Melvin Simon and Associates, Inc. History

Address:

P.O. Box 7033
Indianapolis, Indiana 46207
U.S.A.

Telephone: (317) 636-1600
Fax: (317) 263-7924

Private Company
Incorporated: 1960
Employees: 3,200
SICs: 6552 Subdividers and Developers Nec

Company History:

Melvin Simon and Associates Inc. (MSA) is one of the top three developers of shopping centers and mixed-use real estate projects in the United States. Owned entirely by brothers Melvin and Herb Simon, Indianapolis-based MSA built upwards of 170 shopping centers in the three decades beginning in 1960, playing a major role in the retailing revolution that replaced "Mom and Pop" stores of every description with the massive shopping malls that now dot the American landscape. MSA hurtled into the 1989 real estate recession with a huge load of projects in tow, including the Mall of America in Minneapolis, which at 4.2 million square feet is the largest indoor shopping center in the country; after asset sales and work force reductions, MSA came through the recession in tolerable shape but now faces questions about the permanent appeal of mega-malls such as the Mall of America.

MSA was founded in 1959 by Melvin Simon, a Bronx native, with his younger brothers Herb and Fred. After military service in the mid-1950s at Fort Harrison near Indianapolis, Mel Simon elected to stay in the Midwest, accepting a $100-a-week job as the leasing agent for property manager Albert J. Frankel. His first assignment was to find tenants for the Eastgate Shopping Center in Indianapolis, an experience that gave Simon a taste of the shopping center business and its unlimited future prospects. Postwar prosperity encouraged Americans to consume goods at an unprecedented rate while at the same time spawning a mass migration from cities and farms to the new suburban communities, where land was cheap and population density low. The combination of available land, high consumer demand, and a populace dependent on the automobile inspired the birth of the shopping center, where a dozen or more stores with space for parking could be built cheaply and quickly at the intersection of major roads. The "strip centers," as they were called, lacked both the homey appeal of the neighborhood shops they drove out of business and the cachet of the big city retailers such as Marshall Field's and Macy's; in fact, strip centers lacked every virtue except the two most important in retailing--convenience and price. Their convenience was obvious to anyone who used a car to do his or her shopping, and the price benefits were derived from the economies of scale made possible by the shopping centers' larger stores, most of which had franchise affiliations with national retailers.

A man of ambition such as Mel Simon could hardly ignore the potential for investment. After a few years with the Frankel company, Mel and his youngest brother Herb Simon founded MSA in 1959 to begin developing shopping centers of their own. The brothers' first project was Southgate Plaza in Bloomington, Indiana, a typical strip center anchored by a grocery store and filled out with a half dozen smaller tenants. The brothers had little cash and were often forced to ask friends for investment equity (those who declined to participate would have years to regret their decision) but for the most part developers in the 1960s and 1970s could borrow 100 percent of the construction costs of a shopping center once they had secured its anchor tenant--either a grocery chain or, later, department stores. The revenues generated by tenant leases would be sufficient to repay debt and provide seed money for the brothers' next project. Once established, the pattern was easily continued; as vice-president Thomas Domagala later described to Forbes, "You would go out, find a cornfield, and build a product that was cookie-cutter-type stuff." The Simons made a point of retaining equity whenever possible, thus building the tremendous asset base that later allowed them to borrow funds for larger and larger projects.

In the meantime, the nature of the shopping center was continually evolving. The strip center concept gave way to much larger entities that came to be known as "malls," where two rows of stores faced each other across a common walkway. The first of these was built in 1954 in Seattle; two years later, the first enclosed mall went up outside Minneapolis, where severe weather has always encouraged the growth of indoor malls. MSA was not slow to adopt this innovation, building their first indoor center in Fort Collins, Colorado, in the mid-1960s and following it up with a long line of bigger and more elegant examples culminating in the Mall of America mentioned above. Indoor malls offer obvious advantages in regions of extreme climate, but they also enable more subtle and effective marketing than is possible outdoors, where the customer's attention is easily distracted by weather conditions and where the quality and intensity of light changes continually. By the late 1960s MSA, along with other major developers, had shifted heavily to indoor projects, particularly for centers of any size.

