The Junction Project: A Financial View

We have seen a change in how consumers and citizens access arts, libraries, and events across different spectrums notably in where they’re located, what performances are offered, and the most accessible way for education and entertainment. In the case of libraries, accessibility is not referring to simply a ramp entering a building for the disabled, rather the definition of different methods for accessing the services provided by such outlets: online and in-person or physical. We access research, materials, reserving books, and other resources that a library provides digitally as it is the most convenient way and the most practical way in many instances. Right now, there are 13 branches most of which have staggered hours for cost reduction. Ideally, with the new library planned with the Junction project, 75% of these branches would be closed as everything can be centralized, thereby reducing costs. As it is, a declining use of services is a main reason for service adjustment.

Sudbury has a unique arts scene, and it should be enhanced. Although having city involvement in the actual managing of an arts group is obtuse, providing an outlet for a gathering area for others to display their talents is astute. Currently, the Sudbury Theatre Center is a charity, and with the Junction project, this would presumably change for the simple reason: we need to boost revenues through attendance and rentals. As part of its fiscal stability ordinance, it’s wise to take a different approach to operations. Indeed we can keep the talent and creativity that has been a hallmark for the organization, except we can enhance it to make it more sustainable. Beyond just musical & theatrical performances, it’s an opportunity to market the location as a place to have conferences, trade events, and seminars for entities across Ontario not only Sudbury. The operator of the convention/performance center has to be realistic too and not be charging an excess amount simply to make up the cost from the project.

The art gallery is an interesting opportunity, too. It will allow exhibitions of artists from Sudbury and Canada to showcase their work, which will demonstrate the amount of talent that exists. It would also serve as a venue for permanent collections to be displayed in a more attractive and accessible setting. At the same time, it promotes the ideal values held by national organizations and corporates that the arts is an excellent segment of the economy for a career now that local talent can display their works. Focusing on recruiting for a donor to offset the cost of the construction while making a venue financially feasible in the long-term.

We find that now is the time to focus on creating jobs, new wealth, and fostering a collective effort in economic prosperity.

Fiscal Position to Make It

According to the CBRE report completed in 2018, the argument held that by 2023 the revenues would be $4.1 million. Re-assessing these figures for reality, and my own assumptions, here’s where top- and bottom-line growth would be. The total revenues in the first year — what was supposed to be 2021 — would be $1.8 million. In the assumptions, they planned for revenues at full capacity instead of, say, 2/3 of the capacity. In my assumptions, planning for $18 ticket price and 800 seat capacity (planned for 950), with 20 performances, we’d get total revenues of $288,000. The simple reason for the dramatic difference between the $718,000 put forward in the analysis is a $40 ticket is high especially when you’re expecting a 70% capacity. Instead, having a lower price ticket will entice more attendees and with less performances, costs would be minimized as well to increase the likelihood of a breakeven on this line item. The artists expenses would represent some 50% of revenues ($8,000 spent on products/related costs for the 20 performances equal to $160,000) would leave the performances with a profit. After marketing expenses that includes a $4,000 per touring presentation (to promote the event)— still a considerable sum — we’d be left with a $48,000 profit. So far so good.

Let’s turn to meetings & conferences. Right now, it was planned for more than 200 meetings. At the current price per rental of $113 (room capacity of 21), and as high as $1,600, arguably there is a discrepancy between the rental rates and a realistic demand amount. For example, pricing the two smaller rooms that are 250 sq. ft. at $250 with 30 events will yield $7,500; the medium-sized room at $450 with 10 events, will yield $4,500; finally, the largest room with 3,500 sq. ft. priced at $600 and 3 uses will result in revenues of $1,800. Altogether, revenues from these rooms will total almost $14,000. The last large room — 13,000 sq. ft. — is proposed to be rented at $5,000. In all fairness, this seems reasonable, but high because of the amount of square footage of the space. Suppose the rent is reduced to $2,500 for the first year with the entire space used, not divided, if we have 15 uses, we’d result in $37,500 in revenues from the space. In total, we’d yield a bit more than $51,000; the report indicates $354,000. This would be an extraordinary feat, however, how many firms and groups want to rent out a ballroom annually when payment for food could be an additional charge. Instead, those are getting married would choose to host their wedding at a hall that is specifically for food and reception (such as the Caruso or Italian Club). We see right here that this is a huge cost outlay resulting in a loss. Bundling a conference with the same space, revenues generated would be exceptional boosting up to $562,000 ($1,300 charge per hour x 18 hours in a day for space utilization = $23,400; a conference for 4 days would be $93,600 in revenue for the 1 event; assuming 6 events in a year, we’d have $561,600 from this revenue stream). Including the meeting spaces utilized, revenues generated would be $613,000. We see that this nearly 2x the amount projected. Frankly, this makes more sense to project than what was assumed because we could charge more for the entire conference to utilize the area(s) offered. At the same time, we’re not projecting an exorbitant amount to be realized from just meetings; many businesses in Sudbury have conference rooms in their offices so we have to be realistic about this fact.

