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The mall moguls: Melvin Simon & Associates is the country's number one developer of shopping centers.

The Mall Moguls

Melvin Simon & Associates is the country's number one developer of shopping centers and is opening the country's largest mall next year in Minneapolis. Circle Centre in hometown Indianapolis should be a snap.

As pacesetters in the shopping center business, brothers Melvin and Herb Simon have spent the last three decades building an empire and amassing a fortune. But after years of upward growth, the Indianapolis-based mall magnates now find themselves in the unfamiliar and uncomfortable position of having to tighten their belts around an expanded midsection.

While their industry grapples with a midlife crisis, the Simon siblings are restructing their overextended company, trimming fat and retrenching.

"For three years, we kept building up, building up," says younger brother Herb, 55, who is president of Melvin Simon & Associates Inc. and is most involved in its day-to-day operations. Instead of maintaining a large standing army, he says, the company now needs a "rapid deployment force" that can respond quickly to crises and take advantage of opportunities.

But even with a Schwarzkopf-style battle plan and a Rambo-inspired physique, the Simons will face difficult challenges in the years ahead. They struck some big deals during the past decade--deals that today seem even more daunting because of upheaval in the financial and retail communities.

Simon, for example, is the managing partner in the $625 million Mall of America development, which is scheduled to open near Minneapolis in August 1992. It will be the country's largest enclosed retail and entertainment complex.

The brothers also are part of a partnership that is transforming rundown railroad property in New Jersey into a $10 billion planned community known as Newport Centre on the west bank of the Hudson River, across from New York City.

In downtown Indianapolis, they are moving forward on Circle Centre--a mix of retail, office and hotel space with a potential price tag of $1 billion.

While the brothers spend time, money and resources on these high-profile endeavors, they also must refine existing projects. As developers of standard regional malls, they have been quite successful. But with an oversaturated suburban market, the Simons and other industry leaders are focusing more attention on urban and mixed-use developments. And in these areas, the road to success has been long and bumpy.

Melvin and Herb Simon entered the fledgling shopping center industry on the ground floor and climbed the stairs until they got to the penthouse. Mel admits their ascent didn't follow any grand scheme. "I had a lot of ambitions, but I never planned that far in the future. I just do what I want to do and have to do now."

"I really would like to say we're trendsetters," Herb comments. "But I really don't think we are."

Although the Simons have not necessarily been the first to take certain risks, they have kept a keen eye on the cutting edge. Today, their privately held company manages and has an ownership interest in 167 shopping centers in 35 states. The brothers also own the Indiana Pacers basketball team and have a combined net worth estimated by Forbes magazine at $900 million or more.

In terms of gross leasable area, Melvin Simon & Associates is the number one developer, number two manager and number two owner of enclosed malls and strip centers in the country, according to annual rankings released in the January 1991 issue of Monitor, a trade publication.

Monitor reports that MSA developed and opened 13.15 million square feet of gross leasable area during the three-year period that ended Dec. 31. As of the end of 1990, the company managed 71.19 million square feet and owned 65.12 million square feet of gross leasable area.

A 1988 survey of retailers conducted by Chain Store Age Executive, a monthly retail business magazine, ranked MSA the top shopping center developer in the country. Simon also was the only company that made the top five in every category surveyed.

Despite such accolades, the Simon company is anything but boisterous. Although they are native New Yorkers who clearly enjoy the art of the deal, the brothers are the antithesis of Donald Trump. Trusting and honest, they are viewed as men of integrity.

"Many of us respect them," says Richard Guidera, president of The Guidera Group, a retail/real-estate consulting firm in Minneapolis. "In this instance, you not only respect them but you also like them."

Guidera describes the Simons as "great negotiators." The two have a reputation for bantering with each other like a pair of Marx Brothers, but they also are known for delivering what they promise. And when it comes to publicizing their company or their extensive contributions to charity, the two act like silent sibling Harpo.

"We'd like to promote the projects more than the name," says Herb, who has been described as the quieter and more businesslike brother. "We prefer the projects speak for themselves."

That simply is a reflection of the Simons' personalities, Mel says; they're not seeking fame because of their fortunes. "Herbie and I haven't changed. We're the same people as we were, hopefully a little wiser."

The sons of a tailor, the Simon brothers were born in Brooklyn and grew up in the Bronx. The 64-year-old Melvin, who has been tagged as ebullient and volatile, ended up in Indianapolis via the U.S. Army. While stationed at Fort Benjamin Harrison, he supplemented his military pay by selling encyclopedias door-to-door.

