Drama plays out in late cinema mogul’s multimillion-dollar gift
A look behind the curtain at Santikos’ donations to charity
When cinema mogul John L. Santikos died in 2014, he left his movie theaters and real estate holdings to charity — at $605 million, the largest philanthropic gift in the country at the time.
He also left behind a huge headache.
Officials at the company and the San Antonio Area Foundation were left to figure out how the gift — most of it tied up in real estate — could deliver the greatest benefit to charities.
They’re trying to solve this puzzle as streaming services such as Netflix, Hulu and Amazon Prime scramble the business of movie distribution and steal market share from theaters.
Santikos’ donation more than tripled the assets held by the San Antonio Area Foundation, from $290 million to nearly $1 billion — far more than the community foundation ever had managed.
Santikos intended his theaters and real estate holdings to continue as functioning businesses, company officials said. Profits from both were to flow through a nonprofit named for him to the San Antonio Area Foundation, which then would distribute the funds to charitable causes.
Privately held Santikos Enterprises has thus far spent nearly $65 million building new theaters and renovating existing ones — more than the $53 million that the San Antonio Area Foundation has awarded in grants from Santikos’ gift. Company officials said the expenditures are necessary to keep the theaters profitable over the long run.
A communications breakdown between the boards of Santikos Enterprises and San Antonio Area Foundation has further complicated matters, leaving each side wondering how much the Santikos holdings could realistically
produce for charitable grantmaking.
And five years after John Santikos died, two top executives overseeing his gift have left their organizations: Dennis Noll, San Antonio Area Foundation chief executive, and Santikos Enterprises Chief Executive David Holmes, who Santikos had handpicked to lead the company while he underwent cancer treatment.
“Has it been handled in the most expeditious way possible? Probably not,” Santikos Enterprises Chairman Ed Kelley said. “But again, it was not an easy assignment to take on an asset that was twice the size of the rest of your assets combined and was in an industry that is highly specialized.”
Despite the challenges, Santikos-affiliated officials are bullish on the theaters’ long-term outlook, citing growing attendance and revenue. The domestic box office hit a record $11.9 billion last year as tickets sales rose 5 percent, according to the Motion Picture Association of America. About three-quarters of the U.S.Canada population went to see a movie at least once in 2018.
How does it work?
Louis Santikos founded Santikos Theaters after his family fled Europe during the Greek Civil War that followed World War II. His son, John L. Santikos, later took over the business and, but for a 14-year period, managed it until he died in 2014.
John Santikos left the cinemas and his real estate assets to the
San Antonio Area Foundation. Profits from Santikos Enterprises — which manages eight movie theaters, about 765,000 square feet of retail and office space and 122 acres of vacant land — flow through the John L. Santikos Charitable Foundation, a 501(c)(3) public charity, to the area foundation, which in turn distributes awards to charitable causes set out in his will.
San Antonio Area Foundation board members double as trustees of the Santikos foundation, and appoint the Santikos Enterprises board except for three members appointed by John Santikos: Kelley, former Valero Energy executive Palmer Moe and real estate broker Guyla Sineni.
Santikos’ structure is uncommon in the nonprofit sector, according to experts who track the field. But public charities are allowed to operate for-profit businesses unrelated to their charitable purposes to finance grants, though they must pay income taxes at levels comparable to for-profit corporations. The Santikos charitable foundation, which owns Santikos Enterprises, must pay taxes on its theaters and theater operations.
Though the theaters remained in John Santikos’ estate until the end of 2017, it’s likely that his heirs received a sizable deduction in their estate tax burden, experts said.
“That has been a long-standing tax-planning, estate-planning tool — find out what you expect your estate to be when you die, give away as much of it as you can to get you down below the threshold with the theory being, ‘Well, I’d rather it go to charity than to taxes,’” said Suzanne Friday, senior legal counsel and vice president of legal affairs for Council on Foundations.
Representatives of Santikos’ estate did not return requests for comment.
The Santikos charitable foundation’s nonprofit status gives it a tax-free window to pay down debt on much of its real estate portfolio. The IRS won’t tax nonprofits’ assets purchased with debt for 10 years. If the organization fails to pay off the debt within that period, they must pay taxes on income from those holdings.
And John Santikos’ gift came with considerable debt: more than $110 million at the time of the donation, said Rebecca Brune, the San Antonio Area Foundation’s president and chief operating officer. The Santikos foundation reported $87 million in debt on the company’s theaters, real estate and shopping centers in 2017, the latest available figures.
Is it giving enough?
Santikos has shifted some of its profits toward paying down that debt, company officials said. If Santikos pays off its debt on its non-theater assets before the 10-year window closes, those assets will be tax-free in perpetuity.
Since John Santikos died, his estate and the area foundation have granted more than $53 million to organizations that include Southwest School of Art, City Education Partners and San Antonio Sports.
He specified two fixed gifts to Doctors Without Borders USA Inc. and International Orthodox Christian Charities Inc., which will receive 10 percent of the charitable contributions made annually through his namesake foundation.
Otherwise, the cinema magnate decreed that proceeds would support people in need — including seniors, those with special needs and victims of child abuse — as well as disaster relief, education, public libraries, parks, museums, arts, health care and medical research.
Noll and John Santikos met dozens of times from 2011 to 2014 to discuss the donation, but largely did so without the knowledge of area foundation and company officials, Noll said. Indeed, the theater owner avoided being seen in public with Noll.
“He was very, very private,”
Noll said. “He did not want people to know where his estate was going.”
Officials with Santikos and the area foundation now acknowledge that the organizations initially created an impression that the Santikos portfolio was more flexible and could dole out more cash grants when, in fact, the majority of the Santikos assets were tied up in real estate and other passive investments.
As of 2017, the assets’ net worth stood at less than $470 million. Though the Santikos foundation reported more than $580 million in assets in 2017 to the IRS — the latest figures available — the foundation said it was also saddled with nearly $115 million in liabilities.
Other than “some unrealistic expectations thrown out at some points,” Kelley said, Santikos officials didn’t have a sense of what the area foundation expected the company to generate for grantmaking purposes without liquidating. But Santikos didn’t clearly articulate what it could realistically funnel to the area foundation, either, he said.
Why not liquidate the company? Smaller community foundations and nonprofits that receive donations in the form of companies and other larger assets tend to liquidate because they don’t have the ability to manage a portfolio of that size, Friday said.
‘Economically feasible’
But larger foundations “receive interest in a company and it’s kind of almost an investment question,” Friday said. “What’s our best investment strategy: holding this company and getting the income from it or selling it off and turning it into cash and then investing that cash in a different way?”
The terms of John Santikos’ will and living trust as well as an agreement struck between the theater owner and the San Antonio Area Foundation do not explicitly state that the foundation cannot sell off his assets and reap the cash.
Officials at Santikos and the area foundation believed John Santikos intended for the theaters to operate as long as it was “economically feasible.”
Santikos Chief Executive Tim Handren said John Santikos “was looking for an everlasting gift into the community.”