OUTLETS of Hostility
It is a showdown the likes of which Arizona has probably never seen. The two teams have been hand-picked, with money seemingly no object, from the cream of the Valley crop. The rosters read like a Who's Who of Arizona business hotshots--engineers, lobbyists, public relations flacks. Consultants of every stripe, from traffic to environmental to political. There's even a private detective or two in the mix.
And the lawyers. With this much at stake, there are certainly lots of lawyers buzzing around. All these lawyers are specialists. Zoning specialists, environmental specialists, regulatory specialists, contract specialists and media specialists. Specialists in the administration of, and defense against, defamation.
Talk to a few of them, and it quickly becomes apparent that they all know one another. This morning, they're savaging each other in court or in the newspapers; tonight they'll be sipping Cutty Sark at the Biltmore and talking about their new eight-irons. They're hired guns. It's just business. Nothing personal.
With so much intrigue and political hackery and money swirling around, and so many marquee names on the list of combatants, what they're all fighting about may seem anticlimactic.
They're all fighting about a mall. An off-price outlet mall.
The most basic question is usually the least entertaining one, and so it is here: Does the Valley really need another mall? Even another outlet mall? Even a bigger, busier, noisier outlet mall, with giant television screens and dozens ofmovie theatres and even a 700,000-gallon aquarium--er, sorry--"multisensory marine science center"?
It doesn't matter. The Valley's getting another mall. That fight was over before it even started. This fight is about where the mall will go.
Two national mall development giants--Petrie Dierman Kughn of McLean, Virginia, and Taubman Realty Group of Bloomfield Hills, Michigan--and Grossman Properties of Phoenix are hoping to develop the $100million, 100-acre Great Mall of Arizona at I10 and the Superstition Freeway.
Just four miles to the south, the Mills Corporation, a huge developer based in Washington, D.C., plans to put an even larger mall at I10 and Ray Road in Chandler. If it gets off the ground, it will be called Chandler Mills.
Both development groups say they have the experience and the tenants to make their plans work, even as both acknowledge that the Valley retail market can only support one of them. Somebody's going to make a lot of money, they all say, and somebody's going to lose a lot.
It may be an understatement to say that the scrap has reached ludicrous proportions; each development group has spent untold thousands so high-priced, high-profile locals can lob suits, countersuits and disinformation at one another.
Although the potential financial rewards for the victor are indeed huge, one thing just about everyone agrees on--off the record--is that the fight has become less about money and more about ego.
Retail development is a highly speculative enterprise, something akin to oil wildcatting. It is not the kind of business good losers get into.
"I have never seen, in my 20-plus years ofrepresenting developers, one developer go after another with so much vigor and misinformation," says Paul Gilbert, a high-profile zoning attorney who is working on the Chandler proposal. "I do not like what Isee happening."
But representatives for the Tempe proposal make the same kinds of comments, in virtually the same words.
For the cities involved, the struggle is less acrimonious, but hardly friendly. The stakes are too high. Tempe, where PDK and Taubman want to put the Great Mall of Arizona, is rapidly running out of open land to develop, and needs to squeeze every last sales-tax dime it can out of what acreage it has left.
Chandler, a smallish town sporting big-city ambition, wants to put Chandler Mills right next to Intel and Motorola in its municipal trophy case--nearly doubling its own annual sales-tax revenue in the process.
In their efforts to keep their respective projects on the fast track, both cities have cut corners and massaged zoning and approval processes and offered the developers hefty inducements to hurry up and break ground.
Ultimately, though, both sides agree on one thing. Neither group will start up the bulldozers until it's holding signed leases from enough big-name tenants ("anchors" in the retail vernacular) to secure financing. Neither developer has the $100 million or $150 million it needs for its project jangling around in its pockets. Banks aren't eager to lend that kind of money without ironclad lease commitments from retailers.
The ferocity of the fight already has both developers bleeding. PDK-Taubman wanted to break ground July 1, with completion scheduled for October 1996. How far back the groundbreaking has now been pushed, no one at the company will say.
The Mills project also was supposed to be under construction by now, so it would be finished at about this time next year. That timetable has been pushed back, too, and Mills and its spokespeople are as tightlipped about firm groundbreaking dates as their competition.