Sponsorships are another area of concern. While the report notes that it’s a form of low-key advertising, many firms don’t have the capex to outlay this cost. Furthermore, a $5,000 sponsorship per event could be attained. Taking a realistic approach of $2,500 from a major corporate or financial institution is more realistic because sponsorships are a cost to firms that don’t necessarily see tangible results and can be easily argued as an unnecessary expense. As well, this is a new facility and we’d want to boose sponsorship demand through a lower fee. As such, when it comes to 20 performances, we’d have about $50,000 in revenues generated. Even if we maintained 22 performances as projected, it would be $55,000 in sponsorship revenues; $5,000 is a significant amount of money for businesses that don’t necessarily see direct tangible results from sponsoring. For example, having a car dealership sponsor the performances may not lead a consumer to be going to purchase a car from them for just because of a performance sponsorship. The consumer might just need a new car and chose this one because the product suited their requirements. When firms cut costs, sponsorships are one of the the first items to go.

Out of all of this: Be realistic in your assumptions taking a on-the-ground approach to assumptions.

Based on all of this, we’d see revenues of the following:

Performance rentals: $288,000
Meetings: $51,000
Sponsorships: $50,000
Conferences: $561,600
Total revenues: $950,600

When we assess the costs, we already showed $240,000 related to performances ($160,000 for the performance itself, $80,000 for marketing of all 20 performances). We have to also assess the management and directorships of the building with the following assumptions:

Executive Director: $80,000
Executive Assistant: $50,000
Financial Director: $60,000
Front of House Manager: $50,000
Box Office Manager: $50,000
*Meetings & Conferences Director: $70,000
**Production Manager: $70,000
Customer Service: $40,000
Marketing Director: $50,000
Facility Manager: $50,000
Custodian: $45,000
Total wages: $615,000
Benefits (25%): $153,750
Total Payroll & Benefits: $768,750

*This role includes the role of someone who would be searching out for firms to host their meetings & conferences at this facility; savings of $40,000.
**This role includes the AV / Production Manager that was forecasted to be included. Assumption is the person in this role would have AV experience; savings of $50,000.

From just these revenues and expenses, we’d have a profit of $172,000. The CBRE report has it at $274,000. Based on some of my own revised assumptions, if we boost the performing arts surcharge to $5/ticket, at 800 seats for 20 events, we’d have $80,000 in revenues. Retail/merchandise is unchanged from the CBRE projections at $67,000 given a $1 per capita and 50% cost of goods sold this makes sense. Food & beverage in the assumption here would still be outsourced. For M&C days with delegates ranged between 39,000 and 50,000, assuming 50,000 here, we’d have 50,000 delegates and $25 per capita instead of $19.80, and raising the commission to 20% from 15%, we’d have revenues of $250,000. The AV rentals would remain unchanged at $131,000. In total, we have: $528,000 in other revenues, bringing total revenues to $1.479 million.

Other expenses such as the professional fees and finance charges (interest, credit card, etc.) would be unchanged as would IT and Communications at $49,000. Marketing and sales would have a budget of about $35,000 in the first year as opposed to $43,000 because the assumption is we would have good performances and word-of-mouth instead of hard print/electronic advertising. By keeping utilities the same as the cost of utilities such as water and electricity continue to increase, it would be $229,000 per the CBRE projection. The management fee should be reduced to $100,000 and outsourced still by a 3rd party. A capital replacement percentage is a good allotment of resources because we’re able to be responsible by maintaining equipment for an ongoing basis instead of when the item fails and could cost more. However, the amount is debatable so for argument sake the assumption is 2% of gross total revenues for the first year at $19,000. In sum, we have the total costs for a first year:

Performances: $240,000
Payroll & Benefits: $768,750
Retail/Merch. Cost: $33,000
Other expenses: $49,000
Marketing (facility): $35,000
Utilities: $229,000
Management fee: $100,000
Capital asset replacement fund: $19,000
Total expenses: $1.474 million

Finally, our bottom line: $1.479 million in revenues less $1.474 million in expenses, we’re left with a profit of $5,000. This is far better than the $493,000 loss that CBRE was projecting. Of course, any of these metrics can change but we have to be practical in our approach to the cost side of operations.

