Courtesy of the SAO Report
Shaded grey area shows the 1,680 acres Killington leases from the state; the top of the peaks along the ridge.
Perplexing proposal lacks big picture planning, say resort experts
By Karen D. Lorentz
The Vermont State Auditor Douglas Hoffer recently issued a controversial report investigating the state granted leaseholds for seven Vermont ski areas. The report was released Jan. 20 and was intended for the Vermont Legislature and the Agency of Natural Resources. It was titled “State Land Leases Boost Ski Industry, but are Dated and Inconsistent.”
“The central aim of the investigation was to evaluate the direct financial return to the public for its unique land assets,” according to information posted on auditor.vermont.gov by the State Auditor’s Office (SAO). Of the 19 ski areas in Vermont, seven lease public land from the state; others lease federal land or own it privately. The seven resorts are Jay Peak, Burke Mountain, Smugglers’ Notch, Stowe, Killington, Okemo and Bromley.
Soon after Hoffer released his report, Senator Tim Ashe, chairman of the Senate Finance Committee, sent a letter to the seven areas requesting that they voluntarily renegotiate their leases by the end of 2016 — the move was not well received by affected ski areas. In fact, even the auditor’s report recognized that “The State has no authority to deny or amend requested extensions absent certain breaches of contract.”
The 29-page SAO report (with additional 23 pages of appendices) is a non-audit report used as a tool “to inform citizens and management of issues that may need attention.” This is within the mission of the Auditor’s Office “to hold government accountable” and ensure taxpayer funds are used effectively and efficiently. Among other things it points out the lack of uniformity among the leases.
Fair rental issue
Several of the issues the report raised are related to the study “A Review and Comparative Assessment of The Vermont Ski Area Land Lease Fee Structure” dated September 2007, which was prepared by Economic and Policy Resources, Inc., (EPR) for the Vermont Department of Forests, Parks and Recreation (FPR). That study — based on data from 1989 to 2006 — addresses the relative comparability of the fee structure of the seven Vermont ski areas that have public land leases to other leases on public lands and recommends creating a uniform reporting structure, verification of lease payment calculations, periodic audits, and a review. However, it stopped short of proposing to renegotiate any leases prior to their expiration. Nor did it address a fair market rental return, which it referred to as a perplexingly complex issue.
The 2015 SAO Report questions why the recommendations were not followed and also poses the question of fair rental. It does not look at a return on actual investment made by FPR for the acquisition of those leased lands, nor does it assign any real value to mountainous terrain. Rather it points to the rise in other revenues in comparison to an inflation-adjusted decrease in lease payments from 2003-2013 while acknowledging a 50 percent rise in actual leasehold revenues (from $1.9 million in 1995 to $2.9 million in 2014).
The issue raised of fair return is based on SAO findings that lease income is not commensurate with increases in the sales of goods and services.
“Today’s resorts feature new lodges, hotels, condominiums, retail stores, golf courses, waterparks, and other high-end amenities. Between 2003 and 2013, development at the seven resorts spurred increases in sales of goods and services, property values, and revenues from excise taxes,” the report states.
“Meanwhile, lease payments over this decade fell when adjusted for inflation. The leases were designed to capture a certain percentage of the primary revenue source, which 50 years ago was lift tickets. But, as the resorts have evolved, that revenue source has become one of many. The result is that revenues from lease payments have not kept pace with development as measured by the sale of goods and services, property values, and revenues from excise taxes.”
Ski area response
Parker M. Riehle,
of Vermont Ski Areas Association, told The Mountain Times that the leases are “beneficial to both the state and ski area operators, and there is no interest in renegotiating long-term good faith contracts before their expirations” — one expires in 2032 and six between 2053 and 2060.
He noted growth of leasehold payments to around $3 million annually and increases in various taxes paid have occurred “due to development on private lands that ski areas have had to purchase because their leases prohibited such development on leasehold land.”
Additionally, he said studies including the EPR Report note that on a comparable basis (to other states and the federal government’s US Forest Service Permits), “Vermont’s lease terms have been found favorable to the state and even in many instances produce higher revenues for the use of public lands.”
Lease terms to entice development
Some ski areas on state land began with initial leases drawn up prior to their existence. They were later redrawn to address payments for lifts, trails, ski shelters, and other infrastructure. For example, when areas like Okemo developed lifts also located on private land, a ratio for linear footage of lift lines located on state lands was applied to the total ticket sales percentage an area paid. Varying initial percentages were later changed to 5 percent, which is in effect today.
