COVER

AN IMPATIENT DYNASTY

TOM FENNELL December 22 1986
COVER

AN IMPATIENT DYNASTY

TOM FENNELL December 22 1986

AN IMPATIENT DYNASTY

COVER

Surfin’ Santa glided into West Edmonton Mall’s cavernous, glass-enclosed waterpark last week. Fat and relaxed in his sunglasses, straw hat and Hawaiian shirt, the improbable old St. Nick made merry from a deck chair while manmade surf pounded the sand-colored rubber beach behind him. In the complex that surrounds the wave pool, 140,000 people elbowed for space in the world’s largest shopping centre. Everything seemed to be in place in the vast retailing emporium: dolphins frolicked in their pool, passengers jammed a fleet of yellow submarines and disgruntled ostriches buried their heads in their sand-filled pens. But 13 km away, in their downtown Edmonton office, the four Iranian-born Ghermezian brothers, who created and own the mall that they unabashedly label “the eighth wonder of the world,” were under siege. A critical $480-million bond issue is close to failure, and the family is selling off major real estate assets— including the recent sale of two hotels—to reduce its debt.

Nightmare: Like millions of immigrants who preceded them, the Ghermezians arrived in the early 1950s seeking security, acceptance and, above all, financial success. Their nightmare was failure. Far from the corridors of Canadian corporate power, the closeknit family of former rug merchants quietly built a $2-billion fortune. But last week, as members of the nation’s investment community continued their refusal to buy the Ghermezians’ critical mortgage bond, that nightmare threatened to materialize. If the Ghermezians fail to refinance the West Edmonton Mall, some financial analysts said, that could stall their ambitious plans for expansion into the United States and Central Canada. And that, the analysts add, could destroy the family’s strategy of diversifying away from the mall—which until now has soaked up hundreds of millions of dollars in capital.

The Ghermezians’ dreams of expanding out of Edmonton began to take shape in February, 1985, when the brothers approached officials in Bloomington, Minn., about building a 10-million-square-foot megamail simi-

lar to West Edmonton. Now, the brothers and Bloomington officials are scheduled to proceed with the deal for the $1.6-billion project by a Jan. 2 deadline. But some politicians close to the project said last week that they were concerned by a lack of encouraging signals from the Alberta capital. They, and some Canadian observers, speculated that the brothers did not have the

financing in place. But family spokesman Nader Ghermezian said in an interview that that was not the case. He said that his critics are part of a real estate industry lobby that is determined to destroy the Edmonton mall before it can be repeated elsewhere. And he said that not only will Bloomington’s Mall of America and Fantasyland, as it is called, proceed, but the family will build an even bigger one near Toronto or in Niagara Falls, N.Y.

Turbulent: The Ghermezian brothers— Eskander, Raphael, Bahman and Nader—are accustomed to controversy. Now in their 40s, they trace their family roots back through 250 years of turbulent Middle Eastern history to Azerbaijan, now part of the Soviet Union, near the Turkish and Iranian borders. The family moved to Iran in the 1940s and Jacob, the brothers’ father, built a

thriving business buying, selling, manufacturing and exporting hand-woven and knotted rugs. Life in Tehran was tough and dangerous, and it marked the four brothers for life.

Cash: The family took shelter in numbers, and the entire clan—about 65 cousins, aunts and uncles in allmoved into five storeys of an apartment building in Tehran. In the early

1950s Jacob decided that it was time to move on and brought his wife, Nahenjan, and family to Montreal. The boys were soon attending McGill University—only Raphael graduatedwhile selling rugs door to door. Jacob had been unable to move cash out of Tehran, but he could buy rugs and import them into Canada. The family opened a rug store on Sherbrooke Street in downtown Montreal in 1962, and by 1964 they had opened 16 outlets across North America.

By then the family was looking west again—to Edmonton, where the nomadic entrepreneurs saw a fortune in the making. The province’s vast crude oil reserves would soon be in heavy demand. An explosion in oil prices would boost the Edmonton area’s population and drive land prices up in the process. By 1967 Eskandar and Raphael were

actively acquiring land in and around the Alberta capital.

