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CHANGES IN STORE FOR MOA?

BY ED McKINLEY

Nader (left) and Don Ghermezian at West Edmonton Mall.

Fresh from a court victory that has given it control of its brainchild, Mall of America, the Ghermezian family of Canada is mulling changes to the center, including a major expansion of its entertainment component.

One of the family’s companies, Triple Five Group, gained control of the 4.2 million-square-foot Mall of America — the largest entertainment and shopping center in the United States — in a legal ruling handed down in September. The losers in that verdict, brothers Melvin and Herbert Simon and one of their companies, Si-Minn L.P., say they intend to appeal the decision that transferred power to the Ghermezians. (The Simon brothers are also co-chairmen of Simon Property Group, the publicly held REIT and largest mall owner in the world.)

Meanwhile, the Ghermezians, developers and owners of West Edmonton Mall, Edmonton, Alberta, are contemplating how they’ll reshape Mall of America, which attracts more than 40 million shoppers annually, 40 percent of them tourists traveling great distances to the center in the Minneapolis suburb of Bloomington.

“We would like to bring in some of our concepts from West Edmonton Mall,” Don Ghermezian, president of West Edmonton Mall Property, told sct. At 5.3 million square feet, West Edmonton offers more stores and entertainment venues than Mall of America does and ranks as the biggest retail project in the world.

Among the West Edmonton Mall elements that could migrate to Minnesota are an indoor water park “or other entertainment components, like our themed areas — the special Chinatown Street, for example, the high-end Europa Boulevard, or different themes from all over the world,” said Ghermezian.

“The balance of entertainment to retail is higher in West Edmonton Mall [than at Mall of America], and that relationship is working well there,” Ghermezian said. “We would consider expanding that component at Mall of America so that it would ultimately be between 30 percent and 40 percent entertainment. We want to bring added features, attractions and entertainment to the city of Minneapolis.”

In addition, Triple Five hopes to bring management techniques that Ghermezian says have worked at West Edmonton Mall over to Mall of America, which his family conceived in 1986 before the Simons were brought in to jump-start the project.

“One thing we’ve learned is that attention to detail [is] what people notice most,” Ghermezian said. “We want to be able to provide a shopping and entertainment experience and have it all work out right.”

Details worth noting include “ensuring that the center is always clean,” he said, “that your tenants always open on time, that you’re paying attention to every dollar spent on advertising and that when people come to the entertainment areas, that they’re treated like Disneyland — with greeters at the entrances and parking lot attendants to help you find a parking spot or to find your car.”

Attention to detail also counts at the Fantasyland hotel that Triple Five operates at West Edmonton, he says, noting that the hotel has achieved 97 percent occupancy, which he says is one of the highest rates in North America.

“The hotel is always undergoing total renovation,” he said. “We renovate the first floor and work up to floor 10, then start with the first floor again every few years. We want to give [customers] something new to look at.”

That penchant for offering the unexpected will carry over into every aspect of Mall of America, says Ghermezian. “If we can make it new and exciting to enhance the image and appearance, that’s what we will do.”

Some of the constraints the Ghermezians face in recasting the mall stem from physical limitations.

“In terms of design, the major layout at Mall of America is square, with Camp Snoopy in the middle and retail outside that area,” Ghermezian points out. “At West Edmonton Mall, entertainment is placed strategically in different locations in the shopping center to encourage patrons to walk through the retail areas on their way from one entertainment venue to another.”

To overcome such obstacles, Triple Five plans to use the personal touch. Four brothers founded the company: his father, Eskander, and uncles Nader, Bahman and Raphael Ghermezian. Raphael plans to move to Minneapolis to handle management and leasing.

“We certainly have the management expertise and the personnel to do it,” Don Ghermezian says of the challenge of running Mall of America.

Is Snoopy getting long in the tooth? The Ghermezians plan to revamp and expand MOA’s entertainment offerings with, among other things, a water park.

He himself may commute from Edmonton to Minneapolis to help. “But this is still undecided,” he cautions. “There’s quite a bit we still have to work out.”

Despite the Ghermezians’ apparent enthusiasm, some question whether they will sharpen the image of Mall of America and make the center upscale enough to satisfy affluent customers in Minneapolis. The mall needs ideas from Europe, not Canada, says Therese Byrne, a New York City-based consultant who publishes the Retail Maxim retail real estate newsletter and worked with the Simon people two years ago on repositioning the mall.

“My concern is [that] these new guys aren’t going to get it,” she says of Triple Five. The Simon organization understands what the mall needs, she adds, and it was working to make the right changes.

More than a decade after its opening, Mall of America needs updating because “entertainment ages very quickly,” Byrne insists. “Entertainment is the same as fashion. People get bored easily, and they want the next thing. America is raised on stimulation.”

Knotts Camp Snoopy, the seven-acre amusement park at the center of Mall of America is past its prime, she says, but “all roads lead there” because of that central location.

She says she had recommended grouping related stores and entertainment in “nodes” forming smaller “communities.” Shops for teen-agers and the teen-oriented entertainment should be concentrated in a single area, for example.

