June 2024

• Netflix announced a new immersive entertainment experience it is building in Dallas.
• It is planning to repurpose old department stores to create the Netflix House.
• This could potentially be a promising new trend for commercial real estate owners worried about struggling movie theaters.

I have written and/or recorded videos a lot about the retail market lately. There’s a reason for that – it seems to be the one area of commercial real estate that is really cranking. Having said that, a couple of areas even in retail that are some concern – large department stores and movie theaters. 

Well enter Netflix. While traditional movie theaters grapple with declining attendance, the streaming giant announced it is going to enter the brick-and-mortar world with its innovative “Netflix House” concept. Announced this week, the first Netflix House is slated to open in Dallas’s Galleria mall in Fall 2025, occupying a two-story space previously occupied by a department store. This project signifies a fascinating intersection of trends in the entertainment and real estate industries. So lets talk about it.

The Struggles of the Silver Screen

For decades, movie theaters have been a cornerstone of American entertainment. However, the rise of streaming services like Netflix has posed a significant challenge to theaters. The convenience of watching movies at home has led to a decline in movie theater attendance. According to the Numbers, theater ticket sales are far below what they were pre-pandemic. This has forced theater chains to adapt, with some exploring luxury recliner seating, premium dining experiences, and even in-theater gaming to lure audiences back. And, of course, this long-term trend was worrying for commercial real estate owners. 

Rethinking Entertainment Spaces

The decline of movie theaters, of course, can potentially have a big effect on commercial real estate. As I wrote about a few weeks ago, movie theaters are often anchor tenants in retail centers. 

In addition, the rise of e-commerce has led to the closure of numerous large department stores and shopping malls. This has created a surplus of large retail space, posing a significant challenge for real estate property owners. That’s one of the reasons Netflix’s new venture is so interesting.

On top of a movie theater, Netflix’s new venture will contain a wide array of retail shops, restaurants, and “experiential activities tied to the streamer’s major franchises like Bridgerton, Stranger Things, and Squid Game.” It is designed to be a destination experience, offering a variety of activities beyond just watching movies. This will hopefully broadens its appeal and caters to a wider audience.

Department stores, with their large floor plans and central locations, offer a perfect canvas for the creation of immersive entertainment experiences like this. Netflix House Dallas is just one example of this trend. Malls across the country are exploring similar options, transforming underutilized spaces into multi-purpose entertainment centers that house movie theaters, bowling alleys, arcades, and escape rooms. This not only revitalizes struggling retail properties but also allows movie theaters to offer a more diverse and engaging experience, potentially attracting new audiences.

Benefits for Retail Property Owners

The repurposing of retail space into entertainment centers offers several advantages for property owners. Here are some key benefits:

• Increased Tenant Demand: Repurposing vacant space for entertainment creates a more desirable property, attracting a wider range of potential tenants. This can lead to higher rental rates and increased occupancy levels.
• Enhanced Customer Experience: Entertainment centers create a more dynamic and engaging destination for shoppers, encouraging them to spend more time and money at the mall. This can benefit existing retail tenants by increasing foot traffic.
• Diversification of Revenue Streams: Leases with entertainment centers can offer a more stable and predictable revenue stream compared to traditional retail leases. This helps mitigate risk and provides a buffer against economic downturns.

The Future of Retail Entertainment

The announcement of Netflix House in Dallas is a significant development with the potential to reshape the retail and entertainment landscape. It signifies a future where streaming giants and physical spaces co-exist, offering consumers a more interactive and immersive entertainment experience. This trend presents exciting possibilities for both real estate property owners and entertainment companies. By embracing innovation and creating dynamic entertainment destinations, these entities can ensure their continued success in a rapidly evolving market.

While there’s still some time before Netflix House opens its doors, one thing is certain: the marriage of streaming and brick-and-mortar entertainment could be the key ushering in a new era for movie theaters.