Along the way, the Simon brothers acquired a reputation as honest and cordial negotiators, in sharp contrast to many of their fellow developers. Their modesty and good-humored approach to business won them important support among the bankers and merchants of Indianapolis, a town that does not cotton to big-city egos and publicity hounds. As one retail executive told Institutional Investor, "When Mel and Herb discuss a project with you, it's a joy. They never squeeze or play hardball." On the other hand, the brothers were famous for quarrelling with each other during negotiations in a manner that drew comparisons to the Marx brothers; in the midst of one particularly heated argument Mel Simon is said to have taken off a shoe and thrown it at his brother. Of the two, Mel Simon is considered to be far more volatile and eccentric than Herb, and for a time early in their careers Mel earned the sobriquet "Meshugganer [Crazy] Mel" for his bright red suits and outlandish manner. Yet the Simons have never shown any interest in becoming public personalities along the lines of Donald Trump, preferring to let their projects grab the publicity while they move quietly on to their next deal.

By the early 1970s the brothers were wealthy men and their ambitions had grown accordingly. The crude strip centers of 1960 were now vast enclosed malls such as the giants built by MSA in Baltimore (Golden Ring) and El Paso, Texas (Cielo Vista), each of them offering shoppers three or four "anchor" tenants like Saks or Montgomery Wards plus scores of smaller retailers, restaurants, game rooms, and in some cases play lots for children. Malls were getting bigger and more lavishly decorated, gradually taking on the appearance and even the function of small cities. For suburbs too diffuse to have a "downtown," the mall became a kind of de facto city center, with clusters of adjoining apartment complexes and office buildings, while inside the mall suburbanites found an ersatz Main Street to replace the long abandoned or demolished real one. Critics of this evolution (and there were many) pointed out that the rise of large malls and shopping centers doomed entire generations of independent drug, department, shoe, and toy store owners, grocers, bakers, butchers, florists, hair stylists, auto mechanics, stationers, dressmakers, barkeeps, cafe and restaurant proprietors, and in general anyone whose business could not be absorbed into the larger matrices of mall and franchise corporate planning--a mass extinction to rival that of the dinosaurs, and equally permanent.

In the mid-1970s Melvin Simon set himself up as a Hollywood producer. He made an impressive number of pictures over the next five years, some of them (The Stuntman, Zorro, the Gay Blade) well-received by critics and others (Love at First Bite, Porky's) better left unmentioned, but as a business venture Simon's Hollywood career was a decided failure, costing the mall mogul as much as $30 million. Simon returned to the retailing business in time to participate in its most significant development since the shopping center itself: urban mixed-use projects. Just as the suburbs had made possible the creation of the shopping center and later the mall, a resurgent interest in city living made the 1980s the decade of urban redevelopment. Many members of the "Baby Boom" generation could not afford or did not wish to live in the suburbs where they grew up, choosing instead to settle in gentrified areas of major cities, often the older and more congested parts of the city near downtown. This population of ex-suburbanites kept their suburban tastes, however, demanding the convenience of shopping centers in the middle of crowded and expensive cities. Since land was prohibitively expensive, developers such as MSA had only two sources of space, building up or reusing abandoned structures.

MSA became involved in many projects of this kind in the 1980s, several of them large enough to give the Simon name national publicity. The first of the mixed-use developments was Two West Washington in downtown Indianapolis, a city in which the Simon brothers are heavily invested both financially and as citizens. In 1987, for example, they intervened when the city's professional basketball team was about to relocate elsewhere, eventually buying the Pacers franchise in order to ensure its future in Indianapolis. As Melvin Simon later explained to Institutional Investor, "Sometimes you gotta do certain things ... Indianapolis has been very, very good to us over the years." The development at Two West Washington was another instance of the Simons' civic pride, but it was only the precursor of a much larger project begun in 1982 and more than ten years in the making, Circle Centre. The latter is an enormous effort on the part of the Indianapolis business and government to revivify the city's downtown area by converting three-and-a-half city blocks of aging brick buildings into an enclosed mall featuring two anchors, eighty shops, a multiscreen movie theater, and an entertainment complex. MSA served as managing partner of the project from its inception, after years of frustrating setbacks finally getting it off the ground in the early 1980s with the help of fourteen leading corporations who joined the venture as limited partners.