In short, the best way for this project to be a financial success: Don’t follow the advice to a tee. Historically, the City of Sudbury has followed the advice of a consultant and the costs related to projects end up going over budget. Instead, take a realistic approach to assessing the projections of a major investment such as the Junction project. You can still generate a profit at this point because it has not yet been started so you can adjust the costs related to personnel, marketing, and other expenses. Focus on areas that can be reduced even by a small amount because we see that it yields large results. Furthermore, don’t be concerned about raising the prices on revenue-generating items such as the service charge to the tickets and commissions on the food & beverage. At the same time, consider increasing the rates on small meeting rooms because your demand will be higher for those than a huge room with 13,000 sq. ft. By managing the expectations for the first year of operation while increasing the sources of revenue that are within the control of operation, profitability is possible.

But what about the library and art gallery?

The art gallery would be best suited to attract private capital via one donor. Regularly relying on the municipality for proceeds for operations is one thing, but for the bulk of the expenses and for the capital expense of the project would be best suited to have a single donor with a capital contribution equal to or almost near the amount required for building. The total estimated cost in 2018 was $12.407 million for the art gallery. Finding a $10 million donation for the building will support more than 80% of the cost of the building, thus limiting the amount that would have to funded through government sources. Even if you managed a $5 million donation, this would support 40% of the cost of the art gallery capex. It was discussed that the Franklin Carmichael works are valued at $3.5 million. Bear in mind that these works are not in cash rather a tangible item that audiences come to see, making it somewhat unrealistic to monetize these paintings unless borrowing against the value of the works. In addition, it was almost reviewed that $1.5 million in capital could be raised for the art gallery. I would argue more could be raised and it has to be looked for beyond Sudbury; examples are the donations to Laurentian University for some of their latest buildings.

One way to raise private funds would be to address the operations of the art gallery: focus on new exhibitions and expanding the collections. For example, prior to opening, seek out highly popular exhibitions for the art gallery to attract an audience that would yield a return on investment for the donation. Ensuring excellent exhibitions would support private capital knowing people will visit the art gallery because there’s a captivating and well-known exhibition being held. This in turn will support other exhibitions for viewing at the new art gallery, the setting in which will make exhibition curators want to display the works.

Moreover, we have to move beyond just local talent. Indeed, having local talent display their works will congeal the city to recognize the impressive abilities of local artists, and by pursuing this avenue, we can make those works part of the permanent collection. However, audiences also want to see more than Sudbury and Canadian talent: they want to see international works as part of the permanent collection. Many are interested in the mid-19th century works, and the suggestion here is not to pursue 300 pieces, rather, a small number that would make it worthwhile for attendees because these works are not always seen in Canada, but they can be viewed in Sudbury.

That being said, Canadian talent is important and those world-renowned artists would be an invaluable contribution to the permanent collection. Artists that are on display at the Art Gallery of Ontario — prestigious pieces, not lesser-known works — would be important to bring to Sudbury. Part of the problem that has existed in Sudbury is the location of the art gallery (Belrock Mansion). The site is small and doesn’t function well for an art gallery because of the layout and structure being so old. The new facility will allow for the opportunity to have increased visitors because of the large space and for new works to be displayed. Right there, you’re able to increase the amount of revenues via the two existing streams: admission and venue rentals. Currently, your admission is by donation or you can purchase a membership ranging from $20 for a student to $60 for a family, per year. A flat admission rate is going to have to be charged; you cannot have admission on a donation basis because financially it does not work as this is a business. You need to generate revenues.

In the 2018 report brought forward for the Art Gallery & Library, they projected out the visitors to be some 7,300. Reconfiguring the numbers, here’s what I think could be accomplished in Year 1:

Adult (25–64): Rate, $10, 4,000 visitors
Senior (65+): Rate $7, 1,500 visitors
Student (13–24 w/ student ID): Rate $5, 1,400 visitors
Child (under 13): Rate $3, 500 visitors
Groups, non-school: Rate, $6.50, 400 visitors
Groups, school: Rate, $4, 400 visitors
Total admissions revenues: $63,200

This isn’t unrealistic for a first year. When we look at memberships, if we sell 100 memberships at $60, we’d have $6,000 in revenues; it was presented in the original report at $3,400. We’re simply raising the price and the number of memberships to sell based on the expectation as having top exhibitions and works in the permanent collection. Programming is a large own-source of revenue for an art gallery. As such, the Art Gallery of Sudbury had said in their ‘16-’17 year they earned more than $89,000 in educational & programming revenues. Given we’ll have a larger, more aesthetic space, it could assumed a 40% increase in revenues from this source, resulting in $124,600 in revenues in the first year. Fundraising is another item for revenues but it’s generally lower on average because of the amount of work that goes into a gala fundraising event, so it’s reasonable to assume revenue generation of $16,000 since the report outlined $20,000 in following year from the base year ($14,000). Rental of the space is also another key source of revenue, and the $20,000 that was originally projected is not unreasonable. Revenues from the café could be assumed at $15,000 since it’s a brand new space and generally patrons will visit anything new for the experience of it and to “try it out.” Finally, there are the retail sales, which we could assume would be around $60,000 given this is a new space and more people will visit for that reason, and the likelihood of buying something from the gift shop will increase, plus, the budget for this item in ‘17-’18 was $34,000, and we’re now looking at 2023.

