09 Capitalisation
Planning a new cinema, whether a conversion or a new build, will usually involve capital funding. What are the key elements of your capital funds and how do you set about raising the money?
Capital costing
The business of cinema, like hotels or theatres is high risk with usually high start-up costs, high fixed costs (overheads) and tiny margins. A film exhibitor’s success is dependent almost entirely on the artistic flair and talent of film producers. If there are no good films around (as is often the case in the Summer for example) people simply won’t go to the cinema no matter how comfortable the seating or brilliant the sound system. The costs of building a cinema consist of four main elements:
- Site acquisition and preparation costs
- Construction costs
- Equipment and fit out costs
- Professional fees
The amount of initial investment capital required for a cinema is hugely variable dependent on where it is located, whether it is a new build or refurbishment, size, quality and nature of services to be provided as well as what is required in terms of compliance with local planning regulations.
Conversion can often be more expensive than new build, especially if it is the conversion of an old cinema where the screens have to be reconfigured for modern audiences or its location, squashed between shops and offices in a pedestrian precinct, requires special equipment for the builders to gain access. Trying to ‘rescue’ and bring back into use an old cinema building can be very costly but there are numerous examples of this being done successfully such as the Odyssey Cinema in St Albans.
Distributor release patterns and smaller audiences generally mean that several smaller auditoria are required rather than one big one to make the thing work. Multiplex operators in the UK reduced their capital start-up costs in the 1980s and 1990s by building multiple screens, out of town in a low cost shell with a basic minimum standard of fit out and limited ancillary trading areas. More recently, in the face of tighter planning controls on green field sites, and pressures to regenerate urban areas there is a move back onto the high street.
The majority of cinema chains are also differentiating their offer with upgraded facilities and more diverse programming as exemplified by the range of luxury multiplexes now open in Britain’s major city centres. Multiplexes increasingly represent direct competition to the smaller independent cinema and, like the ‘corner shop’, independents will have to work doubly hard to keep their customers.
Site acquisition and preparation costs vary widely according to particular circumstances. Of the other costs, approximately 75% is accounted for by the construction of the building. The remaining 25% is split into broadly equal amounts for fit out and for professional fees. The effect of VAT should of course be taken into consideration when project cash flows are being planned. The actual cost of creating a new cinema depends on the location and the configuration of the building. For example a four-screen cinema on a town centre site will normally be substantially more expensive to build than a two-screen facility alongside a leisure centre built on a green field or brown field site. As a broad guide, it is possible to build a 2-screen cinema, seating 400 people in total, for as little as £1.5 million but a more typical cost for a good quality new build would be around twice that amount. Digital cinemas will not necessarily be less expensive to build.
Anyone working within the constraints of an existing building, aiming to provide a high quality experience by, for example, offering bars and restaurants as well as having to buy more sophisticated projection equipment in order to offer the full range of film product available, are likely to incur higher than average fit out costs. At the top of the range a specialist exhibitor would expect to pay around £2,000 per square metre (ex. VAT). Fit out is therefore likely to cost between £1.5 and £3 million for a 2/3 screen depending on size of venue.
Raising finance
Due to the high risk and low return on cinema builds, venture capitalists are unlikely to finance cinemas. Most of the money is private capital with some public sector capital subsidy.
Picturehouses (previously City Screen), for example were very successful in the late 1990s in securing Arts Council England Lottery funds for investment in a number of buildings in York, Cambridge, Exeter and Stratford (London). Bank loans and tax efficient investments such as sale and leaseback are also typically used to finance commercial independent cinemas. It is usual to build a package of finance that includes a number of different elements. It is also not unusual to take an incremental approach, perhaps refurbishing or fitting out only one or two of the screens to begin with and raising further finance at some later date.
As a general rule, you should avoid having too much loan capital in your finance package. Interest bearing borrowings are a fixed cost i.e. they need to be repaid regardless of how well (or badly) your cinema performs. This can be a terrible drain on working capital, particularly during the early months when you need to invest in marketing in order to build the business. It is far preferable to have venture (or risk) capital that only expects a return (albeit a higher one) when profits are being made.
You may be able to locate a private investor (business angel) willing to back you or, if the cinema is well loved locally you could also consider doing a share or debenture loan stock issue to bring in friendly capital from the cinema’s supporters. It is often possible to negotiate a capital repayment holiday on bank loans which may help during the first critical year or two however it is always best not to rely on this if possible as the banking services industry is still in a state of flux and borrowing and payment holidays are by no means a given nowadays.
