The Deal Is Off for Burbank, Mall Developer

Five years ago, Burbank leaders were thrilled with the great deal they had just closed that would finally bring a major shopping mall to the city.

Within 25 years, nearly $229 million in sales, property and hotel taxes would be collected from operations of the Media City Center mall and surrounding properties, officials projected.

In addition, Burbank officials exulted, developer Alexander Haagen agreed to split net operating profits from the mall with the city, 50-50. With Haagen, operator of dozens of shopping centers in Southern California, managing Media City Center, another $52.7 million would roll into city coffers in those 25 years, officials happily announced.

How things have changed. Officials now say the mall, which opened in 1991 and into which the city invested $120.7 million, won’t produce a dime in profit for the foreseeable future. But they say they have made another great deal, salvaging $10 million--which Haagen promises to pay in the future--while forever surrendering the taxpayers’ right to half the profits.

What happened?

Public records and interviews with former and present city officials show that the partnership between Haagen and the city, working through its Redevelopment Agency, was beleaguered from the start.

Almost since the beginning, the Manhattan Beach developer has repeatedly made financial demands on the city, records show. And until last June, the city complied, hoping that one more concession would finally make the mall flourish.

In fact, much of the money generated by the shopping center --millions of dollars in tax revenues the city counted on five years ago to make good on its investment--has been diverted to Haagen.

Those now in positions of power in Burbank, including Mayor Bill Wiggins, say they are generally satisfied with how the project has overcome the California recession and a sagging retail market. They point proudly to a revitalized downtown centered on the mall, which draws strong weekend crowds and has generated new jobs.

“This is a phenomenal success to have taken 50% of our profits, which--because the economy changed--was tantamount to zippo, and to translate that into $10 million of guaranteed hard, cold cash is an absolute coup,” said City Manager Bud Ovrom.

That upbeat view is not shared by those who first made the deal with Haagen.

“I’m glad Haagen didn’t want City Hall, or the City Council would be meeting in a tent,” said Al Dossin, a former Burbank mayor who helped select the developer in 1989.

“That’s kind of a snide remark, don’t you think?” said Haagen, 75, who has 40 years of experience in real estate development. “I think our reputation has been impeccable. If you look at the results rather than the comments, the results of what we did are rather impressive.”

Haagen said “sour grapes” are behind the negative comments. “The city was as much a participant as we were,” he said. “We have been a productive entity for years. I went to Burbank because the city asked us to.”

The city refused requests by The Times to examine records of negotiations until after the final deal becomes effective Nov. 26. But other sources show that key changes in the project and its revenues include:

* Haagen could not arrange for the construction of four office buildings and a 300- to 350-room hotel near the mall, buildings the city considered crucial to the success of the project. While the city planned on receiving revenue from the projects, the original agreement allowed Haagen not to build without defaulting.

* Both Haagen and the city wanted an upscale anchor store. In hopes of luring Bullock’s, Burbank in 1989 and 1990 borrowed $51.5 million to pay for the building and a new parking structure to be used exclusively by the store. Haagen, who loaned the money, required the city to pledge 80% of the property taxes from the entire mall, and all of the city’s share of sales taxes from Bullock’s and 34 of 149 mall stores, records show. Haagen has agreed to forgive any amount remaining on the loans after 2016.

In a letter to Ovrom in 1989, a senior officer with the Alexander Haagen Co. warned that the city risked the chance of never attracting a top anchor store if it did not quickly agree to the terms of the Haagen loan.

* Under another agreement in April, 1993, the city gave Haagen all of its share of sales taxes generated over 10 years by Office Depot, Circuit City, and a restaurant, all located on land once reserved for office towers.

The city agreed to do so after claims from Haagen’s company that the money was critical for the overall success of the project, public records show.

The amount of tax revenue to be transferred to Haagen from those businesses is projected to be $300,000 this year, according to Fred Bruning, senior vice president for Haagen.

* Last year, Haagen threatened to leave the mall project unfinished if the city interfered with his plans to raise new capital by taking his company public and offering shares for sale on the New York Stock Exchange, according to public records. The city eventually consented and Haagen has raised $374 million by selling 10 million shares of the new firm, Alexander Haagen Properties, Inc., since last December.

Haagen owns 55,000 shares of the new firm and serves as chief executive officer, president and chairman of the board.

* Just six months later, Haagen had another demand. He asked the city to allow him to pledge the entire Media City Center as collateral for a $75-million line of credit Haagen said he needed. The city owns the land on which the mall was built, and Haagen has the right to stay for 99 years at rent of $1,000 a year.

