Foal-Sharing Your Way to Profitability

Foal-Sharing Your Way to Profitability

If available, a foal-share is our personal contract of choice, especially if the stallion season offered is one of great demand. By definition, foal-sharing is an agreement or an arrangement between a mare owner and a stallion season owner in which both parties co-own the resulting foal. From the mare owner's viewpoint, foal-sharing is a way of breeding his mare to a stallion that is unaffordable or unattainable through a direct season purchase. From the stallion season owner's viewpoint, foal-sharing is usually conducted when the resulting foal from such a union has the potential to sell for a price they believe will be in excess of what they would have received had they sold the season on the open market.

Foal-sharing contracts can be as long and complicated as legal minds can construct; however, the "nuts and bolts" of such an agreement are fairly simple. As long as both parties involved in the foal-share represent sole ownership of their respective components, a foal-share agreement is broken down into four non-negotiable parts (listed below) and numerous variables that are more or less "window dressing" and determined by both parties during the negotiation process.

The four primary prerequisites are as follows: 1) The mare owner agrees to breed their mare to a stallion; 2) The stallion season owner agrees to provide the breeding right without cost to the mare owner; 3) No liens may be placed on either asset during the duration of the agreement and, 4) The resulting foal is either co-owned by both parties or both parties agree to breed the mare and stallion until two live foals have resulted.

Before signing a foal-share agreement on the dotted line, consider the following items that could financially make or break the deal:

1) Ownership of the prospective foal: Even though both parties co-own the resulting foal, the percentage of ownership is negotiable. A majority of foal-shares we have seen call for an equal ownership; however, disproportional ownership does occur, especially if one party is contributing as asset with greater value.

2) Expenses of broodmare and foal: Board and keep expenses of the mare and stallion usually remain the responsibility of their respective owners. The foal's expenses (including but not limited to board, blacksmith, upkeep, veterinary, Breeders' Cup entry fees, sales preparation and advertising) are usually the responsibility of the mare owner, at least until the foal is weaned.

3) Control of the mare and/or foal: This includes the location of the farm where the mare and/or foal will be kept, the consignor of the foal, the specific sale of the foal will be offered in, and the bidding requirements on the foal including reserve procedures.

4) Foal registration: This item is probably the most important for New York Breeders due to the tremendous amount of restricted purses designated for New York breds. This condition not only designates which party is responsible for registering the foal with The Jockey Club, The Breeders' Cup, other stake races and/or state-bred incentive programs but also includes how the breeder line will read on the Foal Registration Papers and subsequently how the breeders' awards will be divided.

5) Sales proceed distribution: This condition varies greatly from contract to contract. Some agreements state that all sale proceeds should be distributed based on both parties' pro rata share. Other agreements state that one party receives a portion of the proceeds, then the other party, then equally thereafter. This is done to limit one party's risk.

6) Legal jurisdiction: Establishes the venue should a legal dispute occur.

Tax and economic advantages to foal-sharing

From a cash-flow point of view, there is no question that the mare owner has the ability to produce a future stream of income or a future racing prospect without the initial outlay of cash for a stud fee. From a tax standpoint, the ownership of the foal begins the process whereby the owner of the foal can take tax deductions connected with that foal's birth. These expenses, including the upkeep of the mare, insurance, etc., can either be capitalized and added to the cost of the foal, or can be expensed by the mare holder as they are paid for.

Foal-share parties must decide if it is more advantageous to them to treat the foal-share as a tax partnership tenants in common, or a joint venture. Consult your tax expert for a clarification of each tax election.

Tax elections and tax planning should be an essential element of every Thoroughbred transaction. Make sure your advisor is a Thoroughbred expert.

If you should have any questions about this article, call us at (732) 634-5100 or fax us at (732) 634-8602.