09 Capitalisation

The amount of initial investment capital required for a cinema is hugely variable, depending on where it is located, whether it is a new build or refurbishment and the 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 screens must be reconfigured for modern audiences or if its location, squashed between shops and offices in a pedestrian precinct, requires special equipment for builders to gain access.

So trying to ‘rescue’ and bring back into use an old cinema building can be very costly, but there are numerous examples of it being successfully achieved, 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 financially. 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. Subsequently, in the face of tighter planning controls on green field sites, and pressures to regenerate urban areas, there was a move back onto the high street.

Many cinema chains also differentiated 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. As a result, multiplexes often now represent direct competition to smaller independent cinemas, meaning they 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 professional fees. The effect of VAT should 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 constructed on a green field or brown field site.

As a broad guide, it is possible to build a two-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.

Anyone working within the constraints of an existing building, aiming to provide a high quality experience by (for example) offering a bar or restaurant as well as buying more sophisticated projection equipment to offer the full range of film product available, is likely to incur higher than average fit out costs.

At the top of the range, a specialist exhibitor should 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 two or three-screen cinema, depending on venue size.

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.

Picturehouse Cinemas 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 a 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, you could also consider doing a share or debenture loan stock issue to bring in friendly capital from local supporters.

It is often possible to negotiate a capital repayment holiday on bank loans which may help during the first, critical years; however, it is always best not to rely on this if possible, as the banking services industry is always in flux and borrowing and payment holidays are by no means a given.

It is crucial not to under-capitalise your project as this can lead to over-reliance on expensive 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.

Funding sources include the normal range of commercial funds plus, when appropriate, public funding from local authorities, further education institutions, and the Heritage Lottery Fund. 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.