Colorado Real Estate Journal - August 5, 2015
Nate Gart was right. “Nothin’ happens if you don’t do nothin’,” Nate Gart, who founded the iconic Gart Sporting Goods in Denver in 1928, once said. Eight decades after the founding, Tom Gart, one of Nate’s grandchildren, pulled out the quote to help convince an institutional partner that investing in the Denver Pavilions, the retail anchor at the upper end of the 16th Street Mall, was the best course of action during the dark days of the Great Recession. The Gart family bought the Denver Pavilions in a $95.5 million deal in July 2008. The one-of-a-kind retail center needed about $20 million in improvements and upgrades. But it was a time when institutional investors all across the country were walking away from big real estate investments. In fact, Bill Denton, the original developer of the Pavilions, didn’t want to sell, but his institutional partner demanded it. The problems, of course, weren’t just in Denver. Bear Stearns had been purchased for a song and Lehman Brothers had just collapsed. The Garts’ 80 percent partner in the Pavilions was ING Clarion (later just Clarion.) The Gart family owned most of the rest of the remaining 20 percent of the Pavilions with another Denver-based company, Rifkin & Associates, which was started by cable TV pioneer Monty Rifkin. The Gart family, which manages the Pavilions, was unusual in that it had such a big stake in the Pavilions. Operators of big real estate developments such as the Pavilions often have only a 2 percent to 5 percent equity stake. By ponying up its own money, the Gart family was demonstrating its commitment and long-term faith in downtown Denver and the local economy, according to Mark Sidell, president of Gart Properties LLC. “Not too long after we bought Pavilions, it was painfully clear that the market’s direction was working against us,” Sidell recalled. The Gart family had a relationship with Clarion since 2003, when it took an 80 percent stake in the Garts’ Village Boulder Shopping Center. Still, the Garts were asking for more money for the 349,566-square-foot Pavilions at a time when many institutional investors were not only unwilling to put more dollars into projects, but also were selling them at losses to more entrepreneurial buyers who were willing to take the greater risk for the potential greater reward. At the time, there was no guarantee that real estate in Denver, or anywhere else, would bounce back. In fact, many experts were predicting the next shoe to drop would be a collapse of commercial real estate loans as big or bigger than what had happened to housing prices, fueled by ill-timed subprime mortgages, which led to record foreclosures in Denver and across the nation. Sidell and members of the Gart family pitched their reasons why Denver and the Pavilions would bounce back better than ever. After all, Denver was their home and they had seen it bounce back from down real estate and economic cycles many times. “It was met with a certain amount of eye rolling,” Sidell said. The turning point came at a meeting when Tom Gart pulled out the “Nothin’ happens if you don’t do nothin’,” quote from Nate. After that, the Clarion officials were on board. Also, the Denver Urban Renewal Authority agreed to step in, with financing for about 10 percent of public improvements around Pavilions. More than the money itself, DURA’s involvement gave Clarion officials confidence that the city was behind Pavilions, too, and wanted it to succeed, Sidell said. And as Sidell and the Gart family members predicted, the Pavilions did roar back. The Pavilions was home to the last NikeTown built in the nation and had been one of the original tenants. NikeTown told them it planned to leave the 30,000-sf space, but gave the Gart family time to find a replacement. It did, with the first H&M store in the Denver area. H&M initially took about 20,000 sf, but has been so successful that it is taking the remaining NikeTown space, Sidell said. Forever 21 showed its faith in the Denver Pavilions by expanding into 32,000 sf from 7,600 sf. In April, Gart Properties announced that the first Uniqlo, a popular global clothing retailer, this summer will take more than 22,000 sf along the 16th Street Mall in the Pavilions. It will be the first Uniqlo in the Rocky Mountain region. Regal Cinemas has invested about $1.7 million upgrading its seats in the United Artists Denver Pavilions Stadium 15 movie theater. When Clarion invested in the Pavilions in 2008, it was through a value-add fund. The holding period for the assets in the fund was to be five to seven years, Sidell said. Because they knew that the seven-year deadline was approaching, they hired Mary Sullivan and John Jugl of Holliday Fenoglio Fowler to find a replacement for Clarion’s equity portion. “Mary first put us in touch with Clarion, then called ING, with our Village Boulder Shopping Center in 2003,” Sidell said. “Later, when we were looking for a another 80 percent partner in four shopping centers we owned, Mary analyzed the deal and said we would be better off refinancing the debt, even though it would have been in her best interest for us to sell most of it,” Sidell said. Sullivan and Jugl did not shop the deal to the entire market. “They took a rifle approach and not a shotgun approach; it was very targeted as far as shopping it to a very few qualified investors,” Sidell said. While Clarion invested in the Pavilions in a value-add fund, Met Life invested in it from a core fund for stabilized properties. Those types of funds often hold the investment forever, Sidell said. “They typically say for at least a 10-year hold period, because you can’t make it open-ended, and nobody will ever go beyond 10 years,” Sidell said. At the same time, Eric Tupler of HFF found a replacement for the debt on the Pavilions. Sidell declined to say how much the debt portion was, but records show that Tom Gart signed a 10-year note for $85 million with the Massachusetts Mutual Life Insurance Co. The $85 million loan replaces debt from FirstBank. Through the process, the Gart family never considered selling its stake in the Pavilions, Sidell said. “That was never even a discussion,” Sidell said. In fact, the Gart family ties to the 16th Street Mall stretch back far longer than its purchase of the Denver Pavilions. Nate Gart was a member of the original committee that helped create the 16th Street Mall. “It’s an honor to be part of the third generation of Gart businessmen who are having a significant impact on Denver and our fine state,” Tom Gart noted. The Gart family continues to have a great relationship with Clarion and expects to build a similar long-term relationship with Met Life, Sidell said. And it worked out for all parties that during the dark days of the economy Clarion was willing to invest more money in the Pavilions, instead of walking away, as so many others were doing at the time. “They were rewarded handsomely by doubling down on their initial investment at the Pavilions.” “Nate was right. Nothin’ happens if you don’t do nothin’.”