CITY OF COUNCIL CYNGOR DINAS CAERDYDD

CABINET MEETING: 20 NOVEMBER 2014 ______

CHAPTER ARTS CENTRE

REPORT OF DIRECTOR OF SPORT, LEISURE AND CULTURE AGENDA ITEM:4 ______

PORTFOLIO: COMMUNITY DEVELOPMENT, CO-OPERATIVES AND SOCIAL ENTERPRISE (COUNCILLOR PETER BRADBURY)

Reason for this Report

1. This report seeks Cabinet approval for the Council to issue a new lease of 125 years to Chapter Arts Centre, which should be seen as part of a wider, strategic partnership in the arts to benefit the residents of, and visitors to, Cardiff. The new lease would give Chapter Arts Centre security to develop its services and obtain external funding. The current 51 year lease held by Chapter Arts Centre was completed in April 1991. Chapter Arts Centre has a strong reputation in the arts and issuing a new lease would fit with the Council`s stated intentions to partner with key organisations to ensure delivery of services to the public in this time of financial restraint. The significance of the arts and cultural sector has been identified by the Council in its emerging Corporate Plan as having a key role to play in making Cardiff the most liveable city in Europe, and follows the leader`s series of `Cultural Conversations` that have been held recently with key bodies involved in arts and culture within the city.

Background

2. Since it was founded as an arts and education charity over 40 years ago, Chapter Arts Centre has been a focal point in Cardiff for community regeneration, arts engagement, production, presentation and education. Chapter began life as an ambitious and ground-breaking venture and still aims to push the boundaries of what can be achieved in the promotion of the arts and how the arts, cultural and creative industries can enrich communities. It has become one of Cardiff’s landmark cultural facilities with an international reputation which extends beyond the City’s boundaries and beyond . Chapter directly employs 120 staff across the main charity and its trading arm and has a consolidated company turnover i.e. charity and trading arm that is around £4 million annually. When staff of the 32 creative companies based at the site is factored in, close to 300 people work directly out of Chapter; that is a significant

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employment hub within the city. Chapter welcomes 800,000 visitors annually, a figure that is on course to be exceeded this year. 3. Chapter is an accessible and diverse, multi-function arts centre; it operates through a company limited by guarantee - Chapter (Cardiff) Ltd (company number 1005570) which is also a registered charity (charity number 500813). In addition, the charity controls a trading subsidiary, Chapter Trading Ltd (company number 6133709) through which passes all revenues and expenditure related to Chapter’s non-charitable activities.

4. The charitable aims and objectives of Chapter (Cardiff) Ltd are stated in its constitution as:

Objects – ‘the promotion, maintenance, improvement and advancement of education, particularly by the improvement of public tastes in the arts, including the arts of drama, mime, dancing, singing and music, painting, sculpture and film’

Aims – ‘to provide support for cultural organisations and artists in parallel with the provision of public programmes of contemporary arts, principally in film, theatre and visual arts, as a means of achieving its objects.’

5. Chapter’s Managing Director reports to a board of trustees of the charity. The staff team is augmented by a further team of volunteers, undertaking a range number of specific duties, such as theatre and cinema ushering.

6. Two buildings are occupied by Chapter in the Canton area of Cardiff at Market Street: the former Canton High School building (“the main complex”, a large collection of former school buildings), and Market House (a self-contained complex of small offices). The former Canton High School complex is occupied through a 51 year lease with 28 years remaining from the City & County of Cardiff at a rent of £10,250 per annum; the freehold of Market House was acquired by Chapter in 1994. In addition Chapter are holding over on a separate lease for the car park to the north of the Centre and they pay the Council an additional £1,550 per annum. Scope for the Council to determine the future operation of the Ty Canna site adjoining Chapter Arts Centre and the car park will be maintained.

