, spokesman for the state Attorney General’s Office, said in reference to analyzing the Borgata negotiations.
But when asked two weeks earlier what Ernst & Young was doing, Moore said “the scope of E&Y’s work is described in detail in the original retention agreement.”
On Friday, Moore said: “The scope of work did not specify a final product or set a fixed price; rather, it was like a menu of possible tasks we could call on EY to perform.”
Ernst & Young was brought in to assist former state Emergency Manager Kevin Lavin, who was charged with consulting with stakeholders, including Borgata, and figuring out how to turn the broke city around.
The firm has billed the state $1.56 million thus far and can charge $470 an hour for its services. Gov. Chris Christie’s brother, Todd, is a director at Ernst & Young.
The Borgata negotiations became an issue during this year’s fight over a state takeover of the city. Advocating for the takeover in April, Gov. Chris Christie said the state can’t negotiate a settlement with Borgata without the takeover.
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“That’s only within the power of the city,” Christie said then.
But Mayor Don Guardian has said the state has been leading those negotiations, even though there has been no takeover.
“We were left out of the discussions for more than a year,” Guardian said in April.
The existence of the 2011 Ernst & Young valuation report was discovered during a November 2013 deposition, a month after a tax court judge slashed Borgata’s $2.2 billion assessment for 2009 and 2010 to $880 million and $870 million, respectively, according to court filings.
The report, obtained by The Press through records requests to the tax court and city, valued Borgata’s land, buildings and improvements at $1.21 billion as of March 2010.
But the report’s surfacing couldn’t help the city for tax years 2009 and 2010, said George Frino, a partner at DeCotiis, Fitzpatrick & Cole, the firm representing the city in the case. Frino said the report wouldn’t be legally relevant for those years. In any case, the appellate court couldn’t consider the report since it’s not part of the tax court record, he said.
The report’s assessment could be legally relevant starting in tax year 2011. Attorneys for the city cited the report in a failed effort in May to block Borgata from getting more tax judgments against the city.
The city and Borgata had settled for $88 million for tax years 2011 through 2014, but the city breached that deal when it missed a December 2014 payment deadline. The casino turned to tax court to get formal judgments for taxes Borgata said it overpaid.
Judge Patrick DeAlmeida allowed Borgata to use the Freeze Act, a series of state laws that applied Borgata’s 2010 assessed value of $870 million to 2011 and 2012.
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Frino said the city’s attorneys put the Ernst & Young report before the tax court “to demonstrate for the 2011, 2012, 2013 years that the value should be higher. $1.2 billion.”
Peter Sarkos, a Fox Rothschild attorney representing Borgata in the case, argued in briefs that the Ernst & Young report considered more than just the real property when it calculated the casino’s worth. He wrote that the casino’s business and personal property values require “removal from the going concern value to reach the real property value.”
The report, though, provides different figures for the casino’s business enterprise value ($1.35 billion), personal property value ($77.3 million) and real property value ($1.21 billion).
Two weeks after DeAlmeida’s judgment, Boyd sold its 50 percent stake of Borgata for $900 million to MGM Resorts, which then sold the property to MGM Growth Properties for nearly $1.18 billion. That’s close to the $1.21 billion figure in the Ernst & Young report.
That May 31 transaction also took place just days after the state enacted a law that exempts casinos from paying property taxes. The timing of the sale prevents the deal from having any impact on what Borgata pays under the new law.
Atlantic City Board of Education President John Devlin questioned the timing of the deal and called for an investigation in a June letter to the district’s state monitor.
“It seems to me that Borgata argued one value to the tax court but presented a whole different scenario to MGM or its shareholders,” he wrote.
Borgata is currently billed $29 million per year for property taxes and will likely be locked in at a similar amount for a decade under the new law. If assessed at $1.18 billion, its tax bill would be $40 million.
Borgata has withheld its last three quarterly property-tax payments to help offset the tax refunds the city owes the casino.
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The skipped payments, signed off on by a judge, total $23 million and have further exacerbated the city’s financial woes as it fights a state takeover.