MSA entered the big leagues of United States real estate development with the completion in 1985 of St. Louis Centre, an elegant two-block-long arcade connecting a pair of department stores with a twenty-one story office building near downtown St. Louis. The $200 million project had been stalled for several years when the Simons were asked to take over its management. "Once they entered the picture in St. Louis," an MSA vice-president later commented to Institutional Investor, "people suddenly felt great about the project. Everyone just rallied around." Indeed, bolstered by the 1980s' bullish economy, the Simons were able to rally support for an amazing number of projects of every kind in the succeeding years. Fashion Mall, a Plantation, Florida, joint venture that opened in 1988, saw MSA go from elegance to opulence in its 660,000 square feet of retail space trimmed with marble tiling and dotted with full-grown palm trees; attached to the shopping mall was a seven-story office building and Sheraton Hotel. Similar projects were undertaken in Arlington, Virginia, and Orlando, Florida, where the Seminole Properties development grew to be several times the size of Fashion Mall in all three categories of retail, office, and hotel. The stage was set in 1989 for MSA to embark on some of the most ambitious real estate projects in United States history--unfortunately, just as the country headed into its worst real estate depression since World War II.

The real estate slump beginning in 1989 hit hardest the office market, crippling even such stalwarts as Olympia & York; but it also brought MSA's retail business to a near standstill after the frenzy of the 1980s. It was not possible to gauge the extent of damage suffered by the privately held MSA, but the depression certainly left the Simon brothers trying to fill an enormous number of leases around the country. In New York, MSA had undertaken the renovation of the former Gimbels' department store on 33rd Street into A & S Plaza, a $400 million, 150-store mall in the heart of Manhattan. A joint venture with New York developers Larry Silverstein and William Zeckendorf, Jr., A & S featured a seven-story glass atrium over which hangs an ornate, animated clock. Across the Hudson River in Jersey City, MSA was involved in Newport Centre, a 200-acre community whose plans included a regional mall, the tallest office building in the state of New Jersey, as many as 9,000 housing units, and the Jacques Cousteau Ocean Center. MSA's partner in the project was The Lefrak Organization, also a New York development firm.

Finally, last but hardly least of MSA's pre-slump ventures was the Mall of America outside Minneapolis. The largest mall ever built in the United States, Mall of America makes use of the entire site once occupied by the Minneapolis Twins baseball stadium, its 600-800 specialty stores and four anchor tenants form a vast rectangle around the interior entertainment section which includes a theme park (complete with roller coaster and dancing dolphins), two-story miniature golf course, fourteen movie theaters, scores of restaurants and bars, and a walk-through aquarium. Circling the enclosed mall are 13,000 parking spaces--"more parking on decks," Melvin Simon told Indoor Business Magazine, "than in the whole city of Indianapolis." MSA is the developer and manager of the $625 million development and owns about 23 percent; its partners are Teachers Insurance and Canada's Triple Five Corporation, builders of the even larger West Edmonton Mall in Edmonton, Alberta.

With such huge exposure in a down market, the Simons have had to unload assets and refinance as many properties as possible to take advantage of low interest rates. According to Business Week, David Simon, thirty-year-old son of Melvin, was assigned to help stabilize his father's strained finances, and the company subsequently cut about 20 percent of its Indianapolis work force and sold or refinanced an estimated $1 billion in property. The cash was needed to pay debt on its various overgrown projects, of which Newport Centre, A & S Plaza, and Mall of America were all still suffering low occupancy rates in the early 1990s. Some critics feel that the age of the mall is over, while others single out behemoths like Mall of America as especially vulnerable. "Customers often end up confused and exhausted," noted Forbes writer Steve Weiner about West Edmonton Mall. If Mall of America were to prove a failure MSA, would surely survive the blow, but a mistake the size of a baseball stadium is hard to explain the next time one goes shopping for a loan.

Melvin Simon and Associates, Inc. History

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