The Developers Diversified Realty Trust acquisition of the real estate underlying 36 Mervyn's stores demonstrates the complexity emerging in retail investments.

For starters, it's a joint venture. Further, it involves foreign capital. Moreover, it was part of a massive 1031 exchange in which DDR simultaneously divested its office and industrial holdings. It's a single-tenant net lease sale/leaseback deal. And, finally, it's an attempt to unlock the underlying real estate value of a retailer.

The deal speaks to the lengths retail real estate investment trusts must go to get returns in today's ultra-competitive environment.

"The Mervyn's acquisition is a highly efficient means of expanding our footprint in the West, but with very limited transaction costs," says DDR CEO and Chairman Scott Wolstein. "It is important to note that the lease structure provides us with a real estate ownership position, but the risks associated with ownership such as property maintenance and increases operating expenses are mitigated because the leases are structured on a triple-net basis."

DDR will sell 25 office and industrial properties to Brascan Real Estate Opportunity Fund--which is run by Brascan Corp.--for $177 million. Of that, $170 million is cash. DDR, in turn, will use those proceeds to fund its half of the Mervyn's acquisition. The deal is a joint venture between DDR and Macquarie DDR Trust (which is an already existing joint venture between DDR and Australia's Macquarie Bank). The difference is that in this venture, DDR will own 50 percent of the assets. In its other deals with Macquarie, it only has retained 14.5 percent stakes.

The new joint venture will pay $396.2 million for the real estate, and then lease the assets to Mervyn's for 15 years at an annual rent of $30.5 million, or about $11.12 per square foot. The rent is subject to increases. DDR said the deal comes out to a 7.7 percent initial cap rate. In all, the 36 stores cover 2.74 million square feet. Twenty-five of the assets are in California, five each are in Arizona and Nevada and one is in Texas. DDR will also earn $1.4 million in annual property management and asset management along with one-time fee of $2.5 million.

DDR has aggressively used joint ventures. In a case study in Retail Traffic's August issue, Wolstein says joint ventures give his company access to capital without having to tap the market through public offerings.

"There are going to be times when common shares are going to be sold at good prices, and times when companies are going to be locked out," Wolstein said in the interview. "We don't want to be left to the whims of the marketplace. We want to have access to capital."

-- David Bodamer