In 1979 and 1980 alone, the Ghermezians sold seven parcels of land to the provincial government for $22 million. Three of the properties, comprising about 119 acres, sold for $5.6 million, but the family had paid just $199,000 for the land. By 1974,the family’s rug business and lucrative land deals had made the Ghermezians the largest private landholders in Edmonton. Currently, through their Triple Five Corp. Ltd., with assets of $2 billion, they control the mall, four hotels in the Edmonton area and sprawling apartment and housing developments in Edmonton’s west end.

Stripped: In 1974 most Edmonton residents had never heard of the reclusive brothers. But the Ghermezians’ anonymity evaporated on the night of Jan. 12, 1974, when Raphael, then 29, arrived on a startled alderman’s I doorstep to offer him £ $40,000 in cash. What Í followed was a provincial inquiry into an alleged bribe, before Mr. Justice William Morrow, which stripped away the family’s veil in front of a delighted and intrigued city. But the Ghermezians did not react favorably to the sudden glare of publicity and public examination of their plan to build the world’s largest mall. Raphael, the most impulsive of the brothers, made the evening television news by attempting to wrestle a camera from an aggressive reporter in front of a TV crew. At the inquiry’s conclusion Morrow cleared the Ghermezians of bribery and said that the Ghermezians were the “most skilful, energetic and persuasive developers” he had ever seen.

The family constructed its giant $700-million, five-million-square-foot mall in three separate phases from 1981 to 1985. Along the way the brothers, led by Nader, lobbied alder-

men hard. At council meetings Nader repeatedly interrupted debates and waved at friendly aldermen, urging them to speak up on his behalf. Said Edmonton Mayor Laurence Decore last week: “They just don’t know the meaning of the word ‘no.’ They just keep coming back.”

Drained: The brothers set a breathtaking pace. While they were completing what they called their “eighth wonder,” they were also redrafting Edmonton’s downtown core, with a commercial district that had been drained of business by the megamail. In the early 1980s the brothers proposed to draw retailing giant Eaton’s Ltd. into a new downtown complex that included apartment towers, swimming pools and an indoor golf course. The $600-million complex added 250,000 square feet of new retail space to the city’s already oversupplied market. But before they agreed to build the centre—and revitalize a deserted city centre—the brothers again insisted on massive tax and parking concessions totalling more than $30 million. The council once again voted to grant the concessions.

The Eaton Centre, which began construction last spring, underscored the family’s aggressive damn-the-critics approach to development which has become their hallmark in dealings with other municipal councils in recent months. Said Michael Spohn, vicepresident of T. Eaton Realty Co. Ltd.: “They bought the block next to us before they even approached us—that’s a pretty big risk.”

Still, despite their dominant position in Edmonton, the Ghermezians seem almost desperate to duplicate their mall elsewhere in North America. Only by repeating it, Raphael explained, can his family achieve two cherished goals: acceptance into North America’s developer elite and acknowledgment of the West Edmonton Mall as a daring retail concept. But some analysts say that there may be another motive: only by constantly adding to the mall, or building elsewhere, can the Ghermezians maintain the allure of their malls. Declared Edmonton businessman Peter Pocklington: “It was the hype of Phase 2 that saved 1. It was the hype of 3 that saved 2.” He added, “I have grave worries.”

Pushing: In February, 1985, the brothers heard of an American city that was eager for new retail development. Bloomington, Minn., a bedroom suburb of the twin cities Minneapolis and St. Paul, issued a tender for a convention centre and shopping complex. In a series of meetings with Bloomington and state officials, the Ghermezians proposed a project twice the size of West Edmonton, costing $1.6 billion _

and covering 10 million square feet.

In early July, just days before they won the Bloomington contract, Nader Ghermezian arrived at Queen’s Park, the Ontario government complex in Toronto. According to Ken Rosenberg, executive assistant to Ontario’s minister of consumer and commercial relations, Monte Kwinter, they told newly elected Liberal Premier David Peterson, “We want to build the largest pri-

vate development in the world, in Ontario.”