7. The main complex was extensively redeveloped in 2008/09. Chapter is now made up of the following elements and facilities:

• Café Bar ‘social space’ covering the full length of the main building between either front and rear entrance; food and beverages are served throughout opening hours • Home to 32 creative businesses in Market House and the main building; these include Ffotogallery, Theatr Iolo, Spinning Head Films, Bafta Cymru and Earthfall Dance • One 120 seat capacity theatre venue • Two rehearsal studios ; Llofft and Stiwdio – Stiwdio can also double up as a performance space with a capacity of 60

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• Two cinema spaces; one with a capacity of 190 and the second 57 • One dedicated visual arts gallery • Two dedicated dance studios where local community classes take place • Five meeting rooms • Dedicated artist studios

Issues

8. Chapter now has capital development plans and funding requirements which mean that the current lease arrangements are no longer fit for purpose. A longer lease should allow Chapter to:

(a) plan with certainty for a major new capital development of the main Chapter premises, “the Capital Alliance Project”, a project involving partnership with other Cardiff-based arts organisations, and Cardiff University to create:

• Expanded and additional self-sustainable facilities for Chapter such as extended gallery space to meet the cultural tourism ambitions of the city. • Expanded and permanent rehearsal and performance facilities for existing Chapter resident companies • State-of-the-art creative industries and digital media hub for Cardiff University that builds upon the essential role Chapter plays in the development of the creative industries in the city.

(b) plan for a sustainable future beyond that capital project

(c) increase options for Chapter to be able to attract future funding, finance and other investment through partnership arrangements, such as joint ventures

9. The case for the City of Cardiff Council issuing a new lease to Chapter Arts Centre is strong due to the following:

(a) the historic financial and social investment into the site, made over more than 40 years, leveraged through Chapter’s community activities, its charitable status and its position as an international centre for the arts.

(b) the historic contribution made by Chapter to the physical and social regeneration of Canton and surrounding areas as a vibrant community (over the last 40 years, Chapter has been able to leverage in over £5 million of capital revenues to upgrade Chapter. As well as the capital redevelopment monies in 2008/09 this includes provision to upgrade meeting rooms, install solar panels and create the community garden. The sources of this funding have included ERDF, Welsh Government and in excess of £500,000 from trusts and foundations based in London).

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(c) Chapter’s contribution not only to the social and cultural fabric of Cardiff, but its economic impact where every £1 into the arts produces £6 into the wider economy.

(d) the future strategic plans of Chapter and its partners, all of which will have a beneficial social and economic impact on the future of the City & County of Cardiff, its cultural ambitions, its economic ambitions and its ambitions to continue to grow as a City of international renown.

(e) The logical development of the long-term asset transfer relationship which has already subsisted as a result of the partnership between Chapter and the City & County of Cardiff over the last 40 years – Cardiff provided initial short leases to the founders in 1971, followed in 1991 by the current 51 year lease. To move to a longer lease is a logical continuation of this pathway of engagement between the Council and Chapter.

Partnership

10. The new lease would be recognised as part of a wider partnership proposal. Discussions held to date have identified that there is great scope for joint working between the Council and Chapter Arts Centre for the common good of the arts in Cardiff and in growing the sector for economic and social benefit. Opportunities being discussed include the delivery of Youth Arts provision in the Canton area using other Council premises; providing the first port of call for inward investment advice and strategic development for creative and cultural SME`s; making a contribution to the operation of the proposed Welsh Language Hub, and cementing the work with the Council`s Arts professionals in outreach and development work including the Cardiff Contemporary Festival.

The Proposed Lease

11. The intention is for the Council to provide Chapter with a 125 year ground lease for the Arts Centre based on the following terms:

• A 125 year Lease at a peppercorn (nil rent) • Tenant will be responsible to fully repair and insure the property • Restrictive User Covenant – to restrict use of the property for the duration of the lease for arts based and supporting activities only • The Lease will be personal to Chapter and no assignment of the lease will be allowed

12. The lease will make clear that in light of foregoing the annual rent of £10,250 per annum under the current lease, for the duration of the new lease the Council will expect to receive equivalent value of partnership benefit in return.

