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Ohio Cultural Facilities Commission Stan Hywet Hall and Gardens3rd Quarter 2010 Meeting Page 1 of 8

Project Analysis and Staff RecommendationNational Underground Railroad Freedom CenterCommission Assessment Team: Tony Capaci, chief analyst and Amy Rice, chief project manager

National Underground Railroad Freedom Center 50 E. Freedom WayCincinnati, Hamilton County

Facility and Project Sponsor Information

ExecutiveSummary: Under NURFCs current operating structure, sustainability is an issue. NURFC is

working with the federal government to establish a federal museum and oversightcommission to commemorate the ending of chattel slavery in the United States.A discussion draft of this legislation was completed in October 2009. Preliminaryterms include the gifting of the facility to the United States government and theUnited States government, via an appointed board of trustees, operating thefacility in cooperation with the Secretary of the Interior and other federalagencies. This legislation is expected to pass in 2011.

Facility Overview: The Center consists of a 160,000-square-foot facility located on the Cincinnatiriverfront. Features of the facility include a museum, interactive story theaters,computer networking to other Underground Railroad sites, arts and educationfacilities, and a public forum space.

The Center is owned and operated by the Sponsor, as an Ohio nonprofitcorporation since 1995.

Culture Presented: The preservation and presentation of features of historical interest or significance.

SponsorBackground: The Sponsor states, The mission of the National Underground Railroad

Freedom Center is to reveal stories about freedom's heroes, from the era of the

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Underground Railroad to contemporary times, challenging and inspiring everyoneto take courageous steps for freedom today.

Project Information

Scope: The Freedom Center has recently been written down to a value of $32M at FYE09. Itwas opened in August 2004, and features three pavilions celebrating courage,cooperation, and perseverance. The current appropriation will reimburse the Sponsorfor construction expenses previously incurred but not yet reimbursed (the Project).The project consists of reimbursing $850,000 on an appropriation awarded in H,B. 562and release of approximately $462,000 of escrow monies held under the original baselease.

Regional Support

Matching ResourcesThe Sponsor demonstrated a minimum of non-state matching resources equal to at least 50 percent of

the total state funding of $15,500,000 (a minimum of $7,750,000). Matching resources weresubstantiated in November 2008. On October 9, 2001, Substantial Regional Support was confirmed bythe Commission in resolution R-01-26. The following table is provided for informational purposes.

Amount

$0

$0

$0

$0

$0

$34,000,000

$0

$4,500,000

$12,000,000

$0

$0

$50,500,000

$7,750,000

City Government

Source

Cash-on-Hand

Funds Already Expended on Project

Federal Government

Site Valuation

Other

Total Matching Resources

Minimum Match

Irrevocable Written Pledges

In-Kind Contributions (up to 50%)

Operating Endowment

Private Contributions

County Government

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Funding Model

Amount Substantiation

$15,500,000

$0

$63,000,000$0

$6,000,000

$22,200,000

$11,650,000 $7,750,000 not substantiated

$106,700,000

$117,744,000

Source

State Funding

Total Funding Sources

Total Project Budget

Cash-On-Hand

Private ContributionsCounty Government

City Government

Federal Government

Other (future investment

income)

Project Need

Financial Assessment

Commission staff analyzed the Sponsors financial statements, including

Internally generated financial statements for year-to-date September 30, 2010 ("YTD10") Audited financial statements for fiscal-years-ending December 31, 2009 and 2008 (FYE09

and "FYE08") Five-year pro forma

Statement of Financial Position Summary

YTD10 % Change FYE09 % Change FYE08

ASSETS:

Current Assets

Unrestricted 3,248,185$ 9.21% 2,974,206$ -61.47% 7,718,885$

Restricted -$ NC -$ NC -$

Long-Term Assets 32,639,131$ -16.09% 38,897,769$ -62.27% 103,096,322$

TOTAL ASSETS 35,887,316$ -14.29% 41,871,975$ -62.21% 110,815,207$

LIABILITIES:

Total Current Liabilities 618,721$ 0.58% 615,126$ -42.85% 1,076,256$

Total Long-Term Liabilities -$ -100.00% 27,000,000$ -41.30% 46,000,000$

TOTAL LIABILITIES 618,721$ -97.76% 27,615,126$ -41.34% 47,076,256$

NET ASSETS:

Unrestricted 33,357,286$ 147.29% 13,489,393$ -78.44% 62,563,238$

Temporarily Restricted 954,643$ 27.72% 747,456$ -35.33% 1,155,713$

Permanently Restricted 956,666$ 4683.33% 20,000$ 0.00% 20,000$

TOTAL NET ASSETS 35,268,595$ 147.38% 14,256,849$ -77.63% 63,738,951$

TOTAL LIABILITIES AND NET ASSETS 35,887,316$ -14.29% 41,871,975$ -62.21% 110,815,207$

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Solvency:An organization is solvent when assets are greater than liabilities. The Sponsor is solvent because net assetsare positive (YTD10 total assets are $35.9M; total liabilities are $0.6M).

YTD10, the Sponsor had no debt; therefore, a viability ratio was not calculated.

Liquidity:Liquidity relates to availability of, access to or convertibility to cash. A test of liquidity is current ratio (currentassets divided by current liabilities), which indicates how many times over the entity can pay its currentliabilities with its current assets. (Note:Restricted current assets were not used to calculate the current ratiobecause they generally are not available to service current liabilities. Including restricted current assets in thecalculation could have the effect of artificially inflating the current ratio.) A current ratio of greater than 1:1 isconsidered acceptable.


Current Ratio 5.25 8.58% 4.84 -32.58% 7.17

The Sponsors YTD10 working capital is $2.7M). Days of cash-on-hand (an indication of how many days anorganization can pay expenses if its revenue stream ceases) at 22 is lower than the 30-day norm.

Leverage:Leverage is the degree to which a sponsor is borrowing money. A measure of leverage is debt ratio (debtdivided by total assets).

YTD10, the Sponsor has no debt; therefore, a debt ratio is not calculated.

Change in Net Assets:Change in net assets examines changes over several years to see where an entity is headed.

Operating Change in Net Assets Summary


Total Revenues (net of capital income raised) $ 5,000,030 17.17% $ 4,267,276 -45.19% $ 7,785,726

Total Expenses (net of capital expenses) $ 5,670,869 -30.48% $ 8,157,132 -22.94% $ 10,584,822

OPERATING CHANGE IN NET ASSETS (pre-

depreciation and pre-realized/unrealized

gain/(loss) on investments) $ (670,839) -82.75% $ (3,889,856) 38.97% $ (2,799,096)

Impairment loss (FAS-144 adjustment) $ - -100.00% $ (42,200,000) NC $ -

Extraordinary income (debt settlement) $ 24,150,000 NC $ - NC $ -

Realized/Unrealized Gain/(Loss) on

Investments $ 26,517 -94.22% $ 458,825 P $ (2,447,546)

Depreciation $ (2,494,182) -35.23% $ (3,851,071) -11.24% $ (4,338,937)OPERATING CHANGE IN NET ASSETS

(post-depreciation and post-

realized/unrealized gain/(loss) on $ 21,011,496 P $ (49,482,102) 416.21% $ (9,585,579)

Pro Forma Review:

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A pro forma review is a projection showing anticipated expenses and revenues for the period.

Operating Pro Forma Summary


Total Revenues (net of capital income raised) $ 5,000,030 17.17% $ 4,267,276 -45.19% $ 7,785,726Total Expenses (net of capital expenses) $ 5,670,869 -30.48% $ 8,157,132 -22.94% $ 10,584,822

OPERATING CHANGE IN NET ASSETS (pre-

depreciation and pre-realized/unrealized

gain/(loss) on investments) $ (670,839) -82.75% $ (3,889,856) 38.97% $ (2,799,096)