They are quiet about it because it is the key to the fight.
All of the lawsuits, disinformation and politicking on both sides are designed to do one thing: spook the other side's prospective anchors and delay groundbreaking. Both sides know that whoever starts moving dirt first will likely win the race of the outlet malls.
Which developer that will be is still anybody's guess. So is what this slugfest may mean for Arizona's business future.oRULEoThe ferocity of the battle of the Valley outlet malls cannot be understood without a bit of history.
Between them, PDK and Taubman own and run dozens of retail centers in other parts of the country. Neither has ever operated an off-price mall before. Both are hell-bent on proving they are up to the task.
Mills, with the construction and operation of four outlet malls under its belt, is the king of this kind of development. Like any king, it has less to prove in the Arizona competition, but more to lose.
Two of the developers have competed for the same turf in the past, in the construction of a conventional mall in the Milpitas, California, area near San Jose. PDK won out when Mills decided against building there.
PDK says Mills showed up like a new tomcat on the block, made a lot of noise about moving in, then slunk away.
Mills claims it didn't make it onto the scene until after PDK already had broken ground, and it was unable to find the chunk of land it needed for its own, bigger project. But, the company hastens to add, many tenants wanted to be a part of the Mills project--and only ended up in the Great Mall by default.
This history has obviously seeped into the Arizona outlet contest. The loathing representatives of the competing development groups feel for their counterparts is evident in their voices.
Paul Gilbert doesn't make much of an attempt to hide his feelings, either.
The tall, plainspoken, 50ish attorney is considered the dean of the Valley zoning trade, and his A-list of clients reflects his status: Hehas represented development colossus DelWebb, Valley newcomer Hard Rock Cafe, and convicted swindler/Phoenician resort developer Charles Keating.
Landmark Land Company can certainly attest to his negotiation skills.
Through Gilbert's efforts, Landmark gained approval of the vehemently antisprawl environmental group Sonoran North for a new 5,500-home planned community in the northeast Phoenix desert.
Among the latest entries on his client list is the developer of the Chandler mall, the Mills Corporation.
For all his experience handling high-dollar, high-stakes development, Gilbert says nothing has prepared him for the fight he finds himself in now.
What he sees happening, he says, is this: PDK and Taubman, late to the table with plans for an off-price mall in Tempe, are running a full-court press on Mills and the City of Chandler to stall construction of Chandler Mills. The developers will stop at nothing, Gilbert says, to stymie Mills' plans--something that has been admitted by Taubman's own attorneys.
In July, PDK and Taubman filed a lawsuit in Maricopa County Superior Court, alleging that the development agreement between Mills and Chandler violates state and federal air-quality laws and the Arizona Constitution. The analyses Chandler used to determine the effect mall traffic would have on air quality in the area were invalid, the suit says.
In addition, Taubman's attorneys claim that the improvements the city has agreed tomake to I10 at Ray Road are not consistent with requirements of the Arizona Department of Transportation and the U.S. Department of Transportation.
The suit asks that the court nullify Chandler's development agreement with Mills--effectively putting the Chandler Mills project back at square one, and sending a message to unsigned tenants that if they want to open anytime soon, they'd be wise to commit to space in the Great Mall.
"They're coming in and raising environmental questions," Gilbert says. "Their motivation is to slow our development down. They don't care about environmental concerns.
"What they're doing is very hypocritical."
He appears to have a point.
The traffic study PDK and Taubman used for their own project in Tempe is actually several years old--and was developed for a different mall that had previously been planned for their site. PDK and Taubman appear to have simply attached a new executive summary to the report and passed it off as current.
The development originally planned for the site was to be a conventional mall, which would have created different traffic patterns than an outlet mall. For example, ordinary mall traffic closely follows commuter patterns; outlet-mall traffic does not.
Despite the deficiencies in the traffic planning for the Tempe outlet mall, PDK and Taubman have gone to great efforts to discredit traffic arrangements for the Chandler mall proposal.
Earlier this summer, the Great Mall developers tried to convince the Maricopa Association of Governments to remove Chandler's plan for $1.6 million of highway improvements at I10 and Ray Road in Chandler from the state transportation program.
