Options for New Ventures in Failed Theaters Few, Expensive

With the cinema business in turmoil, more than a dozen San Fernando Valley movie screens have closed in the past year. And more closures are likely, industry experts say, as the moviegoing public increasingly demands state-of-the-art theaters.

That can create a big headache for theater owners, who cannot easily convert their properties to other uses because of their unique design and size.

“These are the single most challenging buildings I have ever seen to recycle,� said Howard Makler, president and chief operating officer of Excess Space Disposition Inc., which helps national retail chains dispose of surplus real estate and has a number of cinema clients.

The problem has been playing itself out in the Valley for at least the past year. During an expansion drive that started in 1996, big theater chains built state-of-the-art multiplexes throughout the region; at the time, the Valley was considered to have too few screens to meet the demand from its large population.

But as the new theaters came on line, the older ones suffered. Perhaps the most dramatic example of the phenomenon is in the Northridge area.

In early 1998, Pacific Theatres completed the 20-screen Winnetka 20 on Winnetka Avenue in Chatsworth. The theater is the biggest multiplex in the Valley and one of the top-grossing movie houses in the nation, with annual revenues that Pacific officials say exceed $13 million.

At least three theaters in the vicinity have closed since the Winnetka 20 opened. One of them, on Reseda Boulevard near Devonshire Street, is being converted into a Bodies in Motion gym, slated to open in March.

It is the Valley’s only successful theater conversion over the past year of which local real estate brokers were aware.

Irwin Hyman, a senior vice president with real estate brokerage NAI Capital Commercial who represented Bodies in Motion in the theater conversion deal, said he’s looking at other closed theaters as possible locations for the fitness chain. Closed theaters make excellent locations for health clubs because they have lots of parking space, he said.

But Bodies in Motion didn’t foot the bill for converting the Reseda Boulevard theater, which had been run by a small independent operator. That cost was borne by the landlord, and because the theater was fairly small it was a relatively inexpensive conversion. That isn’t the case with most other closed theaters, putting a major pinch on the property owners.

Makler says it costs between $25 and $35 per square foot just to convert a movie theater into a “vanilla shell,� real estate terminology for a building that’s an empty box ready for build-out. Then you have to pay for improvements to accommodate the new tenant, which cost maybe another $20 per square foot.

For a 20,000-square-foot theater, that means renovation costs of up to $1.1 million. And most landlords who own movie theaters are already deeply in debt from the cost of building them.

Yet, as Chris Wilson, head of Wilson Commercial Real Estate in West Los Angeles points out, landlords often have little choice but to eventually do the conversion.

Wilson is working on an effort to convert another one of the theaters that closed in the wake of the Winnetka 20, a former United Artists multiplex at the corner of Chatsworth Street and Zelzah Avenue in Granada Hills. Wilson is negotiating with a big-box retail chain that may be willing to move in, if the landlord converts the building. The new tenant will agree to pay only about 65% of the market rate because of the property’s poor location--and the renovation costs will be enormous.

“If you were getting a buck a foot [in rent] from a movie theater, and you can only get 65 cents from a retailer, what are you going to do? You’re going to take the 65 cents, because you have no choice,� Wilson said.

Wilson is facing similar troubles in his effort to find a new tenant for a closed Edwards Theatres multiplex at 1st Street and East Los Angeles Avenue in Simi Valley. He was negotiating with a mini-storage company to occupy the space, but the deal fell through because he simply couldn’t make the numbers work. The rent the mini-storage operator was willing to pay simply couldn’t come close to making up the cost of renovating the theater, Wilson said.

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Meanwhile, Wilson says another Edwards multiplex in Simi Valley is also expected to close in the near future. Early last month, a 10-screen General Cinemas multiplex closed in the Fallbrook Mall in West Hills.

Another victim of the Winnetka 20, Pacific’s Topanga Theatre on Topanga Canyon Boulevard in Woodland Hills, has been shuttered.

More closures are on the way. AMC Entertainment Inc. plans to demolish a 14-screen theater in Burbank to build a new 16-screen multiplex in its place, leaving the fate of two nearby AMCs--with six screens and eight screens, respectively--very much in question.

AMC spokesman Richard King said there are currently no plans to close them.

In the past year, 17 of the Valley’s 176 screens have been closed, according to Tom Borys, president of box-office tracking firm ACNielsen EDI.

Brokers say that’s just the tip of the iceberg. Pacific Theatres, one of the few cinema chains that appears financially solvent in the current market, is building an 18-screen megaplex in the Sherman Oaks Galleria with all the amenities modern moviegoers crave: stadium seating, digital sound and fancy food and drinks. The arrival of this theater will almost certainly devastate older competitors in the Sherman Oaks area, brokers say.

Not all experts believe the result will be a glut of empty old theaters remaining unused and ugly for years. Bert Abel, a vice president with commercial brokerage Grubb & Ellis Co., says he’s seen this kind of thing before.

“This is not unlike what happened with all the mergers of banks and supermarkets. Someone’s going to pick up the good locations,� he said.

For some users, closed movie theaters are very desirable properties. Under building codes, theaters must have 10 parking spaces for every 1,000 square feet, Wilson said; standard retail operations only need four spaces per 1,000 square feet. That makes closed theaters ideal for other types of operations that require a lot of parking, like nightclubs, skating rinks, health clubs and bowling alleys.

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But Makler, who is on the front lines of the theater conversion business, doesn’t see a lot of demand for those types of facilities. He also sees very few independent operators willing to come in and buy theaters from bankrupt chains to keep running them as theaters, and when they do, these operators can only afford to pay about half the rent that the former tenant could handle, he said.

As national theater chains go bankrupt and walk away from their leases, it will force many landlords to go bankrupt as well, putting the empty theaters into the hands of the landlords’ lenders, Makler said. Eventually, these financial institutions will be forced to sell the properties at a low enough price that it makes financial sense for a buyer to come in and redevelop them--meaning huge losses for the lenders.

“Ultimately, the lenders will probably end up being pinched the most on this,� Makler said.