Crafting the Domain deal

Shonda Novak |
Source: Austin American Statesman

For Bryce Miller, Chris Ellis and Jeff Newberg of Endeavor Real Estate Group, the early days developing the Domain were paved with setbacks.

Creating a landmark luxury retail center – Endeavor’s biggest undertaking – was risky. It was a new concept for:Austin. Tenants might not be ready for it.

And it would be costly to build; the early $150 million price tag eventually would almost double, to $245 million.

But over 30 months between 2001 and 2004, Endeavor’s three frontmen on the project never gave up.

Endeavor’s vision for the Domain was to create “something Austin didn’t have and never experienced,” Newberg said. “This project could be our legacy.”

As a result, they didn’t quit in their pursuit – not even when a financial adviser warned the project was too complicated and costly. Not even when prospective anchor tenants bailed. Not even when substantial sums of their own money were at stake.

Not even when plans for the project brought them in head-to-head competition with Indianapolis-based Simon Property Group Inc., the nation’s largest mall developer and owner.

Simon owned or had an interest in every major mall in the Austin area, with plans to build several more. As Endeavor soon learned, those plans included a competing project on land south of Endeavor’s 57-acre proposed Domain.

Simon’s deal, on about 46 acres owned by the University of Texas, would become the Shops at Arbor Walk.

Miller recalls that the UT site, unavailable for more than a century, “mysteriously and very inconveniently” came to market. Endeavor was among the bidders for the land, but its offer was half that of Simon’s, which is paying UT $130 million to lease the land for 52 years.

“I would say we were a bit naive about Simon and how they felt about market share,” said Miller, an Endeavor co-founder and managing principal. “They had taken some big risks here and were extremely aggressive in defending their market share. We just wanted to do something different and unique in Austin.”

Ellis, also an Endeavor founder and managing principal, described the group’s early rivalry with Simon this way: “Let’s just say it was serious competition against a more-than-formidable company for the primary tenants – namely the department stores – that were out there that could kickstart a project like Domain. We are very fortunate to have picked the right site that the retailers ultimately believed in.”

Endeavor had set out planning an office campus with dot-com companies on the land, which it had acquired with partners in late 1999 after IBM Corp. decided to sell its North Austin manufacturing campus.

The tech bust changed that. Endeavor then started exploring the idea of a retail-driven project, considering “everything from the most dense of mixed-use uses to very rudimentary retail uses like power centers (with big-box stores) and grocery-anchored projects,” Ellis said.

Very early on, plans included Target as a possible anchor. At one point, they had Crate & Barrel on the hook, but the deal fell through. Crate & Barrel instead took its store to the nearby Gateway Center. “Losing Crate & Barrel to Gateway was a very low point,” Miller said.

The project that took shape conjured the upscale urban outdoor malls in pedestrian-oriented settings that were beginning to take off around the country.

“We thought there would be demand for luxury retail if we could bring the right anchors,” Newberg said.

While a unique project was paramount. so were economics.

“At the end of the day what drove the product was the price of the dirt – it was so expensive you couldn’t just put a power center there,” Ellis said.

Miller, E[!is and Newberg launched into research mode, visiting the new breed of lifestyle centers in places suob as Arlington, South Florida, and in San Antonio, the Shops at La Cantera.

They wrestled with countless questions: Should the streets have parking? If so, head-in or parallel? Apartments on both sides of the street or just one? In short, what kind of center would they need to create to make it worth visitors’ time and effort to spend a few hours to shop, eat and take in a movie?

Meanwhile, Ellis, Miller and Newberg plugged away on tt1eir retail recruitment efforts. When the Crate & Barrel deal blew up, “we had no other choice but to go to the department stores,” Ellis said. “It was back to the drawing board.”

They unsuccessfully courted Saks Fifth Avenue, which Simon also sought.

Then came a coup: Endeavor landed Neiman Marcus as the Domain’s premier anchor. The 18-month courtship involved overcoming reservations by Neiman executives that Austin had enough well-heeled shoppers to support a store.

Aware from the outset that it would need a partner with deep pockets and hefty leverage with retail tenants, Endeavor talked to potential suitors. They included General Growth Properties Inc., Simon’s chief rival, and Taubman, the large Michigan-based mall developer.

Endeavor also approached Simon, at the suggestion of Miller’s best friend, Mark Gibson, executive managing director of Holliday Fenoglio Fowler LP. Both Endeavor and Simon are clients of the Dallas­based real estate investment banking and brokerage firm. Gibson said he thought there was potential for a win-win arrangement with the companies’ competing projects.

Initially, there was a “cool reception,” with neither side following up, Miller said. That changed when word filtered through the retail community in 2003 that Neiman Marcus was headed to the Domain.

Soon, Steve Matthews, a local Simon representative, called Endeavor about “resuming our conversations about doing a win-win,” Miller said.

At a big retail convention in Las Vegas in May 2003, a mutual friend introduced Miller to Herb and Mel Simon, the company’s founding brothers, and David Simon, its chairman and CEO. The upshot: Simon said it was committed to its Mo Pac Boulevard (Loop 1) site and wished Endeavor luck with theirs, Miller recalls.

Then, in December 2003, one day before Endeavor was to meet to try to finalize outstanding deal points with General Growth, Simon was ready to talk again, Miller said. He met with Simon executives, including President and Chief Operating Officer Rick Sokolov.

“It was a very productive meeting,” Miller said. “He was very forthcoming and genuinely interested in exploring a win-win.”

The talks included exploring a joint venture, but “it was too complicated to blend our holdings,” Miller said. So a joint venture on the Domain site was agreed upon. Simon would proceed with its plans at Arbor Walk, and the Domain would be the upscale retail site.

“It became clear that Simon was the ideal partner to ensure the long-term success of the Domain, or the inverse – to-substantially impede our ability” to create a distinctive project, Miller said.

Sokolov did not respond to a request for his version of how the competition unfolded between Simon and Endeavor.

Once the: joint venture deal was struck, all aspects of the Domain, from lease negotiations to construction, have been a Simon project, said Kathy Shields, senior vice president of development with Simon.

Two years after the Domain opened on March 9, 2007, Simon bought Endeavor’s ownership interest in the project.

When a new hotel is built at Simon’s second phase, Simon will have all but wrapped up work at its Domain, Shields said.

Shields said that the Endeavor principals are “very capable, very creative developers” who “had the foresight to know that for a project they wanted to be of the caliber that the Domain was intended to be it certainly made sense” to bring Simon on board.

“I think they recognized our retail expertise, size and prominence in the retail industry gave us the edge in getting the luxury retailers and the tenants that were brand new to the market,” Shields said. “We very quickly understood how collectively we could make this project extraordinary, and it was more extraordinary by virtue of working together.”