It is crucial not to under-capitalise your project as this can lead to over-reliance on very expensive bank borrowing further down the line to carry out essential work. Whatever you do, do not rely on a hefty overdraft facility. It is in fact extremely difficult to make the economics of operation stack up if you have to repay masses of capital. There is some ‘free’ or ‘soft’ term capital available but it is not necessarily easy to get hold of unless you are lucky enough to be in a building of significant architectural merit or in a location where there are structural/regeneration funds available.
The sources of funding include the normal range of commercial funds plus, when appropriate, public funding from local authorities, further education institutions, the Private Finance Initiative, Arts Councils and Heritage Lottery Funds. When you are approaching any publicly funded body for support it is worth remembering that you will need to prepare your case for funding in just as much detail as you would for a private sponsor.
Sometimes there is an assumed leniency by organisations that apply for public funding. If anything, these bodies are more stringent in their monitoring, as they have to be publicly accountable for any monies spent and often have to produce performance analyses of their funded clients.
Grant for the Arts, Arts Council England
In certain cases, capital monies for building projects may be available from Arts Council England Grants for the Arts. Before submitting your application, there is a requirement to contact the Grants for the arts team who will make an initial assessment of the eligibility of the proposed project.
Heritage Lottery Fund
The Heritage Lottery Fund operates in broadly similar ways to the Grant for the Arts and the focus, as far as cinemas are concerned, is on buildings with distinct architectural merit. In some instances the buildings will be subject to a Listing Order in which case the refurbishment and/or expansion plans will be subject to specific restrictions. Funding is available for projects throughout the UK and may include buildings in private ownership but such cases “must demonstrate that the level of public benefit provided clearly outweighs any incidental private gain”. The three main areas of public benefit are:
- Safeguarding and enhancing the heritage of buildings, objects and the environment, whether man-made or natural, which have been important in the formation of the character and identity of the United Kingdom;
- Assisting people to appreciate and enjoy their heritage;
- Allowing them to hand it on in good heart to future generations.
European Structural Funds
The European Regional Development Fund (ERDF) and INTERREG are both structural funds that work towards the goal of achieving economic and social cohesion in the European Union. ERDF money is allocated over Objective 1 and 2 areas in the UK. INTERREG money is used for border areas. European funding is a very complex area and although there are precedents for funding cinema projects from this source (the Showroom in Sheffield for example), these have tended to be as part of regional consortia bids led by local authorities and other significant agencies. The prospects for direct applications from small organisations are frankly, limited, especially in pre-/post-Brexit environment.
Local authorities
Local authorities in the UK contribute substantially more funding for the arts than any other agency. The funding sources and budgets vary significantly from one council to the next and in most authorities arts budgets have been cut significantly over recent years. However, with cinema it is possible to make a strong case that a cinema is an important and wanted facility which makes a significant economic and social contribution to the life of the community. The names of departments you will need to contact also vary but funding is often accessed via Recreation and Arts, Tourism and Leisure or Economic Development departments. Support can either be available in the form of grants, or in kind, such as access to free training or use of council facilities. Some central Government funding for regeneration is also routed through local authorities.
National film funding
The BFI is the lead body for film in the UK with responsibility for the distribution of National Lottery funding for the development and production of new British films, as well as audience development activity through supporting film distribution and exhibition.
Funding isn’t currently available for capital projects although there will be National Lottery funding available for one-off projects, education and cultural work which can be accessed through the BFI.
Funding priorities are set out in the BFI’s 5 year plan (2016-2022), BFI2022, which was developed after detailed consultation with a range of different bodies, individuals and organisations.
The BFI distribute funds to national organisations such as, ICO, Creative Skillset, Into Film, Creative Europe Desk UK, Creative England and the Film Audience Network (BFI FAN), as well as to independent companies and individuals.
Money from trusts
Money from charitable trusts is often available particularly for voluntary groups and organisations wishing to work on community projects. Many large companies create trusts which are often most active in the region in which their head office or manufacturing base is located.
