BEFORE THE TEXAS LOTTERY COMMISSION AUSTIN, TEXAS PUBLIC COMMENT HEARING ON PROPOSED CHANGES TO 16 TAC §402.403 (LICENSES FOR CONDUCT OF BINGO OCCASIONS AND TO LEASE BINGO PREMISES) MAY 8, 2019 10:00 a.m. AT TEXAS LOTTERY COMMISSION 611 East 6th Street Austin, Texas 78701 Proceedings reported by electronic sound recording; transcript prepared by Verbatim Reporting & Transcription LLC. APPEARANCES ASSISTANT GENERAL COUNSEL: Tyler Vance CHARITABLE BINGO OPERATIONS DIVISION DIRECTOR: Michael Farrell INDEX OF WITNESSES PAGE SHARON IVES. . . . . . . . . . . . . . . . . . . . . . . . . 5 STEPHEN FENOGLIO . . . . . . . . . . . . . . . . . . . . . . 9 P R O C E E D I N G S MR. VANCE: All right. We're on the record. Good morning. It's 10:00. This is Wednesday, May the 8th, 2019. My name is Tyler Vance, I'm Assistant General Counsel to Texas Lottery Commission. With me here today is Michael Farrell, the Director of the Charitable Bingo Operations Division of the Lottery Commission. The purpose of this hearing is to receive comments on our recently proposed Rule Number 402.403 regarding licenses for the conduct of bingo occasions and to lease bingo premises. In addition to this public comment hearing, the Commission is also accepting written comments via email. The email is on the publication in the Texas Register. Let me find that for you. It will be at legal.input@lottery.state.tx.us. You can find this in the April 26th issue of the Texas Register on page 2135. We will be accepting comments -- written comments via email through May 28th. So in addition to that, anybody who's here present can make an oral comment if they would like. The purpose of this rule is to kind of close or rather officially state the Agency's policy regarding deferred debts, specifically rent, but also in this rule is included all other debts that could be paid by an organization such as utilities or taxes or insurance. The Agency currently has an informal policy of allowing unpaid rental -- deferred rental payment to be made up to 90 days after the date of the occasion. This has been ran through the Bingo Advisory Committee and it is their recommendation and Staff's recommendation and was approved preliminarily by the Commissioners, that the period be 120 days. So this rule as proposed will only allow a payment to be made by an organization 120 days after either the occasion or the date of the invoice for the utilities or the taxes or the insurance. It still allows a lessor to accept a payment beyond that date if it's pursuant to a court order. So if -- say an organization just isn't paying, and it's not the other way around that a lessor is deferring continuously, if it's just that an organization does not want to pay, the lessor can always pursue formal legal process to get that debt. And so with that in mind, I have -- we have one witness here, Ms. Ives. Ms. Ives, would you like to make a comment? MS. IVES: Sure. MR. VANCE: Okay. MS. IVES: My name is Sharon Ives with Fort Worth Bookkeeping. And Mr. Fenoglio's here. Do you want me to continue? MR. FENOGLIO: Go ahead, Sharon. MS. IVES: Alrighty. As you know or probably know, my office went through several audits several years ago. Some of the write-ups were the rent issue that you just spoke about. I do have a question, though, on page 3, paragraph 4, line 19, where you state 120 days from the date of the occasion for which rent is attributed. I just need clarification. So if -- because I have lessors that bill monthly and I have lessors that bill the units quarterly. So how would that factor into the way that this written? MR. VANCE: So the way this is written would be based on the date of the occasion. So if the occasion was on May 1st, you've had six months after that date -- or I'm sorry, three months -- or 120 days after that date, calendar days, to collect that rent. MS. IVES: So that should not effect the lessor billing on a quarterly, so -- MR. VANCE: It could. Let's say you were -- the occasion was in the middle of the quarter or early in the quarter and -- well, no, I guess you get -- because it's on a -- 120 days is a quarter, right? MS. IVES: So if they billed let's say January through March, I receive the bill in April. MR. VANCE: So in that case -- so you could, right, because you could be paying in April for an occasion that occurred more than 120 days prior. So let's say it was a January 1st date. MS. IVES: Correct. MR. VANCE: And you pay in April or something, that's -- that's going to be well after 120 days. MS. IVES: So the lessors would have to change their billing cycle basically. MR. VANCE: It's -- yeah, if that's -- if that's the way -- if you actually -- yeah, you collect after the quarter is closed, right? So you let it go, it goes -- MS. IVES: Right. MR. VANCE: -- 120 days, and then you send a bill and then they have two or three weeks or whatever to pay, yeah, this -- MS. IVES: Right. MR. VANCE: -- this -- the way it's written, you would have to collect that. You would have to collect payment within 120 days of the date of the specific occasion that you're collecting it for. You couldn't just -- just let it all build up. I mean, you could, but there -- you might run the risk of certain occasions falling outside of that 120 day