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Lawyers explain Colonial plans as questions remain

SoVaNow.com / May 26, 2021


Plans to amend the corporate status of South Hill’s iconic theater, The Colonial, have drawn protests from members of South Hill Town Council and Community Development Authority, the entity that owns the theater building.

South Hill Council members Shep Moss and Gavin Honeycutt first raised questions about the plan and a recommendation by Town Manager Kim Callis that Town Council continue to fund the theater in April as work began on preparing South Hill’s FY2022 budget.

On Thursday, Callis invited attorneys Alex Simon and Bradley Ridlehoover to a joint meeting of South Hill Town Council and the South Hill Community Development Authority (CDA). The lawyers were asked to explain why two for-profit entities were formed to oversee renovations and later the operations of the Colonial Theater, and why it would now be appropriate to form a non-profit entity to take over the role of operating theater manager.

Simon had been involved with setting up the two initial for-profit legal entities to manage the community arts center — The Colonial Center of South Hill, LLC and The Colonial Center of South Hill Manager, LLC — in 2008. The Colonial Center of South Hill Manager, LLC was later converted into a for-profit corporation called The Colonial Center of South Hill Manager, Inc.

Ridlehoover was hired to form a new non-profit to take over operating the theater in place of The Colonial Center of South Hill, LLC and The Colonial Center of South Hill Manager, Inc. “On April 22 we formed an entity, The Colonial Center, to take over. The owners of the LLC [the Colonial Center of South Hill, LLC] are gifting their entire interest to the non-profit,” Ridlehoover explained.

Simon laid out the financial structure that was used to raise monies to renovate the former Vaudeville theater building. He explained that funding sources like HUD (U.S. Housing and Urban Development) and VDOT do not generally make grants to private entities looking to restore old buildings. Their grant funds typically are issued to a government unit such as the CDA.

At the same time, certain tax credits — known as Qualified Restoration Expenditures, QRE — available through the IRS to defray costs of construction or renovation of older buildings are not given to non-profit entities because they do not pay taxes.

“To get historic tax credits [the QRE], you have to be a for profit organization. You cannot be a 501(c)3 because 501(c)3’s do not pay taxes, so what’s been done. It’s not a new strategy,” said Simon.

“To [take advantage] of these tax credits an investor put in hundreds of thousands of dollars. The investor does not control the running [of the theater], it only wants to say on its tax return, ‘I’ve got a 99 percent profit interest in this LLC,’” Simon explained.

“The way the Colonial [Center of South Hill, LLC] keeps control and does not have to give up its rights [to operate the theater] is to form the second management company. It did.” Simon continued. The management company is the entity known as The Colonial Center of South Hill Manager, Inc.

Simon said one final component was needed for the private investor to take advantage of the QRE tax credits — that was for the CDA to enter into a long-term lease with The Colonial Center of South Hill, LLC. In 2008 the CDA and the Colonial Center of South Hill, LLC signed a 40-year lease agreement.

With renovations completed and the theater up and running, Simon said, “Now it’s time to say okay tax credit investor, Thank you very much. Go on your way.”

Going forward, Ridlehoover said the plan envisioned by the members of The Colonial Center of South Hill, LLC is to liquidate the LLC and for the owners of the LLC to donate their interests to the non-profit. Ridlehoover never said who the owners were or what interest they were transferring. He explained in response to a question from Moss that the neither the Town nor the CDA could require The Colonial Center of South Hill, LLC to open its books for inspection prior to transferring its interest to the non-profit.

Moss expressed his exasperation saying, “I’m just confused as to how we continue to fund [the Colonial Theater] under those situations while other organizations are required to do it. Where is the fairness and the transparency in that? It is also my understanding that now they want to unwind the LLC and make it a non-profit and on the surface, that really stinks to a lot of people. It is as if they are taking the money and running what they have received for all of these years now that questions are being asked.”

Honeycutt then asked Ridlehoover to explain why the CDA continued to carry a promissory note for about $3.8 million which was owed by The Colonial Center of South Hill, LLC. He said it was told to Council that the note reflected nothing more than “the appraised value of the building and that no money was ever transferred to the Colonial from the CDA. So why was it set up that way?”

