Saturday, June 19, 2010

A Bailout For Circle Centre Mall?

The IBJ's Cory Schouten writes about a growing concern that Circle Centre Mall could lose its two anchor tenants, Nordstrom and Carson Pirie Scott whose leases are up for renewal in a few months. As Schouten notes, the mall's manager, Simon Property Group, has a 15% stake in the mall with other investors. The land on which the mall is built is owned by the City, which issued bonds to provide more than 50% of the funding to build it. A group of about 20 businesses, including AT&T, IPL and the Indianapolis Star, own a stake in the mall as well based on their substantial initial investment in the project to make the deal happen because the Simons didn't want to put much of their own money into it--too risky you see. Simon Propert Group manages and leases out the space for a fee and returns a small profit to the investors each year. The investors pay no rent on the mall despite it being built largely with taxpayer dollars. Apparently Simon has told the City that it may need to step in and help if it wants to keep the two valued anchor tenants and the Ballard administration is saying it will "do whatever it takes to ensure the mall anchors remain." Schouten writes:

Meanwhile, city officials are preparing to step in and do whatever it takes to ensure the mall anchors remain, said Michael Huber, deputy mayor for economic development.

“Keeping Carson Pirie Scott and Nordstrom and a healthy, functioning mall is of critical importance,” Huber said. “We’re fortunate with the management of Simon Property Group the mall is doing as well as it is at a time when many downtown malls are not.”


Huber said he wasn’t sure exactly when the department store deals are up for renewal, but believes it’s next year.

It isn’t clear what incentives the city might offer since Simon has not yet made a request; the city originally enticed Nordstrom to open in the $319 million mall by offering a new building and tenant improvements at no upfront cost to the retailer. How much Nordstrom pays in rent is not spelled out in publicly available documents. Carson’s occupies part of the first three floors of the former L.S. Ayres flagship department store . . .
The downtown Indianapolis mall generated a profit of $8.9 million last year on revenue of more than $23 million, records show. Occupancy held steady in 2008 and 2009 at 92.8 percent, excluding the troubled fourth floor, which is only 59-percent occupied.

Because Huber wasn't around when the original Circle Centre Mall got inked like I was, I'll clue him in on some facts before he becomes too generous in giving away our tax dollars again. Former Mayor Bill Hudnut, who had the original dream for Circle Centre Mall, inked the original deal with the Simons, which allowed them to get a brand spanky new mall with very little skin in the game and a whole lot of money being dumped into the project by the taxpayers with borrowed funds. Mayor Steve Goldsmith, who could not stand Hudnut, assumed that Hudnut had negotiated a bad deal for taxpayers and wanted to open up the books on it before he agreed to proceed with the mall's construction and remove the blight of that giant hole that existed downtown for several years. What Goldsmith learned was that Nordstroms and Parisian, the predecessor retail company to Carson Pirie Scott, paid no rent for their space and received built out allowances to lure them to the new mall. Got that? They paid no rent. I'm surprised Schouten didn't learn that little bit of information when he was preparing this story. The two stores did, however, agree to pay their share of maintenance fees. Simon relies on the lease revenues and assessments generated by all of the other retail stores, movie theater and restaurants to turn a profit for the investors.

Simon insisted on the availability of cheap parking for mall customers. It also insisted that the City construct a large parking garage across the street, which would have a connector to both the mall and the convention center, allowing people to walk back and forth without ever going outside. Goldsmith figured out the City could also generate a chunk of change if it included retail space on the first level of that garage that fronted Georgia, Illinois and Maryland Streets. After the mall was built and the Simons figured out how well the City did in renting out space to the likes of Planet Hollywood, Houlihans and Steak & Shake, it wanted to control that retail space as well. As far as I know, the City never capitulated to that demand. The Simons nixed a plan to build a connector between the mall and Union Station, which pretty much nailed the coffin shut on it.

The mall turns a profit of about $9 million a year on revenues of about $23 million according to Schouten's story. What his story doesn't mention, although Schouten has previously reported on it, the investors agreed to divert dividends in the past that they earned on their investment in the mall to pay the bond debt on Conseco Fieldhouse where the Simon's Indiana Pacers get to play rent free and keep all revenues from both game and non-game events held there. The City is currently in negotiations with the Simons to pick up $18 million in operating costs the Simons claim they can no longer afford to pay because their Pacers are losing so much money.

Now think about the timing of this story and its implications. The Simons plant a story that Nordstroms and Carson Pirie Scott may pull out of the mall as the City prepares to host the Super Bowl in 2012. If the two giant retailers actually pulled out of the mall, it would probably be the end of the mall and appear as a huge black eye for the City during the Super Bowl festivities. Of course, the Simons have lease deals with these two big retailers all over the country because it controls more mall space than any other mall owner in the country. This gives them a lot of leverage most property owners don't have and the Simons are known to use that leverage to get what it wants. The Simons also stand to lose very little if the mall fails. The taxpayers and the other mall investors will be the ones stuck holding the bag. I don't know whether Nordstroms or Parisian eventually started paying rent when their leases came up for renewal in the past, but I doubt it. What I see is a play to make the City pick up the assessments the anchors pay as well so they don't have to pay a dime for their prime retail space, sort of like the CIB picking up the maintenance costs on Conseco Fieldhouse but the Simons continuing to maintain control over it. The problem is that, as usual, there is nobody sitting at the table representing our interests. You can bet Ballard will play right into the Simons' hands just like he's doing with the Conseco Fieldhouse negotiations.