Given all of this, here’s what the First Year revenues would look like:

Admissions: $63,200
Memberships: $6,000
Programming: $124,600
Fundraising: $16,000
Other revenues: $15,000
Retail: $60,000
Rentals: $20,000

Total revenues (non-grants): $304,800
Including grants ($400,000 +30%), existing endowment ($20,000), and private support ($53,000), total of $593,000
Total revenues (including grants and other existing sources): $897,800

The revenues of this aspect of the Junction project don’t look bad either. If we consider the same costs — less occupancy — we’d have the following based on my own revised assumptions:

  • Salaries: $332,800 (+30%, $433,000); to accomodate the increased space, additional workers need to be hired
  • Exhibitions: $53,500 (to $120,000); as a result of increased capacity, new and more exhibitions can be displayed requiring additional resources to showcase and market to the public
  • Education & Programs: $24,000 (to $70,000); same as above, with the increased capacity, programs and education can be increased
  • Conservation/Curatorial: $47,400 (to $50,000); unchanged
  • General & Administrative: $39,300 (to $45,000); increased as a result of increased complexity to operations
  • Marketing: $9,800 (to $30,000); with a new space, marketing has to be effective for the gallery as a whole beyond the exhibitions
  • Cost of Fundraising: $11,000 (to $16,000); unchanged
  • Cost of Goods Sold, Retail: $21,700 (to $50,000); increased due to a new café to be held inside the building
    Total expenses: $814,000

Many of the expenses are fairly estimate with exception to the exhibitions, however, it’s in-line with what galleries of the same size are reporting. Finally, we have the net income, or, as with non-profits, the “revenue (loss) over expenditures”:

Revenues: $897,800
Expenses: $814,000
Revenue (loss) over expenditures: $83,800

In the projections, there was a nearly $80,000 shortfall that needed to be made up with private funding or government support. There’s nothing incorrect with projecting that because salaries are far higher than what is assumed above, and exhibitions are slightly more based on the report. Much of these assumptions are based not only adjustments to the projections, but also includes a pragmatic approach and what other galleries might be doing, in addition to the local market for such a venue as the art gallery. These numbers are not unrealistic and can be achieved if we have clear communication, an exceptional team, and everyone is on board with making this the top gallery in its field.

I’ll close out this section with a few comments on the library. First, other branches have to close, and this would be the only branch available. There has to be synergies with the library to make it financially viable under this new project. Second, it’s difficult to find private donors for a library because not everyone uses them and the services offered are not always necessary for a majority of people. That being said, finding donors is not unrealistic as there are families, organizations, corporates, and individuals who support learning and this is the very function of a community library. At the same time, as the social divide grows, it’s an opportunity for a donor to market their donation as a way to help those who are underprivileged and need access to books, computers, and resources needed to help them grow their knowledge and have a better future for pursuing higher education or trades. Ultimately, the library can’t be charging nearly as much for its services as a performance center because no one would use the services. However, with a library attached to the art gallery, it makes it much easier to receive funding because it would fall under the same umbrella as an art gallery.

Finally, with this project, there is a lot of discussion about parking. Although it’s a concern, it’s almost secondary because people can walk to it from another part of downtown. The argument of lack of parking downtown is exhaustive and it’s never ending; people are tired of hearing about it. “Build up” with the parking is one of a couple of ways to make it accessible. Street parking, and an open-air parking lot are certainly other options but building a parking garage should not be ruled out because it’s the most effective way to bring traffic not only downtown but to the Junction project.

Overall, the project is a good one and it has many components to it that make it worthwhile. The important thing is to not delay moving it forward. The Mayor of Sudbury said it’s “absolutely moving forward,” and this should be seriously taken to heart. For a long time, Sudbury’s arts scene has been underwhelming and the community for it is very strong. Moving forward with an art gallery is unquestionably a great idea. The same for a central, 1-location public library: we can synergize this entire division of services while having a great new facility. The performance & convention center is a no-brainer. Many firms, organizations, and entities want to have a single space that encompasses so much of what can be offered. The hotels are old and outdated, and the food is underwhelming. This new center can be a driving change for the city. The project make fiscal sense, let’s make it a reality.

Austin Martin is a graduate from the Master in Corporate Finance program at SDA Bocconi in Milan, Italy. He previously earned a Bachelor of Business Administration majoring in Finance with Honors from Laurentian University in Sudbury, Canada.

References

L., S., & A. (2018). Greater Sudbury Public Library and Art Gallery of Sudbury: Co-Location Facility and Business Plan Final Report (pp. 1–111, Rep.). Sudbury, ON: Of City of Greater Sudbury.