Local Member Consultation

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13. The view from Cllr Elsmore, Cllr Cook and Cllr Patel is that they would support the issuing of a 125 year lease to Chapter with peppercorn rent. Members believe that in addition to the lease, there should be a partnership agreement between the Council and Chapter, which would outline the commitment of both organisations to work together for the benefit of arts and culture in the locality and city-wide. This would run alongside the lease, but the issuing of a lease would not be dependant upon such a prior partnership agreement being in place. Members are keen that the new lease be granted on an understanding that Chapter will work to fulfil its charitable educational objects, and that within that work, will impact on wider matters including health and social care.

Reasons for Recommendation

14. The shared ambitions of both Chapter Arts Centre and the City of Cardiff Council to grow the arts for the social and cultural benefit of residents and visitors, and the need for longer term security for the Arts Centre in order to progress with its development plans, provide justification for a new, longer term lease to be issued. The lease is part of a wider partnership that both parties are keen to grow over time. The recommendation fits with the Council`s aim to support the third sector and develop partnerships to enhance the quality of life of residents.

Legal Implications

15. The Council has an obligation under s123 of the Local Government Act 1972 to obtain the best rent reasonable obtainable when it grants a lease. However the Council may grant a lease at an undervalue of up to £2m in accordance with the General Disposal Consent (Wales) 2003 where it considers that the lease will be in the social and/or economic well being interests of its area and in accordance with its Community Strategy

Financial Implications

16. This Report recommends that the Council issues a new lease of 125 years with a peppercorn rent to Chapter Arts Centre in accordance with the Heads of Terms set out in Appendix One. The lease will be a full repair and insurance lease so there would be no liability on the Council, as is already the case under the existing lease, to maintain the property. The Council currently receives an annual rent of £10,250 per annum under the current lease which has 28 years remaining on it and therefore this income would be lost. The rationale for forgoing this income is to provide the venue with additional financial stability to support its wider development plans. The Report also identifies that a separate lease for the car park to the north of the Centre remains in place with the Council receiving an additional £1,550 per annum.

17. The Report sets out that above Chapter's contribution to the social and cultural fabric of Cardiff its economic impact is that every £1 into the arts produces £6 into the wider economy.

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18. Appendix 2 is a document Chapter Arts Centre has provided which sets out the financial position of the organisation to support the case for the financial stability of the facility. This identifies the venues reducing reliance on the funding it receives from external bodies and identifies that over a period of years the organisation has reduced the negative unrestricted reserves to almost nil. However the document acknowledges that re-building reserves will take a number of years.

19. As the Council will be reducing the current income it receives Cabinet will need to be content that the income forgone can be justified on the basis of the facility both delivering an ongoing and increasing economic impact for the city and also that its financial position is secure. The loss of lease income would need to be factored into the Council's financial position from the date the new lease is signed. The proposed draft lease gives responsibility for repairs and maintenance to the tenant (Chapter), although there is no contingency budget to factor in such repairs. This is a matter raised by the Economy and Culture Scrutiny Committee on 6 November 2014, with the comment that although the Committee didn`t question the ability of Chapter to maintain the building and raise the required funds, it recommended that this should still be highlighted within the report to Cabinet.

20. It is proposed that each party will bear its own legal costs in completing the lease.

RECOMMENDATIONS

Cabinet is recommended to agree that:

(a) The City of Cardiff Council issues a new lease of 125 years with peppercorn rent to Chapter Arts Centre, reflecting the Heads of Terms contained in Appendix 1

(b) Authority be delegated to the Director of Sport, Leisure and Culture in consultation with the Cabinet Member for Community Development, Cooperatives and Social Enterprise to negotiate the details of the lease and a separate partnership agreement with Chapter Arts Centre.