But while they were pushing ahead in Ontario, the brothers began entertaining Bloomington and state politicians and escorting them on tours

of the Edmonton mall. Increasingly, said Minnesota State Senator Michael Freeman, politicians listened to the Ghermezians’ passionate requests for more and greater concessions throughout the summer. By the fall of 1985 city and state governments had responded with what Nader Ghermezian says was more than $165 million worth of concessions, including taxpayer-subsidized land. Freeman said that the politicians had been convinced by assurances from the Ghermezians that their Mall of America and Fantasyland would attract nine million tourist visits annually and create 40,000 permanent jobs.

But as the Jan. 2 deadline approaches for the Ghermezians to prove that they have the funds for the project, Freeman said last week that the Ghermezians may not have managed to raise sufficient financing. Plans for the mall have been sharply reduced to five million square feet, and the Ghermezians have not provided details of a financing package. If they do not do so by Jan. 2, city officials said last week, the development site will not be released. But Nader Ghermezian told Maclean’s that the mall will be built in at least two stages, “as the economy warrants,” and construction will start in March.

List: Meanwhile, as the family developed the Bloomington project, it was attempting to launch another megamail in Ontario or New York state. By July, 1986, the Ghermezians had acquired an option on a $70-million parcel of land in Mississauga, and they approached Ontario’s Peterson about building a 10-millionsquare-foot mall on the site. At a subsequent meeting with Kwinter, a pro-entrepreneurial cabinet minister whom Peterson picked to deal with the Ghermezians, the brothers handed over a $200-million shopping list of concessions. It included demands for $80 milN lion in free land, a monorail “ link with Toronto’s Pearson In3 ternational Airport, a few kilos' metres away, and a provincial dollar for every Ghermezian dollar spent promoting the new supermall.

Two months earlier the brothers had approached New York state politicians to discover what concessions they would be willing to make for Niagara Falls. The brothers proposed a 5-mil-

lion-square-foot shopping centre and a similarly sized amusement park which the Ghermezians projected would attract 10 million tourists annually. Gov. Mario Cuomo responded with a $556million package that included free land 400 m from the falls, low-interest loans and a wide swath of tax concessions.

Throughout the summer the Ghermezians appeared to be attempting to

develop competition between New York and Ontario officials. Kwinter and a Cuomo aide both visited the West Edmonton Mall, and they returned saying that they wanted to see an even bigger version erected in their jurisdictions. Cuomo stood by his lengthy list of concessions. Mississauga launched a $100,000 feasibility study of the project. But Kwinter lacked support from his cabinet colleagues, many of whom opposed any concessions. In October, when the cabinet passed the message on to the Ghermezians that it would not agree to concessions, the developers quietly let their property option expire. Mississauga city council promptly cancelled its study, but $30,000 had already been spent on it.

‘Doubtful’: The Ghermezians said last week that they still want to move east and are looking at both the Mis-

sissauga and New York options. But any attempt to build in the Toronto area would be opposed by a well-organized development industry lobby determined to keep them out of Ontario (page 19). At the same time, the $480million bond issue, according to William Tremblay, president of the real estate division of Bay Street brokerage firm Burns Fry Ltd., a co-underwriter of the issue, is in the “extremely

doubtful” category. Other sources told Maclean's that the issue will likely be reduced in size to $300 million to make it easier to sell.

Still, some detractors of the Ghermezians say that may not be enough. Nicholas Winslow, a Los Angelesbased economic consultant to Disney and other major amusement developers, says that the Ghermezians are losing money heavily in Edmonton and, because little of the bond issue has been sold, they may now find it increasingly difficult to line up financing for new projects. As a result, said retail industry expert Ian Thomas of Vancouver-based Thomas Consultants Inc., the Ghermezians are being forced to sell off other Triple Five holdings, including the Edmonton Eaton Centre. Thomas told Maclean's last week that a number of clients, including some of the top developers in the country, have

asked him to assess the Triple Five assets that are for sale. A former executive with Triple Five confirmed that some of the firm’s assets have been on the market for more than a year.