Impairment loss (FAS-144 adjustment) $ - -100.00% $ (42,200,000) NC $ -

Extraordinary income (debt settlement) $ 24,150,000 NC $ - NC $ -

Realized/Unrealized Gain/(Loss) on

Investments $ 26,517 -94.22% $ 458,825 P $ (2,447,546)

Depreciation $ (2,494,182) -35.23% $ (3,851,071) -11.24% $ (4,338,937)OPERATING CHANGE IN NET ASSETS

(post-depreciation and post-

realized/unrealized gain/(loss) on $ 21,011,496 P $ (49,482,102) 416.21% $ (9,585,579)

The Freedom Center is danger of not continuing as a going concern. Accordingly, the consortium of banksthat previously held the debt for the Freedom Center have exchanged $47M in bond debt for approximately$24M the Freedom Center was holding in investments. The net result of the bond settlement is anextraordinary gain of approximately $24M in YTD10.

Also material to the Freedom Centers financial position is the adjustment of the carrying value of thebuilding on the FYE09 financial statement. The previous building balance of $78M in FYE08 was writtendown to $32M in FYE 09 as a result of FAS 144, the GAAP pronouncement applicable to Accounting for theImpairment or Disposal of Long-LivedAssets.Additionally, the Freedom Center continues to operate at a deficit, as is evidenced by a pre-depreciation,

pre-extraordinary gain, operating deficit of ($670K) at YTD10, a pre-depreciation loss of ($3.9M) at FYE09,operating deficits in previous years, and the Sponsor-prepared pro forma indicating pre-Federalizationlosses exceeding ($1.8M) for the out years.

Federalization is the prospect that the Facility will be gifted to the Federal Government (free and clear of anyliens), and the U.S. Government will use the Freedom Center to operate a museum commemorating theending of chattel slavery in the United States.

According to the sponsor, if Federalization takes place, the Freedom Center should receive approximately$3M/year in operating revenues on a permanent basis enabling the Freedom Center to generate operatingsurpluses starting at $1.15M for each twelve month period opening October 1, 2011, the beginning of thenext Federal fiscal year. Therefore, when reviewing the Freedom Centers sustainability staff heavily

considers the probability of a successful Federalization of the Freedom Center. According to the Sponsor,the most updated information we currently have available indicates that Senator Sherrod Brown is backingthe legislation that was discussed in draft form in October of 2009, and the Freedom Center management isoptimistic that the legislation will be passed. The Sponsor anticipates that the funds would be received inthe [fourth] quarter of 2011, if [it is] successful in getting the language signed and passed prior to[September 30, 2011]. Even if Federalization is successful, there remains a pending issue regarding cashflow needs being met until the Federal funds are received. A review of the liquidity position calls intoquestion the ability of the Freedom Center to meet its obligations in the first quarter of 2011 and beyond.Currently, staff is waiting for a cash flow schedule from fourth quarter 2010 through the period when Federal

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funds would be received. Correspondence from the Sponsor indicates cash may be depleted in the firstquarter of 2011. Part of the solution to the sponsors anticipated cash flow problem may lie with theFreedom Centers renewed ability to raise funds. Although the Freedom Center must contend with negativeinfluences affecting fundraising, including an uncertain economy, possible donor fatigue, and the affect thewrite down of the building may have on potential donor perspective, the fundraising outlook also includespositive influences, including the affect the bond settlement has on donor perspective as well as the very

real prospect of Federalization. A recent spike in fundraising has enabled the Freedom Center to close thegap on its operating losses, so much so that the sponsor believes the Freedom Center may break even byyear end.

In formulating the staff recommendation to the Commission, staff bases its rationale on the strategy webelieve will most likely enable the Commission to meet its ultimate objective: to have the Freedom CenterFacility provide culture for the next fifteen years. Because operating costs, which have been cut drasticallyin years past, cannot realistically be cut too much further and because operating revenues have historicallybeen insufficient to cover costs, staff believes the most promising option to achieve the Commissionsobjective relies on successful Federalization. The alternative of not approving the Commission funds andthereby exacerbating a dire financial position may lead to the demise of the Freedom Center and theunenviable position of the state owning a singular-use building, the use being a museum in a city that

already houses the successful Cincinnati Museum Center. Staff views the approval for the $850,000 (TheProject) and $462,000 escrow release as getting the Freedom Center closer to Federalization andultimately closer to the Commission realizing its objective.