• If a neighbor substantially interferes with your use and enjoyment of your property, you may be able to file a nuisance claim against them.
• A court will balance a lot of factors to determine whether the interference qualifies as a nuisance.
• If it does, the Plaintiff can potentially receive an injunction or monetary damages.

There was an interesting decision from the Texas Supreme Court this week that caught my eye. And when I say interesting, I mean from the perspective of a nerdy real estate lawyer who finds intricacies of commercial real estate law captivating. So … everyone.

The case resolves around nuisance law – which governs situations where a property owner’s actions substantially interfere with another’s use and enjoyment of their property. Whether it’s late-night construction, overflowing garbage attracting pests, or loud music keeping you up all night, nuisance law can offer a path to resolving these conflicts. 

So lets talk about the Supreme Court case and nuisance in general.

What is a Nuisance?

A nuisance is a condition that “substantially interferes with the use and enjoyment of land by causing unreasonable discomfort or annoyance to persons of ordinary sensibilities attempting to use and enjoy it.”  In simpler terms, it’s something that significantly disrupts your ability to live peacefully on your property. The key elements here are “substantial interference” and “unreasonable discomfort.” Not every minor annoyance will qualify as a nuisance. There must be a level of severity that would bother a reasonable person trying to live a normal life next door.

The Court’s Standards for Nuisance

Courts in Texas consider several factors when deciding if something constitutes a nuisance. These include:

• The nature, character, and location of the activity: Courts consider the type of activity causing the disruption. For example, loud music in a quiet neighborhood is more likely to be deemed a nuisance than the same activity in a bustling commercial district.
• The severity and duration of the interference: The frequency and intensity of the nuisance play a crucial role. Occasional loud parties might not qualify, but constant construction noise probably would.
• The abnormal nature of the activity: Activities considered inherently dangerous, like storing hazardous materials in a residential area, are more likely to be classified as nuisances.
• The customary use of the property: Courts consider how the properties in the area are typically used. Loud music might be expected near a music venue, but not in a peaceful, suburban neighborhood.
• Effect on the average person: The discomfort must be something that would bother a person of ordinary sensibilities, not just someone hypersensitive to noise or smells.

There’s one important part that surprised me when I first read about in law school. Being there first doesn’t necessarily grant immunity from nuisance laws. Even if you’ve lived in your property for decades and a new neighbor moves in next door complaining about your existing activities, you can still potentially be held liable for a nuisance. The law focuses on the current situation and the impact it has on the neighboring property. This can seem unjust to some folks. But the key is that the Court just evaluates the above factors at this point in time – regardless of how long it has been continuing.

In the recent Texas Supreme Court case, a number of residential property owners sued a couple of poultry farms for the constant smell emanating from the farm. See Huynh, et al. v. Blanchard, et al., No. 21-0676, (Tex. 2024). The Court reviewed a few issues – including whether it was a temporary nuisance or not and whether the Plaintiffs had an adequate remedy at law. The Court basically did a balancing act to determine whether it was a substantial interference and, if so, what was an appropriate remedy. Ultimately the Court determined that the trial court went too far by shutting down the farms when there were other, more narrow remedies available.

What are Potential Remedies for a Nuisance?

If you prevail in a nuisance lawsuit, the court can order several remedies, including:

• Injunction: This is a court order prohibiting the continuation of the nuisance activity.
• Damages: You can potentially recover compensation for any harm caused by the nuisance, such as property value decrease or medical expenses due to stress.
• Abatement: In extreme cases, the court may order the physical removal of the nuisance, such as a dilapidated structure attracting pests.

While lawsuits can be effective, they are often time-consuming and expensive.  It’s always best to try to resolve nuisance issues with your neighbor directly through open communication and compromise.  Maybe adjusting activity times or implementing noise-reduction measures can lead to a peaceful resolution.  If discussions fail, though, a lawsuit may be necessary. And that’s when a good real estate lawyer is necessary to help protect your assets.

