The news that the House of Music, Arts and Culture (HMAC) recently filed for Chapter 11 bankruptcy came as a surprise to some members of the Harrisburg community, especially since the business was awarded a $1 million public grant less than a year ago.
But the grant’s sponsor says that HMAC hasn’t seen a dime of the money — and now that its owners have filed for Chapter 11 bankruptcy and putting it up for sale, it’s possible it never will.
David Black, president and CEO of the Harrisburg Regional Chamber and CREDC, said that HMAC hasn’t drawn any money from the $1 million Redevelopment Assistance Capital Program (RACP) grant it was awarded in December. HMAC’s owners must complete projects first and then submit a detailed reimbursement application to claim funds.
“No money has been delivered,” Black told TheBurg. “CREDC has been working with [HMAC] to prepare details for submission, but things have been on hold of late.”
CREDC is the designated recipient of grant funds as an accredited chamber of commerce. It also helped HMAC prepare the initial grant application for a nominal service fee, Black said.
RACP grants, which are intended to improve infrastructure and create jobs in redeveloping communities, aren’t cash awards. They’re “eligible reimbursement” grants, meaning that a recipient must first invest money in a project and prove compliance with grant guidelines to get repaid.
RACP reimbursements can only be applied to building and infrastructure improvements. They can’t be used to cover wages, programs, or business supplies and services.
An RACP award is also contingent on the project matching the grant funds twofold. For every dollar of the $1 million grant HMAC received, Black said, its owners must invest $2 in infrastructure improvements that raise the value of their building.
The significant up-front investment costs and complex documentation process make RACP grants anything but fast money, Black said.
“RACP is one of the most complex grant processes in state government,” Black said. “Sometimes it can take three to five years to get full reimbursement. It’s not a process for the faint of heart.”
HMAC’s owners weren’t considering a sale or Chapter 11 filing when they applied for the competitive grant program, HMAC managing partner John Traynor said.
Bartlett, Traynor & London LLC, the company that owns HMAC, filed for Chapter 11 bankruptcy in the U.S. Middle District Court of Pennsylvania on Aug. 23, one month after a social media storm reportedly cut into the business’s revenues.
According to Black, the bankruptcy and anticipated sale could complicate the process for receiving RACP funds.
Black said that many RACP recipients apply for bridge loans to make infrastructure improvements that they can later claim for reimbursement. A business under Chapter 11 may have a hard time securing private financing, he said.
He also isn’t sure that the $1 million set aside for HMAC would stay with the project if it changes hands.
“It’s uncharted territory,” Black said. “It will be interesting to see if [HMAC] can meet the requirements of the [next] application.”
If HMAC can’t complete the next phase of its application by the end of 2018, it could become ineligible to receive any RACP funds. The $1 million earmarked for the project would go back into the pot of grant money, Black said.
In that event, Black said that CREDC would lobby the state Office of the Budget, which administers the RACP program, to award the same amount to another project in Harrisburg.
Traynor acknowledged that the bankruptcy filing complicates the grant process, but said that HMAC’s owners continue to forge ahead. Their next step, he said, is to submit a schedule of construction projects and funding sources.
HMAC’s owners hope to expand the Capitol Ballroom and renovate the property’s basement to accommodate a music school.
Traynor noted that HMAC can exit Chapter 11 voluntarily, at any time. If their restructuring goes smoothly and they exit before the end of the year, they may have an easier time financing projects, he said.
He also hopes that HMAC’s new owner would continue the RACP grant process if they’re deemed eligible.
RACP was the first public grant HMAC’s owners pursued, Traynor said. The project did receive a $100,000 loan from Harrisburg’s now-defunct revolving loan fund, but Traynor says it was paid back with interest.
Barlett, Traynor and London LLC, the company that owns HMAC, has already sunk some $5 million into the project, including $2 million in personal cash, Traynor said. Most of that money went to rehabilitating HMAC’s once-derelict structure at 1110 N. 3rd Street.
The 34,000-square-foot building once housed Harrisburg’s first Jewish Community Center before becoming the Harrisburg Police Athletic League in the 1970s. It sat vacant for years before Traynor and his partners bought it from the Harrisburg Redevelopment Authority in 2007.
The $187,000 purchase price reflected the renovations that HRA made to the building under former-Mayor Stephen Reed, Traynor said. HMAC’s owners weathered the Great Recession of 2008 and opened their first bar and performance venue, Stage on Herr, in 2009.
The property went to sheriff sale five times in the next four years, Traynor said.
“I’ve always said this project has been a difficult one, and I’ve never said it didn’t have financial issues,” Traynor said. “But we overcame a lot of those.”
He said that the cost of renovating the historic property wildly exceeded anything he and his partners predicted. He cited construction costs as the single greatest stressor on HMAC’s finances.
At times, cost overruns ate into the business’s cash flow, Traynor said. He admits that HMAC had a hard time balancing books some months.
“Were checks returned? Absolutely, but there’s no shame in that and no intent to defraud anyone,” Traynor said. “It’s just part of business when you’re trying to keep the doors open, keep people employed, and bring great music to the city.”
Based on the documents that Bartlett, Traynor and London have provided in their bankruptcy filing, it’s hard to get a full picture of the business’s financial condition.
“Right now, there’s not much you can glean from the filing at all,” said Juliet Moringiello, an associate dean and bankruptcy law expert at Widener University Law School.
She said that more details will emerge when HMAC provides a full schedule of assets and financial affairs statement on Sept. 27 – the same day that HMAC’s partners will convene a meeting with more than three dozen creditors.
The filings do show that the business has $770,000 in unsecured liabilities. It also has a $2.6 million mortgage on its 3rd Street property, Traynor said.
Its property and merchandise assets total more than $5 million. A four-month budget that HMAC submitted with the filings shows that the business expects to turn a profit through the end of 2018.