Downtown Movie Theater’s Funding Gap
One of the sources of funding for the city’s new downtown movie theater is still missing and could hold up the long-awaited project.
The missing piece of the financing package, not to say puzzle, is an allocation of federal tax credits that city officials have been counting on to cover about $1.75 million of the theater’s $11 million budgeted cost. This money needs to be in place before the city can go forward with the other elements of the planned financing that include: (1) a $3 million commitment of city funds; (2) a $2.5 million investment by Regal Entertainment Group in furniture, fixtures and equipment for the eight screen cinema that it will operate; and (3) about $3.75 million in bonds backed solely by the theater’s revenues that Mayor Bill Haslam believes he can sell to civic-minded investors.
The process for getting the type of tax credits the city is seeking, known as New Market Tax Credits, will indeed seem puzzling to anyone who’s not steeped in the workings of the complex federal program that provides for them. Unlike most tax credits, New Market Tax Credits are not a matter of entitlement to those who qualify for them under the tax code. Rather, they are allocated on a discretionary basis by an arm of the U.S. Treasury Department to what are known as Community Development Entities (CDEs) from a pool of about $3.5 billion a year in Congressional authorizations. The CDEs, in turn, award the credits, again on a discretionary basis, to development projects in low-income communities. But the demand for them far exceeds the supply.
Downtown Knoxville qualifies as a low-income census tract, and the city has been shopping for a CDE from which to get a tax credit that’s tantamount to a cash investment in a project. The only CDE from which city officials have so far gotten any encouragement is the National Development Council based in New York City. But according to the city’s finance director, Chris Kinney, the theater project is only on an “alternate list” for an allocation this year in the event that some other project commitment doesn’t materialize. That sounds like being on a college-admission waiting list. And Kinney acknowledges, “Unfortunately, that’s the situation we’re in.”
Haslam insists the theater project isn’t in jeopardy if the tax credits don’t come through this year but concedes its timing could be. “I’m still confident we can get them one way or another, but they’ve always been a big piece of this, and we’ve got a big hole until we do,” he says.
The Haslam administration had been pointing toward seeking City Council’s approval in December of the city’s $3 million contribution to the project preparatory to starting construction in January to meet a targeted October completion date. But the entire financing package needs to be in place before construction starts.
Haslam’s aversion to committing more city money to fill “the hole” at this point is compounded by the fact that project managers are bracing for a big bump in construction costs above the $11 million budgeted. Bids from various subcontractors are due this week, and Regal officials have advised that they are encountering increases of 20 percent or more in the cost of new theaters elsewhere as one manifestation of a pervasive national if not global phenomenon.
“Obviously, we’re worried about it, and we’re doing everything we can to hold costs down by way of providing for alternate types of construction, value engineering, etc.,” says Kinney. So what are the city’s contingency plans if there’s still a significant overrun? “We don’t know yet. We’re not going to create a problem until we have one,” Kinney responds initially. But he goes on to say, “We’re looking at some other places where we might save some money on a one-time basis to help this project if needed.” He won’t elaborate on what they are.
Haslam, for his part, says, “We’ll have two choices: (1) try to drive down costs; and (2) find other sources of money.” Fortunately, he didn’t mention a third, which would be to scuttle the project or put it on hold in hopes that construction costs will come back down.
One potential source of funding is proceeds from the sale of the long-vacant historic buildings that adjoin the theater site on the 500 block of Gay Street, which the city owns. Responses to an RFP for purchase and commercial redevelopment of these dilapidated buildings are being shrouded in secrecy, so it’s unclear how much they might fetch. It’s very clear, however, that they will remain worthless unless there’s certitude that the cinema project is moving forward to serve as a catalyst for restaurant and retail activity in its environs.
The 2,000-seat movie theater has become the centerpiece of the city’s downtown revitalization efforts, and it would be tragic if the vagaries of tax-credit allocations or construction cost spikes were allowed to derail or delay it. If the tax credits aren’t forthcoming this year, then perhaps the city’s Industrial Development Board, which will own the theater and be the recipient of the credits, could obtain a bridge loan until Haslam’s confidence that we will eventually get them comes to fruition.
In any event, by one means or another, I will continue to cherish hopes of being in attendance on the theater’s scheduled opening night next Nov. 2.