February 1, 2016
Want to upgrade your theatre(s) but have difficulty securing the financing? Using a generic outline, EFA Partners shows how, by refinancing all existing debt, too, the needed renovation sums can be obtained much more readily.
Not too long ago, amenities such as in-theatre dining and luxury seating were considered as short-term trends ripe only for certain markets. But that’s no longer the case because (almost to a town, now) theatres are being upgraded to provide more comfortable movie-going than can be experienced at home. Of course, theatre-upgrades are certainly costly, and thus financing is an issue. And while the large circuits enjoy ready access to capital, the same isn't typically the case for smaller operators.
So, let’s consider the example of an exhibitor with four profitable, eight-screen theatres, all located in small-to-mid-sized markets. Let’s also assume the operator owns the real estate at two properties while the other two are leased. To boost market-share, the operator decides to renovate and upgrade each theatre with luxury seating, the renovation coming in at $3m. Given that lenders may not favourably consider a loan for just the renovation without other collateral, the exhibitor’s approach could always be to seek a larger loan that would then refinance all ITAL existing debt while providing funding for the needed renovation, too. This approach could be more attractive to lenders as the loan would be secured by most, if not all, company assets.
STRATEGY & PROCESS
So, for this scenario, let’s assume the total existing debt of $7m comprises two $3m real estate mortgages plus equipment loans totaling $1m. An interested lender would review all exhibitor assets, which could involve getting new appraisals for the owned properties. The appraisals could be done on an 'as completed' basis such that the value of the renovation is taken into consideration.
Let’s assume the appraisals resulted in the theatres being valued at $16m -- a good outcome given that banks will consider lending 60-65% of appraised value. The operator could then close a loan of $10m which, in today's market, could see interest rates in the 4-5% range. $7m could be drawn at close to refinance the existing debt with the remaining $3m drawn down over time as the renovation is completed.
Maintaining market share is key for today’s exhibitor, with competition now being more prevalent than ever as more theatres are becoming renovatedand home-viewing options are getting enhanced. While significant capital may be required for upgrades, exhibitors should examine their markets to determine if theatre enhancements are necessary to maintain or grow profitability.