I want to show you how to recognize the ingredients of opportunity!
FIRST, changes in government economic policies can create opportunities. The Internal Revenue Tax Code(I.R.S. CODE) is where much of the incentives for economic growth are found. In 1954 the economy was in a slump. In order to encourage the building of new buildings, that tax code was changed. Formerly, the owner of a commercial building could depreciate the cost of the building over 40 years. One of the principal reasons for depreciation is to allow the owner of the building to recover the cost of the building without paying tax on this return of the invested capital. With a 40 year depreciation schedule, an owner of a building that cost $20 Million could recover $500,000 dollars each year tax free. This is a 2.5% return each year.
For example if the building’s Net Operating Income (NOI) was $2,000,000 then the owner would deduct the depreciation of $500,000. so the Taxable income would be $2,000,000 - $500,000= $1,500,000. IF THE OWNER WAS IN THE 40% TAX BRACKET HIS TAX WAS $600,000 PER YEAR.
THIS CHANGE IN THE I.R.S. CODE WAS TO ALLOW THE OWNER TO USE DOUBLE DECLINING DEPRECIATION. This meant that the annual depreciation for about 10 years was now $2,000,0000. With this change, the annual taxable income was $2,000,000- $2,000,000 = $0 taxable income. If the tax payer was in the 40% tax bracket, the income taxes would been $600,000 per year . INSTEAD- This change saved the owner $600,000 in Taxes per year. In 10 years the saving was $6,000,000. So the owner still recovers the invested capital in 10 years plus an additional $6,000,000. This is an annual return of 30% ON THE $20 MILLION COST.
In the early 1950’s, The Dayton family, the owner of the Dayton Department stores in Minneapolis, consulted architect Victor Gruen. Gruen was the current retail guru in the U.S. Victor, from Vienna, suggested they built the nation’s first fully enclosed, climate controlled shopping mall. This would be the first shopping center to house two department stores. The Dayton’s were very excited by Gruen’s descriptions and drawings of the proposed mall. When Gruen first drew up the plans for Southdale, he placed the shopping center at the heart of a tidy four-hundred-and-sixty-three-acre development, complete with apartment buildings, houses, schools, a medical center, a park, and a lake. Southdale was not a suburban alternative to downtown Minneapolis. It was the Minneapolis downtown you would get if you started over and corrected all the mistakes that were made the first time around.
Regardless of the Dayton’s wild enthusiasm for Gruen’s new retail concept. They could not raise the capital. After the I.R.S. Code was changed to allow the double depreciation, the funds were suddenly available. This allowed the Southdale Center, commonly known as just Southdale, to be built. Southdale is a shopping center in Edina, Minnesota, a suburb of Minneapolis.
This took a change in the tax code, the creative abilities of Architect Victor Gruen, and courage of the Dayton family to create a new retail vehicle. Gruen created the large shopping malls that came to dominate commerce and entertainment.
Here’s what Malcolm Gladwell, a very gifted writer, wrote about Gruen and shopping malls in the Terrazzo Jungle in the New Yorker” Fifty years ago, Victor Gruen designed a fully enclosed, introverted, multitiered, double-anchor-tenant shopping complex with a garden court under a skylight—and today virtually every regional shopping center in America is a fully enclosed, introverted, multitiered, double-anchor-tenant complex with a garden court under a skylight. Victor Gruen didn’t design a building; he designed an archetype. Victor Gruen may well have been the most influential architect of the twentieth century. He invented the mall.”
“One of Gruen’s contemporaries in the early days of the mall was architect Alfred Taubman, who also started out as a store designer. Inspired by Gruen, Taubman matched Southdale with an enclosed mall of his own in Hayward, California, and over the next half century Taubman put together what is widely considered one of the finest collections of shopping malls in the world. The average American mall has annual sales of around three hundred and forty dollars per square foot. Taubman’s malls average sales close to five hundred dollars per square foot. If Victor Gruen invented the mall, Alfred Taubman perfected it.
Taubman liked the main corridors of his shopping malls to be no more than a thousand feet long—the equivalent of about three city blocks—because he believes that three blocks is about as far as peak shopping interest can be sustained, and as he used “adjacencies” in his malls. There was Brooks Brothers, where a man might buy a six-hundred-dollar suit, right across from Johnston & Murphy, where the same man might buy a two-hundred-dollar pair of shoes. The Bose electronics store was next to Brookstone and across from the Sharper Image, so if you got excited about some electronic gizmo in one store you were steps away from getting even more excited by similar gizmos in two other stores. Gucci, Versace, and Chanel were placed near the highest-end department stores, Neiman Marcus and Saks. ”Lots of developers just rent out their space like you’d cut a salami,” Taubman explained. ”They rent the space based on whether it fits, not necessarily on whether it makes any sense.” Legal Sea Foods restaurant, was off the main mall, at the far end of a short hallway. Why this location? A woman about to spend five thousand dollars at Versace doesn’t want to catch a whiff of sautéed grouper as she tries on an evening gown. More to the point, people eat at Legal Sea Foods only during the lunch and dinner hours—which means that if you put the restaurant in the thick of things, you’d have a dead spot in the middle of your mall for most of the day.
