There is trouble brewing in paradise.
Last week, the producers of the Broadway musical Paradise Square filed paperwork with the U.S. Securities and Exchange Commission to increase its initial capitalization costs from $13.5 million to $15 million. The move, which comes more than one month after the show opened at the Barrymore Theatre, has industry insiders puzzled.
“I am not aware of any show that has done this,” remarked John Breglio, an attorney who worked on hundreds of plays and musicals for nearly four decades before becoming a producer. Other theatre lawyers and general managers with decades of experience also reported never seeing anything like it.
According to the New York Attorney General’s rules, all of the money for a Broadway show must be in the bank on or before “the first public performance of the theatrical production,” which would ordinarily mean its first preview performance. But, a couple of decades ago, theatre lawyers made a handshake deal with the government to extend the deadline for raising the initial capitalization costs to opening night.
As a result, “it is not very unusual for producers to be accepting investments during rehearsals and even into previews,” observed Jordan Roth, the president of Jujamcyn Theaters, which owns five Broadway theaters. Racing against the clock, Broadway producers sometimes scramble to find the final funds necessary to complete the initial capitalization costs of their shows.
One group of investors, who provided the money to finish financing one musical at the last minute, even decided to name their production company “Under the Wire.”
Despite experiencing some cash flows issues during rehearsals, the producers of Paradise Square reported that all of its $13.5 million initial capitalization costs had been raised before opening night. According to a government filing, 58 financiers had invested in the private offering.
However, after receiving mixed reviews, Paradise Square has struggled at the box office. The show has not been able to fill more than three-fourths of its seats or make more than $260,000 in ticket sales each week since it opened, well below the $598,500 weekly operating costs estimated in its original financial documents.
Running in the red since it started performances, the musical has likely depleted the $1.7 million set aside in its original budget to cover any weekly losses.
But, the team behind Paradise Square does not yet think that paradise is lost.
The musical received 10 Tony Awards nominations last week, and demand for tickets to the show spiked on the Broadway ticketing website TodayTix. “The show is finding an audience,” stated its creative and marketing producer, Garth Drabinsky.
In an effort to keep the show running until at least the Tony Awards next month, the producers are now increasing the amount of their offering an additional $1.5 million. The possibly unprecedented move might mean that the show is seeking new outside investors, allowing people to become producers after the show already opened, received reviews, and collected Tony Awards nominations.
Usually, when a Broadway show is struggling to survive, its producers will often ask members of the creative team to reduce, defer, or waive their royalties in an effort to lower the weekly operating costs. The general manager will also often try to trim any expenses that are not fixed in the budget, such as the advertising costs.
In some cases, some Broadway producers will even put more money into their shows, making a priority loan, which would be repaid before any money is distributed to the original investors.
Some industry insiders suspect that the increase in the initial capitalization costs after the show opened might be connected to a so-called “overcall” clause, which allows the producers to require investors to cough up more cash equal to sometimes as much as 20% of their original investments. The provision is rarely used anymore, because it is “a terrible idea,” wrote one lawyer.
If some of the investors do not provide the additional funding when demanded, then the producer would need to sue them for the money. But, in addition to the considerable costs of litigation, getting a court judgment could take years, and the producer needs the money now.
In addition, the producer would likely burn his bridge with the investors. “I wouldn’t want anybody coming back to me for more money, particularly when a show’s in trouble, and, really, money rarely affects the outcome,” remarked the late producer, Hal Prince.
Fortunately for the investors of Paradise Square, the limited partnership agreement for the show does not contain an overcall provision, and the explanation for the baffling move might lie in another part of the complex legal document.
The agreement states that, after all of the money for the show has been raised, “no additional [co-producers] may be admitted without the consent of a majority in interest of [all of the other co-producers].” But, if the initial production expenses of the show before it opens on Broadway are more than the amount of money the producers originally raised, then the lead producer can bring on new producers, and the new producers would only dilute the interests and entitlements of the lead producer.
In other words, if the producers of Paradise Square somehow botched its budget and the show ended up costing more money than initially planned, then they would be able to seek new outside investors now. One industry insider thought that the reported budget was “shockingly low” for its size, commenting that the show should cost between $18 million and $20 million.
While the producers of Paradise Square declined to discuss the financial aspects of the show, it is clear that they need more money. In addition to paying the weekly operating costs and the expenses associated with an advertising campaign for the Tony Awards, the production was sued for failing to pay its former director of group sales last week.