9 comments:

Downtown Indy said...

That's a rather brilliant strategy. We've all been wondering how the Pacers could possibly have a negotiating position for the $18M on Conseco.

And suddenly, there it is!

You don't get to be a billionaire by being stupid (Jim Irsay being an exception to the rule by virtue of inheritance).

Paul K. Ogden said...

"Huber said he wasn’t sure exactly when the department store deals are up for renewal, but believes it’s next year."

Boy, he's really on top of things, isn't it.

Advance Indiana said...

Paul, It's incredible that Huber is already saying the City will do whatever it takes to ensure that the anchors stay. You've pretty much folded your cards before the game is played. That is essentially what the CIB did with the Simons on the Fieldhouse lease until they started getting the shit kicked out of them and realized that people were figuring out how incompetent their negotiating skills were. I've never seen such negotiators who start out on the side of the other party before they even commence negotiating. It happens over and over again in this town.

dcrutch said...

What AREN'T we going to bail out? Where is the line drawn these days? Is there a line? Is there such a thing as corporate fiscal accountability if you're an affluent, influential local business? If so, why does the mall get a bailout, but the IMS has to pretty much fend for themselves in tough times?

Will somebody explain? I concur with the tough call to not extend deficit spending this week in D.C., even though some people are still looking for jobs. But, how can we justify that while bailing out shopping centers?

Advance Indiana said...

It's a vicious cycle. The more we subsidize the downtown, the more it needs to survive. At some point, you just have to cut bait and say fend for yourself like every other business. I like the mall. I shop there regularly because it is convenient. I'm not a fan of Nordstroms in the least bit. Too pricey and the quality of a lot of the clothing doesn't match the high price. I bought a suit there once and was very dissatisfied with it. Dress shirts carrying their label don't wear well at all. Carson Pirie, like Parisian before it, runs great sales. I'm always surprised at how many people I run into from Indy when I shop at the outlet mall at Edinburg, and I'm talking about well-educated, professionals who have more disposable income than most people. Indy folks just aren't high on dropping big dollars on clothing just to say they shopped at Nordstroms.

Indy Student said...

How about a bail out for city parks, which keep having their budget slashed due to these bail outs?

I think the parks and libraries provide much more of a public service than professional sports stadiums and shopping malls ever will. And if the tourists don't use them, then who cares? It seems that sometimes, in this city, we'll do everything to make visitors happ but regular, normal citizens are treated with far less respect.

I'd like to know the ratio of tax dollars spent on enticing visitors vs local citizens. That would be quite an interesting figure, wouldn't it?

Paul K. Ogden said...

"Paul, It's incredible that Huber is already saying the City will do whatever it takes to ensure that the anchors stay. You've pretty much folded your cards before the game is played. That is essentially what the CIB did with the Simons on the Fieldhouse lease until they started getting the shit kicked out of them and realized that people were figuring out how incompetent their negotiating skills were. I've never seen such negotiators who start out on the side of the other party before they even commence negotiating. It happens over and over again in this town."

Bingo, Gary. You hit the nail on your head. These city officials do not know how to negotiate. You never announce at the start of negotiations that you plan to do whatever it takes to do the deal. That results in your get walking all over in negotiations. It's happened time and time again in this city, yet they don't seem to learn.

Bob said...

Ladies and Gentlemen, I think we may be overlooking the cause of all these bailouts/shake downs.

Remember, now that Indy has won the bid for the 2012 Super Bowl, the city is now under enormous pressure to gussy up downtown and make a great show.

What can the city not afford, an empty Conseco Fieldhouse, a Circle Center mall missing two anchor stores, a near abandoned City Market or sidewalks/streets in need of repair.

The City will do anything . . . and, I mean ANYTHING . . . to make sure it avoids these scenerios. Simons know this as well as any of the other "elites." That gives them enormous leverage in any negotiation with the City. The can ask for the stars and the moon, they will get it from the Administration. The Mayor has his eye on this one shining moment.

Maybe it is time to level the playing field for the city as well as the taxpayers and tell the NFL thanks, but no thanks.

dcrutch said...

Goldsmith and whomever else appropo weren't right on everything, like avoiding attention to the water/sewer issue that costs us big money in hindsight. But, when all we could afford was a hole in the ground instead of a mall, he gets at least some of the credit for doing just that.

Whatever the similar fiscally conservative action is that needs to be done these days, boarding-up Conseco, saying, "No" to a voluptuous Lucas or Library, etc., seems an impossibility to ask of current leadership.

They believe it's better to be bold and corrupt than bold and frugal. Governor Daniels is by no means untainted, but we'll see far he succeeds in the other direction.