Council scrutinizes proposed change to DPAC profit-sharing

Apr. 18, 2013 @ 09:32 PM

City Council members on Thursday questioned the rationale for reworking as part of a new the lease the profit-sharing arrangement between their government and the operator of the Durham Performing Arts Center.

The sharpest queries about the deal came from Mayor Bill Bell and City Councilman Don Moffitt, who noted the new deal wouldn’t spin off as much revenue for the city in years the downtown theater does particularly well.

“We get less,” Bell said, leading off the questioning. “What’s good about that?”

The lease extension would lock in the city’s partnership with theater operator PFM/Nederlander until at least the summer of 2023 and potentially up to the summer of 2040.

Its centerpiece, in the council’s thinking, is the proposed replacement of what’s now a straight 60/40 split of the theater’s net operating income. The city gets the 40 percent; PFM/Nederlander gets the 60 percent.

The deal negotiated by City Manager Tom Bonfield and his staff would replace that with a more complicated profit-sharing system that they say is designed to give the operator added incentive to bring it top-drawing shows.

Each year, the city and PFM/Nederlander would still split the first $2 million in net income 60/40, the city as before receiving the lesser share.

The operator would get to keep the next $300,000, then the two sides would resume the 60/40 split until income hits $3 million.

Once past the $3 million mark, PFM/Nederlander would keep 70 cents on every $1 the theater nets.

Administrators explained that if DPAC netted $4 million in a year, the city under the proposed split would receive about $1.4 million. The straight 60/40 split embedded in the present lease would yield it $1.6 million.

Bonfield said the idea is to ensure that the operator – a joint venture between two companies, PFM and Nederlander – has a strong incentive to run the theater in a way that nets $3 million or more a year.

“DPAC in its first four years is multiple times more profitable than anyone ever thought it would be,” Bonfield told the council. “We’re trying to develop a model that would keep it that way. This is trying to structure a very high level of financial return.”

But Moffitt said a straight 60/40 split would seem to give the operator plenty of motivation.

“If they had a declining share of the operating profit, I could see an argument for incentivization,” he said. “But they don’t.”

Administrators and a former Capitol Broadcasting Co. executive who helped city leaders put together the initial financing of the theater countered that the answer lies in the cyclical nature of the theater business.

From fiscal 2009-10 through fiscal 2011-12, DPAC netted $3 million, $2.5 million and $4.6 million, respectively, for the partners. Community Development Director Reginald Johnson cautioned against taking showings like 2011-12’s for granted.

“We should not get used to a particular number,” Johnson said. “The next year, it may decrease.”

Mike Hill, the former Capitol Broadcasting executive, said offering PFM/Nederlander a bigger share of the haul when profits top the $3 million mark rewards the company for taking risks when it comes to bringing in major shows.

The firm often shares the costs of bringing a production to town, where most major-venue operators insulate themselves by merely renting space to a production company, Hill said.

“The fundamental purpose of this structure is to try to affect those day-in, day-out decisions in a way that brings more people to Durham,” said Hill, who now heads D3 Development, which counts the operator as a client. “Would they make any decisions differently in the next year or two? Probably not. It’s more in the long term, trying to think forward.”

City Finance Director David Boyd said he’s confident the proposed split will generate enough money for the city to ensure that it can pay for future capital-repair projects at the theater without having to use tax money to help pay for them.

But Councilwoman Diane Catotti said the city’s responsibility for capital costs is a reason for it to retain the present split, “because we’re pouring all the money back into the building.”

Despite the questions, council members scheduled a vote on the lease extension for May 6. Councilman Eugene Brown signaled that he’s inclined to support the administration proposal.

“Part of the irony for me is to sit here and be focused on how do you divide up an operating profit,” he said, noting that as a one-time member of the Carolina Theatre board he’s more accustoming to pondering subsidies for an arts venue’s losses.