Mel decided to remain in Indianapolis and accepted a $100-per-week job as a leasing agent for Albert J. Frankel in the 1950s. He studied real estate in college, and though he knew he might be able to make more money as a salesman, "I thought the potential was greater in real estate. It was my first job after the service."

In that first job, he handled leasing for the old Eastgate shopping center in Indianapolis. "I enjoyed it, but in a couple of years I decided I wanted to be the person to make the decisions. That's how we got into developing."

Herb joined his brother in September 1959, and MSA was incorporated in 1960. As board chairman, Mel owns two-thirds of the business. Herb owns the rest. Middle brother Fred also worked for the company, but is now retired.

In the early days, Mel became well-known for his tomato-colored suits and flamboyant personality. He and Herb developed strip centers anchored by groceries and drugstores, starting with Southgate Plaza in Bloomington.

Everyone in the business knows the Simon name now, but things weren't easy in the beginning, Mel says. "My first couple of deals I had to get some investors because I didn't have any money. I went to some people I'd been friendly with. I said, |I'm married, I have a baby, I'm willing to take $200 a week.' They turned me down." They're still good friends now, he says, though they may now wish they'd made that investment.

"From the beginning, we always wanted to own as much equity as we could," Herb says. But the brothers sold many of their early projects to raise money for additional ventures. Within five years, they were developing enclosed malls.

Throughout the 1960s and 1970s, the Simons continued to expand their shopping center empire into communities throughout the country. Mel also tried his hand at movie production starting in the late '70s and released films that included "Porky's," "Love at First Bite" and "My Bodyguard." He lost millions of dollars, however, and later called the endeavor "a big mistake."

The brothers purchased the Pacers in 1983 and prevented a potential buyer from relocating the team. Although the Simon-owned Pacers have never been a dominant force in the National Basketball Association, they were at that time the only major-league sports franchise in Indianapolis. Losing the squad would have been an embarrassment to the community and especially to Republican Mayor William H. Hudnut, who was promoting Indianapolis as a city on the move.

Mel admits owning a team with somewhat of a deficit in the win column can be irritating. "But we like to go to the games and we like to root." And he believes the squad continues to improve and foresees the day when the Pacers will be a regular NBA force to be reckoned with. "They're busting their butts 99 percent of the time."

The Simon brothers' first two decades in the development business were more successful than the Pacers have been. But Simon lore does include a couple of comic screw-ups--including the time the brothers failed to conduct a routine soil test and lost $25,000 when one of their buildings sank several inches into the ground. In another industry anecdote, a department store executive marked the Simons as the developers with the dead plastic plants after they installed artificial greenery beneath a skylight. The fake foliage melted.

During the early 1980s, most of the Simons' real-estate ventures focused on mall construction, expansion and acquisition. As the decade progressed, however, developers began to diversify and to take additional risks. Federal grant money made downtown projects more attractive. Emphasis was placed on linking offices, hotels, stores, restaurants and theaters into single complexes.

But such projects have a spotty track record and often take a long time to complete. Developers may enter into partnerships to pull together the various elements, but conflicting styles and values can strain these alliances. Simon's first mixed-use project was the redevelopment of Two West Washington in downtown Indianapolis, which was completed in 1983.

With the advent of deep-discount stores in the early '80s, the Simons returned to their roots and stepped up their development of community centers. Mixed-use projects and malls may be sexier, but community centers offer a faster turnaround on investments.

Many projects were planned before the economy slowed, and Simon filled its plate in Falstaffian fashion. The wide-eyed company nearly doubled the size of its headquarters staff between 1986 and 1989. But the increased load also generated extensive overhead without corresponding revenues.

Herb Simon says the company's biggest failure is that it tried to do too much during the last few years. If given a second chance, Herb says he would have turned down some projects, but he won't reveal which ones.

In the summer of 1989, Simon laid off 94 employees, the first time such an action had been taken since the company was formed. It laid off more employees last fall, and the company won't rule out the possibility of additional cuts.

Simon is said to have employed 4,450 people nationally, including 1,004 at the company's headquarters, before the 1989 layoffs. By the end of January 1991, those numbers were down to 3,398 and 850.

These days, developers may have to focus more attention on existing projects simply because they can't obtain the funds to pay for new ones. Although developers traditionally have had an easy time financing their endeavors, the days of loose money are over. Credit has become tighter than a Hulk Hogan headlock.

The Simons have weathered difficult financial periods before. But 1991 is different, Herb says, because the shopping center business used to be a growth industry. Now it has matured.

Due to the credit crunch, a tremendous infusion of equity is necessary to get projects off the ground. A developer may have to put up cash, pledge assets or attract additional investors in order to receive financing. This, in turn, ties up money and limits the number of deals that can be made.