period. MS. IVES: Okay. The last page, page 4, starting with line 1 -- I'm sorry, line 2. The lessor may forgive the debt. My question is how or what would the procedure be for that? Is it just a forgiveness letter? MR. VANCE: Yeah, I would think that's what CBOD would accept. MS. IVES: Okay. So that letter would obviously need to be sent to the organizations and to the Lottery Commission. MR. VANCE: Correct. MS. IVES: Okay. We were doing that in the past and we've had numerous phone calls from the staff that says why are you faxing this to us, we don't need it. MR. VANCE: Well, I think right now there is no rule on this, it's just -- it's a -- kind of an informal policy that we've developed through -- through formal hearings at SOAH. We've got a couple of orders that our argument at the hearing was that 90 days is a reasonable time for it to become a debt. So up until now we haven't had any -- any real formal, specific, explicit process for this -- this situation. MS. IVES: Okay. So once this becomes effective -- MR. FARRELL: Once this -- this is Michael Farrell. Once this becomes effective, we'll accept that you would be sending us that letter and it would be part of your file. MS. IVES: Okay. So just outline basically what rents are forgiven kind of deal? MR. FARRELL: Right. MS. IVES: Okay. Thank you. Thank you. MR. VANCE: Thank you. Mr. Fenoglio, you've got a form for me? MR. FENOGLIO: I do. MR. VANCE: Thank you, sir. MR. FENOGLIO: And I have a letter. MR. VANCE: Ah, very good. All right. This is Stephen Fenoglio has also submitted a written comment. I'll go ahead and add this to the record and then whatever you'd like to say, sir. MR. FENOGLIO: Sure. Just briefly. So the letter highlights the real situation that charities can be captured and potential sanctions if the rule is drafted. The particular language, which I've highlighted in bold, is the second sentence of subparagraph (B)(4), specifically the -- and I'll just quote, "and any payments from an accounting unit or any authorized organization for insurance, utilities or taxes, more than 120 days after the date the lessor received an invoice for the charge." And so -- and I should back up, my name is Stephen Fenoglio, I'm an attorney in Austin and I'm here representing River City Bingo and its five charities that conduct bingo here in Austin, and as well as a number of other charities and commercial lessors who are similarly affected. So the way it works, and real estate taxes is the best example, and everyone's aware of the Legislature trying to get some property tax relief. The way it works is let's assume it's a strip center in Austin, Texas or it could be Dallas, Houston, San Antonio, Lubbock, Waco. And the strip center has a total of 30,000 square feet of rentable space. There's a bingo hall at one corner and it has 10,00 square feet. In -- by April 15, the appraisal district of whatever county you're in, by law, must send notice to the owner of the property and let's say for the sake of the example we're in Waco, Texas. And the owner of the strip center is ABC Corp. ABC Corp receives its appraisal notice, so let's assume taxes went up 20 percent. The owner of the strip center protests that and he ends up with a 10 percent increase. By November 15 or thereabouts, then the McLennan County tax assessor collector is going to send a tax bill to the owner of the property and let's assume the tax bill for the entire strip center is $100,000. The land owner has leases with all of its tenants and they pay a base rent, let's say it's $18 a foot of their usable space, and what's called triple net. And the triple net is to pay, most importantly, the property tax portion of the bill. And that is never known when they enter into the lease. They know it's most likely to go up, but they don't know by how much. There's also a component for common area maintenance, landscaping, maintaining the parking lot, et cetera. And then there could be utility expenses. The strip center has, let's say a leasing office and then lighting for the parking lot, et cetera, so they're provid -- and they need water to clean off the sidewalks, et cetera, so they've got utility expenses. And then they also have an insurance policy, a master policy, that insures everything in the property. And so the landlord wants to recoup those costs to each tenant proportionate to the amount of square footage they have. So the bingo hall is going to pay one- third of property taxes, one-third of those utility expenses, one-third of the insurance for the entire building. That goes on every day in hundreds of thousands of leases all across the state. That tenant is going to get its bill for the triple net usually sometime in January, because the landlord is accumulating all of those expenses that he can legally charge under a triple net clause, standard clause. And so he's going to accumulate the invoices for the insurance, for the property tax, et cetera, and he's going to issue a bill for the tenant and in many occasions, that bill is spread out over the next year to avoid rate shock. Some landlords, though, the strip center tenant -- landlord, may insist I want to be paid in 30 days. Can't blame them, they're -- they're out the money, but again, many lease agreements, and