CHRIS HESPE Director 14 November 2014

The following appendices are attached to this report:

Appendix 1 – Draft Heads of Terms Appendix 2 – Chapter Arts Centre – Financial Summary

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Appendix 1 Draft Heads of Terms

SUBJECT TO CONTRACT

DRAFT HEADS OF TERMS & CONDITIONS FOR A NEW LEASE

Target Date for Completion: To be confirmed

Premises: Chapter Arts Centre, Market Road, Canton, Cardiff, CF5 1QE, identified red on the subject plan (plan to follow).

The car park will be excluded from this Lease.

Landlord: Cardiff City Council Economic Development Strategic Estates Department The Courtyard County Hall Cardiff, CF10 4UW

Contact: Steve Myers Tel: 029 2087 2391 Email: [email protected]

Landlords Solicitors: Solicitor to the Council Contact: TBC

Tenant: Chapter (Cardiff) Limited Market Road Cardiff CF5 1QE

Contact: Andy Eagle Tel: 029 2031 1061 Email: [email protected]

Tenants Solicitor: To be confirmed

Term: A Lease for a term of 125 years.

Commencement Date: Target date for completion is to be confirmed.

Rent: The rent will be a peppercorn if so demanded by the Landlord.

Insurance: All insurances associated with the building, building contents and public liability will be the Tenants responsibility.

Business Rates: The Tenant will be responsible to pay business rates for the property.

Fitness for Purpose: The Landlord does not warrant that the property is in sufficient condition or is fit for purpose and the Tenant takes the same in its existing condition and will claim no diminution by reason of the condition or fitness of the property.

Repairs and The Tenant will be responsible for the internal and external repairs Maintenance: to the property.

Permitted Use: The property will be used for the delivery of various arts based and ancillary activities.

Alienation: The Tenancy will not be assigned or sub-let in whole. Sub-letting of part will be permitted for the incubator accommodation.

Statutory Obligations: The Tenant will be responsible for undertaking all statutory tests in relation to the property after signing the Lease

Landlord’s Covenants: Quiet Enjoyment.

Costs: Each party is to bear their own legal costs to complete this new Lease.

Rights Granted to the A right of access for vehicles and pedestrians to access the Tenant: demised premises over Council’s land.

Indemnity: The Tenant is to indemnify the Landlord from and against all actions, claims, costs, demands, losses and expenses whatsoever in respect of loss of life, personal injury, damage or any other loss howsoever caused, arising out of or attributable to any negligent or otherwise wrongful act or omission of the Tenant, its employees, servants, agents, workmen or its members.

Notices/Consents/ All notices, consents or approvals required under the Lease must Approvals: be in writing and valid if given by hand or sent by registered/recorded/special delivery post and if served on the Landlord at the address shown in the Lease or if served on the Tenant at its registered address.

Strategic Partnership The Council in lieu of determining the existing Lease at a rent of Arrangement: £10,250 per annum and granting the proposed 125 year Lease at a peppercorn rent, expects to receive an equivalent value of partnership benefit as the existing rent from the Tenant in return for granting the new Lease.

Conditions: These Heads of Terms are issued subject to:

1. Contract 2. Cabinet Approval 3. Any other terms deemed necessary by the City Council’s Solicitors

Appendix 2 Chapter Arts Centre Financial Position (taken from the submission of the proposal for enhanced security of tenure by Chapter Arts Centre to the City of Cardiff Council, October 2014)

Restricted Funds Accounting:

Chapter (Cardiff) Ltd is a registered charity; as such, it is a regulatory requirement that its income and reserves are segregated into two types of funds:

‘Restricted’ funds – these are funds which have been given to the charity for specific purposes; such funds must be accounted for separately and the charity must be able to demonstrate that the funds have been spent on, or are being held for, the purpose for which they were given

‘Unrestricted’ funds – these are funds which have been given to the charity for general, unspecified purposes or which the charity has generated itself (perhaps from trading or similar activities); the charity is free to spend such funds as it sees fit, though obviously within its charitable aims and objectives.

