It’s been a tough year for movie theaters nationwide, and the shiny, new Grand Theatre in downtown Lincoln has not been spared from the pain just because it’s the hot new show in town.

Douglas Theatre Co. Chief Financial Officer John Decker said so far the Grand has not performed up to expectations. Attendance this year in the company’s Lincoln theaters is flat to down 5 percent compared to 2004, even with the addition of the Grand Theatre.

“We expended a significant amount of capital and we have really yet to see the fruits of the return,” he said.

In a letter to two City Council members, Douglas Theatre Co. President David Livingston wrote  “Even with the introduction of The Grand, total movie attendance in Lincoln is down significantly this year compared to the previous year. The mix of higher expenses and lower income is not a model that is sustainable.”

Douglas did not build the theater without some prodding, and financial assistance, from the city.

In 2002, after several years of planning and negotiating, a California developer’s plans to convert the downtown block into an entertainment center anchored by a theater fell through. At the time, Livingston said he wasn’t surprised because the numbers just didn’t add up. While the California developer had negotiated with Douglas, he said the cost to be the primary tenant on the block was the deal-breaker.

About a year after the California developer backed away from the block, Mayor Don Wesely announced Douglas had agreed to build a 14-screen theater in a scaled-down plan whose price tag dropped from about $30 million to $15 million.

The city agreed to kick in about $3.4 million, primarily through tax increment financing, to buy property on the block, demolish the buildings and make other improvements around the theater. A key provision in the redevelopment agreement between the city and Douglas was the city’s promise to preserve its policy banning theaters with more than six screens outside of downtown, at least as long as the TIF bonds are outstanding (that’s nine more years).

Now, less than a year after the Grand Theatre opened, that policy is being challenged because another developer, Eiger Corp., wants to build a 12- to 18-screen theater in southeast Lincoln, at the Prairie Lake Shopping Center at 84th Street and Nebraska 2.

An outside consultant hired by the city concluded that if an 18-screen theater opened, it would be difficult, if not impossible, for the Grand to produce enough profit to cover its estimated debt service or produce a return on Douglas’ investment.

The City Council is expected to act Monday on Eiger’s request to change the theater policy.

Decker said the city is obligated to defend its theater policy.

“We’ve abided by that policy for many, many years without challenging it,” Decker said. “We believe the city will honor and uphold its commitment not only because it’s contractual, but it’s right.”

However, the attorney representing Eiger, Mark Hunzeker, said the redevelopment agreement also has provisions if the policy is changed: Douglas can protest its tax valuation to account for lost revenue, but only if the theater is valued at more than $8.5 million. The theater is currently valued at $6.3 million, according to the county assessor’s Web site. Hunzeker said there’s little risk that a new building that cost $15 million to build and is now valued at $6.3 million will soon surpass that $8.5 million threshold.

Decker said downtown theaters are tricky, rare and difficult to do profitably, so when Douglas was approached by the city, both sides recognized that preserving the theater policy would be a “key inducement” for Douglas to take the risk and make what he said was a $12 million investment.

But Hunzeker said Douglas’ decision to build the Grand was a defensive move since Mayor Wesely said the city had decided to either abandon the theater policy or build a downtown multiplex.

“Does it make sense to take the city subsidy and build the Grand or decline and allow someone else to come in and compete?” Hunzeker said. “I’m not exactly sure who was rescuing whom.”

The threat to the theater policy and faltering movie attendance have prompted Douglas to shelve a plan to build a six-plex theater in north Lincoln. The company has already bought land at 27th and Folkways Boulevard and obtained the necessary permits and zoning changes to build the “NorthStar Theatre” no later than 2006.

Decker said the company has been lobbied hard to build a theater in north Lincoln.

“That’s where people want a theater in this town,” he said. “We get e-mails, we get calls all the time. We do not get them in support of another south Lincoln theater.”

But supporters of the Prairie Lake theater say the city’s two-decade-old theater policy has clearly protected Douglas from competition, since Douglas owns all of the first-run commercial theaters in Lincoln.

“I understand how that could be perceived but if you look up north and east to Omaha, you’ll see that we compete in an open market and we don’t build six-screen theaters and we do quite well,” Decker said. In fact, he said it probably would have been easier to do business in Lincoln without the restrictive policy.

“Part of the reason we haven’t challenged the policy is because we’ve been convinced by the city officials … that this policy is beneficial to our community,” Decker said.

And he said it’s hard to argue that Lincoln hasn’t been well-served by the policy since the city has retained smaller neighborhood theaters while many other cities have seen smaller theaters consolidate into megaplexes.

However, Douglas has never opposed the theater policy, Hunzeker said.

“It’s hard for me to see how that’s the case when the result of that is that they own all the theaters in town,” he said. On the other hand, he says he doesn’t blame Douglas for doing business.

“I have never and won’t criticize them for taking actions which were in their best interest,” he said, “and taking advantage of regulations in place at the time.”

To show that Eiger wanted to be “reasonable and fair,” the developer approached Douglas before applying for the necessary permits to build the Prairie Lake theater and offered Douglas the right-of-first-refusal to build the theater.

“The offer was made and it was declined,” Hunzeker said.

Reach Deena Winter at 473-2642 or dwinter@journalstar.com.