The historic battle over who owns the rights to the land under the lifts at Utah resort.
The era of pioneering entrepreneurs bootstrapping their labor-of-love ski areas into existence through grit, persistence, and resilience has faded over the decades as a result of the natural economic evolution of a maturing industry. That era may be seen by future ski historians to have been emphatically capped by the litigation battle in the Summit County Utah District Court between two titans of the ski resort business, Vail Resorts and Powdr Corp., over the future of skiing at one of the sport’s crown jewels, Park City Mountain Resort (PCMR).
The issue is the expiration of leases signed in 1971 and 1975 that to date have allowed Powdr’s subsidiary, Greater Park City Company (GPCC), to use 85 percent of the total ski terrain at PCMR for its skiing operations. Vail would be the beneficiary of the expiration of the leases and has prevailed in court to date. If Powdr ultimately loses, Powdr will have lost the economic value of forty additional years of the now profoundly below-market rent—reported at a total of $155,000 per year as of 2011—that was provided in the 1970s leases. This price represents the entrepreneurial premium that was hard-earned by PCMR’s pioneers, a premium that is historically important in that it allowed Park City to get on its feet. This would close a chapter in the financial history of an important American ski resort and substitute financial arrangements reflecting the current-day return on investment demands of Wall Street.
In June 2014, the court entered an order evicting Powdr/GPCC from the disputed ski acreage at PCMR, and stayed that order to give the parties an opportunity to negotiate a settlement. As this article is published, Powdr and Vail are in court-ordered mediation, and because the parties have mutually requested an extension of the mediation to August 24, there is some indication that a settlement may be reached that will provide certainty that PCMR will be open for skiing in time for the 2014–15 season. If the mediation is not successful, the court will hold a hearing on August 27 on the size of the monetary bond that Powdr would be required to pay into the court in order for Powdr to continue its right to operate the resort while it is appealing the court’s rulings in favor of Vail. The size of that bond may force the issue for Powdr.
If Powdr is unwilling to post the bond once its magnitude is determined, or if Powdr otherwise decides not to pursue an appeal, or should Powdr appeal and lose, the expiration of Powdr’s lease rights to the disputed ski acreage would become final as a matter of law.
As for Vail, it has made a bold bet on the outcome of a lawsuit in pursuit of a significant prize in the expansion of its ski resort portfolio. Although Vail has enjoyed a 10.5 percent increase in its stock price since the court’s May 21 ruling (as of August 15, 2014), a loss by Vail on an appeal by Powdr could have a significant adverse effect on Vail’s market capitalization. The stakes are large for both companies.
On May 21, 2014, the District Court issued its 82-page ruling explaining its reasoning that under the lease terms, Powdr/GPCC had failed to renew, and therefore has lost, its leases for the disputed ski acreage. Vail is Powdr’s adversary in the litigation by virtue of its lease rights in the ski acreage that it obtained from the current owner of that acreage, Talisker Corporation (through Talisker’s operating subsidiaries). Talisker is an international commercial and residential real estate development and management company that does not have a core competency in operating ski resorts.
If the court’s holdings stand, Vail Resorts will gain exclusive use of the disputed 85 percent of the PCMR ski acreage. In any event, Powdr/GPCC will continue to own a small amount of ski acreage at the base of the mountain, as well as the base area facilities, the parking areas, the resort’s water rights, its snowmaking and sewer infrastructure, and related intangible rights, including the trademark to Park City Mountain Resort. This is an untenable situation for both litigants in the long term, and an unsettling situation for the Park City community in the immediate future.
The court’s recitation of the undisputed facts of the case provides a succinct historical overview of the financial intricacies involved in the development and maturation of Park City.
The Original 1970s Leases
The root cause of the dispute is found in the financial terms struck by GPCC in the leases it was granted for the now-disputed ski acreage by the owner of the acreage at that time, United Park City Mines (UPCM). While the financial terms accurately reflected the daunting risks faced by ski area pioneers in the 1970s, those financial terms had become profoundly inconsistent (in Powdr/GPCC’s favor) with the economics of the ski resort industry by 2011. When Powdr/GPCC missed the deadline (due to a corporate oversight) and did not renew by the 2011 date given for renewal in the leases, Talisker saw its opportunity to terminate Powdr/GPCC’s leases, and the battle was joined. Hundreds of millions of dollars are at stake.
In 1971, GPCC acquired the fledgling Park City resort facilities and infrastructure, and at that time GPCC entered into a lease for use of the now-disputed ski acreage with UPCM, the predecessor to Talisker, which bought UPCM in 2003. A second lease in 1975 added additional ski acreage on substantially identical lease terms, dovetailing that lease’s terms with the tenancy created by the 1971 lease.
The 1971 lease was for 20 years ending on April 30, 1991, with one 20-year option renewable by GPCC. As a result of a 1975 restructuring involving multiple financing parties arising from the financial difficulties GPCC experienced during the early years of PCMR, the parties agreed to three 20-year extensions renewable by GPCC at its option, instead of just one. This meant that GPCC/ Powdr had the capacity to control the now-disputed ski acreage at PCMR until 2051.
The financial terms of the 1971 and 1975 leases clearly reflect the 1970s financial assessments of UPCM, which wanted to see some return on spent mining claims on land that was not reasonably suitable for purposes other than skiing, and GPCC, which was at substantial economic risk in a ski resort start-up in a not yet well-proven segment of the tourist market. The 1975 restructuring called for GPCC to pay UPCM annual rent of 1 percent of the first $100,000 of lift revenues, plus 0.5 percent of all additional lift revenues through April, 2011, and then 2 percent of the first $100,000 of lift revenues, plus 1 percent of all additional lift revenues, from 2011–2051. Over the decades, GPCC has invested some $98 million in improvements located on the disputed ski acreage—lifts, lodges, restaurants, trails.
