Working with local governments is a key ingredient in Vestar Development's recipe for success.

Private companies often regard government intervention as a necessary evil. But for Vestar Development Co., government intervention is not only welcomed, it's considered key to the firm's success.

Approximately 70% of the Phoenix-based company's projects represent some form of public-private partnership. Stretching across Arizona into southern California, about 70 large-scale entertainment power centers bear the Vestar name. Through ownership and third-party management agreements, Vestar capitalizes on governments' desire to enhance infrastructure, increase sales tax revenues, and revitalize abandoned properties or dilapidated structures.

From home building to The Home Depot Vestar's property development and management business began to thrive in the late 1980s when its founders bought the commercial development assets of the company's homebuilding partner.

"The regional economy in the late 1980s and early 1990s was difficult to be sure," recalls Lee Hanley, chairman. "Our homebuilding partner saw a way to capitalize on many of the commercial developments we'd been building for 12 years. It had an opportunity to sell those assets and re-deploy the profits into its specialty."

Focused only on retail development, Vestar then began to establish itself as a primary developer of power centers, notes David Larcher, executive vice president. "The theory of our success is to develop large centers, from 500,000 sq. ft. to 1 million sq. ft., that have large entertainment components," Larcher says. "This makes the centers 24-hour, 7-days-a-week destinations and weaves them into the fabric of the community."

Typically, Vestar centers are anchored by household retail names such as Wal-Mart, Ross Dress for Less, Target, The Home Depot, Marshall's, Lowe's, and AMC Theaters.

To make itself even more efficient, Vestar separated itself into two divisions. The development arm is vertically integrated. It handles development, leasing, and accounting while overseeing all of Vestar's construction management operations. Two professional engineers and a staff architect enable Vestar to interact closely with tenants, local government officials, and subcontractors to ensure that design and construction meets all expectations. Meanwhile, the property management division oversees 14 million sq. ft. of retail space, including 35 Vestar-owned centers.

Patrick McGinley, vice president and director of property management, explains that Vestar owns about 40% of that 14 million sq. ft., the balance being third-party management agreements with institutional clients such as large insurance companies or pension trusts.

Private projects, public gain In the early 1990s, as Vestar's reputation in the development of power centers began to grow, company officials recognized the emergence of another niche: "The economy was in a mess," recalls Rick Kuhle, president. "Cities realized they had many vacant buildings and non-productive land assets in their communities. City officials were looking for ways to improve their communities while also enhancing their tax revenues."

The concept of public-private partnerships began to materialize. Why not employ the private sector to do what it does best and combine that skill with the strengths of local governments? Working through Request For Proposal (RFP) processes, Vestar began to submit offers to local municipalities to redevelop abandoned properties or structures, and transform them into retail destinations.

"There are a lot of benefits to the local governments," Hanley says. "For one, the retail centers generate good sales tax revenues. Generally, in these developed areas, we're talking about properties that have been blighted or abandoned for years. These properties were well located with terrific demographics. They simply had uses or zoning designations that were no longer appropriate."

Kuhle recalls an abandoned naval hospital in California that sat idle for years. Working in concert with the City of Long Beach, Vestar revitalized the site by developing a 1 million-sq.-ft. power entertainment center. "Almost all of our projects now come from the RFP process," Hanley notes. "We've been very fortunate to have the confidence of city officials, who know that we understand how to do this."

Strategies of success Having capitalized early on the trend toward public-private partnerships, Kuhle is quick to point out that competition is on the rise. Today, the company competes with as many as 20 different developers. That's a powerful incentive for Vestar to stay focused on areas that have contributed to its success.

"To survive the economic cycles of our industry, we've emphasized a number of different strategies," Hanley explains. "First and foremost, we've established strong relationships with our major tenants."

In fact, repeat tenants have resulted in repeat business. "Most of the centers we develop are for repeat tenants," Larcher says. "They understand the design and the detail that goes into our projects - things like adding extra amenities into the project and incorporating tenants' designs and ideas. This approach has helped us forge strong relationships with our tenants."

Continuity and consistency have also been keys to Vestar's success. "We've been doing the same thing for more than 20 years," Hanley notes. "We've never stopped developing and managing our assets. We also have a strong balance sheet and strong financial partners. That boosts the confidence of major tenants, city officials and capital partners."

It's also important to earn the confidence of local communities. "In a figurative sense, these centers are owned by the communities and customers at large," Larcher notes. "So, it's important that our tenants are successful and accepted."

Two out of three of Vestar's latest projects capitalize on partnerships with government agencies.

In the northeast region of Phoenix near Scottsdale, Vestar is developing the Desert Ridge Market Place, a 1.2 million-sq.-ft. lifestyle entertainment center with 17 anchor tenants. The $178 million center, which is scheduled for completion in fall 2001, will be home to AMC theater, Barnes and Noble, Tower Records and Old Navy. "We're developing on land owned by the State of Arizona," explains Hanley.

Working with the City of Santee in San Diego County, Calif., Vestar also is involved in a redevelopment project called the Santee Trolley Square. Located on a 45-acre site, the 400,000 sq.-ft. town center will be anchored by a multi-screen movie theater and two major discount department stores. "The neat thing about this project is the county's trolley line actually has a stop at the Square, so it's a great way to get shoppers to the site," says project director Kathy Kirk.

In the Chino area of the Los Angeles market, Vestar will break ground in January 2001 on Chino Spectrum, an 800,000-sq.-ft. power center anchored by many tenants usually found in regional malls. Company officials anticipate the $80 million facility will take 16 months to develop.

In Pico Riviera, Vestar plans to break ground on a 600,000-sq.-ft. power center in early 2001. "We are already 80% pre-leased and we expect to be 100% leased at the start of construction," says Jeff Axtell, project director for the Los Angeles area.