Threshold Resistance (5 page)

Above, ceilings were designed of sculptured white plaster, mimicking the effect of billowy clouds—comforting but not interesting enough to draw shoppers' eyes away from the all-important store-fronts and the merchandise. Skylights were installed to spill pools of light into the space, encouraging movement. Any perceived change in daylight by the customer tends to discourage longer stays in the mall, so we installed artificial lighting units in the skylight wells to maintain the same interior lighting levels through dusk into the evening hours.

We concentrated on every human sense. There is a very distinctive
sound to shopping: heels clicking, people in conversation, shopping bags in motion. Music is not necessary to set the mood. In fact, it can be negative to the experience. Scents are important, too. Hair salons and restaurants must be isolated from better dress stores and jewelry counters. To enliven the space we also incorporated court areas, punctuated by museum-quality art, into our designs at the interior entrances to department stores and in the center of the mall. James Rouse might call all this manipulation. Indeed it was. That was and is my job as a developer of retail space.

As we planned our properties, we had another important advantage over cities and towns: We could control the merchandising of the center. That's impossible when multiple landlords own the buildings in a downtown's retail district. Like a department store, we considered the most effective adjacencies for the stores. What combination of merchants made the most sense? What men's shoe store would do best adjacent to Brooks Brothers? And, years later, would shoppers appreciate a Williams-Sonoma store across from Pottery Barn?

Sounds pretty basic. But to this day, competitive mall developers lease space as if they're slicing salami. Whenever there is a vacancy, they rush to fill it with the next available tenant, oblivious to the merchandising issues and opportunities. And whenever a lease comes up for renewal, they sign the retailer up for as long as possible, no matter how tired the store. This inattention to detail penalizes the merchants, the customers, and the landlord. And in today's world of public real estate companies, it penalizes the investors.

After all, adding a tenant to a shopping center is like mixing a new element into a chemical formula. The addition changes the experience for the shopper and the merchants. That's one of the reasons the Taubman Company negotiates the
shortest
leases in the industry, averaging just five to seven years. Lease renewals always mandate store renovation, and if a retail concept has lost its appeal,
we want the store out of the center—extracted from our chemical formula. In its place, we add a fresh, new concept to please shoppers and strengthen every store's opportunity.

Most observers believe that the roof on an enclosed mall is there primarily to shut out the weather. Not true in our centers. The enclosed space allows the stores to open their front doors to the customer year-round, night and day, rain or shine. Remember Milton Petrie's deep throat store design? Contrast that and all its barriers with the openness and attractiveness of a well-designed mall store like The Limited or Pottery Barn. You are almost in the store as you pass, and the merchandise calls out to you in a way it never could on the street.

When these opportunities are placed right in front of the customer (and with the assistance of knowledgeable salespeople), impulse buying increases dramatically. You run to the store for a dress shirt and end up buying two ties and a new belt. Everything other than the shirt is an impulse buy. So are the new Norah Jones CDs you pick up and the box of Godiva chocolates.

The multiplex movie theater concept was created in shopping centers to turn what was a calculated scheduling decision into more of an impulse decision. With staggered start times, cinemas can attract viewers who never intended to go to the movies when they headed to the mall. We first started putting theaters in our centers in California. The discussion of what to see shifts from the kitchen table at home to the cineplex lobby. If you've ever spontaneously found yourself in front of a movie screen holding a bag of popcorn and a large Coke, you've just made several impulse decisions. Nicely done.

This set of principles didn't emerge fully formed from my head when I started building enclosed malls in the early 1960s. But over the course of the decade, as our organization developed the experience and capabilities to develop several huge projects at once, these ideas became an integral part of our planning process. In 1970, for
example, we had 7 million square feet of retail space under construction, and another 10 million in the planning stages. I was always thrilled when I found we could incorporate lessons learned from our malls in California into the design of malls we built near Milwaukee or in Grand Rapids or in the Chicago suburbs, in the late 1960s and early 1970s.