Ridlehoover answered that grants like the ones used to rehabilitate [the theater] are not given to a for-profit entity “so they [VDOT and HUD] gave it [the grant funds] to the CDA. But there was a purpose to the money, to rehabilitate the Colonial. The CDA cannot just transfer money on its own to a for-profit. There has to be some kind of legal mechanism for the money to go and the way it did it is through a revolving loan.”

The note is evidence of that transfer, Ridlehoover said, before suggesting that the CDA consider forgiving the note so that the non-profit would not be strapped with a large debt and no way to repay it.

Moss then asked if The Colonial Center, LLC was “just going to walk away” if the note is forgiven. He was told by Ridlehoover, “Yes. Typically, the assets go to the non-profit and there is no recognition of cancellation of indebted as income. That’s part of how the structure is typically done in the first place. That’s how you unwind them.”

In response to Moss’ question about how the Colonial spends dollars it receives each year from the town through the CDA, Ridlehoover made clear that neither Moss nor the town could force The Colonial Center of South Hill to turn over its books. Moss had suggested in prior public meetings that a review of the books would quell public concern about the use of taxpayer dollars to support theater operations.

Moss read aloud a provision of the lease agreement between the CDA and The Colonial Center of South Hill:

“Landlord may request such supporting documentation as it determines is reasonable under the circumstances, in Landlord’s sole discretion, to verify the amount of the Tenant’s gross receipts. Failure to provide the supporting documentation within one month is a default hereunder.”

After listening to the language, Ridlehoover replied, “Yes, you can request information to make sure that the CDA did receive the right amount of rent. As far as expenditures, no, I don’t see why a landlord would ever need to know what was spent.”

Ridlehoover said, going forward, once the theater is operated by a non-profit, such as the newly formed The Colonial Center, the organization’s tax returns as well as its application for non-profit status will become public documents.

Council member Ben Taylor then asked Robin Jones, a local CPA who was present at the meeting Thursday as a member of the public, if her audited records clearly showed that the public funds given to the Colonial Center for specific purposes had been used accordingly. Jones replied, “We never audited them [The Colonial Center of South Hill, LLC. Our firm was hired to audit the CDA financial records.”

Under the terms of the lease between The Colonial Center and the CDA, The Colonial Center of South Hill is required to provide the CDA with an annual certified statement showing gross receipts. Former South Hill Mayor Earl Horne, the executive director of The Colonial, acknowledged that this was never done.

Callis on Thursday laid the fault for the reporting lapse on Frank Malone, who served as longtime director of the Community Development Authority who died last year. “I guess this was never done,” said Callis.

The lease agreement clearly states, “Payment of the percentage rent is to be accompanied by a certificate signed by an authorized officer of the tenant certifying the gross receipts of the tenant.”

Callis then shared information he said came from Horne purporting to list gross receipts from the theater for the past six years — $92,000 in 2015, $115,000 in 2016, $149,000 in 2017, $97,000 in 2018, $104,000 in 2019 and $20,000 in 2020. Not included in these amounts are the monies the theater received each year from the CDA.

Callis had previously said The Colonial typically received around $175,000 each year since as its town budget allocation, but was entitled to as much as $600,000 from the annual proceeds of South Hill’s 1-cent food and lodging tax.

As the meeting wrapped up, Honeycutt looked at Simon and Ridlehoover and said, “All of this has my head swimming.”

As Moss — and to a lesser extent, Honeycutt, a member of the budget committee — continue to press for information about the operations of the Colonial Theater, and whether and how to unwind the existing for-profit entities, Callis is pushing forward with turning over operations of the theater to The Colonial Center nonprofit.

On Thursday he asked Simon and Ridlehoover to prepare language he could present to the CDA forgiving the outstanding promissory note and approving the transfer of the lease from the for-profit LLC to the non-profit Colonial Center.

The CDA was set to meet on Tuesday, to discuss and vote on the matter. Members of the CDA include South Hill Mayor Dean Marion, Council Members Shep Moss and Lillie Feggins Boone, Tammy Manning, LJ Dornak, Town Manager Kim Callis, and Jeremy Lynch.

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