Charity Trading Arms: It is a common feature of charities with significant non-charitable commercial activities for their non-charitable income and expenditure to be channelled through a separate, trading subsidiary, or ‘trading arm’. The Charity Commission usually gives guidance as to what type of activities constitute trading outside of a charity’s core charitable aims and objectives. Trading which is regarded as directly linked to charitable aims and objectives will normally be permitted to be channelled through the charity (in the case of Chapter (Cardiff) Ltd, this will include amongst other items sales generated through its cinema and theatre operations as these are regarded as core to its charitable aims and objectives).

Chapter (Cardiff) Ltd also operates a significant amount of non-charitable, social enterprise trading through its café and bar operations. Such income and related expenditure is channelled through a separate trading arm, Chapter Trading Ltd.

As charities are normally exempt from corporation tax, it is usual for arrangements to be put in place for charity trading arms to covenant that any profits or surpluses earned are transferred to the parent charity; this arrangement is a standard recognised practice, acceptable to HM Revenue & Customs. This type of arrangement allows and encourages charities such as Chapter to undertake trading operations which will help fund their core charitable activities but which will not attract undue tax liabilities. Chapter operates just such an arrangement between Chapter (Cardiff) Ltd, the parent charity, and Chapter Trading Ltd, its trading arm subsidiary company.

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Chapter Trading Ltd:

The following summarises the trading subsidiary results for the last two financial 31 March 2014 31 March 2013 Sales 1,602,409 1,585,628 Cost of sales and administration costs (1,283,958) (1,255,624) Operating profit 318,451 330,004 Management charges to Chapter (Cardiff) Ltd (298,451) (350,004) Retained profit 20,000 (20,000) Net assets 2 (19,998)

During the last financial year, Chapter Trading Ltd therefore contributed a total of £298,451 to Chapter (Cardiff) Ltd, its parent charity. This figure is not untypical of the level of surpluses contributed to the charity from its trading arm over the last few years since the reopening of the main building after redevelopment in 2009. Chapter Trading Ltd is forecast to contribute £350,000 to its parent charity for the current financial year to 31 March 2015.

Chapter (Cardiff) Ltd:

The following summarises the audited accounts for the charity for the last two financial years:

31 March 2014 31 March 2013 INCOME: • Awards & donations 5,442 9,529 • Membership 15,124 11,325 • Sponsorship 14,634 14,237 • Core grant funding (i.e. ACW and Cardiff Council) 690,910 700,911 • Facilities & property income 282,599 268,259 • Gallery shop 18,827 22,687 • Theatre & cinema sales * 527,147 454,800 • Project funding ** *945,322 530,087 **54,949 6,537 • Capital grants & donations 298,451 350,004 • Management charges (to trading arm) 2,853,405 2,368,376 TOTAL INCOME Expenditure (2,755,088) (2,407,387) Net incoming resources 98,317 (39,011) *includes £832,566 of restricted funding **all this figure is restricted funding Total Charity Funds: • Restricted funds 3,427,887 3,323,510 • Unrestricted funds (581) (14,521) 3,427,306 3,308,989 TOTAL FUNDS CHARITY FUNDS INCLUDE: • Fixed Assets: 4,394,505 4,412,814 - mainly improvements to the leasehold buildings owned by Cardiff Council @ £3.547m - also includes freehold premises at Market House @ £355K

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• Total Liabilities (current and long-term): - includes loan against the freehold of Market House @ £675K 1,305,374 1,348,058 - also, although bank accounts were in credit balance at the balance sheet date, Chapter has an overdraft facility of £100K secured by an all asset debenture - includes accruals & deferred income (£446,851); mainly grants received against capital items in fixed assets

Chapter`s Interpretation of the Accounts.

