Las Vegas Sun

September 19, 2019

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Stratosphere retailers say they’re hurting

At the Tower Shops at Stratosphere the sale signs are out in full force.

Berini Sport is offering 30-50 percent off selected items. Marshall Rousso is offering "drastic reductions" of up to 75 percent. And at Victoria's Secret, there are almost as many clearance signs as there are pairs of pink panties.

Shopkeepers at the Stratosphere say the sale signs in most of the 52 stores and concessions are there for a reason: business isn't so good.

"We definitely expected to do better," said Carll Fredericksen, owner of CJ's Casino Emporium, which sells antique slot machines.

What Fredericksen -- or any of the other retail tenants -- did not expect was the series of misfortunes that have plagued the Stratosphere since it opened in April 1996 on Las Vegas Boulevard South.

First, there were reports of glitches in tower operations and lower than expected revenues. Within months, after one Wall Street analyst said the tower was "locationally challenged" and another issued a scathing report calling the company "a disaster," founder and Chairman Bob Stupak was ousted, and newly elected Stratosphere Chairman Lyle Berman angrily declared that "bankruptcy is not in our vocabulary."

Finally, in January 1997, after many months of low revenues, the resort filed for bankruptcy protection. Two months later the Minneapolis-based Rainforest Cafe chain announced it would write off development costs related to a "previously planned" restaurant at the Stratosphere. Rainforest, which is also headed by Berman, later decided to locate it's 13th popular themed restaurant at the MGM Grand.

Today, there is barren space at the tower where there was once plans to locate a Rainforest Cafe, Kids Quest facility and Aquarium Gift Shop. There is also an unfinished, 15-story, gargantuan mass of concrete and rebar at the base of the tower that was supposed to be an additional 1,500-room hotel.

These and other projects have been put on hold, to the dismay of Tower Shops retailers, while the fate of the Stratosphere Tower hangs somewhere between Las Vegas Boulevard North and U.S. Bankruptcy Court.

"If they had completed phase two and added the Rainforest and the other shops, and then completed the second (hotel) tower, I think it would have made the Stratosphere a nice property, but it wasn't finished, and it definitely has hurt business," Fredericksen said. "Now, I guess we just have to grin and bear it."

Not all retail tenants feel so amenable.

Locked in by what they perceive as exhorbitant long-term lease rates, two Stratosphere shops, Gallery Michel Animation and Fine Art and Kaplan Shoes, have filed District Court suits against landlord Strato-Retail LLC, a corporation controlled by Simon DeBartolo Group, the nation's largest public company that manages commercial real estate.

Gordon Group Holdings Ltd., a Las Vegas-based developer, is a partner in Strato-Retail LLC.

Simon DeBartolo and Gordon Group also are the developers of the Roman-themed Forum Shops at Caesars and Gordon Group is co-developer of the Fashion Outlet of Las Vegas near Primm's three resort properties.

"The Tower Shops at Stratosphere is currently 95 percent leased with sales in excess of $500 per square foot. This level of sales productivity ranks Stratosphere at the top tier of all shopping centers in the United States," said Simon DeBartolo spokeswoman Billie Scott. "We have been pro-active in the past in communicating with our tenants and stand ready to speak with them regarding any problems they have. We are willing to continue to seek creative and mutually acceptable solutions to problems that are not beyond our control as we are, likewise, a tenant -- not the landlord."

Strato-Retail, however, has filed District Court suits against three other tenants: Nathan's (hot dogs), Juice Jockey and Kaplan Shoes for alleged nonpayment of rent.

Since all five suits were filed in the fall of 1997, there have been complaints and cross complaints by the tenants alleging basically the same thing: that the landlord promised there would be a Rainforest Cafe, Kids Quest, an additional hotel and even a mechanical King Kong thrill ride that would climb the side of the tower with passengers in the beast's belly.

Instead, the retailers charge, it is they who find themselves in the belly of the beast.

"The problem is the lack of traffic," said Jack Rose, owner of Nathan's and Juice Jockey, situated in an attractive kiosk amid the retail shops.

"I've built up a beautiful place with great signage," Rose said. "You've seen it. You can get a hot dog or fresh squeezed orange juice or carrot juice. We're supposed to be doing great. Instead, we see an empty counter."

But Rich McKeown, manager of the Tower Shops, painted a different picture of retail business at the Stratosphere.

"We're not going to comment on any litigation that's in process," McKeown said, "but I will say the majority of shops are doing very well."

About the vacant space where there was supposed to be a Rainforest Cafe, Kids Quest facility and Aquarium Gift Shop, McKeown said, "We're as disappointed as the merchants that these things aren't here."

Still, McKeown and marketing coordinator Lori Feiro note business continues at the Tower Shops.

Feiro said 98 percent of available space at the Tower Shops is leased, and of that space, 85 percent is occupied. "Some stores haven't been built out yet," she said.

In addition, more businesses are interested in setting up shop at the mall. Feiro pointed out that County Rock & Roll Store, which sells concert memorabilia, plans to open at the Stratosphere next month.

