insights (2006-33)

Downtown Cinema Financing Tribulations

After a year of trials and tribulations, the city administration has finally succeeded in lining up all the pieces of the complex financing arrangements that will fund completion of the new downtown movie theater.

Some of these components won’t actually come to fruition for several months. But they are all now firm enough for the city to take them to the bank, so to speak, to secure a $7 million bridge loan that will enable construction to proceed.

Securing this loan comes in the nick of the time to prevent work on the cinema from coming to a screeching halt. Groundbreaking had been delayed for several months earlier this year because of the same set of financial complications that have been bedeviling Mayor Bill Haslam until just now. In April, Haslam and his outgoing finance director Chris Kinney managed to improvise to the extent of obtaining a previous $3.5 million bridge loan from local banks that allowed work on the $12.5 million project to get started. But all that money has now been spent, and it will take the additional $7 million bridge loan to keep things going until all the pieces of the permanent financing are in place—at which point the bridge loans will be repaid.

The pieces of this mosaic consist of:

• A $3.5 million investment on the city’s part that, for bizarre reasons, can’t be made until the other pieces are in place.

• $4.5 million in proceeds from the sale of what amount to junk bonds secured solely by the cinema’s revenues. Haslam intends to personally place these bonds with angel-like investors that he’s been lining up.

• A $1.4 million infusion derived from an ever so esoteric type of federal tax credit.

• A $1.1 million infusion from tax increment financing that involves dedicating any increase in property taxes derived from higher assessed valuations to a horde of downtown buildings for up to 15 years.

• $2 million that Regal Entertainment Group, which will operate the eight-screen cinema, has committed to pay for its furniture, fixtures and equipment.

The city’s Industrial Development Board will at least titularly own the cinema until all debt has been repaid, at which point ownership is due to revert to the city and could prove to be a valuable asset either for sale or as a source of income.

Why, you may ask, has it taken such complexity and damnable difficulty to get a movie theater built on Gay Street to hopefully contribute to downtown revitalization?

The answer centers on Haslam’s resolve from the get-go not to put city taxpayers on the hook for more than $3.5 million and his resort to what at times has seemed like a quixotic quest to raise the rest of the money in other ways.

His biggest stumbling block has been obtaining the tax credits which, from the city’s standpoint, are tantamount to a grant. These federal tax credits are actually awarded by the U.S Treasury Department to financial institutions which can use them to reduce their tax liabilities with the stipulation that the savings get allocated to worthy economic development projects per a host of federal regulations. But those allocations are almost like found money, and found money doesn’t grow on trees.

The source on which the city has had its sights set is the National Trust for Historic Preservation. The NTHP had made a $2.6 million allocation of such credits to the Tennessee Theatre’s renovation and was encouraging about the movie theater’s prospects of getting one as well. But when nothing was forthcoming by the beginning of this year, the city began to cast about for other sources, only to end up empty handed.

Meanwhile, cinema construction was put on hold for several months because regulations perversely precluded the city from making its investments until the tax credits proceeds were in hand—or else foregone. The initial bridge loan was devised to extricate the city from this bind, but the delayed construction start has pushed back the cinema’s targeted completion from late this year until well into 2007. The delay has also added $750,000 to the project’s cost due to rises in building material costs.

Finally, in June, when Haslam was just about at his wit’s end, he got word from NTHP’s John Leigh-Tetrault that a $1.4 million tax credit allocation should be forthcoming later on this year. November is now the due date; but to help the city out of the bind that was on the verge of forcing a construction halt, NTHP has guaranteed its delivery. This guarantee, together with the $1.1 million TIF that went before City Council on Tuesday and apparent faith on the part of lenders that Haslam can raise the $4.5 million, is what’s securing the $7 million bridge loan that will keep the project funded for the nonce.

The TIF was a late addition to the financing package, concocted primarily to cover the increased construction costs resulting from delays. Unlike other TIFs the city has awarded to developers tied to the value of their property enhancements, this one will raise money for the cinema resulting from any form of increase in assessed property values in the designated downtown area. Arguably, this amounts to tapping taxpayers for more than the $3.5 million cap Haslam had placed on the city’s investment in the project. But the mayor asserts that, “The movie theater has already and will create more value downtown”—making it appropriate to draw on that.