The bond issue is failing, said Winslow, because the investment community does not believe that Edmonton, with a population of 683,000, can support a mall with 828 stores and an amusement park at the same time. Indeed, one evening last week a lone man in a bathing suit was the only person on the rubber shore of the mail’s $75million waterpark. And while the attractions and shops were intended to draw tourists and Edmontonians to the complex for recreation, Winslow, who has studied the mall for clients, says that because many of the amusements are not breaking even, fees charged to retailers for rent, maintenance and other costs have climbed.

Rocked: Thomas said that the Ghermezians’ sales figures tend to support Winslow’s conclusion. Retail sales in the West Edmonton Mall are running at close to $250 per square foot, he said—well below the national average of $375. As well, sales are dampened because Edmonton has more retail space per capita than any other Canadian metropolitan area. Philip Boname, a Vancouver-based urban development consultant who has also studied the mall, says that the Ghermezians have been rocked by the collapse of energy prices in the West and the resulting recession in Edmonton. Boname says that it is likely the Ghermezians’ banker, the Bank of Montreal, has told Triple Five to bring down its level of debt by selling off assets. But Donald Peacock, a spokesman for the bank, told Maclean 's that the bank “still feels very positive” about the West Edmonton Mall.

Still, not all retailers are satisfied with their performance in the mall. Supermarket giant Safeway Canada Ltd. abandoned the centre in October, even though the company will pay for its lease until 2006. Said Jack Lawson, Safeway vice-president for real estate: “The store had deteriorated in volume to the point where even a rent reduction would not have put it in the black. West Edmonton Mall is simply outsized for its market.” But Nader Ghermezian said that Safeway left because it had built another store nearby. He added: “As a result, the company closed down the mall store and three others to maximize profits.”

Sears Canada Inc. executives say that their store performed poorly and that they would not locate in the mall if they had it to do over again. Said Sears vice-president Harold Mandel: “Other than the circus atmosphere of West Edmonton Mall, there is really

no need to drive out there.” He added: “I love the Ghermezians as characters, but I sure don’t want to go into another mall with them. It’s like the Lord: He created in day 1 and then day 2— but at least the Lord said, Tm going to rest now.’ ”

The Ghermezians point out that the mall has a low tenant turnover. And a confidential memorandum to institutional investors prepared by McLeod Young Weir Ltd. and Burns Fry Ltd. of Toronto, co-underwriters of the Triple Five bond issue, describes the mail’s strong profit-generating capacity since the third phase opened in September, 1985. In the 11 months ending on June 30, 1986, West Edmonton Mall Ltd. had total revenues of $64.9 million and expenses of $18.1 million for earnings (before interest and depreciation) of $46.8 million.

Fate: The memorandum predicts that the mall will record operating income of $70.5 million in 1987, climbing to $86 million by 1991. On the assumption that the $480-million issue is subscribed at 10.5 per cent—the rate used as an example in the memorandum— the mall’s interest costs would be $50.4 million. But U.S. analyst Winslow says that when the cost of borrowing and operating the mall’s waterpark is included, the Ghermezians are likely to lose a minimum of $15 million annually.

During an interview in his downtown Edmonton office, Nader Ghermezian downplayed both the family’s inability to break out of Edmonton and the fate of the mortgage bond issue. He said: “The bond issue isn’t over. We could still go to Europe for money.” And although some stores are struggling, he says that others are doing a booming business. He pointed out that many stores have opened two outlets in the massive mall.

Despite the controversy over the success of the retailing side, there is little doubt that the mall has become a huge tourist attraction. David James, general manager of the Edmonton Convention and Tourism Authority, said that tourists visiting the city are coming mainly to see the mall and are expected to spend $800 million in 1986, up from $700 million in 1985 and $500 million in 1984. Said Mayor Decore: “I don’t know where this city would be right now without the Ghermezians.” But although the Ghermezians have won over Edmonton, they still face the challenge of winning over Canada’s cautious investment community—and the wary governments of Ontario and New York state.

TOM FENNELL

ANN SHORTELL

ANN WALMSLEY

JOHN HOWSE