Tuesday, July 29, 2014

Financing of the Noah's Ark Theme Park

For some time, Answers in Genesis (AiG), the group behind the Creation Museum, has had its sights set on establishing a theme park focused around a replica of Noah's Ark.  Originally viewed as a $172.5 million project, the park's plans have been revamped to entail a $73 million initial phase due to slower than expected funding. It is this first phase that has recently been submitted for approval of tourism sales tax rebates from the state of Kentucky. Given this background, I thought I would share a few thoughts about the project's finances, thoughts that are admittedly limited due to the paucity of publicly-available information. I have no interest in speaking about the underlying religious and scientific debates or whether tourism tax rebates are appropriate, but instead will stick to the accounting as it pertains to the project's funding...

As stated above, the first phase of the project is estimated to cost $73 million. To pay for this, the organizers sought a combination of donations (a goal of $29.5 million) and borrowing through a municipal bond issuance (an offering of up to $62 million). With great fanfare, the organization declared in February that sufficient funds had been raised to begin construction. At that time, $14.4 million of donations had reportedly been raised; today, that figure stands at $14.8 million. Clearly, there is still room to go in terms of donation, so what was the fanfare about? The municipal bond issuance entailed bonds secured only by the revenues of the to-be-built park (a more risky type of investment); as protection to investors, the bonds were sold with the provision that they would immediately be redeemed (i.e., refunded) if a certain threshold of funding was not achieved (there have been somewhat mixed reports about what that precise threshold was). The excitement surrounding the announcement, then, was that this key threshold was met. Interestingly, we now learn that AiG itself invested "probably between $2.5 million to $3 million" of its own funds in the bonds.

Though it may seem like a small piece of the picture, the funds coming from AiG were critical, since they helped prevent triggering a redemption of all of the bonds. Given this information, the natural question to ask is where AiG obtained the funds to buy the bonds. Since the most recent publicly-available financial statements for AiG are for June 30, 2012, we are left conjecture at this point (though presumably lawmakers have seen something more recent). These most recent financials show a cash balance of $1.5 million for AiG, so to purchase bonds, they needed to have more cash on hand. Here are some possibilities for how such cash came about and what they would say about the future of the Ark Encounter project and AiG:
  • AiG's operations may have generated additional funds since 2012. Though their operating revenues have trended slowly downward and the organization posted losses in the previous two reported years, it is possible that they were able to buck the trend and develop a surplus over the 1.5+ years since their last financial report. Of course, this cash source would be the best news for AiG, as it is indicative of a financially robust organization signaling its confidence in a spin off project by helping to finance it.
  • Barring the ability to generate additional cash through operations, AiG may have liquidated other assets to help buy the bonds. This cash source would be more troubling in that it paints a picture of an organization with a precarious financial situation placing a substantial amount of its remaining reserves in a high-risk expansion project. One could again argue that this conveys AiG's confidence in the project, but it also indicates that if the project were to fail, AiG could as well.
  • As a last consideration, it is possible that AiG used cash donated for the Ark Encounter project to buy Ark Encounter bonds. This clearly would be the most troubling, since it would be tantamount to double-counting: if a donor gave $1 and that $1 was then invested in bonds, it could appear as if they generated $2 for the project ($1 through donations and $1 through the bond issuance) when they actually only raised $1. AiG's financial reports could help rule this out, but it likely will be some time before they are publicly available.
Again, due to limited information available to the public, I cannot rule out any of these possibilities. Hopefully, however, those at AiG will opt to clarify so that supporters and those considering providing tax incentives for the project have a better feel for its viability.

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