A $1.5 million city loan for a local theater group that has been in default for more than two years will be cut in half and forgiven as long as the troupe continues to perform for eight years, according to a bill that got initial approval from the Denver City Council on Monday.

Su Teatro — a 40-year-old theater group and one of the only Latino theaters in the country — hasn’t paid on the 15-year, zero-interest loan with $3,630 monthly payments since May 1, 2010.

The federal Housing and Urban Development loan approved and administered by the city in 2007 allowed the theater group to buy a piece of property on South Santa Fe Drive that had been a salvage yard. The theater group had wanted to build a cultural center, but the economy crashed and the theater group couldn’t raise the expected $3.5 million to construct the center.

Now, the city’s Office of Economic Development has worked out a deal that will save the theater troupe and reactivate the abandoned property.

The agreement that faces final approval from the council Monday transfers the deed for the property to the city, which will immediately sell it for the market value of $770,000 to the group that owns Stranahan’s Whiskey for undisclosed purposes.

The remaining $780,000 that Su Teatro still owes on the original loan will become a lien against the organization for eight years but will be forgiven if the nonprofit continues “to provide the type of community service that it has for the last 40 years,” said Paul Washington, director of Denver’s Office of Economic Development.

Technically, it will be a performance loan, requiring that Su Teatro continue to use the Civic Theatre as a nonprofit community facility, provide “substantially similar public benefits” to those being provided today and submit annual reports, according to the bill before the City Council.

“We could have played hardball and called our loan,” Washington said. “But Su Teatro would be forced into financial turmoil. We could lose that public benefit and cause a historic nonprofit to face some extraordinary adversity.”

In 2009, the group abandoned the idea for a cultural center and followed the urging of then-Mayor John Hickenlooper, who wanted the theater troupe to move into the former Denver Civic Theatre farther down the road on Santa Fe Drive.

The group bought that 15,000-square-foot building and its 300-seat theater but left the property at 215 S. Santa Fe in limbo.

“So basically, as long as they do their thing for eight years, the taxpayers eat it,” said Councilwoman Jeanne Faatz, who voted against the measure that will come up for a final vote Monday.

“People who borrow money should have to pay it back,” Faatz said at a committee meeting this month. “This falls into the special-deal-for-special-folks category. That is what concerns me.”

The measure passed on an initial vote with nine “yes” votes, one “no” and two council members who abstained.

In January, the city said 91 of its loans were in various stages of arrears. At the beginning of the year, the city had a 15.5 percent loan-default rate. It is now at 9.7 percent, and Washington told the City Council that he hopes to get it to 7.2 percent by the end of the year.

Washington said the city has been able to restructure nearly $9 million worth of loans that had been in default — mostly extending the payment terms or coming up with payment plans that are more appropriate to the cash flow of the borrower.

The city has been in negotiations with Su Teatro for several months on this loan, which Washington said have been “very extensive, protracted and sometimes heated.”

“We came to a joint decision that this is a nonprofit that is essential to the community and simply cannot afford to pay the loan back,” Washington said in a committee meeting.

“We came to the mutual understanding that this protects the city’s interests and extends the period of time for public service, allowing the nonprofit to continue,” he said.

Councilwoman Judy Mon-tero said the lien will be a hardship for the theater company as it tries to get money to make required maintenance fixes.

Su Teatro director Anthony Garcia told the council committee that the plan was to build a cultural center but the group couldn’t have picked a worse time to fundraise.

“What happened is we tried to do it in one of the worst economies,” Garcia said. “This is something that has been hanging over our heads.”

The most recent financial documents from the nonprofit showed that in 2010, the group brought in $596,601 in revenue — $361,385 of which was listed as gifts and grants on the federal disclosure form.

In 2009, the group earned $841,102, which included $546,914 in gifts and grants.

But revenue from admissions, tour income and workshops and lectures has improved, growing to nearly $90,000 in 2010 compared with nearly $72,000 in 2009.

Jeremy P. Meyer: 303-954-1367, jpmeyer@denverpost.com or twitter.com/jpmeyerdpost