Neither McKeown, nor Feiro offered exact counts on foot traffic at the Tower Shops, but Berman in 1996 said, "We expected 100,000 visitors per week, but have been getting only 77,000."

"The store owners are struggling over there," said Las Vegas attorney John Peter Lee, who represents several businesses in District Court actions against Strato-Retail.

Lee pointed out many of the Stratosphere retailers signed 10-year-leases at an average of $120 per square foot a year. For an average-sized 1,000-square-foot shop, that translates to lease payments of $10,000 each month.

The suit filed on behalf of Kaplan Shoes, for example, which alleges "collection of rents procured by fraud," seeks actual damages in excess of $10,000 as well as punitive damages and other expenses from Strato-Retail.

The suit alleges Strato-Retail made false representations to Kaplan Shoes in early 1996 about planned additions to the tower to induce the retailer to sign a lease. The owners of the shoe shore agreed to a five-year lease on April 4, 1996.

The plan for phase two at the Tower Shops at Stratosphere was also disclosed by one of the two public real estate corporations that merged to form Simon DeBartolo Group in its annual report to the Securities and Exchange Commission.

Simon Property Group acquired the DeBartolo Realty Corp. in March, 1996, a month before the Stratosphere opened, to form Simon DeBartolo Group. A week before the merger, Simon reported to the SEC it owned a 50 percent interest in the Tower Shops and "Phase I of the project is scheduled to open in the summer of 1996, with Phase II opening in the fourth quarter of 1996."

Phase II, which was supposed to include the Rainforest Cafe, Kids Quest facility and Aquarium Gift Shop, never materialized, a point that attorneys for the retailers plan to stress during the upcoming civil trial.

But attorney James Kohl, who also represents Kaplan Shoes and several other retailers, noted it could be months or even years before the suits are settled, and that's if the attorneys can keep the cases out of U.S. Bankruptcy Court.

"We're not suing the owner of the building, and one reason is because the Stratosphere Corp. is in Chapter 11," Kohl said. "But if the Stratosphere Corp. is somehow tied to the suits, then it is likely that the bankruptcy court will gain jurisdiction."

Both Lee and Kohl said the retailers are in a very difficult situation -- and through no fault of their own.

"They're getting it from both sides," Kohl said. "There were promises that weren't kept, and they're paying high rents."

A big promise that wasn't kept -- according to the District Court suit filed by Kaplan Shoes -- is that the Tower Shops would be "promoted in conjunction with the Forum Shops at Caesars Palace ... "

The Indianapolis-based Simon DeBartolo Group is the commercial real estate agent for both the Tower Shops and the Forum Shops, but industry experts note that just because the two shopping complexes share the same landlord doesn't mean they share the same shopping experiences.

"In the world of Strip retailing, whether you are on the Strip or a half mile off the Strip, the difference is the same as black and white," said Michael Kammerling, senior vice president of the retail division of Lee & Associates, commercial real estate services.

Kammerling said there is little comparison between the Tower Shops at Stratosphere and the Forum Shops at Caesars, which gross more than $800,000 a day.

"That translates to $25 million a month, or $300 million each year," Kammerling said. "We know that 30 million visitors come to Las Vegas each year. And so, for every visitor there's $10 spent in the Forum Shops."

That doesn't mean that everyone who visits Las Vegas stops by The Forum Shops -- but many of them do.

Spokeswoman Maureen Crampton noted that more than 81,000 people visited The Forum Shops the Saturday after Christmas, and the center normally experiences daily traffic counts averaging 45,000-50,000.

Crampton also noted that in 1996 sales at The Forum Shops were in excess of $1,200 per square foot, based on 250,000 square feet of total space, and the industry average is $350 per square foot.

"We're the top performer in the industry," Crampton said.

Kammerling agreed The Forum Shops "raised the bar and brought it to a new level," but he added the cost to the retailers is very high.

"They're getting over $200 a square foot in some instances, and that's just base rent," Kammerling. "When you start adding common charges, it drives the annual nut so high in some of these places that it almost doesn't make sense to try to run a business."

Indeed, Kammerling said some national chains look at positioning themselves at The Forum Shops as more lucrative in terms of advertising and notoriety than sales.

But, while retailers at the Tower Shops at Stratosphere pay an estimated $50-$80 less per square foot than retailers at The Forum Shops, many of them don't look at the experience as lucrative in terms of revenue or advertising.

"The rents the retailers pay at the Stratosphere are still extremely high given the amount of traffic going through there," said George Connor, first vice president of retail properties at CB Commercial.

"One problem at the Stratosphere is there are a limited number of elevators to take visitors to the top of the tower," Connor said. "It's very difficult with elevators to move the volume of traffic up to the top. This is why department stores have escalators instead of elevators. They move volume of traffic. This is also why it's so critical to have a Rainforest (Cafe), Aquarium (Gift Shop) and other traffic generators."

Several retailers said they're looking forward to days ahead when billionaire Carl Icahn, a corporate raider who has purchased a majority of Stratosphere notes at discount prices, begins to put his personal stamp on the property.

"I think that's the only solution," Fredericksen said. "Maybe then, the second tower would be finished and phase two to the retail area would be completed."