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TOPIC: Affect of Digital Equipment on Real Estate Values

Affect of Digital Equipment on Real Estate Values 25 Sep 2011 04:19 #37054

  • lionheart
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I read recent and not so recent comments on this forum that some people believe a theater not having been converted to digital projection has an impact on the value of that theater. It was even said more than once that the cost of the conversion should be deducted from the price of the theater.

I wouldn't dispute that the business value is lower for a theater with film projection than that same theater would be with digital projection. My question is, do you think a theater seller must deduct the entire cost of conversion from the asking price in order to sell? I know that would be attractive to a buyer, but is it realistic to expect such a concession by the seller?

This is particularly relevant to me since I have a theater I am trying to sell. I have already reduced my price over time from $450K to $275K for various reasons, including the lack of digital equipment in the booth. When I separate that $275K into the business/equipment component and the real estate component, I could say that I'm asking $240K for the real estate and only $35K for the business/equipment. Now $35K is much less than what I paid for the equipment, and even further still from the replacement cost of that equipment. Not all of that equipment is involved in projection. Some of it is concession equipment, seats, and other items not related to projection.

Now, I can understand if someone isn't willing to pay my asking price because it hasn't been converted to digital. That is their perogative. But, I do not agree with the idea that I should absorb the cost of digital conversion in order to sell my property. A theater business is not just a projector. It is also the land under the building, the structure, the concession stand, the seats, the bathrooms, the marquee, the carpet, the drapes, the heating and air conditioning systems, the plumbing and electrical systems, the fire sprinkler system, the handicap access, and so much more.

I would say that a seller could deduct whatever the value of their old film projection system(s) is from the asking price on the business/equipment, and that would be a fair concession. Of course, if the seller has already done that, then he or she may not even be willing to go that far. I personally have already deducted a significant amount from my business/equipment portion of the theater's asking price, so I believe anyone who might buy my theater is essentially getting the film projectors and associated gear for free anyway. I still believe they should pay for all the rest. If someone wants to buy a theater, then they should do so based on all the costs and not just one.

I've written on this topic before. I used the metaphor of a car. If you go to buy a used car, do you think the owner should have to deduct the price of all the latest audio equipment from the asking price of his car because it still has a cassette player in it? The engine and transmission run great. The body and interior are fine. But you tell him that nobody is buying cars these days if they don't have the latest killer audio system. He tells you that he already based the price of the car on it's age, mileage, and condition. He isn't asking as much for his car as it would go for in the big city, or maybe on the other side of town. He wasn't asking you to pay the same price as you would for a car with that fancy audio system, he points out. Is the buyer or the seller right in this case? Who is being reasonable?

I would also like to point out that some theater prices may actually be lower than the cost of digital would be for that theater. The owner would have negative cash flow to upgrade and sell it to you. He would be paying to give it away? Does this mean the theater should just close? Not necessarily. It all goes back to the numbers and the market analysis. If you believe the market analysis supports your plan for a theater, then don't expect someone else to do everything for you.

There are different ways to value a business. One is based on how much money it brings in. Another is based on the value of its assets. Normally if a business doesn't make much or if it is out of business, it is sold for asset value. When there is an asset sale, you shouldn't expect the price to go any lower because the asset you are looking for is not on the list. Either, you buy it, or you don't, based on what is on the list, not on what is not.
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Re: Affect of Digital Equipment on Real Estate Values 25 Sep 2011 15:20 #37057

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Lionheart,

Can you post links to your earlier threads on your theater?
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Re: Affect of Digital Equipment on Real Estate Values 25 Sep 2011 18:05 #37058

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I'm not sure exactly what threads you are referring to. A lot of my postings are in response to threads started by others. I did start some over the last few years about my theater being for sale. Here are the ones I could dig up:

www.bigscreenbiz.com/Forums/The-Lobby/34...a-Theater.html#34484
www.bigscreenbiz.com/Forums/The-Lobby/33...n-theater.html#33784
www.bigscreenbiz.com/Forums/The-Lobby/32.../Purchase.html#32840
www.bigscreenbiz.com/Forums/The-Lobby/32...y-Theater.html#32284
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Re: Affect of Digital Equipment on Real Estate Values 25 Sep 2011 18:44 #37060

  • Keweler
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Lionheart,
I think this a difficult topic. While I see your points as valid, let me just give you couple of my thoughts:
Things are only worth as much as somebody is willing to pay for it.
In don't think, we are talking cassette player. I think it is more an engine using leaded gas when the whole world is using unleaded.