Well-run department stores are the engines of malls. They have powerful brand names, advertise heavily, and carry extensive cosmetics lines (shopping malls are, at bottom, delivery systems for lipstick)—all of which generate enormous shopping traffic. The point of a mall—the reason so many stores are clustered together in one building—is to allow smaller, less powerful retailers to share in the department stores traffic. A shopping center is an exercise in cooperative capitalism. It is considered successful) when the maximum number of department-store customers are lured into the stores in the mall.
”The customer comes into the mall, walks down the hall, gets on the escalator up to the second level. Goes back along the second floor, down the escalator, and now she’s back where she started from. She’s seen every store in the center, right? Now you put on a third level. Is there any reason to go up there? No.” A full circuit of a two-level mall takes you back to the beginning. It encourages you to circulate through the whole building. A full circuit of a three-level mall leaves you at the opposite end of the mall from your car. Taubman was the first to put a ring road around the mall—which he did at his mall in Hayward—for the same reason: if you want to get shoppers into every part of the building, they should be distributed to as many different entry points as possible. At Taubman malls—the ring road rises gently as you drive around the building, so at least half of the mall entrances are on the second floor. ”We put fifteen per cent more parking on the upper level than on the first level, because people flow like water,” Taubman said. ”They go down much easier than they go up. And we put our vertical transportation—the escalators—on the ends, so shoppers have to make the full loop.”
Suppose that there was a downtown where the biggest draw was a major department store. Ideally, you ought to put the garage across the street and two blocks away, so shoppers, on their way from their cars and to their destination, would pass by the stores in between—dramatically increasing the traffic for all the intervening merchants. But in a downtown, obviously, you can’t put a parking garage just anywhere, and even if you could, you couldn’t insure that the stores in that high-traffic corridor had the optimal adjacencies, or that the sidewalk would feel right under the thin soles of women’s shoes. And because the stores are arrayed along a road with cars on it, you don’t really have a mall where customers can wander from side to side. And what happens when they get to the department store? It’s four or five floors high, and shoppers are like water, remember: they flow downhill. So it’s going to be hard to generate traffic on the upper levels. There is a tendency in America to wax nostalgic for the traditional downtown, but those who first believed in the mall—and understood its potential—found it hard to look at the old downtown with anything but frustration. ”In Detroit, prior to the nineteen-fifties, the large department stores, like Hudson’s, controlled everything, like zoning,” Taubman said. ”They were generous to local politicians. They had enormous clout, and that’s why when Sears wanted to locate in downtown Detroit they were told they couldn’t. So Sears put a store in Highland Park and on Oakland Boulevard, and built a store on the East Side, and it was able to get some other stores to come with them, and before long there were three mini-downtowns in the suburbs. They used to call them hot spots.” This happened more than half a century ago. But it was clear that Taubman has never quite got over how irrational the world outside the mall can be: downtown Detroit chased away traffic.
Planning and control were of even greater importance to Gruen. He was, after all, a socialist—and he was Viennese. In the middle of the nineteenth century, Vienna had demolished the walls and other fortifications that had ringed the city since medieval times, and in the resulting open space built the Ringstrasse—a meticulously articulated addition to the old city. Architects and urban planners solemnly outlined their ideas. There were apartment blocks, and public squares and government buildings, and shopping arcades, each executed in what was thought to be the historically appropriate style. Sound familiar?
Once, in the mid-fifties, Victor Gruen sat down with a writer from The New Yorker’s Talk of the Town to give his thoughts on how to save New York City. First, Gruen said, Manhattan had to get rid of its warehouses and its light manufacturing. Then, all the surface traffic in midtown—the taxis, buses, and trucks—had to be directed into underground tunnels. He wanted to put superhighways around the perimeter of the island, buttressed by huge double-decker parking garages. The jumble of tenements and town houses and apartment blocks that make up Manhattan would be replaced by neat rows of hundred-and-fifty-story residential towers, arrayed along a ribbon of gardens, parks, walkways, theaters, and cafés. ”The chief means of travel will be walking,” Gruen said, of his re-imaginedmetropolis. ”Nothing like walking for peace of mind.” Shopping Malls are frequent sites of senior’s daily walk.
Some of Gruen’s ideas of many years ago are current planning proposals.
Today, credit is scarce. The Federal government is issuing proposals to encourage economic growth. This will continue. In 75 days there will be a new President and Congress- both will have their own ideas of how to get the economy moving. Stay alert. What type of economic change will propel you?