• An Alamo Drafthouse franchisee surprised many this week in Dallas by declaring bankruptcy and shutting its Dallas locations.
• Alamo itself has pledged to reopen the Dallas locations as soon as possible.
• Its unclear, though, whether movie theaters will continue to be strong anchor tenants for retail developments.

I reckon anyone who is reading this article has been to an Alamo Drafthouse. The cinema chain that started in Austin is famous for its in-theater dining and strict no-talking policy. As Texans, we have been lucky to have such a vibrant, enthusiastic movie chain to visit. And it has spawned copycats – which has only benefitted consumers. 

Unfortunately, last week the cinematic experience in Dallas, Texas, suffered a blow with the abrupt closure of all five of its Alamo Drafthouse locations – leaving customers and employees reeling. But what happened? And what does this mean for those cinemas? Could something similar happen in Houston or Austin or San Antonio? Lets talk about it.

Dallas Franchisee Files for Bankruptcy

The primary culprit behind the Dallas closures was the bankruptcy filing of the franchisee, Two is One, One is None, LLC. This local operator apparently struggled financially, likely due to a combination of factors. The ever-changing landscape of the movie industry, with streaming services vying for viewers’ attention, could have played a part. Additionally, the rising costs of rent, labor, and food supplies might have squeezed profit margins. Specifically, its release stated that the dwindling moviegoer numbers since Covid had hurt. Either way, it filed for Chapter 7 – which is liquidation. So it does not appear likely that Two is One, One is None plans to reorganize and continue to run the theaters. 

Alamo Parent Intends to Reopen

It’s important to differentiate between the closure of the Dallas locations and the Alamo Drafthouse brand itself. The Alamo Drafthouse Cinema operates under a franchise model, meaning individual entities own and manage specific locations. The closure in Dallas only affected theaters under the franchisee’s umbrella.

In the wake of the Dallas closures, the Alamo Drafthouse corporate entity expressed its commitment to bringing the brand back to the city. Its statement highlighted efforts to “get Alamo Drafthouse Cinema back up and running”. This suggests a proactive approach to finding a new franchisee or potentially taking over operations themselves – the details were not forthcoming.

I know very little about bankruptcy law. So I called my friend and fantastic bankruptcy lawyer Jermaine Watson – a Partner at Cantey Hanger LLP. He explained to me that, typically in these situations, the franchisor will try to find a new operator to run the theaters. The franchisor typically has a first priority lien on the property, the equipment, etc. It also usually supplies the franchisee with a lot of the materials it needs and goods it sells. As a result, it is not too difficult to replace the operator with a new one. The franchisor does, of course, have to negotiate this with the bankruptcy trustee. But often the trustee will be happy for the franchisor to find a new operator. Again, Jermaine was not commenting on this particular bankruptcy case – just bankruptcy cases in general. But as a result, if Alamo proceeds like this, its possible the Dallas cinemas could be up and running again in relatively short order.

What Does This Mean for the Rest of Alamo?

The news also sparked concern for Alamo Drafthouse’s other Texas locations, particularly Austin, Houston, and San Antonio.  While these locations remain operational, it’s natural to wonder if they could face similar fates.

The financial health of the franchisee operating these theaters is crucial.  News reports haven’t indicated any financial troubles for the franchisees in these cities. However, the competitive landscape and economic factors remain relevant concerns. We could go through the concerns – but those are for the movie industry as a whole. And while I love going to the movies and love Alamo Drafthouse, I am certainly not an entertainment industry insider. So I can only speculate.

But I think that is an interesting question and one we should potentially explore more. Movie theaters are popular anchor tenants to retail commercial properties. But will that continue to be the case in the future? As the theater experience continues to evolve, will we see fewer successful theater chains in existence? I guess check back in this blog in the future for that discussion.For now, the closures in Dallas serve as a cautionary tale, highlighting the challenges faced by the cinema industry. However, Alamo Drafthouse currently seems committed to continuing to thrive in the Texas market.