A September 1971
Business Week
cover story focused on the burgeoning shopping center industry. Guess who appeared on the cover? Here's how they described me:

Dapper? That's about the nicest thing any reporter has ever said about me. But I can't believe my shoes were scuffed. The article goes on to capture the passion I felt for my centers then and still do now:

I've been called much worse. But you get the idea. Planning is everything. Screw that up, and a retail development will never realize its fullest potential. Get it right and everybody wins.

While we spoke many times after our discussion at that industry conference in the early 1960s, I never struck up a close personal relationship with James Rouse. Judging from the design of his later en
closed centers, however, I think he did come over a bit to my way of thinking. And our retail properties flourished, as retailers embraced our properties as launching pads for exciting new concepts and unprecedented growth.

For the Taubman Company, too, horizons never looked brighter.

S
electing the correct sites and designing and merchandising the malls properly were certainly instrumental to our early success. But without the proper financial architecture, none of these projects would have succeeded. I wasn't a numbers person by training, and I was never the type of developer who felt that it was crucial to pinch pennies at every stage of the operation. Again, it was design that mattered most. If the financing and leases were structured in the right way, and the incentives of the landlord and the tenant were properly aligned, I knew we'd do fine financially in the long run.

Here, too, we made some innovations. I was fortunate to work with responsive lenders. TIAA, the big insurance company, financed many of my early projects. When we were about to close on a $20 million mortgage on the Sunvalley mall, they called the day before closing and said they couldn't close until the following day because their check-writing machines handled only seven digits. So they went out and bought a new one.

When we started building, the process was as follows: a developer would design a center, sign up some early leases, and get a mortgage commitment. The mortgage commitment stipulated that if the developer met targets for opening dates and the number of AAA-rated
tenants, then the lender would lend a certain amount against the property. Then the developer would get a bank to lend against that commitment so the center could be built. This process seemed to have it backward, since it encouraged developers to sign up tenants early in the process. To me, the best tenants are the ones you get toward the end of the leasing process, when you have something real to show them. Ultimately, I went to Chase and convinced them that they should give me a commitment to build, and that I'd start leasing once the space was built.

We took great care in selecting retailers, starting with the anchors. The long-term agreements entered into between department store companies and retail developers determine to a large extent the value of the shopping center. These complex contracts are called “covenants of operation” and “reciprocal easement agreements.” That's legal terminology for mutually establishing hours of operation, shared costs, and most important of all, the quality and character of the department store that will do business at the property for a set term. In other words, if Saks Fifth Avenue agrees to be part of the shopping center for twenty years, the company assures the developer that a Saks store or another of the same quality and character will anchor the mall—and help draw customers—for two decades to come.

Against that promise (and the promises of the other anchor stores in the project), the developer can lease the mall tenant space at attractive rents. Specialty stores want a shot at the Saks customer and are willing to pay for that opportunity. Here, again, we innovated. Most developers charged fixed rent that was based on their costs of land, construction, and operation. But I didn't see myself as a landlord renting spaces to tenants. I saw myself as a retailer with an ongoing business. So in our centers, we structured our leases based on the gross volume of retailers. They would pay a fixed rent plus a percentage of sales above a certain level. That had the effect of aligning our
interests. If I could figure out how to bring more people to the centers, and design the centers in such a way as to increase impulse purchases, we'd both win. That's one of the reasons we became so good at promoting our centers: we saw that as part of our job. In 1974, we brought the Chicago Symphony Orchestra to Woodfield, and it drew an audience of 30,000. The music lovers came for the brass and the woodwinds, but a lot of them stayed to shop.

In thinking about promotion, retailers and developers are well-advised to take cues from other industries. I learned a great deal from my buddy Warner LeRoy, son of the legendary MGM movie director-producer Mervyn LeRoy (his impressive credits included such major pictures as
The Wizard of Oz
). Warner came into the public eye in the late 1960s when he opened the hotter-than-hot Manhattan nightspot Maxwell's Plum (where Donald Trump met his first wife, Ivana). His next triumph was Tavern on the Green, which captured his personal flare for theater and quality. Toward the end of his life, he acquired the aging Russian Tea Room, into which he poured his heart and soul. Warner knew how to create a buzz and sustain public interest. And the stories he told about growing up on the sound stages of early Hollywood could hold your undivided attention for hours.