Jay
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Re: Affect of Digital Equipment on Real Estate Values 26 Sep 2011 00:03 #37064

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Ok, Jay, perhaps you are correct. Maybe a projection system is the "engine" of the theater. Now, the film "engine" is still running. It will run for a little longer, but soon the fuel will become unavailable or hard to find. However, the theater is not a complete loss since the engine can be replaced.

I would sell the theater for the appropriate value of a theater with an old engine and everything else in fine shape. I would not deduct the cost of a buyer converting to a new engine. What kind of used car seller would do that for you? He might change the tires, throw in a tune-up, and maybe even repair a dent or two, but he is not likely to buy you an engine, unless his car is going to bring him enough money to make the sale make sense. If I could afford to put a new engine in it for you, then maybe I would, but what you are asking would be impossible for many theater sellers. You are just going to have consider the case of a theater for sale with film equipment just like buying an old theater without an "engine". Base your offer on the value of the real estate and other assets.

Don't you think if a theater has digital projection that it will be priced much higher than one that doesn't? If I had installed digital projection, I would be asking much more than I am now. So, in essence, I have already deducted the price of digital installation. I consider my price to be asset value.
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Re: Affect of Digital Equipment on Real Estate Values 26 Sep 2011 03:48 #37068

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Lionheart,

IMHO, these are the factors that makes it difficult to sell your theater: (cost of digital conversion is just one factor)

1) This theater has only been operating for one year out of the past 14 or more years.
2) You have been unable to keep the theater running without you there meaning that it can't cover normal operating expenses. You are better off on a cash flow basis keeping it closed. This should be treated by individuals as an investment and not buying a job which it would be it seems.
3) Now, the cost of digital must be taken into consideration.
4) It is a twin. One room is very small (34 seats right). No way you could open a movie in that room.
5) 3000 population in town and not that far from a larger area. 22 miles is not very far for people to travel to on a regular basis.
6) Price seems high. I do not believe this theater can handle debt service of $2000 per month. Add digital debt service costs of $2000 per month and ......just too much.
7) Poor economy still.
8) Difficult to borrow money.

You talk about the value of your equipment. The only equipment that has any value would be the following: amps and speakers if they are capable of being digital equipment. Almost everyone is going to Dolby Digital when they are upgrading their projectors. What sound formats do you support? A CP-750 can be purchased for less than $3000! Making CP-650s bought for $10k a couple of years ago worth $2000. I feel your pain on equipment because we are sitting on a decent amount of film equipment as well.

Concession equipment: Restaurants are closing down left and and much of a theater's equipment needs can be purchased for $5000 tops.

I have always thought you should have more pictures of your theater and the town just like Mike has done with his theater for sale. I have only seen one picture of the interior of the auditoriums while you have shown many of the concession stand and tables.

The value this theater is worth is solely the value of the real estate. Of course many older theaters have limitations of use due to slope floors which lowers the value even more.

But hey this is just one person's opinion. Good luck.
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Re: Affect of Digital Equipment on Real Estate Values 26 Sep 2011 04:06 #37069

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Correct me if I am wrong...... but hasn't Mike's Temple Theatre been for sale for about six years now?
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Re: Affect of Digital Equipment on Real Estate Values 26 Sep 2011 04:13 #37070

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If so, that just shows you tough these can be to sell. He has done a good job IMHO though.
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Re: Affect of Digital Equipment on Real Estate Values 26 Sep 2011 15:47 #37072

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Gee, Rufusjack. You sure are little Johnny Sunshine today. :( Besides the fact that I would argue a few of your points, I would also point out that you turned the thread away from my original focus and directly onto why you think my theater is hard to sell. My original point is that I think it is unreasonable for a buyer to expect theater sellers without digital to deduct the cost of installing it from their asking price. It is probable that each seller has already taken into account that his theater is not equipped with digital when he chose his asking price. That is all I really wanted to say. I just tried to paint a word picture with a metaphor to get people thinking.