In contrast, under its May 29, 2013 Lease with Talisker, Vail will pay a $25 million annual base rent, increased by inflation adjustments not less than 2 percent per year, plus an annual participating rent of 42 percent of “Resort Earnings” (before interest, taxes, depreciation, and amortization) over a threshold of $35 million per lease year. “Resort Earnings” include earnings from the Canyons Resort and any property acquired by Vail in Summit County, Utah, in connection with the combined Canyons/disputed PCMR ski acreage resort, and the lease expressly includes earnings from property or management rights acquired by Vail from Powdr/GPCC and their affiliates. The $35 million threshold will be increased annually by an inflation-adjusted index not less than 2 percent, plus a 10 percent upward adjustment for cumulative “Capital Expenditures” made by Vail from May 29, 2013 through the end of Vail’s accounting year that ends during the lease year for which that participating rent payment is due. “Capital Expenditures” would include the acquisition of any other businesses, land, or business assets intended for use in connection with the combined Canyons/disputed PCMR ski acreage operation, which clearly contemplates Vail’s potential acquisition of all or part of the Powdr/GPCC assets at the PCMR base and related intangible rights. Vail is granted the right to all rents due and awarded from Powdr/GPCC on the disputed ski acreage, regardless of whether the litigation results in a determination that the Powdr/GPCC lease have expired. Those rents would be included in “Resort Earnings” for purposes of computing the participating rent.
(Vail’s Form 8-K filed with the SEC describing the transaction can be found on the SEC’s EDGAR website at http://www.sec.gov/Archives/edgar/data/812011/000110465913045415/a13-13329_18k.htm. The full text of the Lease may be found at http://www.sec.gov/Archives/edgar/data/812011/000110465913045415/a13-13329_1ex10d1.htm.)
The Current Lawsuit
The dispute between Talisker, and now Vail, and Powdr/GPCC had its beginning in 2011. Under the leases, Powdr/GPCC was required to give written notice to Talisker on or before March 1, 2011 in order to extend the leases beyond April 30, 2011. It was not until April 29, 2011 that Powdr/GPCC realized that they had not sent a renewal notice. Powdr/GPCC, after a short but intense investigation of the facts, sent a confirmation of lease renewal to Talisker on May 2, 2011, two months and two days late. The court’s finding was, in essence, that Powdr had never effectively designated a person or persons to be responsible for the renewal notice, or set up a process for renewal. The CEO of Powdr testified that “GPCC did not have a tickler system to keep track of whether or when the Leases needed to be renewed.”
As remarkably, given the profound financial implications of the below-market leases as of 2011, Talisker did not have an employee specifically responsible for tracking whether a lease renewal was timely given. Talisker simply filed Powdr’s May 2, 2011 renewal confirmation, and it was not until late December, 2011 that a Talisker employee realized for the first time that written notice of extension had not been timely sent. By letter of December 30, 2011, Talisker informed Powdr/GPCC that the required notice of extension had not been timely provided. The Talisker lawsuit was filed in March, 2012. Thereafter, Talisker demanded higher rent from Powdr/GPCC, which Powdr/GPCC declined to pay.
In August 2012, Vail Resorts first communicated with Talisker about a possible acquisition or lease of the Canyons Resort next door to PCMR, as well as of the disputed ski acreage at PCMR. The May 2013 Vail-Talisker transaction gives Vail a 50-year lease to the Canyons and the disputed PCMR ski acreage with six 50-year renewal terms, for a potential total of 350 years. In that transaction, the parties agreed that if Talisker prevails in the lawsuit, the disputed ski acreage at PCMR would be added to the Vail lease. The transaction also gave Vail full rights to control the ongoing litigation with Powdr/GPCC. Even if Powdr/GPCC should ultimately prevail in the litigation, the Vail-Talisker transaction stipulates that Vail’s lease rights will become effective upon expiration of Powdr/GPCC’s lease and will be in force for the remainder of the 350-year potential term of Vail’s lease.
In its May 21, 2014 decision, the court decided that under Utah law, “strict compliance” with lease renewal provisions is required, not “substantial compliance” as argued by Powdr/GPCC. In broad terms, Powdr/GPCC asserted that substantial compliance should be sufficient given the effect of non-renewal on the multiple parties involved and the “enormous public consequences.” The court ruled that the proper legal analysis must be based on examination of the leases’ renewal provisions, and that Powdr/GPCC had not met the lease terms and related legal standard for effective renewal.
The court’s ruling is based on facts the court has determined are not in dispute between the parties, and on its interpretation of controlling Utah law. Given the stakes, Powdr/GPCC are highly motivated to appeal once the District Court litigation is final, in which case the Utah Supreme Court’s view of the facts and law involved will ultimately determine the litigants’ fates. That court is not bound in any material part by the decision rendered by the District Court. But during the time the case is on appeal, Powdr/GPCC would have to risk the treble rent damages plus attorneys’ fees that Utah landlord-tenant law provides in the event of tenant holdovers; hence the significance of the District Court’s upcoming ruling on the size of the bond described above—as an early indication of the extent of the risk Powdr would have to take as a condition of pursuing an appeal.
A thorough and balanced analysis of the business risks and issues in the litigation can be found at http://www.forbes.com/sites/danielfisher/2014/08/13/14505/. Further developments may be followed by setting your Google Alerts to “Vail Park City.”
Tom Parrott is an ISHA member and a corporate and mergers and acquisitions attorney in McLean, Virginia.
Photo by Rudi Riet.