Different trusts have varying and often very precise rules of eligibility: many will not consider your application unless you are a registered charity and an even greater number won’t make grants to individuals. As with sponsorship you cannot necessarily expect a quick turnaround on your application – some trusts may hold their meetings as little as once or twice a year.If you wish to pursue this source of funding, a number of useful publications exist, in particular the Directory of Grant-Making Trusts and Funding Digest, a monthly publication aimed primarily at voluntary organisations. Both are often available in public libraries.
Sponsorship
Commercial sponsorship offers the potential to attract some significant financial and ‘in kind’ support but do not underestimate the amount of time you will need to spend organising sponsorship deals. Sponsorship is normally part of the general promotional expenditure of a business and although that can encompass a sense of corporate or social responsibility, it is not philanthropy or a gift. Some companies do make philanthropic donations but sums tend to be small and often access is restricted to community groups.
It is important to think carefully about what you may have to offer each company you approach. Companies will be most interested in supporting projects, which are aimed at an audience section to which they are trying to market their products. Companies should usually be approached via public relations or marketing departments, although it is always worth playing on any direct contact with the management you might be able to establish. Don’t expect to receive a rapid response or necessarily any response at all. It is good practice to follow up an initial letter with a telephone call. Be aware that sponsorship is a game of delicate negotiation and not something that will happen overnight.
As with any type of fund-raising it is vital to do your research: nobody is going to take you seriously if you haven’t bothered to find out the name of the person you are writing to, or which products the company sells. The more you know about an organisation, the better the position you will be in to offer them an appealing package. Remember that company sponsorship is a payment for the promotion of goods and services. At all costs avoid offering a sponsor something you are unable to deliver. Equally, don’t allow sponsors to feel that they can influence the cultural integrity of your project; if you feel uncomfortable with the extent of involvement sought by a sponsor, it might be better to look elsewhere for support. It is also worth investigating Arts and Business (formerly ABSA). Although not a funder in the first instance, it does operate a pairing scheme which acts as an incentive scheme for business sponsors. The scheme helps both businesses and the arts get the most from their partnership by providing additional financial support in the form of awards. To qualify for an award you will need to have your sponsor already in place and the financial rewards are greater if this is a company which is new to arts sponsorship. The scheme will only match cash sponsorship. Often companies may be more willing to provide support in kind by providing goods and services. For example, you may be able to find a brewer who will provide beer for your opening night launch party or a printer who will print your publicity at cost. Clearly, you cannot enter the ‘in kind’ support into your accounts. However, it is worth totting up the value of in kind support as this can sometimes be used as partnership funding and it is always useful to know the real costs of doing something. If you wish to pursue this source of funding, a particularly useful publication is the Guide to Company Giving published by the Directory of Social Change. This should be available in most public libraries.
Crowd funding and raising money from the public
Crowd funding is fundraising for the social media age – online campaigns seeking small contributions from the public at large.
There are three main types of crowd funding – Equity Crowd funding offers donors a return on investment; Rewards Crowd funding offers donors non-financial incentives; while Donation Crowd funding offers nothing in return.
Most arts projects use the Rewards Crowd funding model.
Fund seekers choose an online crowd-funding platform – popular sites for arts organisations include Kickstarter, IndieGoGo and Crowdfunder. There are a wide variety of new platforms, so it’s worth investigating which provides a good balance between registered users and traffic (so people will discover your project beyond those who you share it with) and the premium they charge for that visibility in their cut.
Create a fundraising page for your project, write (or film) your pitch, and set a target amount to raise and a deadline by which you’ll raise it. List a range of incentives or rewards to offer in return for different donation figures. These could include, for example, credits in your brochure, tickets to screenings, invitations to special events, or “limited edition vintage merchandise” (aka those old festival T-shirts you’ve got sitting in the cupboard). Then start promoting your campaign.
Some models, such as Kickstarter, operate on an “all or nothing” basis, meaning that if you don’t reach your target figure by your deadline, the pledges are returned and you don’t get any of the money. This can be useful for testing out interest in a potential product or event before committing to invest in it. Other platforms allow you to keep any funding you raise within the time period. The crowd-funding platform you use takes a 5 – 10% cut of the money raised by any successful project.
Crowd funding has funded all kinds of projects – from gadgets to grizzly bear coats. Film exhibitors now taking the plunge to raise much-needed money for their equipment, venue or events, include Flatpack Film Festival, Floating Cinema, London Short Film Festival and Sheffield Doc/Fest [INSERT LINK http://www.independentcinemaoffice.org.uk/blog/docfestcrowdfunding].
