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WHEN TO COOPERATE, WHEN TO COMPETE?

By Nancy Cohen

Rival developers built Stonecrest.

Bad blood is spilling over Richmond, Va., where two leading developers, Taubman Centers and Forest City Enterprises, are vying to capture the market for themselves — each with a high-end open-air center.

This is not the first territorial tug-of-war to engulf the historic Southern city. During the Civil War, the capital of the Confederacy withstood onslaughts by five Union commanders before falling to Gen. Ulysses S. Grant in 1865. Though the current conflict centers only on market share, not secession, it, too, raises questions about the benefits of union: Why do developers sometimes struggle for independence rather than ally to conquer a market together?

On today’s Richmond battlefield, the forces are thus arrayed: Bloomfield Hills, Mich.-based Taubman Centers established a beachhead in the city in 1997 with its acquisition of Regency Square, a mall catering to the upper-moderate market. To extend its reach to the high end, Taubman Centers is building Stony Point Fashion Park, a 700,000-square-foot open-air center to be anchored by Dillard’s, Galyan’s and Saks Fifth Avenue.

Cleveland-based Forest City first laid out its designs on Richmond in 1996, when it teamed up with Thomas E. Pruitt, a local developer, to build Short Pump Town Center. After drawing the interest of Dillard’s, Hecht’s, Lord & Taylor and Nordstrom, Short Pump Town Center grew into a $250 million, 1.2 million-square-foot open-air project. Both companies’ centers are now under construction and slated to open in September 2003.

But over the past two years, Taubman Centers has filed a series of lawsuits challenging Short Pump on grounds ranging from its impact on traffic to the legality of a bond issuance. Moreover, the company organized and funded a group of local taxpayers to mount legal opposition to Forest City’s plan.

Competition for tenants has turned nasty too. In April, The Wall Street Journal quoted an executive of a national accessories chain as saying that Taubman officials threatened not to renew his chain’s leases upon learning that he was close to a deal at Short Pump. “It’s a nightmare,” he said.

Is this any way to build a shopping center? Common sense might suggest that two developers battling over the same market lay down their arms and work together, avoiding the expense and ill will of a fight and mitigating the risk of overbuilding.

Elsewhere, developers are negotiating just such compromises. Though sole proprietorship may be preferable, it’s no longer always possible, said Stephen D. Lebovitz, president of Chattanooga, Tenn.-based CBL & Associates Properties. “In today’s world of few new development opportunities, we are doing more of our projects with partners than without,” he said. That is a departure for the company.

In Huntsville, Ala., for example, CBL found itself on the verge of competing with Colonial Properties Trust, Birmingham, Ala. Rather than build separate centers in a market that would support only one, they teamed up to develop the 650,000-square-foot Parkway Place, scheduled to open in October.

In similar circumstances, Taubman Centers has been known to take the same pragmatic approach. “If you believe in a project, obviously you’d like 100 percent of it,” said company Chairman, President and CEO Robert S. Taubman. “But sometimes that’s not a viable option — and it’s better to have a piece of something than none at all.”

The Arlington, Va.-based Mills Corp. found another way to skirt the problem. In 1998, when the company was developing Katy Mills outside Houston with Taubman Centers, it filed suit to block Simon Property Group and Chelsea GCA Realty from erecting a premium outlet center two miles away. Mills finally resolved the conflict by paying Chelsea $21.4 million to drop the project altogether.

“Many market forces encourage a joint venture [among developers] from time to time,” Taubman said, citing capital needs, risk reduction and retailer preference among them. Another impetus is “when a competitor is working on a similar concept in a similar market.”

While those very conditions led his company into battle in Richmond, they gave rise to a partnership in Florida. With the Forbes Co., Southfield, Mich., Taubman Centers is building the Mall at Millenia, a 1.2 million-square-foot enclosed regional center opening in Orlando, Fla., in October.

“In Orlando certain department stores were interested in our land, others in Forbes’s,” Taubman said. “We were able to work together, and we’ll end up with a better project because all the retailers are united.”

Integral to the partnership, Taubman said, was the existing relationship and mutual respect of the two companies, Michigan neighbors.

Forest City, too, has enjoyed “great partnerships,” said Douglas Lund, a Forest City senior vice president. “They’re often formed when one partner owns land but does not have our expertise to develop it, and we’re either invited in or invite ourselves. It has become a bit of a trend where the landowner wants to remain in the deal.”

That was the case in Atlanta, where Forest City joined forces with Cadillac Fairview to build the 1.3 million-square-foot Mall at Stonecrest, which opened last October.

“Cadillac Fairview owns a tremendous amount of land in the area, but had gotten out of developing shopping centers and into managing assets,” Lund said. “The net result of building the shopping center together is to increase the value of their land.” He called it a “much happier situation” than the one in Richmond.