PDK and Taubman told MAG that Chandler's traffic studies were "inherently flawed" and failed to look at long-term safety and air-quality impacts. Also, the developers argued that it would cost more than the $1.6million Chandler was offering to widen the Ray Road off-ramp and overpass leading to the mall.
MAG didn't listen.
PDK and Taubman did not let that defeat deter them.
They hired Valley Yberlobbyist Larry Landry, who has worked for the group that tried last year to pass Proposition 400, a new freeway tax, and for the paint industry, which would like to avoid bans on selling spray paint to teenagers.
In short order, Landry convinced Phoenix officials to examine the effects Chandler Mills would have on their city. Phoenix also decided Chandler's planned improvements were adequate.
Though PDK and Taubman's efforts to stop Chandler Mills were not successful, the state transportation department eventually did require the City of Chandler to provide about $1 million more than the city originally planned to improve the Ray Road intersection with I10.
PDK and Taubman's traffic offensive didn't stop at local government.
Over the last few months, puzzled staff members at the U.S. Department of Transportation in Washington, D.C., have been deluged with reports, studies and complaints about Chandler Mills--apparently generated by PDK and Taubman and their Arizona help.
And notable help it has been. Earlier thissummer, Tempe Mayor Neil Giuliano, Guadalupe Mayor Anna Hernandez and County Supervisor Mary Rose Wilcox flew to Washington--on Taubman's behalf--to ask the feds to examine Chandler's plans for I10 improvements near the mall.
Taubman has even gone so far as to appeal to Transportation Secretary Federico Pea. The company enjoyed a close relationship with Pea when it developed a successful mall during his tenure as mayor of Denver.
Gilbert feels it is somewhat unusual for two mayors and a county supervisor to fly to the nation's capital--and for a developer to appeal to a member of the president's cabinet--for the purpose of slowing down the construction of a mall in Chandler, Arizona.
"Since when have officials of a city ever done that to the developer of a project in another town?" he says. "I've never seen anything like it."
So far, Taubman's tactics do not seem to be paying off. But that doesn't faze an architect of the developer's assault, Washington, D.C., attorney Neil Proto.
"We are confident that we will prevail in the race to build the mall we want," Proto says flatly. "And we are willing to do whatever we must, at every level of government, to do so."
It is not the first time Taubman has employed such tactics. The developer has been in similar scraps in Annapolis, Maryland, and Hartford, Connecticut. Each time, Proto has launched attacks on the competition on two fronts--traffic and air quality. And though Proto's strategy has yet to work, both he and Andrew Hurwitz, the big-name attorney he has hired to employ it here, say they think the third time may be the charm.
Gilbert doesn't think their plan will succeed--but he doesn't like being on the receiving end of their technique, either. He questions his opponents' motivation.
"I would have to say that ego plays a part here," he says. "Mills is more market-driven and doesn't have anything to prove. I think Taubman sees this as more than a market decision. They want to make a big splash."oRULEoWalt Petrie, president of PDK, is an excitable guy who loves to talk about himself, his company and his mall-building exploits. He says he also loves a good fight--and, despite the headaches it has doubtless caused him, he seems to be relishing this one.
"They [Mills officials] have done a lot of complaining about the way things have gone out there," he says. "But this is business. This is the American way.
"Mills knows that as well as anybody."
Petrie also hastens to point out--correctly--that for all his talk about the ferocity of the attack on his client, Gilbert can only credibly carry the babe-in-the-woods routine so far. He didn't get his corner office--or his reputation--by letting the other guy roll over him.
After Mills was slapped with PDK's lawsuit in July, Gilbert and other attorneys representing the Chandler project started poring through the details of the Great Mall's development agreement with Tempe. They found plenty wrong with it, and filed a countersuit in early September.
Mills' suit--eerily remindful of PDK and Taubman's--basically contends that Tempe, in its rush to beat Chandler Mills to groundbreaking, violated both city and state zoning laws, as well as Tempe's own general plan. The suit asks that the city and Great Mall developers be required to start their approval processes all over again, which would bump back their groundbreaking--and presumably spook unclaimed tenants into signing with Chandler Mills.