Leases also called for payments on goods sold (skis, repairs, food and beverage, other retail) in ski shelters — now 3 percent for state-built lodges and 2.5 percent in operator-built buildings on leaseholds. These fees have been a significant part of revenues since they began and continue to be unless a land swap caused a base lodge originally on leasehold to be on private land.
In a late 1980s interview, Rod Barber, assistant director of state lands who had worked in Forests and Parks in the 1950s, explained: “One of the reasons the state gave good lease terms to ski areas was to induce developers to build the areas. Skiing was a risky business, but the state wanted to utilize the mountains to bring in some opportunity and revenues so we deliberately made the terms as attractive as possible.”
That included “long-term leases so the areas could get the loans needed for development,” Barber added, noting that the state initially chose to own the lifts and buildings built by operators “so that the ski areas would not have to pay property taxes on them.”
Preston Leete Smith, founder and operator of Killington, recalled an important amendment to Killington’s lease in 1973 after a tough year (little natural snow). “The bank’s ability to loan required our lease to be in excess of 50 years. The extension [9 additional terms after the first 1960 lease for renewal options to 2060] made borrowing more readily available to us.
“The state could have changed our lease at that time — they had the opportunity to make a quid pro quo arrangement as the basis for the extension. But they didn’t,” Smith said, recalling both the understanding and support of the ski business.
Another reason was that in the event a ski area went under, the state as the owner of the property could dismantle the lifts and return the mountains to their original condition, Barber said, noting just how risky the development of a ski area was perceived to be.
Vermont lost 30 areas from 1970 to 1985 and another 9 by 1990, which illustrates the validity of the risk as many didn’t make it.
The initial lease given for Killington, which was substantially the same as that given to Mount Mansfield, was granted to the Sherburne Corporation in November 1957. It provided for a “leasehold” arrangement with initial terms of ten years with successive options to renew; a payment to the state of 10 percent of annual gross receipts above the first $40,000 on lift operations; the equipment and buildings installed on lease land would become and remain the property of the state; the state would allow no other similar development on its land within ten miles of the area; the initial agreement would be amended from time to time to include land on which additional facilities were installed.
A November 1960 lease, which occurred after Killington’s first profitable season, followed. It changed the terms to 5 percent of revenues derived from lift-ticket sales and 5 percent of sales made in the state-built shelter (later changed to aforementioned 2.5 and 3 percentages). That lease also gave the lessee the right to remove all equipment and property installed on the leasehold upon termination of its lease.
Most of the leases given to the six areas resembled this one in terms with the exception of Bromley which was paying on lift-line revenue only as there were no lodges on the 100+acre leasehold. However, they all differ in language and lack uniformity in structure and some are vague as to ownership of lifts.
Many leases were later amended to provide for land swaps which saw areas pay millions of dollars to purchase parcels the state wanted and trade them for some of their leasehold land, usually to build base facilities/ villages to be competitive in changing times.
In 1968, Killington spent $200,000 (inflation-adjusted $1.4 million) to buy 1,480 acres on Camel’s Hump to trade to the State for land contiguous to its private land and Snowshed. This was done to increase a 44-acre village site to 400 acres. (Net earnings that year were $91,188; a return on that investment is debatable as that Village Center was “never built,” Smith noted.)
Jay Peak provides a more recent example. Its lease was amended in 2010 to allow for a release of 418 leasehold acres back to the state for the preservation and protection of the Long Trail in exchange for being given 59.8 acres in its base area to allow for a village, amenities, and growth.
Other amendments included reducing ticket revenue to 2.5 percent for the first five years after installation of a gondola or tram. It extended to the next five years if all lift revenues were under $750,000 but 5 percent if exceeded. Jay’s 1977 lease notes terms for the new tram, specifying 10 years at 2.5 percent unless the second five years exceeded the $750,000, then 5 percent. (This provision expired, and the standard 5 percent has been paid for the last 20 years, evidence that such changes were made in response to challenging times and a desire to promote improvements.)
Perspective from former operator
When Preston Leete Smith, founder and operator of Killington (1958-1996), first read the report he “thought nothing would come of it.” Smith grew Killington into a public ski company that rivaled Vail Resorts and other ski area giants before selling and retiring in 1996.