However, if the Commission were to approve the funds and Federalization did not come to fruition, theCommission would be responsible for placing those additional funds at risk. Accordingly, staff isrecommending the Commission approve the Project and release of the escrow funds contingent on aguarantee, acceptable to the executive director at her sole discretion on both the appropriation of $850,000and the escrow release of approximately $462,000. Such a guarantee would ensure the Commission isplacing the yet-to-be-approved state funds at no greater risk than they are currently andin factlessensthe states risk associated with $14.5M of appropriations previously approved as the Freedom Center movescloser to Federalization. Also, staff recommends the Commission require a board-approved business plan

addressing cash flow concerns from fourth quarter 2010 through Federalization and until a projectedpositive cash and working capital position can be re-established. Finally, noteworthy for the Commissionsdeliberations regarding the Freedom Center, is the Federal requirement that the Facility be free of all liens inorder for Federalization to take place. This criterion would require the Commission to release its first lienposition on the facility. As stated previously, staff believes the best option to ensure the Facility providesculture for the next fifteen years relies on Federalization, and the exchange of the first lien position forFederalization is a worthy one.

A review of the Sponsors solvency, liquidity, leverage, change in net assets and pro forma indicates it ismarginally likely the Sponsor will be able to operate the Facility and present culture to the public over asustained period of time in accordance with Section 3383.07 of the ORC.

See Exhibit E for a summary of the Sponsors financial statements.

Provision of General Building Services

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Although experienced in the provision of general building services at the Facility, the Sponsor hasmarginal financial capacity to continue providing general building services at the Facility. Inanticipation of the Sponsor completing the proposed Facility transfer to the federal government,Commission staff conditionally confirms the Sponsor continue to provide these services as permittedby section 3383.07 of the ORC.

Approval of the Project and Authorization of the Expenditure of Funds

Appropriation History:

AppropriationName

BillNumber

AppropriationDate

G.A. AppropriationAmount

Comments

NationalUndergroundRailroad Freedom

Center

Am. Sub.H.B. 562 6/24/2008 127 $850,000 Funding this project.

NationalUnderground

Railroad FreedomCenter

Am. Sub.H.B. 699

12/28/2006 126 $2,000,000 Funded construction of thefreedom center.

NURFC H.B. 16 5/4/2005 126 $4,150,000 Funded construction of thefreedom center.

NationalUnderground

Railroad Freedom

Center

H.B. 675 12/13/2002 124 $4,000,000 Funded construction of thefreedom center.

NationalUnderground


Am. Sub.H.B. 640

6/15/2000 123 $3,500,000 Funded construction of thefreedom center.

NationalUnderground


Am. Sub.H.B. 850

3/18/1999 122 $500,000 Funded construction of thefreedom center.

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Cincinnati RiverfrontDevelopment

Am. H.B.748

9/17/1996 121 $166,668 Architectural fees andcontinuing development

work on the freedomcenter.

Cincinnati RiverfrontDevelopment

Am. H.B.748

9/17/1996 121 $333,332 Funded construction of thefreedom center.

Total $15,500,000

Recommendation: The materials submitted by the Sponsor were reviewed and analyzed, and theCommission project analyst, project managers, and executive director recommend approval of Resolution R-10-17 and recommend the approval of the Project and authorization of the expenditure of funds.

Commission Actions This Meeting:In Resolution R-11-XX, the Commission is asked to do the following: determine need for Project; determinesubstantial regional support; determine the provision of general building services; approve the project andauthorize the expenditure of funds, pending certain requirements; and authorize the execution of legalagreements.

Chief Analyst Project Manager

Executive Director

Exhibits

A Provision of Culture

B Detailed Project Budget

C Facility Project Info

D Project Team Resumes and qualifications

E Financial Statements

F Evidence of Local Match

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