After ArcLight Cinemas’ closure, what happens next?

This week’s announcement that ArcLight Cinemas and Pacific Theatres will not reopen after the COVID-19 pandemic sent local moviegoers and filmmakers into mourning, especially those who considered the historic Cinerama Dome their second Hollywood home. Luminaries like Rian Johnson, Edgar Wright and Aubrey Plaza joined the outpouring.

While most industry insiders expect prime locations such as the Cinerama Dome on Sunset Boulevard to eventually return under new operators, it was a stunning end for a chain that seemed to do everything right, from its craft cocktail bars to its comfortable seats and online reservations system.

Beyond the high-end ArcLight theaters, the Pacific locations at the Grove and the Americana at Brand were also highly trafficked destinations with loyal followings.

Still, the problems that likely led to ArcLight’s closure are not unique to the chain, and it may not be the last to fall to the effects of the public health crisis.

ArcLight and Pacific executives remain silent on the abrupt announcement. But it appears that a key factor in the decision to close was rent, which is the largest fixed cost for theatrical exhibitors.

Bills to landlords piled up for multiplex operators in the months after governments closed theaters in March 2020, especially in Los Angeles, where cinemas remained shuttered for a full year. Once authorities allowed theaters to open, operators had to decide whether they could pay what they owed with attendance restricted at just 25% to 50% of capacity.

Decurion Corp., the real estate company that owns ArcLight and Pacific, likely didn’t see a path forward.

“It’s the amount of debt these companies have incurred,” said Jeff Bock, an analyst at Exhibitor Relations. “They couldn’t see a way to profitability over the next couple years. It’s hard to sustain a business like theatrical exhibition with everything still unstable.”

There were clear signs of trouble for ArcLight. Less than two weeks ago, a Twitter user posted a photo of an eviction notice found at ArcLight’s Culver City location.

The collections agent listed, Caitlin Brannon, declined to comment when reached by phone, while a lawyer on the document did not respond to requests for comment on the notice, first reported by IndieWire.

Many of ArcLight’s locations are leased and were burdened by high rents, including the Santa Monica theater that opened in 2015.

Rents have been a major issue for other businesses, including retailers and restaurants, that have spent much of the last year closed. Landlords in many cases have been willing to cut deals with tenants because they haven’t had other businesses waiting in the wings to take over the lease. That’s especially true of multiscreen theaters, which are difficult to convert to other uses.

“In the past, landlords can aggressively deal with a tenant who’s not able to pay, but that has not been the case since the pandemic,” said attorney Jeff Krieger, a partner at Greenberg Glusker who specializes in bankruptcy law.

With ArcLight, though, the situation clearly reached a breaking point.

Beyond costs of rent and stocking up on food and beverage, theaters face an uncertain landscape. Studios continue to push back their biggest blockbusters, on which theaters depend for survival.

The companies that backed theaters are probably also looking at a future in which more movies go to streaming services and fewer films get long, exclusive windows on the big screen before people can watch them in their living rooms. This despite the recent box office success of Warner Bros.-Legendary’s “Godzilla vs. Kong,” which indicated strong pent-up demand for Hollywood movies.

The National Assn. of Theatre Owners (NATO) lobbied hard to secure federal assistance to beleaguered theater owners. But it’s not clear how effective that assistance has been. Many operators applied for PPP loans, which came with restrictions. Initially, borrowers had to put at least 75% of their loans toward payroll in order to have them fully forgiven. Congress in June lowered that threshold to 60%, allowing businesses to spend more money on expenses like rent.

A NATO spokesperson declined to comment on ArcLight’s demise or current market conditions facing smaller regional chains.

The so-called Save Our Stages Act, sponsored by senators Amy Klobuchar (D-Minn.) and John Cornyn (R-Texas), was supposed to act as a $15 billion lifeline for independent entertainment venues, including small theaters. However, the application portal set up by the Small Business Administration crashed when it opened last week, leaving shuttered venue operators in the lurch, as outlets including Variety have reported.

“We are focused on strengthening the portal’s performance and user enhancements for when it reopens,” the SBA tweeted Wednesday.

It’s unclear who might move into the former ArcLight and Pacific locations. Grove and Americana developer Rick Caruso has said he wants to keep the projectors rolling. Mexican theater chain Cinépolis has a relationship with Caruso properties, having reopened the Bay Theatre in Pacific Palisades, but the company did not say whether it was considering additional locations.

“We were very disappointed to hear of the closing of ArcLight,” said Luis Olloqui, Chief Executive of Cinépolis USA, in an emailed statement. “It’s been an extremely difficult year on all exhibitors and we sincerely hope that something can be done to save these iconic theaters.”

Few expect the entire chain to be sold in one piece, given the complications of dealing with multiple landlords. Instead, the theaters are expected to be unloaded piece by piece.

Netflix has been the object of speculation on social media as a possible savior of ArcLight Hollywood and the Dome, following its purchase of the landmark Egyptian Theatre. New York-based Cohen Media Group, which bought Landmark Theatres in 2018, has also shown interest in cinema assets. Neither would comment for this story.

Giant chains such as AMC, Regal and Cinemark might be natural operators, but may not be interested in spending the additional cash after taking such a beating to their balance sheets.

There’s also the off-chance that a movie studio or local billionaire swoops in. Whoever does, though, will be buying into a business that will have to adapt to long-term changes accelerated by the pandemic.

“If ArcLight, which is very beloved, especially by people in the industry, can’t survive, it’s going to make people nervous and question whether this theatrical model can survive,” said Bock. “What happens next is going to be a big deal for the future of the industry.”