Lambeth and Southwark councils are proposing to loan The Old Vic £7.5 million towards the theatre's £12 million plan for a new annex on Waterloo Road.
The 201-year-old theatre is planning to redevelop the site currently occupied by the restaurant Hello Darling to create a new education and rehearsal centre.
The council loans – expected to be repaid over 10 years – are due to be approved by the two authorities at their cabinet meetings later this month.
It's not the first time Southwark has loaned money to local cultural institutions: the Central School of Ballet will have to repay £3 million to the council for the fit-out of its new premises.
"The Annex is a once in a generation opportunity, said Kate Varah, The Old Vic's executive director.
"With the visionary collaboration of Lambeth and Southwark Councils, we will together ensure that this vibrant theatre sustains financially and that its wide-reaching social engagement is so deeply embedded that there can never be any doubt about the value of The Old Vic to those it serves: a civic resource, a beacon for cultural adventure, a place where everyone can explore in an environment where they feel truly welcome."
Lambeth Council leader Cllr Jack Hopkins said: "The Old Vic is a cultural icon and we are incredibly proud to have it in Lambeth on the boundary with Southwark. Increasingly our role as a council is to harness the energy and dynamism of the borough in a way that benefits all our communities.
"We are determined to open up our creative industries to the diverse, but often under-represented, talented young people in the borough, particularly those from BAME backgrounds.
"Partnerships with organisations such as The Old Vic are crucial if we are going to achieve that. As a result I believe that the support we are set to discuss providing The Old Vic for this project matches our important goals and ambitions for the community'
Cllr Rebecca Lury, Southwark's deputy leader and cabinet member for culture, leisure, equalities and communities, said, 'Southwark has a long-standing and positive relationship with The Old Vic, which has helped many young people in Southwark gain unique and valuable insight into the world of theatre.
"We have promised to make sure Southwark residents are able to thrive and take advantage of the many opportunities on their doorstep. This exciting arrangement with The Old Vic is just one part of this; delivering jobs, skills and training for our young people, and opening up the world of culture to a wider and more diverse group of people'
The Annex will include a Clore Learning Centre for schools and colleges with integrated education offices, a library of playtexts freely available to schools and visitors, and much-needed back of house space for The Old Vic's staff and companies.
The theatre will gain the ability to mount studio-style performances of drama, music, comedy and dance.
The theatre has already raised £1 million towards this phase with a proposal to complete the Annex by 2022.
The theatre has also announced that Glenda Jackson has joined the board: "It is a privilege to be appointed to The Old Vic's board," she said.
"Working on its stage has always brought me great joy and to now have the opportunity to help support its future is a responsibility that I take very seriously.
"Providing young people with opportunities to access the arts is vital if we are to educate effectively, inspire creative imagination and equip them with the skills to navigate through life.
"The Old Vic's recognition of this is inspiring and I look forward to working with them to make their future plans a reality."
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