It turned out to be the last straw, ending a partnership in a way few at City Hall could have imagined when it began.

For years, city officials had tried desperately to build a major shopping center in downtown Burbank.

Haagen came to Burbank with personal endorsements from Los Angeles County Supervisor Mike Antonovich and former Supervisor Kenneth Hahn. He had earned a solid reputation for daring to build large shopping centers in places most developers avoided, such as Watts and Baldwin Hills.

In a letter to Burbank officials in 1988, Haagen said his “high quality, innovative and exciting” project held great promise for the city.

“Our belief in this concept and the future of Burbank is underwritten by our guarantees to the City for $100 million in revenues during the initial 20 years of project operations,” according to the letter.

The Burbank Redevelopment Agency spent $55 million to purchase property, demolish existing buildings and relocate businesses, and another $14.2 million on aesthetic improvements to the surrounding area.

But the grand design was quickly compromised as plans for the office buildings and hotels dissolved.

In an interview, Haagen said that he insisted all along that he could not build offices or hotels himself, but would work closely with a firm that could--Homart Development Co.

Homart’s inability to find any prospective tenants during the recession was “the disaster in this whole project,” said Tom Clark, a Newport Beach attorney who served as the city’s chief negotiator with Haagen from the beginning of the project.

The consequent lack of tourists and white-collar workers needing a place to shop and dine led to low foot traffic throughout the mall and a vacancy rate as high as 30% to 40% among stores this year.

Another key element in the Media City Center’s long-term viability was luring an upscale retailer. City officials were prepared in 1989 to borrow $18.5 million from the developer to get the job done.

Haagen’s chief financial officer, Seymour Kreshek, warned the city that Bullock’s would move elsewhere unless millions of dollars more were invested, according to a letter in city files.

The Burbank Redevelopment Agency then agreed to borrow another $33 million from Haagen and repay it with property and sales taxes until 2016.

“We were so desperate to have a quality store, maybe we’re lucky it didn’t cost us more,” said Mary Lou Howard, a former councilwoman.

“At one point in time, we were willing to give them fixtures, land, do everything,” she said. “I don’t think any of us dreamed having a center like this would cost so much. This isn’t going to be paid off in any of our lifetimes.”

When the proposed hotel and office towers were not built, city officials worried about how to make the overall project look complete, according to a 1993 staff report.

Haagen offered to bring new retailers--an Office Depot and Circuit City--and a restaurant to the site until the market for hotels and offices improved.

But as part of the deal, Haagen wanted to keep the city’s share of sales taxes from the new businesses--money he said was needed to help bring the mall to full capacity and secure long-term financing, according to public documents. Last year the city agreed, diverting an estimated $300,000 annually in sales taxes to Haagen for use in mall operations.

It wasn’t enough. Within months, Haagen asked the city for permission to go public with his firm, and in December offered investors around the world shares of his 36 Southern California properties.

Unsure of what the move meant, city officials consulted with Clark and other advisers, determined Haagen was merely refinancing his existing debt on the Media City Center, and gave the developer the go-ahead.

This time, the city wanted something from Haagen: a return of the sales tax from Office Depot and Circuit City.

In support of the request, Clark argued in a letter to Haagen that the council agreed to the diversion only because Haagen said it was critical to the success of the mall as a whole, and “not so the developer would realize a windfall.”

In the same letter, Clark noted that the Burbank Redevelopment Agency has “already pledged virtually all of its available revenues from the center to Haagen.”

The concession was not what Haagen had in mind. In a letter to then-Mayor George Battey, the developer wrote: “The staff’s ‘demands,’ in my opinion, are truly unreasonable, unwarranted and excessive.”

In the same letter, Haagen threatened to sell his interest in the Media City Center in 1994, when he contended he no longer needed the city’s consent to do so. The city backed down.

“The hope was if we hang in there, we would at some point in the future” share in proceeds, Clark said.

Neither Clark nor city officials anticipated what would come next: Haagen’s desire to use the Media City Center as collateral to raise still more funds.

“I don’t think I really realized what the final package was until he brought it to us,” Clark acknowledged.

Some, such as Dossin and Howard, believe city officials and consultants were simply outsmarted by Haagen.

Current city officials dispute that point, saying the mall’s opening in 1991 was ill-timed, but represents a much-improved use of the land.

Ask mall tenants how business is doing and the answers are as varied as the merchants themselves.

