The sudden closure of McNally Smith College of Music has created an uncertain future for its lone tenant, the History Theatre, 17 years after the city of St. Paul sold the downtown building.

Days before McNally Smith announced in December that it had run out of money, the school agreed to a new 10-year lease with the History Theatre. The lease included a nondisturbance clause meant to keep the theater in place in case the building changed owners.

But History Theatre managing director Karen Mueller said she learned last week that McNally Smith’s lender never approved the lease.

The latest bank-approved lease is up at the end of June. Mueller said she wants to get an interim lease through June 2019 while pursuing a multi-year deal.

“We’re hopeful and optimistic that we can work toward a long-term lease,” she said. “I’m really hopeful we’ll be able to sign. It’s uncertain.”

Owners Jack McNally and Doug Smith did not respond to requests for comment for this story.

McNally recently told MPR News that they haven’t determined their next steps for the building, including whether to sell it.

“We’re committed to making good on any back pay, any of our obligations. And if that plays a role in that, then so be it,” he said.

McNally Smith attorney Ryan Murphy declined to comment Wednesday on the possibility of foreclosure for the property.

2001 SALE BENEFITED THE THEATER

The music school building used to be the east wing of the Science Museum of Minnesota. When the museum moved to Kellogg Boulevard in 1999, it left behind a costly problem for the city of St. Paul.

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City officials wanted a buyer who would fill the rest of the building while guaranteeing the theater a stable home for decades to come.

“Whatever happens in that building had to work for the Great American History (Theatre) and give them a long-term home where they can be successful in downtown St. Paul,” Jeff Nelson, then the city director of cultural development, said in June 2001, according to city council minutes.

But when two colleges and Minnesota Public Radio passed on moving in, “the possibility of demolishing the building became increasingly certain,” March 2001 city council minutes read.

Instead, the city struck a deal that June with McNally and Smith, the owners of Music Tech, a for-profit contemporary music college in Minneapolis’ Warehouse District.

Music Tech would buy the building — then valued by the county at $8.5 million — for a dollar. They’d also get $550,000 in the form of a sales tax-funded grant and forgivable loan plus another $500,000 loan they would pay back over 20 years.

In return, Music Tech promised to spend $3.7 million improving the building, bring its 260 students and 90 faculty and staff to downtown St. Paul, and sign a 40-year lease in which the History Theatre would pay only its share of the cost to operate the building.

“It was a no-brainer at the time,” said Brian Sweeney, who was the city’s director of planning and economic development.

MCNALLY BOOSTED DOWNTOWN

McNally Smith seemed to thrive downtown, eventually doubling in enrollment.

Besides students and jobs, the college livened up the downtown arts scene, aided by additional city subsidies.

Since 2013, McNally Smith received another $98,491 in sales tax-funded Cultural STAR grants to support a Grammy Camp, the More Music St. Paul Partnership and three Lowertown Guitar Festivals.

Former Mayor Chris Coleman in December called the college “a critical partner for many years as we have developed a vibrant downtown with arts centering the rebirth.”

It also worked well with the History Theatre, sharing space at an affordable price.

PAID NO PROPERTY TAXES

As for the building the city gave away, its value soared after the renovation. The county in 2004 said the property was worth $18.9 million.

But even though the school was organized as a for-profit business, its owners never were required to pay property taxes.

According to the state Department of Revenue, counties should exempt for-profit colleges from property taxes if they offer a curriculum that parallels that of a public college.

So while colleges of cosmetology, hair styling, cooking, art and acupuncture pay property taxes, some business and nursing schools do not.

City records show Music Tech had a letter from Ramsey County in 2001 assuring they’d qualify for a full tax exemption.

The exemption is worth $543,000 this year alone.

But now that the building no longer is being used as a school, it likely will be subject to property tax in 2019.

ENROLLMENT FALLS

From a high of about 600 students, McNally Smith’s enrollment tumbled to 376 by fall 2016.

School leaders said they shrunk intentionally to focus on quality. But at the same time, the college found it necessary to offer steep tuition discounts to lure students.

Financial aid totaled $2.4 million in 2015-16, up from $300,000 a decade earlier, according to financial records filed with the city. The school’s last annual budget was $11 million.

To shore up their finances, college leaders tried to transition to a nonprofit school, which could accept donations.

A Cultural STAR application filed in October asked the city for $100,000 to help with that change.

“It will require a number of years to build a new nonprofit college that is financially stable and sustainable, though we have an excellent start with a new Board of Directors, the commitment and dedication of our entire faculty and staff, and numerous partnerships with cultural, musical, educational, and other businesses throughout the region,” the application read.

The city approved a $100,000 loan in November.

One month later, McNally Smith abruptly announced it had run out of money and was closing at semester’s end.

The city canceled the loan.

City officials say McNally Smith paid off its original Cultural STAR loan in 2010 and no longer owes the city any money.

CITY OPTION TO BUY

The school’s sudden closure leaves the city back where it was in 2001 — only this time, someone else owns the property, now valued at $13.6 million.

Under terms of the 2001 sale, McNally Smith was required to keep the school open for at least 10 years. Since then, the owners have been free to sell the building.

Should they find a buyer, the city until 2021 has the right to override the sale and buy it for the same terms agreed to by the third party.

Liz Xiong, spokeswoman for Mayor Melvin Carter, said they’re “still exploring all of our options” for the building.

“We value the musicians and the community that that institution built,” she added.

‘A GREAT DEAL’

Sweeney, the former city economic-development director, said that the school’s sudden closure was “terribly unfortunate” but that the sale to Music Tech was “probably one of the better deals during that period.”

He contrasted it with another deal that same year to keep Dayton’s in downtown St. Paul. The department store — which became Marshall Field’s and then Macy’s — got $6.3 million from the city, spent another $12 million remodeling the store and then closed immediately after its 12-year obligation was up.

“Compared to other initiatives to increase jobs, attract people downtown, create and sustain a cultural asset, this was a great deal,” Sweeney said.

John Mannillo, a real estate developer and frequent critic of the city, said St. Paul “has made some lousy investments but that may not have been one.”

In a phone conversation before the History Theatre learned it doesn’t have a long-term lease, Sweeney said key to the Music Tech deal was keeping the 40-year-old theater in downtown St. Paul.

“We were able to maintain that asset in the downtown,” he said. “It continues to be a jewel for the downtown arts community.”