Ideas for taking the mall upscale are there for the taking in Las Vegas, where in recent years $500-a-night hotel rooms and five-star restaurants have replaced $30-a-night rooms and budget-price, all-you-can-eat buffets, says Byrne. Progress in reinventing Mall of America has been slowed because of long-term leases, she asserts, especially those held by restaurants that aren’t posh enough to fit the future she foresees for the center.

The upscaling theme that Byrne pursues resonates also for Stanley L. Eichelbaum, SCMD, a retail consultant and president of Cincinnati-based Marketing Developments.

“With any project, no matter how gigantic or how comprehensive the mix, to remain dominant it needs terrific levels of upscaling,” he said.

For Eichelbaum, it’s the difference between the newest hit television show and a tired summer rerun. At Mall of America, he says, the need for the new and trendy becomes especially acute because of competition from other centers in the market, including the recently expanded and renovated Southdale Center, Edina, Minn., the first enclosed, climate-controlled mall (sct, October 2002).

Time is also working against Mall of America, Eichelbaum says. “A great share of the market … for Mall of America has seen it over the decade of its existence — and to draw them back, it’s got to be current.”

Eichelbaum warns against relying on amusements. “Entertainment, while an important element in terms of restaurants, has proven too often to be a crater of incredible expense with minimal return,” he said.

Shopping itself can provide sufficient entertainment, and that’s where Byrne sees a role for home furnishings, especially as a draw for younger men. She says she is encouraged by Ikea’s decision to build a more-or-less-freestanding unit (the first in the Minneapolis market) adjacent to the center. The store, still under construction, would be tied by an elevated walkway to a proposed second phase of Mall of America.

“There is a phase-two plan with an Ikea and, potentially, other major retailers,” said Don Ghermezian. “We would like to be able to impact that design.”

That desire to determine the course of the mall came a step closer to reality with the September ruling in Triple Five’s favor by Judge Paul A. Magnuson of the U.S. District Court in Minneapolis. The court ordered Simon to sell its 27.5 percent stake in the mall to Triple Five, ruling that Triple Five partner Si-Minn had breached its fiduciary duty by secretly arranging sale of the stake between itself and Teachers Insurance and Annuity Association. The sale had thus wrongly yielded majority ownership to the Simons and their companies.

Triple Five came up with the idea for Mall of America and secured development rights for the land in 1986. When the company couldn’t obtain financing and some prospective anchor tenants were reluctant to commit, the Ghermezians invited Melvin and Herbert Simon to take part.

Teachers then agreed to provide financing and eventually contributed $650 million for construction, later converting the sum into an equity investment in the property. Teachers ended up owning 55 percent of the mall, leaving the Simons and Triple Five to split the remaining 45 percent equally between them.

The dispute between the Simons and the Ghermezians arose in 1999, when Simon Property Group, the REIT, bought half of Teachers’ interest. The court ruled that Si-Minn failed in its duty to keep Triple Five informed of the transaction, thus ruining Triple Five’s chances of participating in the deal.

Agreements among the parties when the mall was created had guaranteed Teachers an 8.5 percent annual return on its $683 million capital account, or about $58 million a year. Any income above that level would be divided between the other partners, but the mall has never generated $58 million in annual income, so all profits have gone to Teachers, according to court documents.

This did not leave the other partners empty-handed, however. A partnership of Simon and Triple Five managed the mall for a fee of 5 percent of the center’s gross income, a sum court documents say is above market rate. Simon actively took on the management duties and collected 80 percent of that fee, while Triple Five, with no day-to-day management responsibilities, got 20 percent.

But the 1999 Simon-Teachers deal generated fees for Simon and allowed it to share in the advantages Teachers had been granted in the original partnership agreements.

Ruling that the Simons had acted unfairly in arranging the purchase without Triple Five’s knowledge, the court ordered Simon not only to sell the 27.5 percent interest to Triple Five, but also to give up all profits received as a result of that interest from 1999 to the present. To take possession of that interest, Triple Five is required to make a payment of $81.38 million to Simon within nine months.

The court appointed a “special master” to determine how much Simon owes from those profits and for Triple Five’s legal fees. (All of this is subject to an appeal by Simon.)

Simon was also removed as managing partner of the mall, with the fees now being divided 80 percent for Triple Five and 20 percent for Simon. The ruling prohibits Simon from conducting mall activities outside the ordinary course of business without written consent from Triple Five.

The legal proceedings so far have concerned Triple Five’s allegations that Simon breached its fiduciary duties, but Triple Five may go to court again to seek further damages for breach of contract, according to Triple Five attorney Roger James Magnuson (no relation to the judge).

Simon officials declined to comment for the record on Mall of America, but the company has expressed its intention to appeal in news releases.

Don Ghermezian says he is looking forward to assuming control and seizing what he calls “the opportunity to really make a difference with the shopping center and bring a different perspective to it than has been in place for the past 10 years.”

For him, that means “a family approach and a family attention to detail” on a mall conceived by family in the first place.

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