As for why my theater is hard to sell, I am not going to deny that it is not perfect. If it were perfect, the price would certainly be higher, and it would have sold by now.

You are mistaken in some of your statements. For example, the town has a population of about 3,584 not 3,000. This is only within the city limits. Most people live outside of town, in the country, or around the lake, etc. The zip code of 74426 has a population of 12,294. The county has 19,797 residents. (Poulation data is from Sperlings at bestplaces.net.) And, the Gentry Cinema is the only movie theater in the county. It is the closest one for all of the county's residents and some more outside the county. Does this automatically mean that all area residents will choose the Gentry over the competition. No, but it does mean the Gentry can call the entire county its market area, and any new operator will have an opportunity to grow the business because the people are there.

The theater was closed for many years because the previous owner built a new theater and closed the old one. I am told that he didn't do a very good job and the new place closed in a short time. I believe it may be a used car dealership or some such thing now. It had very poor sound with echoes was one complaint I heard. The old theater was very run down and needed a lot of work. After several years, that is where I came in. I put a lot of work (and money) into it. The city was planning to condemn it just prior to my buying it, if that gives you an idea how far gone it was.

I replaced everything and remodeled and improved the place. I lost a lot of seating space, but I managed to include a small second auditorium, where I would not choose to open a new film unless I had no choice, which happened rarely. However, for a place to move films over after having played the bigger room first, it's fine. Some customers actually said they preferred it. The ceiling is about 18 feet high, just like the big room. It has beautiful royal blue drapes on the walls and unique lighting recesses in the middle of the drapes. I built what I call a fake stage at the front with a bit of a plain procenium. When the guys from Aster out of Denver came to install some equipment for me, they commented that I had done a really good job on the small room. They said they had seen a lot of theaters will small rooms that they were not impressed with, but that they liked what I had done with the space. The late John Pytlak (an Oscar winner and a technical expert that used to post on this forum) would have agreed that it's more about the proportions of a room and screen than about the actual size of it. He emphasized that point often. Sure, big is nice, if you have the space for it. But two screens are better than one.

As for someone spending only $5,000 to equip a concession stand, I will say that I have equipment that you probably wouldn't find in a $5,000 concession stand. I have a Vulcan Flashbake Oven, an Alto-Shaam cook and hold double oven, a full size fridge, a full size chest freezer, a 3 compartment sink, and then I also have the more traditional popcorn popper, butter dispensor, and microwave oven. The counters are custom built for the space. There are tables and seating for 20 in a well defined dining area in front of large windows that fill the lobby with natural light in the day, and emit a warm glow to the world at night.

I know the revenues are not outstanding, and I am always open and honest with anyone who asks me questions. However, your estimate of a $2000 payment seems high to me. Did you assume that a buyer would finance the entire asking price? That is not realistic. A buyer would have to put a significant amount of money down no matter what institution will give him a loan, probably anywhere from 30 to 50%.

Anyway, I know a loan is not likely feasible for most people who would be interested. That is why I have offered a lease-to-own option. The lease payments would be far less than that $2,000 you spouted off. I only ask that someone buy the equipment from me for $35K as a condition of signing a lease. Then I will give them a lease rate of $800 per month for two years, and the payments will be applied toward a down payment at the end of the lease (if you buy).

It cost me $50,000 to fully equip the the place (and that was a bargain rate), but I have only been asking $35,000 for the equipment. I tell you what... if a person will buy my theater outright, instead of asking for lease-to-own or owner financing, I will subtract another $25,000 off the price of the equipment. That will bring it down to $10K for the equipment and $240K for the real estate.

And just to be fair to those who can't afford to buy the place in that manner, I will take that same $25,000 off the price of the equipment if you go the lease-to-own route... on the condition that you put cinema grade digital projection systems in the theater prior to opening. Without the digital equipment in place, I will not take the $25K off the price.

There! For the same $10,000 that I paid just for the seats (Irwin Marquee seats), you can buy all the equipment, if you meet my conditions. I will essentially be giving away the projection and sound equipment, and all the concession equipment, too. You pay the price of the seats, which are only lightly used, and the equipment will be paid for, as long as you install digital projection systems or buy the whole place at once.