the lease agreements that I've seen, allow for that payment to be spread out over several months. You have a -- a statute which Mr. Bresnen and I helped craft that authorizes or allows commercial lessors to charge certain triple net expenses and that's 2001.406, which specifically allows a charity to pay for its proportionate share of certain triple net expenses, including subparagraph (B)(1), property taxes, subparagraph (B)(2), utility expenses; water, electric, gas, et cetera, and subparagraph 3, property and casualty insurance premiums. So the state already allows, in addition to a base rent that the charities might pay, the statute allows that. But what the language that I highlighted says, they have to pay it in 120 days or else they're not allowed. We think that that language, if left in, will cause significant harm to charities throughout the state who will face Hobson's choice of either paying all that, they may not have the money to pay all of it, or risk the potential for either some sort of sanction, including potential loss of the license. All of the clients that I represent enthusiastically support the premise of this rule, which is timely payment of rent or else the way the rule is drafted, the conclusion is that the landlord has impermissibly loaned money. I represent -- Ms. Ives referenced earlier, I represent some of the commercial lessors that in 2017 were hauled before this Agency and ultimately SOAH, because they were charging back rent, because charities didn't have the money to pay it. And the Agency at that time took the position that that was a loan. We ended up settling and agreeing to these particular lessors that they would not charge rent past 120 days, which I think is part of the genesis of this -- the language in this rule. So we support that. We think that's the right decision to make. But the second half of that one sentence causes us extreme concern. And so we would ask for either a striking of that language that I've highlighted in bold or a modification of the language. I will tell you that some commercial lessors charge on a quarterly basis those expenses, but that lessor has received the invoice from either the taxing authority or the real owner of the strip center, you know, in January of that year, but they're going to spread those payments out quarterly to the charity. So some of those charities would be okay with that, because they only get the bill on a quarterly basis, but again, the whole point of this I think is to get to the issue of the base rent. And again, the Legislature has said certain triple net expenses are authorized. By the way, one of the common area -- or common triple net expenses, the Legislature did not authorize to pay, and that's common area maintenance. And we don't quarrel with that because that's what the statute gives us. So under that triple net analysis, those common area maintenance costs have to be absorbed by the lessor as a part of the base rent that he, she or it is charging. I'll be happy to answer any questions. MR. VANCE: All right. Mr. Fenoglio, thank you very much. MR. FENOGLIO: Thank you. MR. VANCE: Take these into consideration and of course respond to them prior to any adoption. MR. FARRELL: Well, I do have one question. Do you have recommended language? MR. FENOGLIO: One suggestion is to strike the language in bold and that would eliminate the harm. I have had conversations with some other charity and lessor reps within the last 24 hours, I have not had a chance to digest all of those comments. We may come back before the comment period, which is the 12th I believe -- MR. VANCE: So, yeah, I said right before you walked in, we -- I've got it on the date of May 28th will be the closure, because that Monday -- so it technically closes on a Sunday and then that Monday is Memorial Day, so it's going to be on May 28th we'll accept written comments. MR. FENOGLIO: Okay. We may suggest other language besides the outright striking of that language. Thank you. MR. VANCE: Very good. Thank you. All right. Do we have any more witnesses? It doesn't appear so. No more forms. Okay. If there are no more witnesses then I'd like to thank everybody for coming up here today, thank you for your comments, and we will of course incorporate your verbal comments, as well as the written comments that were submitted, into the record of this rulemaking. The time is 10:17 and we are adjourned. Thank you very much. This public comment session is closed. (Adjourned and concluded at 10:17 a.m.) C E R T I F I C A T E STATE OF TEXAS ) COUNTY OF HARRIS ) I, Kimberly C. McCright, Certified Vendor and Notary in and for the State of Texas, do hereby certify that the above-mentioned matter occurred as hereinbefore set out. I FURTHER CERTIFY THAT the proceedings of such were reported by me or under my supervision, later reduced to typewritten form under my supervision and control and that the foregoing pages are a full, true and correct transcription of the original notes. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 16th day of May, 2019. /s/ Kimberly C. McCright Kimberly C. McCright Certified Vendor and Notary Public Verbatim Reporting & Transcription, LLC 1322 Space Park Drive, Suite C165 Houston, Texas 77058 281.724.8600