Crowd funding seems to work particularly well when the seeker is asking for money for something specific, rather than general running costs. As Charlie Phillips from Sheffield Doc/Fest warns, “No-one wants to see their money disappear into a general slush fund, so make the money as ring fenced and specific as possible.” Your project is competing against thousands of others on the same website, so creating a compelling story for projects is more likely to draw potential donors.
The reason many funders make a pledge is simply because they want to feel involved in a project. Companies and organisations can capitalise on that by offering incentives that make donors feel like part of the team. Regular updates, progress reports, or a simple thank you can help strengthen and build relationships.
Like any other kind of fundraising, a crowd funding campaign takes work. Once the campaign is launched, there is only a limited amount of time to reach your goal. Laura Harford from UP Projects, who raised £11,200 for Floating Cinema, explains, “The campaign was 8 weeks long in total and during that time it required a considerable amount of staff resources to keep up both the marketing presence and research into contacts needed to maintain momentum and interest”. You’ll need to invest energy into spreading the word and raising interest in the project, as well as the follow up. Ian Francis from Flatpack Film Festival advises, “Don’t underestimate the amount of work involved in looking after your backers, and distributing the rewards”.
One of the great things about crowd funding is the potential for donors to spread the word about a project to their contacts via social media platforms. It’s like fundraising and marketing in one, so an interesting or fun pitch is often key to promote sharing on social media.
Already mentioned in this section, you could try raising funds through the public issue of share or debenture loan stock. This is particularly appropriate if you have an easily identifiable community to sell your idea to (and it helps if its members are rich of course!).
There’s also traditional public fundraising efforts which can overlap sometimes with crowd funding sponsorship but also exist in their own right such as, sponsored activities (sky-diving, swimming, walking, slimming, hair-cutting etc.), sponsoring a seat (or a brick, or a plank), lotteries, car boot sales, appeals, covenants, legacies, large donations, events, benefits… the list is endless.
All these methods have been used by many a successful cinema campaign. While you should not expect to raise hundreds of thousands in this way, it is not unrealistic to aim for several tens of thousands. Incidental benefits of raising money in this way are that (a) it creates profile locally among audiences for your venture and (b) it demonstrates to other funders that the project is genuinely wanted by the community it serves.
Private Public Partnerships
This will almost certainly be an area you need to explore as part of your fundraising strategy. Public Private Partnerships essentially look at ways of involving the private sector in public enterprises, in particular in financing arrangements but also in operation. Many people will be familiar with this type of scheme in relation to provision of healthcare and public transport in the UK. In the case of cinemas, in the original edition of At A Cinema Near You [INSERT LINK], there are a number of examples of such partnerships including financing of the Lux in Hoxton, London (now, sadly defunct) and the FACT Centre in Liverpool, which incorporates a cinema operation run by Picturehouses, who also put up some of the start-up capital. Since then, there have been some success and some horror stories relating to PPP in the wider public sector, so you just need to be aware of the risks. It may be possible to secure capital investment in bars and restaurants if you opt for a franchise. Securing private finance in this way is often the only option left but you should be particularly wary of deals with property developers. This will invariably entail the developer investing in (say) the cost of building the shell in exchange for ownership of the freehold. If your organisation is the lessee, don’t forget that the developer will want to see a substantial return on his investment in the form of rent (as well as property market inflation) and that the average lease agreement gives no protection against regular (usually five yearly) rent increases.
Summary of key points from Chapter 8
- Cinema is a high-risk business with high start-up costs and small margins
- An independent cinema is unlikely to provide equity investors with an adequate return in the short term or to generate enough revenues to pay back substantial commercial loans
- Building and site acquisition costs are enormously variable. Building a smaller town centre cinema may be much more costly than a multiplex build due to location and the standard of ancillary trading facilities required
- Avoid having too much commercial loan capital in your finance package – it will suck the lifeblood of your business in the crucial early years when you need liquidity
- Opportunities for public sector funding of cinema venues are limited. Local authorities are often best placed to support a development but you should also consider Arts Council and Heritage Lottery funds.
- You may be able to secure some funds from the public, trusts or sponsors through conventional and unconventional fundraising initiatives.