Petrie says Mills' efforts will go for naught. He says he has signed leases for space at the Great Mall from Oshman's Supersports USA, Linens N Things superstore, and Off Fifth, Saks Fifth Avenue's outlet arm.
"They [Mills] are claiming that Tempe forced through all these approvals because they can see that we're attracting a lot of attention from tenants," Petrie says. "They're scared, and they're worried. We beat them once [in Milpitas], and we're going to beat them again."
Tempe did act hastily to get the necessary approvals for the Great Mall, and here's why: The project is just the kind of development city planners want to attract--and soon, because they are running out of land.
Eighty-three percent of Tempe's land is filled; a third of it with homes, apartments or condominiums, and more by Arizona State University. Within a few years, almost 95percent of the available land in Tempe is projected to be developed. Tempe Community Development Director Terry Day says that within 15 years, the city will be "built out"--that is, totally full.
Zoning questions, then, have become more urgent and controversial as the city's land squeeze has tightened. City officials like Day must work to balance commercial and residential uses. More than 40 percent of the city's general fund comes from local sales taxes. Houses cost the city more for services than the revenue their property taxes produce.
It isn't difficult to imagine what kind of development the city wants to cultivate.
"We need the right kinds of development," Day says. "We're running out of land. We have to plan for the city's future revenue needs."
Besides tiny Guadalupe to its west, Tempe is the only city in the state that has all its boundaries determined by other entities: Scottsdale and the Salt River Pima-Maricopa Indian Community to the north, Phoenix to the west, Chandler to the south and Mesa to the east.
To beef up the tax base, the city has two main projects planned: the Rio Salado, north of downtown along the Salt River, which officials hope will become a retail and commercial tax-generating plum à la San Antonio's River Walk, and the Great Mall, which would generate millions of dollars a year in sales taxes.
It is this zeal for sales-tax revenue that, Gilbert claims, drove Tempe officials to break the law, hoping to beat Mills in the mall race.
Mills' suit appears to have merit; Tempe's general plan says the southeast corner of I10 and the Superstition Freeway is to include amixture of owner-occupied residential, retail, office and industrial properties. Theplan for the Great Mall, the suit points out, does not contain any provisions for owner-occupied residential development.
Public documents show that the city's planning staff recognized the need for a general plan amendment for the proposed outlet mall.
"Normally, a zoning change of this nature would trigger a need to modify General Plan 2000 if one of the uses was not owner-occupied residential," a staff report says. No such amendment was made.
Also, the suit claims that, rather than having zoning variances approved by the city's Board of Adjustment, Tempe occasionally, "in connection with certain favored projects," allows such rulings to be made by the city council, acting as the Board of Adjustment. That is what the city did with the Great Mall.
Mills contends that such a move by the Tempe City Council was illegal. Whether it was illegal, the council's action illustrates how loyalties and principles can become scrambled in a fight as acrimonious as this one.
When Gilbert says the Tempe City Council sometimes makes zoning decisions in place of the Board of Adjustment, it's because he knows. Gilbert has represented multiple clients in such actions before the city, which Petrie points out with glee.
Mills has fought the Great Mall with some other fairly unconventional and heavy-handed tactics. After it was sued by PDK-Taubman, and then countersued, the company commissioned Rust Environment and Infrastructure, a national engineering firm, to execute a traffic engineering study ofthe PDK-Taubman site. The study concluded that the Great Mall would create a "traffic nightmare" on Baseline Road and at the I10/Baseline interchange.
Mills then used the traffic study as the linchpin of a public relations attack.
Cardboard leaflets with covers reading, "What's the last thing you want popping up in your neighborhood?" were left hanging in plastic bags from the doorknobs of thousands of Tempe homes. When residents opened the leaflets, photos of a gridlocked freeway popped up, along with the ominous news that the Great Mall would create the "Super Bowl of traffic jams."
The leaflet went on to say that the Great Mall's developers, "who have no experience building malls of this magnitude--are in over their heads ... especially evidenced by their inability to make realistic traffic projections."