Industry experts caution, however, that though such collaborations are in some cases feasible, a partnership of equals holds its own perils.

“It’s always cleaner to develop a project on your own,” said Lebovitz. “Communication and coordination are a challenge with two different companies — most, like us, in business for some time and used to their own way of doing things. Structuring a joint venture is very complicated, including deciding what happens if you disagree and the economics of it. Everyone wants the best deal for himself.”

Though developers do join with developers to build projects, perhaps more common today are alliances with institutional investors, who provide capital and help reduce financial risk, or with individual landowners, who contribute a location, but stay out of the development and management business.

“Unless each partner brings something the other doesn’t have, a joint venture doesn’t make sense,” said Greg Leisch, a retail real estate analyst at Delta Associates, Alexandria, Va., a commercial real estate appraisal and consulting firm. “The pattern and history of real estate development is to have [the property] to yourself. But it’s case by case — when joint ventures make sense for the participants, they do it. Otherwise, it’s good, old-fashioned direct competition.”

As suggested by the recent dissolution of Mills’ partnership with Simon, not all matches are made in heaven. In June Mills bought out Simon’s interest in five Mills properties. The deal, valued at $430 million, brought to a close the sometimes fractious seven-year relationship between Mills and Indianapolis-based Simon. (Mills continues to partner with Taubman on megamall ventures in an alliance dating back to 1998.)

In May Mills Chairman and CEO Larry C. Siegel underscored the advantages and alluded to the limitations of such a partnership.

“In the past Simon’s market position and balance sheet helped to ensure that we obtained the most favorable financing terms in the marketplace,” he said. “Simon’s investment also served as a strong endorsement of the quality of our asset type. Today our successful track record speaks for itself and our capital access is very strong. … Accordingly, it makes sense to part ways.”

With institutional capital available, and with the heft that major developers have accumulated through industry consolidation, many have little incentive to risk a clash of titans.

“It’s one thing to partner with an institution with deep pockets where you direct the operational strategy, and another to partner with a company with the same wherewithal,” said Arlene Isaacs-Lowe, a REIT credit analyst at Moody’s Investors Service. “The operational experience in the past has not always been positive regarding reporting requirements, decision making and the ability to fully control the strategic direction of an asset. Some of these ventures have been unwinding in the last couple of years, and [developers] have been swapping interest in assets to get complete control of one rather than partial control of two.”

Chicago’s General Growth Properties has largely avoided those headaches over the past 15 years by pursuing joint ventures only with institutional investors, said Robert A. Michaels, the company’s president.

“We have three or four major institutional partners we’re expanding and doing new things with,” he said. (Some joint ventures with developers, including two that opened in 1990 — Pavilion at Buckland Hills, Manchester, Conn., with Urban Retail Properties; and Superstition Springs, Mesa, Ariz., with Westcor Partners — came to the company through acquisition.)

These days, Isaacs-Lowe noted, the major developers seem more inclined to partner on the acquisition of a portfolio that they then divide, as The Rouse Co., Simon and Westfield America did this year when they carved up the assets of Rodamco North America.

If developers do decide to build a project together, anticipating potential difficulties and resolving them in advance is the key to a positive collaboration, CBL’s Lebovitz said. “The better job you do of setting forth clear responsibilities up front, the smoother it will go.”

Yet reaching such an agreement is not always possible. Taubman and Forest City officials reportedly met in September 2000, when the idea of partnering in Richmond was floated. For reasons that remain known only to those involved, they were unable to find the common ground they have both successfully staked out with other development firms.

Two years later the combat and the acrimony continue to rage. The strife sowed uncertainty about Forest City’s project among retailers and the public and delayed — at considerable cost — Short Pump’s opening by a year, said Lund. “Our competition has been less than fair in their tactics,” he said, sounding aggrieved. “Their lawsuits could be classified as frivolous. They’re just trying to stop us or slow us down because Regency will suffer when we build Short Pump.”

Of Taubman Centers’ motives, and alluding to the bond issuance, Taubman said, “We’re just trying to make sure it’s a level playing field.” He declined to comment further on the conflict.

Taubman maintains, however, that with a population of about 1 million, Richmond can sustain the rival centers. “We’d each do better if the other didn’t exist, but it’s a strong, affluent, growing market,” he said. “Both will succeed over time.”

Some observers are less certain of that outcome. “These two companies are highly reputable, but look at the size of Richmond,” said Isaacs-Lowe. “How can that marketplace support two new, large regional malls, except one at the expense of the other, or both at the expense of all other existing retail? It’s about shifting share.”

Although the question of who will succeed there will linger beyond the September 2003 grand openings scheduled for Stony Point and Short Pump, history does sound a cautionary note to developers skirmishing over that — or any other — market today. The Union forces were victorious in April 1865, when Richmond finally fell, but its business district went up in flames.

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