Most agree that the Northridge earthquake and subsequent closure of major shopping centers in the San Fernando Valley helped bring more people to the Media City Center. Prior to January, some said, business was “dead.”

“It’s incredibly slow, but we’re still ahead 150% of last year in sales,” said Manager Shawn DeCloedt of Expressly Portraits. “It may take getting more established. It just seems this mall needs a couple of more years.”

In contrast, Circuit City and Office Depot are expected to do a healthy $20 million and $10 million in sales this year, respectively, according to broker Steven Soboroff, who represents both chain stores.

Last year, Haagen’s prospectus for the stock offering listed the mall’s loss at $3.9 million for 1992 and $5.5 million for 1993.

Haagen has had troubles with other municipal partners. He angered officials with the Los Angeles Community Redevelopment Agency earlier this year by trying to end a partnership that helped open the Baldwin Hills Crenshaw Plaza. Both sides recently settled the dispute by agreeing to go their separate ways in 1996, with a minimum payment of $1.35 million from Haagen to the city of Los Angeles.

The Burbank City Council has approved the $10-million buyout offer from Haagen, effective Nov. 21.

Under the terms of the buyout agreement, Haagen must pay the city $10 million total in separate payments during 1995 and 1996. In exchange, he obtains the right to develop two remaining parcels that were reserved for a hotel and office tower. The city loses its half interest in any profits, public documents show.

“What the city wanted, I did,” Haagen said. “If you look under the rocks, there was nothing but good intentions. We created things no one else has produced. Certainly, we didn’t produce a bad shopping center.”

Media City Center Revenue Diversions

The Burbank Redevelopment Agency and Alexander Haagen Properties Inc., the partners who built the Media City Center shopping mall, have agreed to split up. In a deal that will become final Nov. 26, the city will surrender to Haagen its right to half the profits from mall operations in return for $10 million. But in a series of earlier agreements, the city has already diverted to Haagen millions of dollars in tax revenues generated by the mall.

Cash Transfers

1. From Bullock’s and 34 of 149 mall stores

2. From two adjoining stores and restaurant

3. From Media City Center

4. From Media City Center

5. From remaining 114 mall stores

City of Burbank

Property taxes from Media City Center: 20%

Sales Taxes from remaining 114 mall stores: 100%

Alexander Haagen Properties Inc.

Sales taxes from Bullock’s and 34 of 149 mall stores: 100%

Sales taxes from two adjoining stores and restaurant: 100%

Profits from Media City Center: 100%

Property taxes from Media City Center: 80%

Notes:

1, 2; Since mall opening, $700,337 has been paid by Burbank to Haagen.

3: When buyout becomes inal Nov. 26, all net profits from mall to Haagen.

4: $4,148,612 has been paid by Burbank to Haagen.

5: Approximately $1.2 million annually retained by Burbank

Original Mall Funding

For the $250-million project in millions.

Haagen: $169

Burbank Redevelopment Agency: $69.2

Anchor stores: $11.8*

* such as Sear’s, Ikea and Mervyn’s

Key Dates

NOV. 1988: In a proposal to Burbank City Manager Bud Ovrom, Haagen guarantees at least $100 million in tax revenues and other payments within the first 20 years of operation if he is selected to build the mall.

SEPT. 1989: Burbank Redevelopment Agency and Haagen agree to a 50-50 split of mall profits after debt payments. Agency agrees to borrow $18.5 million from Haagen to build parking structure for upscale anchor store. City agrees to divert 70% of mall-generated property taxes to Haagen by 2016.

SEPT. 1990: City officials agree to borrow $33 million from Haagen to build store for Bullock’s. City agrees to divert an additional 10% of property taxes generated by the mall to Haagen. City agrees to divert all sales taxes from Bullock’s and 34 mall stores to Haagen until 2016.

APR. 1993: A third agreement between Haagen and the agency gives the developer the city’s share of sales taxes from Circuit City, Office Depot and Pollo Loco stores for 10 years.

DEC. 1993: The Alexander Haagen Company goes public, becoming Alexander Haagen Properties, Inc.

JUN. 1994: Haagen asks Burbank officials for permission to pledge Media City Center as collateral for a loan.

OCT. 1994: City Council accepts promise of $10 million from Haagen; in return, city surrenders forever its right to half of mall profits, and Haagen receives right to develop last two parcels near the mall.

Source: Alexander Haagen Properties Inc., and records on file at city of Burbank

Researched by Vivien Chen