Informed of Senator Ashe’s letter to the ski areas, Smith now sees a “very lopsided story. In times of crying for revenues, especially in Vermont, this could be a very dangerous thing and strikes me as not understanding the entire spectrum of the ski business and how it contributes to state revenues. The leases have worked well for the state and the ski areas,” he stated, noting the inquiry is “missing the real problem.”
Smith suggests promoting an effort to understand the ski business, and said if lease payments were down or not keeping up with inflation that it might help the state to see why and examine where they could help and support areas on leaseholds. Asking areas to pay more without understanding the total picture flies in the face of reason and history, Smith said.
That bigger picture starts with the leases and the recognition that from day one the ski business has been a risky one. “Risky and not always very profitable,” Smith and Riehle both stress.
Inflation and Federal land lease comparison
The SAO Report found that lease payments on ticket revenues haven’t kept pace with inflation and raised the question of a fair return on the leaseholds in light of substantial gains in many taxes from other sources of revenue revenues. (No mention of profitability to the ski areas is mentioned although there’s an implication of it due to greater revenues.)
“Lift tickets revenues haven’t kept pace with inflation — there’s just so much you can charge, plus today there are so many more pass products at any given area. Those products make it cheaper to ski today than ever due to inflation. Adjusted for inflation, there has been no increase in lift ticket dollars realized by ski areas despite tickets costing more at the window today,” Riehle added. [See story March 28, 2012 Mountain Times .]
Upon receiving customer complaints in the 1980s, Smith had investigated Killington’s rising lift ticket prices and found that the increases were “justified to keep pace with inflation. If state lease payments declined after 1988, it wasn’t due to inflation, it was due to declining skier visits and lack of a village.
“What the state ought to realize is that Killington was denied the opportunity to build a village and that competing with growing areas with villages was largely responsible for a decline in visits and (inflation-adjusted] lease payments during the last 20 plus years,” Smith stated.
“The data indicate that in the aggregate the number of skier visits is correlated with the amount of revenues paid to the Department of Forest, Parks and Recreation,” the 2007 EPR Report confirms.
Smith also said that the federal leases are more attractive than the state’s, a fact the EPR study confirms.
“USFS permits set fees based on lift tickets and ski school revenues prorated by the share of lift lines on federal lands and gross revenues from ancillary facilities such as restaurants where located on federal lands. Vermont leases universally establish a flat 5 percent fee on prorated lift ticket revenues while the USFS system employs a graduated system with fees starting at 1.5 percent and capped at 4 percent where covered gross revenues exceeds $50 million,” according to the EPR study.
Agreeing with Smith, Riehle said, “A 2002 study by the SE Group for the National Ski Areas Association found the average lease rate of 2.45 percent for all federal leases was well within fair market value rental for the use of public lands. That speaks to the Vermont rate, which is twice that. New Hampshire is 3 percent. If Vermont’s rate were applied to ski areas on federal property, their rents would increase significantly.”
This puts the areas on state land at a competitive disadvantage not only with areas in other states but also with other areas on federal lands within Vermont.
Courtesy of the SAO Report
Pie chart shows lease payments made by the seven resorts on state land in 2014. Killington pays the most based on its acres, followed by Stowe and Okemo.
EPR Report conclusion
The 2007 EPR Report concludes with a suggestion regarding expiration of the leases: “A graduated gross revenue fee structure appears to be evolving as seen in some of the peer leases and in the hybrid approach employed in the National Forest System permit program and may be more equitable to lessor and lessee. Over the 1986 to 2006 period a great deal of public discussion and debate has generated thinking that may be informative to consideration of such an approach in the future as Vermont considers renewing expiring leases. Such a change over, if determined to be desirable, could be completed on a revenue neutral basis.”
Asked if the report were suggesting standardizing language in the future when leases expire and if revenue neutral suggested not increasing payments, Riehle said: “Yes, definitely was referring to when the leases expire, not now.
“By revenue neutral, that would mean they might change percentages to be uniform, say having the retail and food/beverage percentages match the lift-ticket percentage rate but in such a way as to not be a net increase in the overall payments for the same amount of business (but of course such payments would increase/decrease in proportion to the business levels under the performance-based structure),” Riehle added.
The SAO Report is critical of FPR for making little progress with EPR recommendations during the ensuing years, but experts note that no changes to the leases could be made until they expire and, therefore, such efforts to restructure leases would have been premature.