Industry's ability to recycle property put to a screen test

If a movie were to be made chronicling the dismal financial state theater operators find themselves in, the script might include the following commercial plug: "Stadium-Style Seating: Technological Triumph and Tragedy, now playing for a limited time at an antiquated movie theater near you.'

Caught in a web of changing technology and consumer preferences, several theater chain operators have been forced to reorganize under Chapter 11 of the U.S. Bankruptcy Code. In recent months, Carmike Cinemas, Edwards Cinemas and United Artists Theater Co. have all filed for Chapter 11 bankruptcy protection. In September, General Cinemas said it too was considering bankruptcy reorganization.

Landlords of retail centers that include non-stadium-style movie facilities - the equivalent of modern-day dinosaurs - find themselves in a major bind. As a result of the Chapter 11 filings, landlords will be forced to take back literally hundred of leases rejected by the movie operators.

For example, Carmike, the nation's third largest motion picture exhibitor, as of June 30 operated 2,815 screens at 439 locations in 36 states. The company has received approval from the Bankruptcy Court to reject leases relating to 65 theater locations. Meanwhile, Carmike's stock price on the New York Stock Exchange closed Sept. 29 at $.6875, down from its 52-week high of $13.62.

Compounding the problem is that most industry experts believe the sector is overscreened by at least 20%. The current inventory is conservatively estimated at more than 37,000 screens, or about 7,500 screens too many.

Act 1: The movie revolution The death knell for antiquated theaters was sounded five years ago when stadium-style seating first emerged in theaters with dramatically improved sight lines, sound and creature comforts. Theater operators knew the older properties would eventually prove to be a financial drain, so why didn't they simply unload those leases?

"Unload to whom?' Howard Makler, an expert in site disposition, asks rhetorically. "Who is the buyer? Essentially the problem is that all theater operators are in the same situation in that they really didn't want to buy someone else's older, antiquated facility that they would then would then have to turn around and close.'

Makler is COO of Huntington Beach, Calif.-based Excess Space Disposition Inc. The company, which also has offices in Lake Success, N.Y., has done plenty of work for theater chains, including AMC Entertainment.

Act II: Landlord indifference Collectively, landlords aggravated the situation by refusing to grant rent reductions and forcing several operators to file for bankruptcy protection, explains Makler. "Landlords are partners with their retailers more than they want to admit it. I think many landlords knew in their hearts that this was coming, and that they didn't want to deal with it or accept responsibility.' But now that several operators have filed for Chapter 11, the problem is now the landlord's.

Act III: Exit strategy Landlords of older theater facilities need to start evaluating their options immediately, but that's easier said than done. Makler estimates that it costs $25 a foot, a steep price, just to return a theater to a vanilla shell. "By the time you're done retrofitting it, you may indeed have spent more money than just bulldozing and rebuilding,' says Makler.

Most movie theaters physically occupy what Makler describes as secondary locations. They're typically located behind another building or in the elbow of a center, so they are not sites in high demand. In a few instances, former theater buildings have been torn down and replaced with national retailers such as office supply stores, but that's rare.

"With movie theaters there is no simple formula that can be applied across the continent of surplus locations,' explains Makler. Each site is unique.

But real estate does create pitfalls and opportunities at the same time, adds Makler. Someone will find a way to recycle these theater buildings to create the highest and best use, but that script has yet to be written.

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