I think that is an outstanding offer.
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Re: Affect of Digital Equipment on Real Estate Values 26 Sep 2011 18:24 #37076

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To get back on topic, yes the cost of digital is/should significantly affect the value of your theater only behind that fact it has been closed for much of it's life the past 15 years.

Why? Well very few people have access to $150,000 cash. This maybe higher as sound upgrades might need to be made. What processors do you have? Amps? Speakers? So one would have to borrow/lease at what very well could be $2000 per month or more based on 7 years. Let's do some math (feel free to correct me where I am wrong):

Ticket Sales - $70,000 (this is an average of twins in the Mo/KS area, the range is $57,000 to $154,000 [all digital is the $154] all with zip code populations between 4000 people and 7700 people)

Concession Sales - $35,000 (assume 50% of ticket sales)

Assume 50% film rental, 35% costs of concessions leaves $57,750.

Minus $24,000 for digital conversion costs leaves $33,750.

Minus utilities of $600 per month, minus phone charges of $100 per month, cc fees of 3% (I know you were cash only before, but credit cards are a must today), $100 trash for a total $11,175 per year leaving $22,575

Labor - if lucky enough to pay someone $10 per hour maintaining your previous hours (7 shows per week) even with just one person working at a time $9100 a year.
Leaving $13,475.

If I buy this theater for $200k cash, that leaves me only a 6-7%% return on my investment. But there are many costs left out: insurance, misc office supplies, additional labor, shipping for the hard drives, any advertising costs, booking fees etc.

This assumes no cap-x expenditures as well.

A business that loses money is only worth the value of it's equipment.

You mention concession equipment that it normally not needed in an average concession stand like the ovens, chest freezer, etc. How much revenue do those pieces together bring in? Both ovens can be purchased on a "buy it now" basis on ebay for $5-600 each.

Even if someone had the $350,000 cash needed to buy this theater and pay for the digital equipment, they still would want a return on that investment of at least 15-20%. Can this theater make a $70,000 profit?

Even a $200,000 purchase price and still running film, has this theater had a profit of at least $20,000 after all costs including all reasonable labor expenses?
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Re: Affect of Digital Equipment on Real Estate Values 27 Sep 2011 09:50 #37091

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I will not post my numbers on a public forum. If a potential buyer is interested, they can contact me at This e-mail address is being protected from spambots. You need JavaScript enabled to view it for more information. Since you obviously are not interested in buying my theater, Rufusjack, I'm sure I won't be hearing from you.

As for whether my equipment is digital ready, I don't know. I did not have digital sound. I had Dolby SR. It sounded great, but of course will be left in the dust by changing technology. I think my processor was a CP55. My speakers were Sony and Peavey. My amps were pretty good, but the brand slips my mind right now. I never checked on what it takes to go digital, so I can't say what would work and what wouldn't.

I've already said I won't charge a buyer anything for that old equipment anyway, so what difference does it make? Yeah, whine that it costs too much for a buyer to convert. Sorry, folks, but that's life. You want to be in the theater business, then it's going to cost you something. Nobody is going to give it to you. If I installed digital for you, then I would add that amount to the asking price anyway. But, I can't afford to do it. And this is going to be the way it is for nearly every theater for sale. I already have the place priced at asset value. You probably can't build a place for anything close to what I'm offering mine for, so I don't accept that I have to price it for $150K less. Go try to buy an empty warehouse and tell the seller he has to reduce the price by hundreds of thousands because it is not ready for digital. He will laugh at you. My place is way better than a warehouse, so I may do worse than laugh.

