Shakopee Town Square

Carlson Real Estate Co. surprised the real estate industry by acquiring the barely surviving Minnesota Valley Mall in Shakopee, MN, in 1988. At that time, over 45% of the rentable floor space still had dirt floors, only 41% was leased and 10% of the retailers were mostly struggling entities.

What convinced the company to proceed with its plan to buy the shopping mall were the studies it conducted showing that turnaround of the shopping was possible, primarily the result of anticipated economic and tourist boom in the area as well as forecasts of improved traffic flow.

The first thing that Carlson Real Estate did was to negotiate with current tenants and increased rental rates. Then, it beautified the exterior and interior of the building, and found new tenants. Finally, the mall was renamed Shakopee Town Square to provide it a local feel. These efforts eventually paid off as seen in improved earnings for the mall.

Citation Details
Title: The turnaround of a shopping mall. (Shakopee Town Square in Shakopee, Minnesota)
Author: Dean Riesen
Publication: Journal of Property Management (Refereed)
Date: July 1, 1995
Publisher: Institute of Real Estate Management
Volume: v60 Issue: n4 Page: p48(3)

http://www.allbusiness.com/sales/519786-1.html

Sometimes, you’ve got to take a chance. Nearly six years ago, Carlson Real Estate Company took on a repositioning challenge that many in the real estate industry called crazy. We purchased the struggling Minnesota Valley Mall located in Shakopee, Minn., a southwest suburb of Minneapolis proper.

This shopping center was anything but desirable. At the time of the purchase, more than 45 percent of the rentable floor space still had dirt floors, only 41 percent of the space was leased, and 10 percent of that occupancy was made up of struggling tenants.

Why would we want to purchase an asset that had seen nothing but failure? Our philosophy is to do a great deal of research and evaluation when approaching any deal … whether it be a sale, purchase, or lease. We believe in taking on challenges and risks when the formula for success requires hands-on experience and hard work.

Prior to the purchase of the Minnesota Valley Mall, we studied the likelihood of the mall’s turnaround. That meant researching the surrounding community, as well as the shopping center.

We met with the Shakopee mayor’s office and the Chamber of Commerce and determined that large growth was projected for the bedroom community of 20,000. Plans were in the works for the expansion of the Bloomington Ferry Bridge, an artery into Twin Cities proper. This expansion would significantly open the flow of traffic.

In addition, we commissioned a market study which revealed that the Shakopee trade area extended further south along Highway 169 than initially expected because of the lack of competing shopping facilities in the various rural communities in south central Minnesota.

Another encouraging sign was the amount of tourism in the area. Drawing residents from throughout the Twin Cities metropolitan area were Canterbury Downs horse racing track, Valley Fair entertainment park, the annual Renaissance Festival, and Murphy’s Landing historic community and museum.

In addition to investigating the community, we researched the center and its existing tenants. It appeared to have several good anchors including Kmart, Super Valu Supermarket, True Value Hardware, and Snyder Drug. We sent employees to sit in the parking lot of the center to observe cars coming and going and to determine levels of activity. Kmart appeared to maintain a steady flow of traffic at one end of the mall, and Super Valu, which was located at the opposite end, also kept the parking lot active.

Given all the positive factors, we were confident that the Shakopee market had great future growth potential over the next five to 10 years. We believed that this was an opportunity to purchase an undervalued asset at the beginning of the growth phase. By purchasing early in this phase, we believed that we would be able to build strength within the center by the time the real growth in Shakopee started.

We purchased the mall for $1.8 million, or approximately $13 per building square foot, in December 1988.

Leasing issues

A month after the purchase, we adopted a plan to renovate the shopping mall and make it more “shopper-friendly.” The first step was to determine the fate of existing tenants, so they could be incorporated into the shopping center renovation plan. (Even though the center was only 41 percent occupied, we were willing to let tenants go if they were not willing to get on board and become part of the turnaround.)

Of the 13 tenants (seven locals, five franchisees of national chains, and a Super Valu grocery), only five had existing leases; the remainder leased on a month-to-month basis. As a protest to their former absentee landlord who had done nothing to improve the center, tenants were holding back rental payments. Eight had not paid any occupancy costs for over six months, and a few had not paid for nearly a year.

We determined the amount that each tenant was required to pay under the terms of their leases and required that each begin paying. Next the lease negotiations began with each tenant that was occupying on a holdover basis. Six of the eight holdover tenants signed renewals and committed to moving to new locations within the center and to performing substantial upgrades to their space finish. Build-out of these spaces was scheduled to coincide with the renovation.

Negotiations were made more difficult because most tenants were paying rental rates which were less than we were achieving in our industrial projects. As a result of the acquisition and renovation, tenants were required to pay a higher rental rate. (Not only did we have to hit them with base rental rate increases to justify the investment we were going to make, but we also had to hike the common area maintenance (CAM) budget to be able to bring the maintenance up to an acceptable standard.) We eased “sticker shock” by structuring deals which started with low base figures with annual increases.

Renovation work

To compensate for the increase in rent, we embarked on a $1.5 million renovation of the exterior and interior of the building. From the street, the shopping center had the appearance of a bulk industrial project, we needed to turn it into a user-friendly shopping center. The exterior of the center was brick with a wooden facade attached above the ceiling level. No lighting existed for exterior signage; no glass openings existed for retail display; and there was no elevation relief along the entire expanse of the facade.