As counterintuitive as it may seem, we always tried to open with empty stores. Our centers were planned initially to open with at least 15 percent vacancy through the end of their first full year of operation. That gave us an opportunity to see what types of stores had the greatest appeal in the market and figure out what we were missing before we fully committed our space. Remember, a center is like a big store. We wanted to see which goods moved and which didn't. To me, anytime a center opens 100 percent leased, it's a real estate failure. I always saw myself as being in business with our tenants, not as being in an adversarial relationship with them. Indeed, over the years, I formed close personal and business relationships with many
of my tenants. One was Les Wexner, founder of The Limited and a true retailing genius. In the mid-1970s, I took Les on a helicopter ride to see our Detroit-area centers, Fairlane Town Center, Lakeside, and Twelve Oaks. Each had a Limited store.

Wexner was a natural merchant. At that time, his stores, in my opinion, were not designed to maximize the opportunity of an enclosed regional mall location. His merchandise was right on target, but the stores essentially turned their back on the mall and the customer. They looked like warehouses, with racks hung on strips on the wall. “Les,” I said, “your stores are a blight on my shopping centers.” I told him that he had to redesign the stores or we would not have The Limited in our centers. Fortunately, he agreed with my analysis. Our company's store planning and design department lent a hand, and today, all divisions of The Limited and its spin-off brands, which certainly no longer need our help, are among the most successful stores in any mall: open, inviting, and full of energy. And Les Wexner has become one of my dearest friends—and a great patron of fine architecture.

In two decades working as a builder and developer, I had been fortunate to form many long-lasting personal and professional relationships. Doing business with the same people over time builds trust and can lead to terrific opportunities. Over the years, I joined corporate boards, invested in other businesses, and continually built a network of contacts and colleagues.

Not all of these opportunities were attractive. In the 1970s, I was invited to Iran by the shah and his wife to consider development of a U.S.-style shopping center on the main highway from Tehran to the airport. I passed on the offer when I learned that essentially the entire ruling family and its chief advisers and ministers lived in and conducted business out of Geneva, Switzerland. I'm glad I followed my instincts. The threshold resistance was way too high.

Some long-standing contacts, however, allowed me to apply my
theories of threshold resistance to real estate investing in a more hospitable climate. The opportunity came about in large part because of relationships I had formed working in California. In the late 1950s, I had first met Jimmy Peters. At the time, Jimmy and his brothers Leone and Tony were running the prospering New York real estate brokerage firm of Cushman & Wakefield. Jimmy introduced me to Charles Allen Jr., a very successful New York banker and a great businessman. Charles and his brother, Herb, were my partners in our earliest West Coast shopping centers. To return the favor, I introduced Jimmy to Warren Sconing, head of real estate for Sears. They hit it off, and Cushman ended up handling the Sears Tower. I also brought Jimmy to Detroit to make a deal with Detroit Bank and Trust (now Comerica) on their headquarters building on Fort Street. These were Cushman & Wakefield's first major assignments outside New York.

One day in 1976, Charles Allen called to ask me if I was familiar with the Irvine Ranch. He wanted me to go take a look at it because he thought we had an opportunity to buy it.

The Irvine Ranch—77,000 acres of prized property in Southern California's Orange County—was one of the most beautiful master-planned communities in the nation, and it had a storied past.

James Irvine, born in Belfast, Ireland, in 1827, came to America in 1846. He worked for a couple of years in a New York paper mill before heading to California in search of gold. Instead, he found riches in land. James became a successful produce merchant in San Francisco and began investing in real estate. By 1864, he had done well enough to join with two partners in purchasing three huge Mexican and Spanish land grants—Rancho San Joaquin, Rancho Lomas de Santiago, and a portion of Rancho Santiago de Santa Ana—which at the time covered 120,000 acres along the Pacific Ocean south of Los Angeles. James gradually bought out his partners and used the land primarily for sheep grazing. Irvine's holdings gained in value as the
Southern Pacific and Santa Fe railroads were completed to Los Angeles in the 1870s and 1880s. He died in 1886, just as new residents began flocking to Southern California to start new lives.