I just know that if someone started with a warehouse or other building to repurpose, or maybe an old theater that has been closed a while, my theater is still way closer to ready for service than they are. This is worth a lot. If Checotah had never had a theater and I told you the market population was 20,000, you might think it was a decent spot to put one in. Yet, with a building ready to go, except for digital upgrade, now I guess I would have to sell it for way less than cost to satisfy Rufusjack and people of the same opinion. :angry:
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Re: Affect of Digital Equipment on Real Estate Values 27 Sep 2011 15:30 #37093

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I don't think the cost of installing digital needs to be taken right off the purchase price, however I'm sure any serious buyer is going to take it into consideration as they negotiate a price. The cost for digital is significant and necessary to play Hollywood movies, if the numbers don't work with those costs figured in, the buyer is not going to buy.
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Re: Affect of Digital Equipment on Real Estate Values 27 Sep 2011 15:56 #37094

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I guess I must be too old to follow this exchange between Lionheart and Rufusjack. Since when did the projection equipment determine or have any "major" impact on the selling price of a theatre? While I acknowledge that because of current cost digital projection equipment it's a "component" in the value, what ever happened to the location, condition, gross ticket and concession sales?

My personal opinion is that I would run film as long as I could get prints, since digital projectors will cost more in the long run to maintain, despite the delusion some people are under. The only big winners are the film companies, who are score big time savings in print costs from an exhibitor's conversion to digital. Every year that it can be put off is another year that you have avoided wearing out your new (and much more fragile) digital projectors, not to mention that the cost will almost CERTAINLY come down over time. While the change to digital is inevitable (thanks to the major circuit's greed, jumping into digital with their eyes closed), you're actually saving money the longer you can put the changeover off.

If the calculated cost of purchasing or financing the cost of converting to digital in the future would become a "major" component of the net profit of a theatre, then I would question buying such theatre at ANY price.
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Re: Affect of Digital Equipment on Real Estate Values 27 Sep 2011 18:52 #37097

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techman707 wrote:
I guess I must be too old to follow this exchange between Lionheart and Rufusjack. Since when did the projection equipment determine or have any "major" impact on the selling price of a theatre? While I acknowledge that because of current cost digital projection equipment it's a "component" in the value, what ever happened to the location, condition, gross ticket and concession sales?

Five years ago I would agree with that statement as you could spend $10-15,000 per screen and have a pretty good presentation. Plus most of that equipment had an expectation of a long life. In 2011, the cost to convert to digital starts at approx. $75,000 per screen and there are reasonable signs that a conversion is needed within 2 years. For a small theater, that is significant. At a $1000 per mo per screen, the cost of digital could very well equal 15-20% of the gross sales. THAT IS VERY SIGNIFICANT!!! Remember this particular was only able to pay a small salary to the owner.

Despite Genedo's previous claim of 20% in increase business for all digital theaters, I do not see that being the case. You certainly can expect a nice increase in ticket sales due to 3d and 3d charges but that is short-lived. So you spend $1000 more per screen with very little expectation of increase in revenues.

A theater has the following components that would determine the value: 1) The real estate itself, 2) The theater cash flow as a business, & 3) value of equipment, & 4) Realistic future expectations. You all can decide if a any theater has any value with any of those components.

I am very aware that my theater has very little value right now in this environment and it has been running non-stop for 5 years. Yes it does suck.

Lionheart, again I have a great deal of respect for you for sharing your story. It takes a mature person to do so and many will learn from this. I know that is not much consolation though.
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Re: Affect of Digital Equipment on Real Estate Values 28 Sep 2011 22:59 #37121

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This may be a simplistic view of the situation... but if I was looking at any theatre these days, digital would most definitely be a part of the equation. There's no way I could ignore the possibility that I might be forced to invest a substantial amount of money into a theatre that I might have just financed, thereby increasing the debt load I had just recently taken on. Could I do that? WOULD I do that? Would it be smart not to consider the question?

The used car-old engine analogy is interesting, but not well thought out, in my mind. Sure, a used car dealer might slap on a tire or fix a dent, as described here. However, his ethics would certainly be suspect if he sold a car with an engine he KNEW would be dead within a year or so, and did not tell the prospective buyer or somehow accommodate for it. Nobody buys a car with the expectation that the engine will konk out in a year or so, and I expect the same expectation would hold for a theatre that included its projection equipment.

So with respect to the parties here, I would mentally be adding the cost of digital gear to the price of the theatre, knowing the possibility I might be tacking that on pretty soon.

Do I expect you to deduct the full cost of digital conversion? That would be a fairly subjective question since I would have to decide if the theatre price, plus conversion costs, would be a reasonable deal for me personally. Someone else's thresholds might be more or less.

It's a good subject though... one that we all should have expected to come up sooner or later.
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