(1) Chapter’s revenue streams are diverse and show a steadily declining reliance on public sector funding as a proportion of overall income over the last few years (just 18% for 13/14) with the bulk of revenues coming from trading activities and other self-generated revenue sources, such as cinema and theatre ticket sales, property rental and hire of facilities: 2013

“Project Funding” increased in 2014 because of a number of new restricted funded projects commencing during the financial year, most significantly the British Film Institute ‘Film Hub Wales’ project. As such, these have contributed to a significant overall increase in revenues, but have slightly diluted the overall proportion of revenues from trading, commercial and similar self-generated revenues. Nevertheless, “Core grant funding” reduces overall; in addition, it should be noted that all such projects will include contributions to core Chapter overheads and can therefore be viewed as contributing to Chapter’s overall sustainability.

“Core grant funding” represents annual funding from Arts Council of Wales ( £677,500 for 2013/14, but subject to a 2.5% cut for the current financial year 2014/15) and Cardiff Council ( £13,410 for 2013/14, already reduced from 2012/13 and now removed completely for the current year 2014/15).

(2) Following the redevelopment of the main Chapter site in 2008/09, the charity was left with negative unrestricted reserves and an unsustainable cost base. The charity had not made an operating surplus for as far back as anyone could recall (public sector funding in more generous times for the arts providing the ‘safety net’ to fall back on). This position has been turned around and Chapter’s unrestricted reserves deficit, largely a result of the combination of an unsustainable business model and the impact of the 2008/09 capital redevelopment, has now been eroded virtually to zero (£581). In short, Chapter has been modernised financially and operationally but has not lost sight of its core social, community and artistic role. Chapter can now look to build reserves, rather than focus on recovering a previously unsustainable position; this will however take a very long time, unless investment can be found from somewhere, or some other boost to the unrestricted reserves position can be found, such as an asset transfer of the main site. Whilst this alone would not generate a cash position, it would create an unrestricted reserve representing an asset against which cash or other investment could be leveraged.

(3) Chapter has strong cash flows, largely because of its café bar trading operations, other commercial trading from charitable activities (ticket sales and so on) and its funding relationship with Arts Council of Wales, which is paid quarterly.

(4) This resilient cash flow position is underpinned by the bank overdraft facility. Whilst Chapter would wish longer-term to reduce this reliance on short-term debt facilities and move towards a fully cash positive position, the charity’s bank account fluctuates well into credit each quarter and the bank is provided with the reassurance of the Arts Council funding being paid each quarter. Nonetheless, whilst not anticipated at any time, sudden withdrawal of the bank overdraft facility remains a risk to the charity. Strengthening of the charity’s

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balance sheet would both reduce this risk and the likelihood of it happening and would improve Chapter’s options to access appropriate replacement finance should the need arise.

(5) Chapter can demonstrate its ability to generate surpluses/profits from its trading operations. The trading company’s gross margins stand up well against catering industry averages at around 60% and Chapter Trading Ltd contributes a healthy profit to the parent Chapter (Cardiff) ltd every year. We see this improving going forward, though there are inevitably capacity limits to what is achievable and expansion is limited by lack of financial capacity within the charity.

(6) The principle issue for Chapter then, as revealed in the accounts and outlined in (2) above, is the lack of unrestricted reserves:

(a) cash flow is strong and funding lines are reliable and resilient, which means Chapter can manage its operations perfectly adequately within existing constraints;

(b) however, there are no funds available for investment or for contingencies, nor any unencumbered assets available which can be used to leverage additional finance for investment in longer-term plans;

(7) The majority of liabilities shown on the balance sheet are ‘bookkeeping’ entries against other balance sheet items. Chapter has a relatively low level of real debt finance; but it is worth pointing out that:

(a) this debt is fully secured against Chapter’s only real mortgage able asset – the freehold of Market House;

(b) this loan was only taken to contribute towards the funding package for the redevelopment of the main Chapter site; in other words, Chapter had to mortgage its only real asset in order to improve its landlord’s building;

(c) of the other fixed assets shown on the balance sheet, these primarily represent the investment into the redevelopment of the leasehold premises owned by Cardiff Council and have no practical application as far as Chapter’s ability to pledge them to raise finance or other investment; in other words, the lease Chapter holds is no use to any lender as security. The other assets are subject to a debenture to the bank to secure the overdraft facility.

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