The provisions of his will gave control of the ranch to his son, James Irvine II, when he turned twenty-five, in 1893. (It is reported that the young man, known as J.I., first traveled at age eighteen from San Francisco to San Diego on a high-wheeled bicycle to see his father's holdings.) J.I. shifted the business focus of the ranch from sheep and cattle raising to agriculture, making land available for tenant farming (mostly hay and grain). In 1894, he incorporated his holdings as the Irvine Company under the laws of West Virginia, one of only a few states that allowed corporations at the time.

When sophisticated irrigation systems were developed throughout the first decades of the new century, J.I. turned his attention to the very profitable citrus industry. The same speedy, dependable rail lines delivering settlers to Southern California made it possible to ship fresh produce affordably across the continent. The land was soon covered with walnut, orange, and lemon trees, with vegetable fields, and irrigation systems.

Under the direction of J.I.'s son, James Irvine III, the ranch became one of the largest landholdings under cultivation in the United States, boasting the finest asparagus crop and Valencia orange groves in the world.

For estate planning purposes and to fund educational and charitable projects in Orange County and San Francisco, J.I. in 1937 established the James Irvine Foundation, which held his controlling interest in the Irvine Company. Upon his death, in 1947 (he apparently drowned while fishing in a stream on a Montana cattle ranch owned by the Irvine Company), his stock passed to the foundation as trustee on behalf of the people of California. J.I.'s only living son, Myford Irvine, served as president of the Irvine Company until his mysterious death in 1959. Apparently, Myford was not very well
liked. He was found dead in the basement of his home with multiple gunshot wounds (two in the stomach from a 16-gauge shotgun and one in the head from a .22-caliber revolver). The official cause of death was determined to be “suicide.”

Throughout the decade that followed, Joan Irvine Smith, J.I.'s granddaughter, acted as a much-needed watchdog for the family, as foundation trustees sought to benefit personally from the rich resources of the ranch. Joan also pushed for innovative land-use planning and donated 1,000 acres for the development of the University of California, Irvine, campus. Thanks in large measure to Joan's personal lobbying, federal and state laws were amended in 1969 to limit the percentage of ownership a foundation may hold in a corporation to just 20 percent. The new regulations gave foundations twenty years to meet this restriction. But rather than sell off portions of their stock over time, the trustees of the James Irvine Foundation pursued a sale of all their holdings in the ranch. Trustee Simon Fluor—whose company had an active relationship with Mobil Oil—brokered a sale of the foundation's controlling interest in the ranch to Mobil. When she learned of the pending transaction by accident, Joan Irvine Smith in December 1974 filed suit in California to stop the deal. The California state attorney general, agreeing that the offer was too low and the sale procedure was flawed, joined Mrs. Smith in her action. Intense legal wrangling ensued for the next two years.

In August 1976, I got the fateful call from my partner Charles Allen Jr.

He suggested that I go down to Beverly Hills to meet with a Colonel Gotleib, a lifelong friend of Allen's, who would introduce me to Joan Irvine Smith, the largest Irvine Company shareholder other than the foundation, and Keith Gaede, the husband of Joan's cousin. At the time I certainly was aware of the Irvine Ranch, which covered about 22 percent of the land area of booming Orange County (at the time home to about 1.5 million people), stretching more than twenty
miles inland from the coast. I had also long admired Irvine's state-of-the-art master plan, and had been following Mobil's battle to acquire the company. I flew into Orange County Airport the next day.

I was impressed with Joan Smith the minute I met her. You could sense her determination and love for the ranch. It was also clear that she was one tough woman. I later learned that she had divorced her first husband after discovering that he was having an affair. The story goes that when Joan learned of her unfaithful husband's rendezvous with his girlfriend at Joan's horse ranch in Virginia, she had the place surrounded by security personnel and demanded he leave or face the consequences.

But before I could endorse a bid higher than Mobil's $24-per-share offer, I needed to make the proper appraisal and evaluation. That could take weeks, even on a fast track. Smith assured me that the company's records would be open for our review, and promised that management would be available to answer our questions. We put together a team of Taubman Company personnel headed by Bob Schout, our head of market research, assembled our outside consultants, and went to work.