Waaay Off Broadway cabaret, closed since the end of 1976, reopened Tuesday night with Gotham and medium-sized audiences.

The club, $75,000 in debt 16 months ago, suffered from small crowds and a beer-and-wine-only policy.

New legislation, alowing theaters like Waaay off Broadway and Arena Stage to serve hard liquor, has passed the City Council and been signed by the mayor. Waaay Off Broadway producer/manager Denny Lyon says the bar will change over as soon as the ruling has passed the waiting period.

Lyon points to the urban renewal projects and new private housing in Southeast, the planned Capitol Hill Racquet Club at I and South Capitol streets, and the proposed Metro stop at M and Half Streets SE as indications of an improving neighborhood.

Capitol Hill Cabaret Corp., which owns the Waaay Off Broadway and two other nearby clubs, has rebuilt the facade at 55 K St. SE. The club is booked through the middle of May, with Bette Midler's Harlettes following Gotham and "Hit Parade" star Dorothy Collins after that.

The corporation is "negotiating" to open a parking lot across K Street from the club entrance, and Lyon plans to improve the stage facilities inside the club.