Staff at Montgomery County’s Department of Economic Development incorrectly calculated the expected economic impact of a 2006 Bethesda theater project, telling the County Council the project was worth twice its actual value, a report by the county’s Office of the Inspector General says.
The Bethesda Theatre, whose art deco marquee has decorated Wisconsin Avenue since 1938, closed in 2010 after its owner defaulted on the mortgage, leading to a loss of more than $2.5 million for the county, the report says.
The report, released Tuesday, criticized the process the county used to award economic development grants for projects such as the one for the theater, and the county has said it will make changes to the process.
County staff also used an incorrect equation to estimate the potential economic impact that revitalizing the theater could have on the surrounding area, and didn’t tell the council that the county could be obligated to repay a state grant for the project, the report says.
The Bozzuto Group of Greenbelt bought the theater for $3.5 million in 1996, expecting to build apartments or condominiums attached to the theater.
As part of the agreement to approve the residential construction, the county planning board required the preservation of the theater’s exterior and interior, and the building would have to include either a movie theater or performance space.
In 2003, Bozzuto formed the Bethesda Cultural Alliance, which became the new owner and renovated it using Bozzuto construction crews to do much of the work, according to the report.
In 2003, the County Council approved a $375,000 economic development fund grant for the alliance to fund renovation of the theater.
In 2005, Bozzuto sought more county assistance because the project cost more than expected and a federal tax credit didn’t come through.
The county’s Department of Economic Development proposed a $1.5 million grant in May 2006.
At the time, the office estimated the cost of the project to be $11 million, for which the state provided a $2 million guaranty for the project’s first mortgage, and Bozzuto providing another $2 million guaranty. Bozzuto received the grant with the passage of the fiscal 2007 operating budget.
Later in 2006, the council endorsed a $675,000 grant for the theater renovation from the Maryland Economic Development Assistance Authority and Fund, money for which the county could be liable.
The theater opened in October 2007, with expectations that it would host off-Broadway shows and other performances. But the recession soon limited the theater’s ability to generate profits, the report says.
In 2009, the Bethesda Cultural Alliance terminated its agreement with the New York-based company it had contracted with to put on productions, claiming the cost of staging them was too high. In 2010, the Bethesda Cultural Alliance closed the theater and defaulted on its mortgage, leading BB&T Bank to foreclose on the building. It later became the Bethesda Blues and Jazz Supper Club.
The cultural alliance dissolved in 2012. A Bozzuto spokeswoman did not respond to a request for comment Thursday.
The county made $1.875 million in economic development fund grants to the cultural alliance, along with paying $717,300 to the state to pay back the MEDAAF grant plus interest, totalling more than $2.5 million in costs to the county.
But the report argued that the project was not totally without benefit.
“The historic theatre was preserved and renovated, and there is an entertainment entity operating in it. The housing stock has increased, and there is more taxable square footage,” the report says.
Also, the Whitney apartment and condominium complex built as part of the project is assessed at more than $77 million.
But even if there’s a silver lining, the project found dark clouds.
The standard governing how applications for economic development fund grants are assessed for the project’s economic viability “lacks specificity, and its intent is unclear,” according to the report.
“The regulations do not contain clear guidelines as to how the financial viability of the funding recipient should be considered,” it said.
The report also faults the information provided to the council and public on the economic development grants for the project, which was based on incorrect calculations.
The data were calculated using an incorrect multiplier, a method used to try and quantify the direct and indirect effects of a project.
The county thought the project could bring about $13 million. The correct figure was about $6.5 million, according to the report.