Nontraditional Cinema Deal May Fill Void

Shopping center developers won’t be pinning their hopes on new movie theaters in 2001--as they have done for the last few years--and many owners of centers will face a daunting task trying to fill former theater space with new users.

Although a few theaters will be built next year, continuing troubles in the industry have already caused some developers to abandon plans for new theaters and to be ready to spend a lot more money if they want to include theaters in a new development.

“In the year 2001, it will be very difficult for any developer to fund a project with a theater as an anchor,” predicted Jerry Snyder of the J.H. Snyder Co., a Los Angeles-based developer.

Snyder Co. is going ahead with plans for multiplexes at its Promenade shopping and entertainment development under construction at the Howard Hughes Center in Westchester and at The River, a development under construction in Rancho Mirage, he said. However, Snyder said his company has replanned Valley Plaza, a shopping center redevelopment in North Hollywood, without the theaters that were once envisioned.

Snyder’s company has the financial backing to construct the buildings that house the movie theaters and to outfit the interiors of the theaters if need be, he said. The financing is crucial, Snyder explained, because outfitting a typical modern multiplex costs about $5 million for the seats, sound systems, screens, film projection systems and soundproofing.

Developers and theater owners have split the cost of construction in many--if not most--new theaters built over the last 15 to 20 years, said attorney Gary A. Glick of Cox, Castle & Nicholson. Typically, the developer pays for constructing the outer shell of the building and the theater operator finances the interior fixtures and equipment.

In such an arrangement, the theater operator usually leases the building for 10 or 20 years. The developer receives lease payments but doesn’t share theater profits or have anything to do with running the theaters.

But movie exhibitors’ troubles during the past year plunged a number of the biggest chains into bankruptcy after an expansion frenzy. Theater companies built new complexes with stadium seating that often siphoned customers from older theaters. Because of their financial woes, Glick said, theater operators can ill afford to finance more theaters or sign new leases.

Instead of these traditional leases, Snyder and Glick said, some shopping center developers and owners are now considering a different type of arrangement.

In the new deals, the developer pays all the cost of building and outfitting the theater. Instead of leasing the building to the theater operator, the developer hires the theater operator to manage the multiplex in return for a management fee or a portion of the profits or both.

Several real estate sources said such deals were common years ago. In real estate parlance, these deals are referred to as “operating agreements” to distinguish them from leases.

Among the chief differences between this arrangement and the traditional lease setup: The developer assumes more risk by financing both the outer shell and the fixtures and equipment inside the theater, and the developer acts as both owner and operator of the theater, sharing in the profits or losses from its operations. The theater operator gets a smaller portion of profits but doesn’t have to worry about lease payments.

“I’ve probably done 100 theater leases, but until the last six months, I’d never seen an operating agreement,” said Glick, who represents a number of shopping center owners with theaters as tenants. “I’ve seen several of them in the past few months.”

Snyder said he’s prepared to sign either an operating agreement or a traditional lease at his new developments, depending on what kind of deals he can strike with theater operators.

“We’re fortunate that we have relationships with our lenders that will allow us to fund the full cost of [furniture, fixtures and equipment] if we have to,” Snyder said. “At Howard Hughes Center, we’re putting the seats in and we’re going to pick an operator any minute now.”

Most bankrupt theater operators will probably complete their Chapter 11 reorganizations during the next 12 to 18 months, according to Glick, who said the outlook for 2001 is mixed for shopping center owners with theaters as tenants.

“There are a lot of leases out there on good theaters sitting on good real estate, and those theaters will continue to do fine,” he said. “Those that won’t do well are the ones that are old or in areas where there is too much competition from state-of-the-art theaters.”

Because bankruptcy law allows theater operators to escape from leases they want to cancel, Glick said, some landlords undoubtedly will be stuck with theater properties that will be difficult to fill with another movie exhibitor or to convert to another use.

“Landlords who get these theaters back as a result of theater operator bankruptcies are going to have a lot of work to find users who can take over those properties,” Glick said. “There always seems to be someone who comes along who can make these assets work, but I don’t know who that might be in this case.”

Unlike generic retail space, Glick noted, theaters are expensive to convert for other uses because of their sloped floors and the fact that they are customized buildings intended to be used only as theaters.

Theater chain woes will present the biggest problems “for projects that are anchored solely by a cineplex,” said John Given, a senior vice president at Hollywood-based CIM Group, developer and owner of a number of Los Angeles-area retail projects.

The multiplexes and megaplexes that have sprung up in malls around Southern California generally play a bigger role in the success of those malls than theaters do in CIM Group’s projects, which tend to be what is known in the industry as “street retail” rather than enclosed malls, Given said.

“In our approach, theaters are sometimes an important contributing factor among many factors that cause a street to be successful, but they are only one of the factors,” Given said. Developers have turned to movie theaters so often to anchor their projects in recent years that it seemed every new mall and shopping center had to have a multiplex.

But Snyder said it only seems that way.

“We have eight or nine developments going at our company, and seven of them never had theaters in the planning,” he said.