Guys And Malls: The Simons' Crapshoot

From the Indianapolis offices of Melvin Simon & Associates Inc., you can see the bubble-topped Hoosier Dome rising out of a landscape as flat as a pane of glass. But on the inside, the offices sound more like a Bronx street corner. Above the general hubbub of leasing agents shuffling documents and chattering into phones, Melvin Simon, the firm's New York-born co-founder, is barking out instructions. Most are hurled at his secretary, but this gravel-voiced remark is aimed at his brother Herbert: "Hey Herb," Melvin yells. "We've got Art `Give it Away' Spellmeyer on the phone."

Herbert jumps to the receiver, and it's easy to see why. On Aug. 11, Simon & Associates, the nation's second-largest shopping-mall developer, will open the doors of the largest U.S. mall project ever attempted. Located near Minneapolis and dubbed the Mall of America, the $625 million retail extravaganza packs a roller coaster, a bi-level miniature golf course, scores of restaurants, and 2.5 million square feet of retail space into an area the size of 52 football fields (table). Spellmeyer--the guy on the phone--is responsible for completing construction and filling the sprawling space in the midst of the worst retail slump in recent memory. As Melvin's nickname for him suggests, it hasn't been easy.

HEADACHES. The Mall of America, in fact, opens just as the Simons are restructuring their entire $900 million empire. Having built a fortune by blanketing the nation with low-budget strip malls, the brothers are now scrambling to stay liquid in the face of a searing real estate depression. They've scaled back new projects, laid off employees, and sold or restructured assets to raise cash. Meantime, to attract tenants to the Mall of America, they've given away as much as $100 million in reduced rent and other concessions. Melvin, 65, and Herbert, 57, are still confident their megaproject will pay off. But even Herbert admits to moments of anxiety. "To make a decision like this, it had to be the late '80s," he says. "Today, you can't just call up the bank and they'll send you money like they did then."

From its start in 1988, the project has presented one headache after another. The Simons have endured two tough rounds of financing, bankruptcies that threatened the survival of anchors R. H. Macy & Co. and Bloomingdale's Inc., and a feud with downtown Minneapolis merchants. The Simons' exposure is limited to financing the mall's operations, since three Japanese banks have joined Teachers Insurance and Annuity Assn. of New York in picking up the $625 million construction tab. But with all the rent giveaways depressing income, the Simons still have plenty of worries.

It's all a far cry from where they started. The sons of a Central European immigrant tailor, Melvin and Herbert grew up in a $30-a-month third-story walk-up in the Bronx. Melvin went to Indianapolis with the Army and never left. He sold encyclopedias for a time but soon found a job with a shopping-center developer. By 1959, he had lured brother Herbert to Indy, and the two struck out on their own.

The Simons built bare-bones strip malls on every busy thoroughfare they could find. Concrete hulks adorned with plastic plants, the projects didn't win any architectural awards. But the brothers had a knack for finding prime locations and eventually were able to graduate to such glitzy--if ill-fated--projects as A&S Plaza in New York City and New Jersey's Newport Centre.

Along the way, they built a colorful reputation for extravagance, investing freely in everything from Hollywood to the National Basketball Assn. Melvin, the pair's idea man, ventured on his own into movie production in the 1970s, only to lose a total of $40 million. While his Porky's and Porky's II: The Next Day proved to be Hollywood's version of a strip mall--ugly but hugely profitable--they couldn't make up for such critically acclaimed duds as My Bodyguard and Zorro, The Gay Blade.

In 1983, the brothers bought the NBA's hapless Indianapolis Pacers in order to keep the franchise in town. They frequently entertain bankers and retailers at Pacers games, where they are as vocal as any second-balcony beer-belly. A referee nearly ejected Melvin Simon from one game after the developer berated him continuously from a seat at half court. "They are the Pacers' biggest fans," notes David Weiss, a former Citibank executive who says he has seen Melvin nearly run onto the basketball floor to protest a referee's call.

PITFALLS. Since they won't fly on the same plane, each Simon brother has his own private jet. But the two generally stick close to Indianapolis, despite some recent local embarrassment. At the city's urging in 1982, the Simons launched a project called Circle Center that was designed to turn downtown Indy into a regional retailing mecca. So far, though, the project consists of three 20-foot-deep holes covering three square blocks. Herbert has persuaded 13 local companies, led by Eli Lilly & Co., to invest $55 million, but not enough major retailers have signed on to lure the requisite bank financing.

The Simons take the setbacks in stride, but they're hardly ignoring them. They've trimmed their roster of deals in progress from 80 a few years back to fewer than 10 today. And since 1990, they've slashed their Indianapolis work force by nearly 20%, to 800. Most important, they've assigned David Simon, Melvin's 30-year-old son, to bring some discipline to a loosely run firm that had never even produced a consolidated cash-flow statement.

David, a former investment banker at First Boston Corp. and Wasserstein, Perella & Co., is charged with raising cash to head off a liquidity squeeze. "That's what the banks were screaming for," says Weiss, the former Citibanker. Since David arrived in June, 1990, sources familiar with the deals say, the firm has refinanced or sold more than $1 billion worth of properties, generating an estimated $200 million in cash. One big winner: a deal to use cheaper bank debt to replace $110 million in bonds sold by Drexel Burnham Lambert Inc. that paid a huge 11% interest, plus a portion of cash flow from seven malls. That transaction alone freed up $75 million.

Generating cash hasn't eliminated the Simons' problems. Though the restructuring reduced the firm's exposure to both A&S Plaza and Newport Centre, for instance, it still holds significant stakes in both developments, which are plagued by low-occupancy rates. And don't forget Circle Center. Still, the Simons have staying power. Their strip malls produce good income, and the firm recently opened two high-end projects with occupancy rates topping 90%: the Forum Shops at Caesars Palace in Las Vegas and the Fashion Centre at Pentagon City.

GREAT EXPECTATIONS. They'll need all the strength they can muster. When the Mall of America opens to Ray Charles singing America the Beautiful, more than 30% of its leasable space will be vacant. "We haven't told any of our clients to go into the mall," says Steven B. Greenberg, president of retail consultancy the Greenberg Group, which advises more than 10 national chains. Many retailers want to see how the mall does before jumping in.

The wait-and-see attitude is understandable, given the long odds the megamall faces. The Simons hope to lure 45 million visitors a year--more than the number drawn by Walt Disney World, the nation's No. 1 tourist attraction. While most visitors are expected to come from within a 400-mile radius, marketing extends as far as Tokyo, where the official airline of the mall, Minneapolis-based Northwest Airlines Inc., is pushing excursion packages.

In judging how the Mall of America might do, most experts look to the only comparable project: the West Edmonton Mall in Canada. An attraction-filled retailing behemoth, it is owned by Triple Five Corp., the operating entity for Canada's Ghermezian brothers. The Mall of America was the Ghermezians' brainchild, too, but they had to bring in the Simons as partners after failing to arrange financing. The mall claims more than 23 million visits a year--more than 9 million of those from farther than 100 miles away. But observers doubt it is doing very well. "Everyone who goes to Edmonton goes to West Edmonton Mall," says Toronto retail consultant John Winter. "But it's so large, it's difficult to shop. It is not a spectacular performer."

Herbert Simon just sighs when presented with such assessments. His firm has battened down its hatches to ride out the retail slump, and his three decades in the business give him confidence. "The first time I went inside, I got the feeling that this thing really works," Simon says. All he has to do now is perusuade 44,999,999 others to stop by for a look.

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