DALLAS - Proposals to build three major horse racing tracks around Texas could require more than $300 million in tax-exempt financing in what would be the largest-ever use of bonds for such a purpose, market sources said.

Local officials, investment bankers, and bond lawyers say that proposed tracks near Houston and San Antonio could be entirely financed with tax-exempt bonds that would be sold by locally created sports authorities. Because there would be no private investment, the debt could be issued as governmental-purpose bonds under the tax code.

But whether those two deals will be done hinges on whether the private groups that currently hold track licenses can sell them to the sports authorities. The Texas attorney general is now studying this question of state law.

A third proposal is a private-public partnership that would use up to $65 million of municipal revenue bonds to build a track in Grand Prairie. Only a small part of the suburban Dallas project may qualify for tax-exempt financing, however, because of the private equity in the project.

While some in the Texas bond industry privately question using tax-exempt bonds to build a sports facility for a gambling industry, several bond lawyers say tax law concerns would be resolved by having a government agency own and operate the facilities.

The push for bond financing come from private investor groups who hold licenses to operate major tracks and local officials anxious to create new jobs. Many note that the proposal would use a conduit-financing system debt supported solely by track revenues and would not put taxpayers or general obligation credit ratings at risk.

The largest of the three plans won approval last month when a divided Harris County Commissioners Court created a sports authority to sell up to $198 million of tax-exempt bonds to build and operate a racetrack by 1994 in the Houston area.

That plan calls for $95 million to be used to build the track and the remaining $103 million to be placed with investors in Sam Houston Race Park Inc. to buy the racing license that the private partnership now holds.

Wall Street analysts, bond lawyers, and investment bankers said the proposed issues skirt tax law questions by having the tracks fully owned and operated by a government entity.

"We've analyzed it, and it can be done," said Bob Randolph, bond counsel at Vinson & Elkins in Houston, a firm expected to be involved in the Harris County financing. "It would be a governmental-purpose bond."

Any private management contract to operate the track would have to meet tax law provisions that limit such agreements to five years with a third-year termination clause. At the same time, at least 50% of the compensation must be fixed and not tied to the profits of the project.

"A price of doing tax-exempt financing is that in effect that equity interest is turned over the public," said Fredric A. Weber, a senior, bond lawyer at Fulbright & Jaworski in Houston. "The asset can be financed with tax-exempt bonds to the same extent that hospitals or other enterprises can."

The same basic proposal, to have the government own the racing license and operate the track, would also be used for a smaller proposed track in the small city of Selma, near San Antonio.

Selma Mayor Ken Fleenor said his board is backing a conduit financing of up to $70 million of tax-exempt bonds because it would carry little direct risk and could have major rewards. A new sports authority would issue the bonds.

"There's no risk involved for us from the way the bonds are set up," the mayor said, pointing out that the conduit bonds would not be an obligation of taxpayers in the 600-person city. "We think it's a good way to do this because we have the authority to issue tax-exempt bonds."

Under the plan, the city could eventually own the track, and the $750,000-a-year budget could benefit from profits from operating the track, which is called Retama Park. The proposal is being handled by Dallas-based Rauscher Pierce Refsnes Inc.

"Our share would probably be half our budget at least," Fleenor said. "But it could be more in the out years."

Whether the concept of a government-owned horse racing track advances, however, may depend less on the tax code than on state law.

Texas Assistant Attorney General Jim Thomassen, chief of the state's public finance section, said Harris County officials are seeking a formal legal opinion to determine if the private investor group granted a license by the Texas Racing Commission can legally sell it to the county.

"There have been some preliminary discussions about that with Houston," he said.

The transfer of ownership of the racing license is not an issue in Grand Prairie, where a private group will be partners with a city-created sports authority.

In January, local voters approved a half-cent increase in the sales tax to support up to $65 million of municipal bonds to help build the $97 million project.

"We're going to use as much tax-exempt financing as is legal and feasible," said Grand Prairie Finance Director Wayne Usry. "We will have to wait until our plans are done and then sit down with our bonds counsel to discuss that."

Bond lawyers said that even with private involvement, Grand Prairie could likely use tax-exempt bonds on a small scale to build parking lots, bathrooms, and other such facilities. Usry said most of the $65 million in bonds would be sold as taxable debt.

Because Grand Prairie has the only proposal supported with a tax, it may be viewed as a stronger credit that the two projects that will be secured only by track revenues.

"From our perspective, we would have a hard time [rating] a project backed by track revenues, especially for a start-up operation," said James Burr, vice president and assistant director of legal analysis at Moody's Investors Service. "I don't know how credit enhancers would view that, either."

Nationally, bond financing of racetracks has been sparse in recent years because in 1982 the federal government banned the use of tax-exempt industrial development bonds to finance them. And in 1986, Congress banned the use of private-activity bonds for sports facilities.

The highly publicized, defaulted $40 million issue of Polk County, Iowa, racetrack bonds sold in 1984 and remarketed under a lease purchase agreement in 1987 is the largest ever known use of tax-exempt financing for such a project, according to Moody's and Standard & Poor's Corp.

Wall Street analysts say most recent issues for tracks have been sparse and small, mostly because of tax law changes and the desire of private investors to retain control of the tracks.

Some object to the proposal. One Texas bond dealer argues that the state's proposed racetracks could set a bad precedent for the use of tax-exempt financing.

"Municipal bonds are supposed to be used to build streets and sewers, not a project under the cover of economic development," he said. "Even if these deals are legal, that doesn't make them right."

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