When the Village of Merrick Park opened last September in Coral Gables, a suburb of Miami, The Rouse Co. had high expectations for the 770,000-square-foot retail component of its $200 million, mixed-use project.

Featuring tenants such as Neiman-Marcus and Nordstrom, the retail portion was positioned to challenge the highly profitable Bal Harbour Shops, roughly 20 miles to the north.

But six months after opening, the retail component of Merrick Park is only 78 percent occupied and 90 percent leased. The original pro forma for the mall projected an 11.2 percent return on investment, but it's only yielding 7 percent, says David Fick, managing director of real estate research group Legg Mason Wood Walker in Baltimore. “When a company comes out of the box at a 7 percent return, and its best objective is 9 percent by 2006,” considering the cost of capital, “it is losing money,” he says.

Merrick Park has significant handicaps, including its location, the economic fallout from 9/11, which occurred during construction, and a downturn in tourism. The mall's location, near auto body shops, low-income housing and a rapid transit line, isn't befitting a development of its stature, says Fick.

To make up for this deficit, it was built “like a castle,” he says. “Its stunningly beautiful architecture” faces inward, away from the surrounding neighborhood.

But the demographics of Merrick Park are desirable in spite of the development's immediate surroundings, says Michael Finkel, managing director, FKS Realty Group, in Miami Beach. According to 2002 projections, nearly 450,000 people live within a five-mile radius. And although the median household income for the area is only $45,000 to $50,000, “you have pockets of great wealth,” he explains. Coconut Grove, Key Biscayne and South Miami are some of the wealthiest enclaves in South Florida.

Retail rents for non-anchor tenants are well below Rouse's projections. Just how much small stores are paying, however, is hard to determine, says Finkel. In addition to base rents and pass-throughs, the amount of tenant improvement allowances can offset high rents, he says.

“The average projected base rent for non-anchor tenants, without pass-throughs, was $50 per square foot,” says David Tripp, vice president of investor relations at Rouse. But those projections were pre-9/11, he says. After the tragedy, leasing dropped off and so did rental rates.

In the past year, a number of Bal Harbour tenants signed leases with the Village of Merrick Park, including Tiffany & Co., Cole-Haan and Cache. A lawsuit regarding Bal Harbour's tenant restriction clauses was settled in March 2002. The clauses forbid Bal Harbour tenants from opening stores at its new competitor. After that, “things picked up again,” says Tripp.