In your QoD about Vici buying MGM Properties, in the comments, there seemed to be some confusion about what the real estate investment trust owns. Is it just the land? Or is it the buildings too?
The MGM and Vici properties are all leased on a "triple net" basis. This means that the real estate investment trusts own the land, the buildings, and everything in between. The "triple" in the leases also means that the tenant, who is responsible for everything that's part of the buildings -- from landscaping to lightbulbs -- also pays the property taxes and insurance, along with whatever modifications are undertaken.
Yes, it's a great deal -- for the landlord. And most businesses in this country operate under triple net leases. Even the biggest ones, like the casino companies, and Walmart and McDonald's, pay rent to separate companies that are in the real estate business. They do it for tax purposes, because real estate professionals manage the properties, and because it frees up a bunch of a company's money and its ability to borrow.
Casinos have traditionally been operator-owned properties; up until the last 30 years or so, casinos were in the "sin" business. In the 1960s-'70s, Ray Kroc had easy access to bank loans and most other financial markets to fund McDonald's explosive growth. Sam Walton had the same for Walmart. But Jay Sarno was forced to borrow from the Teamsters Union and other entities that might have been using a front for their murky funding sources, so they wanted the building and business to be tied to the same loans.
Casinos continue to be burdened with this connotation. Hotels and "clean" resorts still have an easier access to capital and a better profit projection from most analysts.
The REIT model helps casinos be more modern in their money management.
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Luis
Sep-13-2021
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Bill Hirschman
Sep-13-2021
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