Mills' claim in the flier that PDK and Taubman have never built a mall "of this magnitude" is incorrect. PDK's Great Mall of the Bay Area in California is approximately 1.5 million square feet, generating around $4million in sales-tax revenues every year. Both those numbers are slightly larger than what the developers are predicting from the Great Mall in Tempe.
Also, Petrie says, his opponents' traffic study is incorrect and points out that Mills approached the owners of the Great Mall site before settling on the one in Chandler. Though Mills says it was initially attracted to the Great Mall site because of the heavy nearby traffic (the intersection of I10 and the Superstition Freeway is the busiest in the state), access concerns caused it to look elsewhere.
Petrie attributes Mills' actions to jealousy.
"We have a better site than they do," he says. "It's that simple. They looked at it themselves, didn't want to spend the money on a site this good and now are saying it's bad. That's ridiculous."
Among the most troubling questions raised by the great mall race are these: At what point does healthy business competition become unhealthy? Are cities willing to go so far to secure sales-tax revenues that they damage themselves in the long run? What messages do conflicts such as these send toother companies interested in building or locating in the Valley?
There is a fundamental conflict between two important tenets of city revenue planning, says Mary Jo Waits of ASU's Morrison Institute for Public Policy. To pay for fire, police and other services, cities need an adequate sales-tax base. Consequently, they strive to lure large merchants inside their borders. But zoning large parcels of land for retail means that there is less space left for companies that produce stable, high-paying jobs--which are also extremely important to a city.When a city finds itself running out of available land, as Tempe is, the choices it has to make about employment versus revenue can become agonizing.
"It would be good if Arizona towns could focus on high-quality, high-paying jobs that offer benefits and enough money for people with families to live on," she says. "The question is how towns will use inducements. Will they try to get those kinds of high-tech businesses and services, or will they go for retail?"
In this deal, Tempe comes out the loser inany comparison with Chandler regarding bang for incentive bucks. Tempe will reimburse the Great Mall's developers $14.5million from sales-tax revenues for infrastructure already under construction to make the property accessible. The developer will receive 70percent of the sales-tax revenues from the mall for 12 years, or until the $14.5 million is paid off, whichever comes first.
The city will pay an additional $8 million for improvements to the roads surrounding the Great Mall. For its $22million effort, then, Tempe will get a development that beefs up its sales-tax bottom line by about 6percent annually.
Chandler has agreed to pay back the $2.6million it will "borrow" from Mills for its own infrastructure improvements with sales-tax refunds to the mall. For this relatively small investment, however, the city will see its annual sales-tax revenue nearly double.
Another key factor in deciding the amount and type of incentives for a large retail development is employment. Is there an ironclad agreement that the business will hire employees from inside the city?
While Tempe's Great Mall is expected to provide thousands of jobs, there is no agreement about where tenants will find the people to fill them. Guadalupe Mayor Anna Hernandez has waxed enthusiastic about the Great Mall, saying it will provide much-needed work for underemployed citizens of her town. She also boasts that the mall will be within walking distance for her constituents, more than 40 percent of whom do not own cars.
Without some commitment from mall retailers, however, the question must be asked: With a labor pool made up of thousands of young, energetic ASU students just minutes away, how many Guadalupe residents will find jobs in the mall? Developers are happy to accept endorsements from local politicians, but neither PDK-Taubman nor Mills has made anyone any promises in this respect. Nor has any of either mall's confirmed tenants.
The war of the malls has also raised the question of whether predatory business practices may affect companies considering a move to Arizona.
Chandler Mayor Jay Tibshraeny says the outlet-mall battle has stretched tactical and strategic boundaries dangerously.
"It's kind of uncharted territory," Tibshraeny says. "What we may be doing to ourselves in the long run, I don't know. The only ones really making out here are the consultants and the lawyers."
Paul Gilbert says he thinks Arizona is considered a good place to do business by other parts of the country. And that perception may change if politico-legal conflicts like themall war occur on a regular basis. Competition is a good thing--but there is a point when you can have too much of it.
"I don't think it's healthy," Gilbert says. "We're sending all the wrong messages out. Competition is good when it's about improving the quality of your product, but that's not what is happening here. We're only trying to slow each other down, to hurt each other's chances of getting off the ground.
"I have not enjoyed this fight.
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