We removed as much of the exterior brick as was physically possible and replaced it with glass to make storefronts. Aqua-colored awnings were added above each of the window openings to add dimension and color variation. At each of the three major mall entrances and two anchor entrances, we constructed peaked entryways which rose high above the rest of the facade and provided adequate room for shopping center identification, as well as tenant identification. Finishing touches to the exterior included resurfacing the parking lot, and removing the wood facade to replace it with a stucco front which was wired for individually-lit lettered signs.

The interior condition was a property manager’s nightmare: interior lighting was tested between five- and 10-foot candles; storefronts were closed with pull-up residential garage doors; plants were dead in most interior planters; and the local maintenance person had used-car parts stored in various vacant bays throughout the center. In addition, separate electrical and gas metering had not been completed for any individual tenant spaces, so each tenant had been billed an arbitrary figure which had no back-up or validity.

We installed new lighting, changed the electrical system, rebuilt planters, and exposed painted beams to match the exterior decor. In order to complete this overhaul, tenants had to endure many inconveniences, including constant dust and loss of electricity. (We received only one request for compensation for lost income due to a store having to close for a few hours during an electrical changeover.) We were careful to keep tenants abreast of our schedule so there would not be any surprises. With adequate warning, the tenants were willing to tolerate the disturbance.

To coordinate with the new image of the shopping center, we renamed the mall Shakopee Town Square. Our idea with the new name was to give it some identity which tied it more directly to the Shakopee community because we felt that the mall had never really been accepted. We also created a logo with the new name and incorporated it into banners which we put throughout the interior of the center.

Attracting tenants

With the renovation well underway, we began to court strong regional and national tenants to bring some names and marketing efforts to the center. Our first big deal was with Guetschoff Theaters, Inc., a local operator of 25 screens throughout the Twin Cities. To accommodate the theater, we expanded a portion of the shopping center (this was when it was still 50 percent vacant). This expansion translated into an additional $1 million investment. We studied the theater business and structured a deal which provided us with 10 percent cash-on-cash return with future potential upside if the operation proved successful. The theater has been so prosperous that it has recently requested the opportunity to expand.

We also began to target some women’s soft good retailers because Shakopee had a shortage in this area. Fashion Bug was one of the initial targets because they fit very well into the market. Fashion Bug refused our initial approaches because the shopping center was considered too risky. We responded with a percentage rent deal they couldn’t refuse, but asked that they roll the percentage rent into fixed rent in the third year if they were successful. By year three, Fashion Bug wanted to expand and was willing to lock into a fixed rent figure on all of the space immediately.

One of the goals we determined for Shakopee Town Square was to make it a place where citizens could come for goods and services. We signed on the Employment Center, a division of Scott and Carver counties, as a service to the community.

The new look of the mall lured former tenant Radio Shack back to the shopping center. We structured a creative deal which involved moving them from their existing location in downtown Shakopee and subleasing their downtown space to another tenant. With a fresh store and a better location, their sales have increased significantly.

After the acquisition, discussions began immediately with Kmart and Super Valu regarding expansions. A deal was struck with Kmart to sell them enough space within the mall and some adjacent land to add on 35,000 square feet to create a new 86,000 square foot prototype. One potential hitch to this deal was that Kmart did not want its store to open into the mall. We indicated that we would not allow for the expansion if the store was closed off to the mall. The negotiations with Kmart resulted in an entrance to the mall and Kmart’s main outside door near the mall entrance. This satisfied Kmart’s security concerns and our traffic-flow concerns.

Super Valu began investigating expansion opportunities in 1989 and expanded in 1993. They expanded from 20,000 square feet to 36,000 square feet into the mall (The expansion was extended into the mall so that we could preserve outside space in the event that it was ever needed in the future).

Shekopee Town Square Renovation Schedule

ITEM                                 AMOUNT

Interior

Demo, paint, decor                  $143,900
Electrical                          $130,000
Mechanical                          $100,000
Mall store fronts                    $50,000

Total interior                      $423,000

Exterior

Design                               $31,000
Facade rework                       $310,000
Glass store fronts                  $144,000
Lighting/electrical                  $50,000
Landscaping                          $50,000
Roof replacement                    $340,000
Pylon signage                        $75,000
Parking lot repair

Total exterior                    $1,055,500
Total renovation                  $1,479,400

Tenant areas

Shell improvements                  $200,000
Tenant improvements                 $550,000
Theater                           $1,215,000
Total tenant items                $1,965,000

Total capital items               $3,444,400

Today, the mall is 92.5 percent leased. Our management team has brought the ongoing upkeep of the center to a very professional level. This center, which five years ago was netting the previous owner only $4,000 pre-debt, is projected to net us $565,000 in 1994 and $700,000 in 1995. Our 10-year projected returns are in excess of 15 percent.

Dean A. Riesen is president, CEO, and partner of Carlson Real Estate Company. He currently serves as vice chairman of the Minneapolis Downtown Council, state finance chairman of the Independent Republicans, and board member of the Minnesota chapter of NAIOP.

Brad Lis is managing director of investments at Carlson Real Estate Company. As a director, he is responsible for the company’s retail activity in Minneapolis and retail land at Carlson Center.

Carlson Real Estate Company is a limited partnership of Minnesota businessman, Curtis Carlson and family, with a portfolio of more than 4 million square feet of various real estate investments throughout the United States.