Three years ago, a developer could receive 100 percent financing for a project. Today, even a proven company such as Simon might have to put up 25 percent. With community centers that cost $12 million to $30 million apiece, that's not small change.

In addition to problems in the financial community, retailing also is going through a period of upheaval. But Simon officials downplay the negative impact this could have. "With disruptions come opportunities," Herb says. "There's always going to be a need to sell merchandise."

Simon has an extensive clientele. So even if one tenant leaves, there's always another one ready to take its place.

As some of Simon's older malls do lose tenants, the company is encouraging community center anchors such as Phar-Mor drugstores to fill the openings. Keeping older malls viable has long been a key to Simon's success. In today's more competitive market, the company is intensifying its expansion and redevelopment efforts to keep properties up-to-date.

Although new construction has slowed, Simon still will continue to develop power centers, which are community centers anchored by category killers such as Toys |R' Us and T.J. Maxx. These centers will become heavily weighted toward large tenants, who will have to start paying a more proportional amount of the rent. Developers traditionally have required relatively low rents from their anchors, while smaller tenants have had to carry a larger burden.

Despite its retrenching, the Simon company will be in the limelight more in upcoming years than ever before. Scottsdale Galleria--an anchorless mix of upscale specialty shops, movie theaters and restaurants--will open this year in Scottsdale, Ariz. Another project set to open in 1991 is the lavish Forum Shops at Caesars in Las Vegas. And Hollywood Promenade, a mixed-use development that will wrap around the famous Mann's Chinese Theater, is in the preconstruction phase.

Clearly, though, the biggest attention-grabber will be Mall of America. More than three times the size of a traditional mall, it will cover 4.2 million square feet and will include 2.6 million square feet of gross leasable area.

Located on the site of the former Metropolitan Stadium in Bloomington, Minn., the mall will introduce Nordstrom, Macy's and Bloomingdale's to the Twin Cities. Sears, Kohl's, Service Merchandise and 400 specialty stores round out the retail component. Other highlights will include a seven-acre indoor theme park known as Knott's Camp Snoopy, miniature golf courses, 18 movie theaters, a 1.2-million-gallon walk-through aquarium, restaurants, cafes, bars and nightclubs.

"I think it will really be the eighth wonder of the world," Mel says. Even the arrangements for parking 13,000 cars boggle the mind. "There'll be more parking on decks than in the whole city of Indianapolis."

The Mall of America concept was introduced by the Ghermezian brothers, developers of West Edmonton Mall in Canada, the largest shopping mall in the world. The Ghermezians made a splashy entrance into the Twin Cities, but they couldn't get financing. So they brought in the Simons as managing partner.

While most Simon employees juggle multiple projects, one group of workers is dedicated exclusively to the mall. The interdisciplinary "MOA Team" has its own suite of offices at Simon headquarters. It includes about 45 people in Indianapolis and about 125 in Minnesota. Members come from various backgrounds, including construction, architecture, engineering, leasing, development, management and marketing. Computers link architects, engineers and designers in Indianapolis, Los Angeles and Minnesota, allowing the fast-track project to be designed and built at the same time.

Financially, the mall is a risky venture. The Wall Street Journal reported in October that the Simons had to guarantee about $75 million in short-term loans from two Japanese banks for the project. That front-page story also said the anchor stores received "extraordinarily attractive leases," which means the other retailers will have to pick up the slack.

Although promotional materials describe the mall as a "vacationland," Simon is looking at the development more as "the gateway to the Twin Cities," says Rosemary Rice McCormick, the project's marketing director.

In Indianapolis, the Simons are not working on a gateway but a center-piece. The company feels Circle Centre was designed to be a contribution to Indianapolis.

The mall promises to rejuvenate the downtown area, Mel says, giving people more reasons to live downtown. And that's the way a downtown should be, he says. "Once you get all the amenities--shopping, theaters, entertainment--people are going to look very seriously at building residences downtown."

There have been changes among the anchors as the project has progressed, but the Simons are confident that Nordstrom, another department store and The Limited's six-store International Shops will be anchors. The first phase of the project is not expected to be finished before late 1993.

Circle Centre and Mall of America promise to be two giant feathers in the Simon cap. So what happens next? Can one really top the "eighth wonder of the world"?

"There will be other great mountains to climb," Mel speculates. Though the real-estate pace has slowed a bit for the time being, "I don't think the world is going to stop developing."

PHOTO : Mel (seated) and Herb Simon started in the '60s with Southgate Plaza in Bloomington.
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Author:Pockrass, Steven
Publication:Indiana Business Magazine
Article Type:Cover Story
Date:Apr 1, 1991
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